SandRidge Energy (NYSE: SD) has had a lot of problems over the past few years. One of its worst problems, that few investors really talk about, is its battle with its well decline rate. It's a problem that's holding back America's oil boom, as three out of every four barrels of oil added through horizontal drilling are simply replacing production from previously drilled wells. However, as SandRidge Energy's wells mature, it's finding that this problem is starting to moderate, making it easier for the company to grow production.
Drilling down into the decline rate
Take a look at the following slide from a recent investor presentation.
Source: SandRidge Energy Investor Presentation (link opens a PDF)
That slide shows SandRidge Energy's type curve, which is the production curve it expects to see when it drills a well in the Mississippian Lime formation. Curve is the key word as production from these wells curves downward. A well that had an initial oil production rate of 176 barrels of oil per day will see that production slide to less than 10 barrels per day within seven years. Because of that, SandRidge Energy needs to continue to drill wells just to maintain production as it offsets this steep production decline.
This isn't an issue that's specific to SandRidge Energy. Range Resources (RRC +1.50%), which also has operations in the Mississippian Lime, has a similar decline curve for its wells as noted on the following slide.
Source: Range Resources Investor Presentation (link opens a PDF)
For SandRidge Energy, however, it's beginning to get to the point where its scale and longevity in the play is starting to pay off. That's because as the company's wells mature the company's base decline rate moderates and becomes less of a hurdle to growth. The company no longer needs to overcome a lot of wells producing an 80% first year decline rate. Instead, SandRidge Energy is currently battling a base decline rate of about 35%, however, that base decline rate could moderate to just 15% over the next few years as noted on the next slide.
Source: SandRidge Energy Investor Presentation
SandRidge Energy's moderating base decline rate is really the key that's allowing the company to project strong production growth over the next few years while keeping its capital spending flat.
Investor takeaway
Horizontal oil wells decline incredibly fast, which makes it hard for companies like SandRidge Energy and Range Resources to grow production. However, these wells do produce for a long time so once the curve begins to flatten out it makes it much easier to grow production as more of the new production is growth instead of maintenance. SandRidge Energy is entering that turning point right now, which is starting to put one of its worst problems firmly in the rear view mirror.
