SandRidge Energy Inc (SD) 2018 Q1 法說會逐字稿

Good morning, my name is Denise, and I'll be your conference operator today. At this time, I would like to welcome everyone to the SandRidge Energy Q1 2018 Earnings Conference Call. (Operator Instructions)

Thank you. Johna Robinson, Investor Relation analyst, you may begin your conference.

Thank you, operator, and welcome everyone to the conference call. With me today are Bill Griffin, President and Chief Executive Officer; and Mike Johnson, Chief Financial Officer.

We would like to remind you that in conjunction with our earnings release and conference call, we have posted slides on our website under the Investor Relations tab that we will be referencing during the call.

Keep in mind, today's call contains forward-looking statements and assumptions, which are subject to risk and uncertainty, and actual results may differ materially from those projected in these forward-looking statements.

We will also make reference to adjusted G&A and other non-GAAP financial measures. Reconciliations of these measures can be found on our website.

Finally, you will see us file our 10-Q later this afternoon.

Now, let me turn the call over to Bill.

Good morning, and thank you, Johna. Thank you for -- everyone, for joining us today for this discussion of SandRidge Energy's first quarter 2018 performance results and our go-forward outlook.

John Suter, our Chief Operating Officer, is unable to join us today, so I will be also addressing the operational updates. Our Chief Financial Officer, Mike Johnson, will speak to our financial highlights later in the call.

So if you would please turn to Slide 3.

A lot has transpired since the beginning of the year, when the company made a decision to initiate changes in senior management, in conjunction with the broader strategic shift in direction and focus. The result of these and other actions by our Board of Directors has driven an accelerated transition to a much leaner, margin-focused company with meaningful upside and a broad spectrum of potential new opportunities.

I'm proud of our demonstrated ability to adapt and remain focused on delivering solid operating and financial results.

SandRidge employees have been able to look past the recent disruptive events and quickly adapt to not only the organizational changes but their expanded individual responsibilities and priorities.

This is best demonstrated by the fact that we executed solidly on our first quarter capital program, along with taking necessary steps to ensure realization of nonlabor operating efficiency improvements.

Our current delivery to date, along with reaffirmation of 2018 guidance, is consistent with our prior year performance and will remain a go-forward standard that this company will deliver predictable results.

SandRidge began this transition process with decisive action to meaningfully reduce go-forward cash cost, better positioning us for profitable growth and market-value recognition.

Cost reduction efforts have been effective as we have already realized labor and nonlabor cost savings that put us right on track to exit 2018 with a cash G&A expense rate of $36 million to $39 million per year. This represents a reduction in the cash G&A expense rate of almost 50% since 2016.

We currently plan to run 2 to 3 rigs over the course of 2018 with a moderate outspending of cash flow. While the continued production decline remains a challenge, we believe current activity levels are appropriate as we work towards resolution of the current process to assess strategic options.

However, we are continually assessing additional near-term incremental drilling options in relationship to improving product prices.

These efforts are to ensure our ability to move quickly, and potentially increase drilling activity as circumstances dictate.

Near-term capital program objectives are directed toward the continued growth of oil, as a percentage of the product mix, and delivering strong returns on invested capital.

Additionally, we expect the results of this year's program to increase the markets' level of confidence in our undeveloped resource value, positioning us for increased drilling activity and profitable organic production growth in the near future.

As you're likely aware, we have also initiated a process to review strategic options to the company's evolving plan for growth and value creation. This is a broad process that incorporates numerous possible outcomes that could create meaningful incremental value opportunities and potential returns to shareholders.

It is important to note that we are managing this process with the highest of priority and urgency, yet maintaining a thoughtful and deliberate approach to ensure the resulting outcome is the best for all SandRidge shareholders.

In total, our collective actions and priorities are focused on driving value creation and the recognition of that value.

The graph, on the far right side of Slide 3, illustrates the challenge and opportunity. This shows our current, 0-leverage market capitalization of $500 million is less than 60% of the PV-10 of the total proved reserves at current share prices.

We see the ongoing strategic review process as a platform that clearly demonstrate this valuation disconnect and draw our market attention to the upside of SandRidge.

Please turn to Slide 4, where I'd like to discuss some key takeaways from first quarter operations.

First is that our capital program continues to drive positive results.

During the quarter, we completed 4 new Northwest STACK Meramec wells with an average 30-Day IP of 675 barrels per day equivalent, exceeding predrill estimates.

Capital expenditures for the quarter were $37 million, primarily associated with North Park development activities.

Net expenditures in the Northwest STACK continued to be nominal due to the low SandRidge working interest position under our Drilling Participation Agreement. These lower, before-payout working interests are resulting in fewer net wells being completed, having a proportional impact on additive new production volumes.

The total company production for the quarter averaged 35,600 barrels of oil per day equivalent, comprised of 51% liquids. This production was below the previous quarter, impacted somewhat by capital spending rates along with weather and simultaneous operation curtailments of approximately 650 barrels per day equivalent for the quarter.

In the North Park basin, our capital expenditures were primarily associated with pad drilling within the core area to further define optimal well spacing. As a result, we have 7 new North Park wells currently scheduled for completion with expected significant associated oil production coming online this summer.

In conjunction with our operational and financial efforts during the first quarter, we also initiated a comprehensive reassessment of the entire SandRidge drilling portfolio.

As a result of this work and current commodity prices, we have elected to reallocate $11 million of development capital to the Mississippi Lime.

