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3 Things to Watch When SandRidge Energy Reports

By Matthew DiLallo – May 6, 2013 at 8:00AM

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SandRidge reports on May 7.

Mississippi Lime-focused oil and gas producer SandRidge Energy (NYSE: SD) is scheduled to report its first-quarter earnings on May 7 after markets close. It's an important report for SandRidge as it could be the last one with CEO Tom Ward at the helm. The newly expanded board has until June 30 to make a decision on Ward's future with the company. With that as a backdrop, let's take a look three important areas to watch when SandRidge reports.

Performance against expectations
Analysts are expecting SandRidge to lose $0.06 a share this quarter. That's reversing $0.04 of earnings last quarter. However, the company did just sell its cash-flowing Permian Basin assets which needs to be kept in context. SandRidge does have a plan to make up that sale, so its important to see how its doing against that plan. The plan includes spending $1.75 billion this year, a bulk of which will be spent on its Mississippian acreage, which should its production up to 34.3 million barrels of oil equivalent. Look to see if SandRidge has any updates to its production guidance for the year now that the company has another quarter under its belt. 

An update on the Lime
The Mississippian Lime is incredibly important for SandRidge's future. It's planning to drill 581 wells into the formation this year after drilling 396 wells last year which brought its total in the play to 681 wells. What's important for SandRidge is to find the most oil levered area of the play to drill new wells. Current production is just 45% oil and NGL; however, 80% of its cash flow is from oil so finding the oil sweet spot is important.

Overall, the industry has had mixed results from the play. Recent good news came from Devon Energy (DVN -2.65%) which reported solid results from its emerging Mississippian acreage. The company brought on 24 wells in the quarter which hit the company's economic targets with significant oil and liquids-rich gas. On the downside, Chesapeake Energy (CHKA.Q) reported a disappointing joint venture transaction on some of its Mississippian assets as it only was able to get $2,400 an acre after previously estimating its acreage in the play was worth many times that amount.

Aside from keying into what SandRidge has to say about the play, one number to watch here are its well costs. SandRidge is looking to get its drilling costs down to under $3 million per well. Getting those costs down will increase its rate of return and enable the company to drill more future wells with less money.

Finally, one specific area of the Mississippi Lime to pay close attention to is to SandRidge's acreage in Kansas. The company is still delineating its acreage in the state and its early wells have been a rather mixed bag. Positives here will go a long way to securing SandRidge's future.

How goes the Gulf
While a bulk of SandRidge's future is resting on its Mississippian acreage, it does have a sizable shallow Gulf of Mexico position. This is a cash flow asset for the company as its just investing to maintain its production with the excess cash flow going to fund the development of the Mississippian. That being said, SandRidge is looking to expand its position with additional bolt-on acquisitions.

That was until it settled with activist investors who've been calling for Ward's resignation. These same investors are also calling for SandRidge to exit the Gulf. It's possible that we will get some additional color from the company as to whether it plans to grow or divest the Gulf assets.

Foolish bottom line
It's an important quarter for SandRidge, as it could be Ward's last if the company's performance flops. That could lead to yet another strategy change for the company, particularly surrounding its Gulf of Mexico assets. Despite the fact that its capital plans are funded through the end of next year, SandRidge still has a lot of work ahead of it.

Motley Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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