Source: SandRidge Energy.
SandRidge Energy (NYSE: SD) recently reported surprisingly solid second-quarter results. This is after the company did a good job of lowering its costs, which enabled it to produce more oil and gas with less money. That said, the company is still in a tough spot as its financial position has been really weakened by the downturn in the oil price. It's a situation CEO James Bennett addressed head-on during the company's second-quarter conference call. Here are five things he wanted investors to know.
1. Liquidity is paramount right now
The first point that Bennett hammered home on the conference call is that "liquidity [is] paramount" for the company right now, so investors should expect it to "maintain a strong liquidity position." It was this desire to have as much liquidity as possible that was behind its decision to raise $1.25 billion of second-lien financing in June. That nearly doubled its liquidity as we can see on this slide:
Source: SandRidge Energy investor presentation.
2. We still want to reduce debt
SandRidge Energy, though, would still like to improve its balance sheet by removing some debt. In fact, Bennett said he still has his "eyes on $1 billion of debt reduction for now." However, that's really a moving target depending on the oil price. As he pointed out:
The ultimate answer to that longer term, how much debt should be off the business, or what the leverage level should be, is going to depend on what commodity price environment we're in. If we're at a $45 price environment, that's going to give you a different answer than at a $60 or higher price environment. But for right now, I've got my eye on $1 billion. After that we'll evaluate.
What's worth noting is that subsequent to these comments, SandRidge Energy did take a first step in reducing its debt when it repurchased $250 million in senior notes for $94.5 million in cash and exchanged $275 million in notes for new convertible notes. In a sense, this covers half of its debt reduction targets, assuming full future conversion of the convertible notes into SandRidge Energy stock.
3. We won't sell assets at a fire-sale price
One of the other levers SandRidge can pull to reduce its debt is to sell assets. However, Bennett said that, "the urgency to sell assets in a pretty choppy, volatile market has lessened" because the company boosted its liquidity with the second-lien debt. Further, while the company wants to sell assets, it doesn't "need to do anything at fire sale prices" because, as Bennett put it, "we have time... so I'm going to be a little patient there because I can." Having said that, when the time is right SandRidge will use the proceeds from future asset sales to reduce its debt.
Source: SandRidge Energy.
4. We're staying as nimble as possible
Despite having time, SandRidge is still in a tough spot right now. Bennett noted that, "together with the whole industry SandRidge is in the midst of a challenging period for commodities. The tone of the market in pricing is much different today than it was a month ago or a month before that." Because of this, it has changed how it plans to operate going forward to,
[...] A string of 90-day tactics taking into account market movements [that] will be more executable than trying to stick with a single one-year or two-year plan. So look for us to remain nimble and move as opportunities become available.
Because of the complete lack of visibility in the oil market SandRidge is really going to focus on the next quarter, as opposed to the next year. This could lead to revisions to its capex and production plans as the company is trying to remain really nimble until it has more visibility.
5. Here's what we need to do to succeed
Bennett concluded by saying:
We don't need to grow for growth's sake. We need to ensure the long-term stability of the balance sheet at some point, and we need to protect the enterprise and protect our liquidity, so we will balance all those. But to say exactly what we'll do in two years from now, I think it's going to depend on a lot of circumstances on what the market looks like, but look for us to continue to improve operationally. That's what's going to make the business work. We can make some balance sheet moves and protect our liquidity, but driving down the well costs, drilling better wells, finding new areas, deploying the multilateral technology, appraisal new venture success, those are the things that will really make us successful.
SandRidge's main focus right now is on running its business as well as it can during the current environment. It believes that if it can become a really strong operating company and fix its financial issues it will be in a much better position to succeed over any commodity price cycle.
Investor takeaway
SandRidge Energy still has a lot of work to do. However, it's not under the gun right now as it has liquidity and therefore time. Because of this, the company is going to focus on what it can control, which is its operations and costs, while it looks for ways to reduce debt. That said, it could really use a big oil price rally to give its finances a needed boost.
