Going into SandRidge Energy's (NYSE: SD) third-quarter report there were three areas I was watching most closely. I already took a closer look at SandRidge's solid Mississippian oil growth and its well costs and performance. The one area that I didn't look at in great detail was the company's update on its stacked pay potential. It's an important piece of SandRidge's future value, so let's dig a bit deeper into what the company had to say about it this past quarter.
The potential
As the following schematic shows, SandRidge has the potential to target several additional oil and gas producing zones in addition to its core Mississippian development.
Source: SandRidge Energy Investor Presentation
This is important for several reasons. First, SandRidge already has the acreage leased meaning this represents added value to the company. In addition to that, in many cases the company already has existing infrastructure, so adding these new zones can be done with less capital, which boosts returns.
If the company can prove that these additional zones will be economical, it will increase the value of the company significantly. Basically, SandRidge is sitting on what could be a hidden asset. It's just now starting to discover the potential that was sitting right under its existing acreage.
Testing one, two, three
This past year SandRidge has tested several of these zones and the initial results are promising enough that the company is going to continue its work. For example, SandRidge has drilled four horizontal Chester wells this year, which have delivered 30-day initial production rates of 274 barrels of oil equivalent per day, or BOE/d. While that's slightly below the company's typical Mississippian well, it's encouraging enough to support additional Chester development next year.
Another encouraging development was a vertical appraisal well drilled into the Marmaton formation. That well produced a 30-day initial production rate of 496 BOE/d. A second delineation well confirmed that there's future development opportunities for the Marmaton formation.
Overall, SandRidge's results support the view that it has substantial future development opportunities from these additional zones. That said, the company still has a lot of work to do before this value will begin to be reflected in its share price.
The pitfalls
One of the areas of concern is that its Woodford test program has been a flop so far. The company completed three wells of a nine well test and the results were bleak. Two of the wells delivered test oil rates of 68 and 37 barrels of oil per day while the third well only produced water. That said, SandRidge still sees potential from the Woodford as recent industry results from companies like Devon Energy (DVN 0.98%) suggest that there is significant hydrocarbons that can be produced from the Woodford.
As the following map details, two Devon Energy wells produced significant quantities of oil and both of those wells are located in close proximity to SandRidge's position.
Source: SandRidge Energy Investor Presentation
Another company to watch is Marathon Oil (MRO 0.76%). Though its operating to the south of SandRidge's position it is targeting the Woodford, as well as the Mississippian and Marmaton plays. So, while the initial results from SandRidge's first three Woodford wells were lousy, results like those from Devon Energy as well as the push from other producers like Marathon Oil, support the belief that there is Woodford potential within SandRidge's acreage.
The investor takeaway
SandRidge's stacked pay potential is an area investors want to keep an eye on. Unlocking new areas of its existing acreage could add significant future value to the company as it proves that it can produce from these future zones. Early signs look promising, but again it's early so investors shouldn't read too much into initial results just yet.
