SandRidge Energy's (NYSE:SD) focus on the Mississippi Lime play was initially met with much criticism, as investors lambasted the company for spending the majority of its capital on a seemingly marginal play that delivered largely disappointing results for many operators.
But thanks to SandRidge's innovative use of the latest oilfield technologies and its extensive investments in infrastructure, the company is now seeing very impressive results from its Mississippian drilling program that should drive stronger financial performance in the quarters and years ahead.
All in on the Mississippi Lime
With the notable exception of some assets in West Texas' Permian Basin, SandRidge is overwhelmingly focused on the Mississippi Lime play after divesting its Gulf of Mexico and Gulf Coast assets to private equity firm Fieldwood Energy for $750 million in cash earlier this year.
The Mississippi Lime, a vast limestone formation that spans large portions of Oklahoma and Kansas, is a relatively shallow play that was historically developed using vertical wells and conventional completion methods. But the application of horizontal drilling and multistage hydraulic fracturing has helped revive the play.
Conquering unique challenges
Still, the Mississippian faces a unique set of challenges including a relatively low percentage of oil, high decline rates, and extremely high volumes of saltwater relative to hydrocarbons. For many operators, these challenges were simply too big to overcome. Companies including Shell, Encana, and Apache have all exited the play in recent years, as they simply weren't able to generate the returns they desired and saw better opportunities elsewhere.
But SandRidge is staying strong. The company has gone above and beyond other operators to invest in the necessary technology, infrastructure, and other assets to slash operating costs. Thanks to extensive investments in saltwater and electrical infrastructure, an aggressive shift toward multi-well pad drilling, and other initiatives, it has managed to reduce its well costs from around $4 million per well in 2012 to less than $3 million currently.
As a result, returns have improved dramatically. SandRidge's typical Mississippian well that costs $2.9 million to complete now earns a 64% rate of return at current strip pricing, which is comparable to leading U.S. shale plays. If the company can reduce well costs to $2.7 million per well, returns should increase to 79% and could even soar as high as 128% if costs can be reduced to $2.3 million per well.
How SandRidge plans to further improve returns
In addition to its sizable investments in saltwater and electrical infrastructure, SandRidge is also investing heavily in technology that will allow it to get a better understanding of the geology of its acreage and optimize well placements accordingly.
Last year, it acquired 730 miles of 3D seismic data, which helps identify where the most productive hydrocarbon formations are located. This year, it plans on acquiring an additional 1,070 miles of new 3-D seismic data, which could further improve well productivity and boost ultimate recoveries.
SandRidge is also testing new well designs that could result in significant cost reductions. In the first quarter, the company tested a dual stacked lateral well design in Harper County, Kansas, which was completed for just $5.2 million and achieved a 30-day IP of 707 Boe per day.
In other words, the dual stacked lateral delivered initial production rates comparable to SandRidge's existing well design while costing about $400,000 less per well. The company reckons it can apply this well design to many other parts of its acreage, where it could yield similar cost savings.
SandRidge has done a commendable job improving returns in the Mississippi Lime through utilizing the most advanced technologies and investing in critical infrastructure. With the company guiding for 20%-25% annual production growth through 2016 and with returns expected to keep improving, SandRidge should be able to deliver stronger earnings and cash flow that could lift its valuation.
Arjun Sreekumar owns shares of SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.