Last Thursday, SandRidge Energy (NYSE: SD) announced a joint venture with Repsol YPF, S.A., an energy company based in Spain. Under the terms of the deal, SandRidge will sell 250,000 net acres in the Extension Mississippian play and 113,636 net acres in its Original Mississippian play for a total of 363,636 net acres. The transaction is valued at $1 billion, or $2,750 per net acre. SandRidge will receive $250 million in cash at closing and $750 million in drilling carries.
This joint venture is the latest in the string of capital-raising moves by the company to fund its capital expenditures, which far outpace cash from operations. SandRidge's goal is to become self-funded by the end of 2014, and it appears the company will continue pursuing non-debt funding in the form of royalty trusts, joint ventures, asset sales, and potential sales of its already-public royalty trusts, SandRidge Mississippian Royalty Trust (NYSE: SDT) and SandRidge Permian Trust (NYSE: PER).
Looking ahead, the company has already hinted at the possibility of another royalty trust likely to come in the first half of 2012.
Shallow, conventional oil
SandRidge produces oil solely from two places: the Central Basin Platform in the Permian Basin and in the Mississippian play in Oklahoma and Kansas. While other companies were pursuing the big shale boom in areas such as the Eagle Ford and the Bakken, SandRidge instead decided to move to shallow ground, where well costs are low and the per-well economics are particularly attractive. In fact, the company believes the return on both plays is 88%.
Because of the shallow targeted depth of both of these plays, the company has been able to use lower horsepower equipment, which has been in less demand as the rest of the industry has moved up the scale. That means less cost inflation. Over the past two years, SandRidge's service costs have stayed flat, which is quite a feat.
Looking forward
Due to the acquired drilling carry and lower working interest in the Mississippian as a result of the deal, the company expects 2012 capital expenditures to clock in at $1.6 billion, down from a previous $1.8 billion. Moreover, the company appears to be well on its way to fulfill its three-year strategy, which includes EBITDA in excess of $2 billion, annual double-digit production growth, and self-funded capex, as well as a debt-to-EBITDA of two by the end of 2014.
It's certainly hard to forecast three years out in this industry, but there are a few reasons to believe SandRidge has a shot at meeting its goals:
- The company has specifically targeted shallow, conventional oil. As previously noted, this has led to low well costs, along with greater visibility on those costs.
- With 7,900 potential drilling locations in the Central Basin Platform and more than 4,000 drilling locations in the Mississippian, its drilling program should enjoy highly reproducible success.
- With highly reproducible success forthcoming, the company has hedged $4.2 billion in revenue from 2011-2015 at prices ranging from $74.40 in 2011 to $94.51 in 2015. That's further out in the future than most other companies will go, which shows management's faith in its assets.
Foolish bottom line
SandRidge is a very volatile stock with a 52-week range of $4.55-$13.34. Anyone buying shares should be willing to hold long enough for the company to execute its three-year strategy. Despite what looks like a huge funding gap each year, the company has proven time and again that it can raise capital through creative means such as joint ventures and royalty trusts.
