Photo credit: SandRidge Energy.
SandRidge Energy (NYSE: SD) really turned a corner in 2013. It ejected founding CEO Tom Ward, cut costs, and refocused operations on the company's core strengths. The oil and gas explorer is now well funded to pursue existing growth opportunities through at least the end of 2015.
That doesn't mean investors should expect a boring 2014. In fact, I see a few important moves in store for the company in the year ahead. Let's take a closer look.,
From the Miss to the Midcon
Last quarter, SandRidge changed the way it referred to its core operating area. Instead of calling it the Mississippian, it's now referring to the sector as the Midcon to more fully reflect its potential in the U.S midcontinent region. This is by design as the company is starting to see promising results from tests of other zones stacked above and below its core Mississippian target area.
Peers like Newfield Exploration (NFX) and Continental Resources (CLR) are among the many producers turning to emerging areas of Oklahoma to grow production. Newfield Exploration's newest play is actually called the STACK as its acreage holds multiple production zones. The company is focusing a good portion of its 2014 capital budget on this new Midcon area. Continental Resources is also spending a decent chunk of its 2014 capital budget on its new Midcon growth area. The Bakken giant has earmarked 25% of next year's capital as part of a multiyear effort to triple production.
SandRidge's plan is to continue to appraise the potential of these additional zones. That said, before the year is out I expect to see the company shifting to a multiwell pad development program that encompasses at least one of those zones. That would make it a true Midcon driller instead of just being focused on the Mississippian formation.
Make a big move in the Gulf of Mexico
SandRidge Energy treats its operations in the Gulf of Mexico as a cash cow to fund its core Mississippian Lime development. Because of this it's cutting the capital being spent on the region and is letting production decline in order to increase cash flow. To put some numbers behind that, 2014 will see the company spend $70 million less than 2013 in the Gulf, with production declining from 10.1 million barrels of oil equivalent, or BOE, to 8.3 million BOE.
Still, SandRidge is sitting on significant potential in the region. Certain operations sit above Miocene age sands that are some 15,000 to 25,000 beneath the surface. The prospect was identified by Royal Dutch Shell (RDS.A) years ago, but has never been developed. Shell estimated that it held somewhere around 200 million barrels of oil. The problem is that the project is outside of SandRidge's skill set to develop, which is why it will need to bring in an industry partner. I expect SandRidge to find its partner before the end of 2014 and sign a low-risk, high-upside deal that immediately unlocks some of this value for the company.
Investor takeaway
SandRidge holds several hidden assets that aren't yet appreciated by the market. That is why I expect to see the company make moves to unlock some of the value that these two areas are currently hiding from investors. That should improve the company's long-term outlook, as well as drive returns for years to come.
