On SandRidge Energy Inc.'s (UNKNOWN:SD.DL) fourth-quarter conference call, management acknowledged that if the current oil price environment is the new normal then it has too much debt. In fact, the company said it would need to carve about $1 billion from its $3.2 billion debt under that scenario. However, the company remains confident it can keep its head above water and maneuver through this deep downturn in the price of oil.
Time is on our side
CEO James Bennett addressed the company's balance sheet and leverage head-on during the call. He pointed investors to the following slide to show some key positives that should help SandRidge manage this part of the industry cycle.
Regarding the balance sheet, Bennett said SandRidge is "tackling this from several different angles."
First, we have time. Our balance sheet is structured with no bond maturities until 2020. We amended our bank covenants to replace the total leverage ratio, just reaffirmed our borrowing base facility, and at year-end, had over $1 billion of liquidity.
The good news for investors is that SandRidge isn't up against any looming bond maturities, which gives it a few years to figure things out. However, the company isn't wasting time just hoping commodity prices recover. Instead, actions such as amending its bank covenants are intended to ensure it can survive what could certainly be a long downturn.
Bennett also said SandRidge is "reducing our spending and capital levels through our decreased capital program, decreasing it by $900 million, reducing well costs by 20% -- which will drive improved capital efficiency -- and are reducing our G&A expenses."
These will improve the cash generation ability of our assets and extend our liquidity runway. We do have a free cash flow deficit this year. While we have shrunk that deficit every year for the last three years, in this price environment, we need to reduce it further and get closer to operating within cash flow. In 2015, we plan to raise at least $200 million from non-E&P and noncore asset sales and monetization. These will supplement our liquidity and fund a large portion of the spending gap this year.
What I find interesting is that the company plans to outspend its cash flow even even after cutting $900 million out of its spending program and raising an estimated $200 million through asset sales. This means SandRidge will use some of its $1 billion in liquidity, which could very well come back to bite the company if commodity prices don't improve.
That said, the company continues to outspend its cash flow because it is "proactively investigating multiple scenarios regarding ways to rightsize the balance sheet in a protracted pricing downturn," according to Bennett. Options being considered include joint ventures, drilling partnerships, and selling additional noncore assets. SandRidge hopes that continuing to drill, and demonstrating it can earn strong returns at current commodity prices, could make it easier to get a good value in a deal should it decided to go down one of these paths.
SandRidge Energy, like so many other oil companies, just has too much debt for oil that costs $50 per barrel. The good news is the company has time on its side to sort things out. However, one hopes the decision to continue to overinvest while it has some spare liquidity doesn't cause problems later, as its liquidity has come down significantly over the past few years and could dry up over the next few years if SandRidge is not careful.