SandRidge Energy (UNKNOWN:SD.DL) is continuing to put up some really good numbers. What's most impressive is how these numbers are working together to create long-term value for investors. Let's drill down into how the company's numbers are improving and what this means for investors.
The biggest improvement SandRidge Energy has made over the past few years is in capital efficiency. The company is spending less money on each well, enabling it to stretch its capital dollars. New CEO James Bennett said it best on the gas and oil company's Feb. 28 earnings conference call:
In 2013, in the midcontinent, and you can get this number on page seven of the earnings release, we spent $844 million in the midcontinent. That's all-in well costs, including all D&Cs, saltwater disposal infrastructure, workovers, and capitalized interest. So $844 million to drill 434 wells. That compares to 2012, when we spent $927 million to drill 396 wells. So in this improved capital efficiency then, we spent 9% less capital and drilled 10% more wells.
This is a continuation of the company's focus on improving returns. Chief Operating Officer David Lawler noted on the conference call that over the past eight quarters SandRidge has lowered total well costs by $1 million, or 26% per well. That's a remarkable improvement and a big value creator for investors. It not only improves the company's internal rate of return, but it enhances liquidity as SandRidge can drill more wells with much less money than just a few years ago.
Opportunity within its portfolio
Another important improvement is the company's growing opportunity within its current portfolio. While SandRidge Energy has been shedding assets over the past year it has also been increasing future opportunities.
This past quarter the company's appraisal program added more than 100,000 additional acres to its focused core drilling program. SandRidge is also exploring additional formations, including the Marmaton and Woodford, within its acreage position. These targets could eventually be added to this core drilling focus. As it stands now, the company has a 10-year inventory of high return drilling locations, which should continue to grow over time.
Energy companies in America are finding a lot more oil and gas than previously thought. The Marmaton, for example, is a play few investors have probably heard about. It extends throughout portions of Oklahoma and is seen as promising by Apache (NYSE:APA) as a solid liquids-rich play. Because of that, Apache is doubling its Lower Marmaton activity this year. While the returns aren't yet phenomenal, it's still a solid play that holds liquids rich potential that could eventually fuel additional growth for SandRidge Energy.
Another potentially important future play for SandRidge Energy is the Woodford. While the company's first few wells have been poor, SandRidge believes it is making progress in cracking the code to unlock the Woodford's oil. The Woodford is a play that's beginning to gain importance for peers like Devon Energy (NYSE:DVN), as that company's emerging Mississippian-Woodford Trend is growing fast -- in the last quarter production there jumped 47% quarter over quarter. Production also exceeded Devon Energy's projected exit rate, which should give SandRidge Energy investors some hope that it too will see future success in the play as Devon Energy is drilling some Woodford wells near SandRidge's acreage.
The final area that is improving at SandRidge Energy is proved reserves. While the company sold a significant amount of proved reserves over the past few years, on a pro forma basis proved reserves are up 25% over the past year. Furthermore, the company was able to replace 425% of production through its drilling program last year.
This is starting to translate into real value creation. One number that indicates this is the company's PV-10, which is now $4.1 billion. That's up 43% from the PV-10 value of $2.9 billion that SandRidge had at the end of 2012 on a pro forma basis. Both proved reserves and PV-10 should continue to increase over time as the company's drilling program adds new reserves.
There's a lot to like at SandRidge Energy. The company offers compelling production growth, as well as upside from its appraisal and exploration program. That should create solid value over the next few years as the company's capital efficiency really begins to shine.
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