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3 Things to Watch When SandRidge Energy Inc. Reports Earnings

By Matthew DiLallo – Feb 26, 2014 at 10:15AM

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What to look for when SandRidge Energy reports earnings on Feb. 27.

Photo credit: SandRidge Energy

Mid-continent focused driller SandRidge Energy (NYSE: SD) is expected to deliver its fourth-quarter and full-year results on Feb. 27. The release will mark the end of a transformative year for the company. It let founder and former CEO Tom Ward go, it grew its oil production in the Miss and finally the company began exploring its staked pay potential within the Mid-Continent. On top of that the company began 2014 by exiting the Gulf of Mexico.

Because SandRige Energy is a company in transition, investors need to continue to monitor it closely. Here are the three most important areas to watch when it delivers its results later this week.

Is the Woodford Shale still a dud?
SandRidge Energy is exploring several zones in addition to its core Mississippian Lime acreage. Early results from the upper and lower Mississippian as well as the Marmaton and Chester look promising. However, last quarter the company's test of the Woodford Shale came up with more water than oil. That was really discouraging given that companies like Devon Energy Corp (DVN -4.07%) are seeing some solid success in the Woodford.

Last quarter SandRidge Energy noted that two solidly performing Devon Energy wells were located near SandRidge Energy's leasehold. Because of this it gives the company some hope that it too will find success in the Woodford. This is why investors will want to pay close attention to what SandRidge has to say about the rest of the Woodford appraisal wells it drilled last quarter. Solid results here will add to the underlying value of SandRidge's acreage position in the region.

Photo credit: SandRidge Energy

Any updates to guidance?
When SandRidge Energy announced the sale of its Gulf of Mexico business, the company also announced new production growth guidance for 2014. The company now expects pro forma growth of 26%, with its liquids production growing by an even faster rate of 43% this year. Investors will want to note any changes to the company's guidance when it reports.

The most important area to watch is the growth in liquids production as about 80% of the company's Mississippian cash flow comes from liquids production. This is why we want to continue to see liquids production grow faster than overall production.

Any uptick from natural gas prices?
While liquids production is important to SandRidge Energy, 55% of its proved reserves are natural gas. Because of this the company has significant upside to natural gas prices. While it currently hedges a portion of its natural gas production, SandRidge Energy should still see a boost from rising gas prices.

Investors will want to make note of any changes the impact from rising natural gas prices has on the company's operations going forward. For example, SandRidge Energy has an agreement to supply Occidental Petroleum Corporation (OXY -1.54%) with natural gas. However, because natural gas prices have been low, SandRidge Energy isn't drilling enough wells to maintain the supply it had contracted to Occidental Petroleum. Because of this SandRidge Energy is forced to pay Occidental Petroleum for the shortfalls in gas volumes. Now that prices are rising it could have a positive effect on SandRidge Energy's losing agreement with Occidental Petroleum.

Investor takeaway
SandRidge Energy investors have reason to be optimistic about the company's upcoming report. The company has really turned around its operations and its new path looks appealing. On top of that potential positives from increased natural gas prices and the Woodford drilling program could lead to a nice upside surprise this quarter. 

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Matt DiLallo owns shares of SandRidge Energy. The Motley Fool owns shares of Devon 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.

Stocks Mentioned

Devon Energy Stock Quote
Devon Energy
DVN
$59.62 (-4.07%) $-2.53
Occidental Petroleum Stock Quote
Occidental Petroleum
OXY
$62.60 (-1.54%) $0.98

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