Mid-Continent-focused oil and gas producer SandRidge Energy (UNKNOWN:SD.DL) is on deck to report its second-quarter results on Wednesday after the market closes. This could be one of the most important reports in the company's history, given that the market currently views it as a potential candidate for a future bankruptcy. Because of that, it needs to say a lot to assuage investors' fears when it reports earnings this week.
1. We're both liquid and solvent.
Given where its stock price is right now, investors don't expect SandRidge Energy to survive the downturn in the oil market. These fears really took hold after it recently added another $1.25 billion in debt to its balance sheet even after CEO James Bennett said that the company would "probably want to remove $1 billion of debt from the balance sheet" given the weakness in oil prices.
SandRidge Energy raised that incremental debt to bolster its liquidity so that it would have adequate cash to survive a protracted downturn. However, the company now has more debt than some oil companies 10 times its size, bringing into question its solvency. Suffice it to say, the company needs to make clear that bankruptcy is not on the horizon by demonstrating that it has adequate liquidity for the long haul and more than enough assets to offset its debt.
2. We have an actionable plan to reduce our debt.
Speaking of that debt, SandRidge Energy has certainly been sending mixed signals on what it intends to do to improve its balance sheet. Earlier this year, it entered into a debt-for-equity swap, which whittled down about $50 million of its debt. However, it then piled on $1.25 billion in additional debt, saddling it with more than $2 billion over and above where it said it felt comfortable with, given the current oil price. These mixed signals have destroyed what little equity value it had left, leaving the company with fewer options to address the situation.
That being said, it needs to put forth an actionable plan to address the situation this quarter as it's running out of time with the market. This plan could consist of selling assets to raise cash or news that it has been buying back its debt at a discount on the open market -- if it wants investors to continue to hope that it will survive.
3. Our operations are performing much better than expected.
The last thing the company needs to say this quarter is that its operations were outstanding. It needs to deliver a meaningful reduction to its costs, bringing it closer to its goal to get its per lateral well cost down to $2.4 million. Furthermore, it must reduce operating costs below the current projection of $13.50-$15.70 per barrel of oil equivalent in order to improve its weakening cash flow.
Ideally, the company will also have delivered better-than-expected production in the quarter, as it can't really afford to miss guidance due to weather or operational disruptions. To do this, new wells drilled during the quarter need to meet, or better yet vastly exceed, type curve expectations.
In other words, SandRidge Energy really needs to have hit this one out of the park.
Investors are really questioning SandRidge Energy's ability to survive this downturn. Not only did the company have too much debt before oil prices weakened, but its debt load has only grown worse over the past year. Suffice it to say, the company must address the situation this quarter as its simply running out of time in the minds of investors. Not only does it need to address these concerns head-on, but it needs to deliver outstanding operational results for investors to still hold on to any hope that the company won't end up going bankrupt.