Our plans are to drill 4 new wells this summer, targeting oilier areas of the play. The location of these 4 wells are shown on the reference map on the lower left-hand side of Slide 5.

At current strip prices, we're projecting internal rate of return of approximately 45% for this program. We're excited at this opportunity to generate additional new production and further demonstrate the undeveloped value of this important SandRidge asset after a period of extended drilling inactivity.

Timing changes in the 2018 North Park basin completion schedule shifted some associated capital into 2019, which we were able to utilize to fund the Miss Lime development. These changes did not impact our full year guidance, which remains unchanged from the previous quarter.

SandRidge today operates over 1,100 Mississippian wells that currently deliver approximately 90% of the company's overall production.

Our large, predominantly HBP, acreage position and operational infrastructure, combined with low Miss Lime operating cost of $6.43 per BOE year-to-date, establishes SandRidge as a premier operator in the play.

In the Northwest STACK, and moving to Slide 6, we continued to test the Meramec through our Drilling Participation Agreement with good results during the quarter.

As our knowledge of the Meramec continues to improve, we're gaining increased confidence in our ability to identify and target the best areas of commercial drilling potential.

As we discussed last quarter, there is still meaningful variability across the full acreage position. We have chosen to focus the majority of our drilling on the area outlined on this map as we believe it represents the best potential at this point in time.

We've talked several times previously about our delineation objectives within the Northwest STACK, but we're also continuing to evolve and improve completion techniques.

We have early-time data that indicates a meaningful uplift with higher-density frac stimulations. We'll be in a position to discuss this in more detail next quarter, but it is noteworthy that our learning curve advancement in this play involves more than just improved location-selection certainty.

Again, because of our low participation interest in the new wells under the agreement, our associated net shares production is proportionally impacted, and we did see some production decline relative to the fourth quarter.

The 4 new Northwest STACK Meramec wells turned to sales during the first quarter are highlighted in orange on the activity map on Slide 7. Shown in blue are the previously drilled SandRidge-operated Meramec wells. These 4 new short-reach laterals averaged a combined 30-Day initial rate of 675 BOE per day, 76% of that comprised of oil, and with an average return -- rate of return in excess of 30% at current strip pricing.

Moving to the North Park basin in Slide 8, our year-to-date capital program has been primarily focused on pad drilling and infrastructure build-out within the core area to further define optimal well spacing.

Net production for the quarter was 2,400 barrels per day, impacted somewhat by simultaneous operations and weather-associated production deferments during the first months of the year.

Also, our type curves remain unchanged with improving returns associated with increasing oil prices.

I would also like to mention 2 initiatives to mitigate the flare gas volumes in North Park. SandRidge has signed an agreement with Advantage Midstream to build a small-scale modular gas-to-liquids, or GTL, processing facility at our Big Horn tank battery. This initial pilot facility will process around 500 Mcf per day of natural gas into diesel and gasoline as the sellable by-product, eliminating natural gas as the product stream and the need for flaring.

We're also waiting for final permit approval to install a mechanical refrigeration unit, or MRU, to be operational in the fourth quarter.

This facility will provide additional revenue from NGLs extracted from the wet gas stream, delivering the lean gas for combustion or further processing.

We believe both of these initiatives will provide scalable commercial options, providing an expanded evaluation window to longer-term midstream takeaway considerations.

Slide 9 demonstrates the objectives of 2 different Niobrara well spacing tests currently planned for North Park. The current field development plan is built around 16 wells per section. We have finished drilling 3 benches of our 16-well per section "wine rack" pattern shown on this slide.

The spacing between laterals in any given bench is 1,320 feet or a quarter-mile, staggered as you move up to subsequent benches.

Two of the wells in this 8-well test area were completed previously and are online and performing above type curve. Completion operations for the remaining 6 wells are underway, with first production expected later in the second quarter.

As you may recall, last quarter, we stated that commercial production has been confirmed from the Niobrara B, C and D benches. Because of the commerciality of the Niobrara A is still undetermined and exhibits somewhat lower potential, we are currently not including that as part of this spacing assessment.

Additionally, contingent upon the results of our current spacing assessment and well completions in progress, we anticipate an 8-well, increased-density test later this year to evaluate a wine rack, vertical spacing pattern, with reduced separation between laterals of 660 feet within a given bench.

Success with this increased density development will significantly impact full field development plans and further increase the ultimate recoverable reserves from the field.

I'd like to emphasize that while we continue to advance our learning curve and make significant progress improving the ultimate value and potential of North Park, we remain focused on balancing the allocation of capital to ensure delivery of strong returns.

The North Park production graph on Slide 10 demonstrates the up-and-down nature of our current production profile. As an early-life development project, with a relatively small current production base and an area with significant federal leasehold positions, there are required periods of delay associated with regulatory stipulations and infrastructure build-out that will impact new drilling and completion timing.

Additionally, the realized cost savings associated with bundling completions and pad drilling, both further result in outcomes where multiple wells come online as a group, all resulting in periods of decline in step function and increases in production rates.

As our base production continues to grow, this impact will lessen.

The second half capital program also includes additional associated facilities construction. The result will be a second production peak with our 2018 drilling program realized during the second quarter of 2019.

While the scheduling impact creates some disconnect between capital timing and production increases, you can clearly see the positive overall production trend of our 2018 activities over this 18-month period.

Before I turn it over to Mike, I would like to congratulate the entire organization on remaining focused on one of our most important strategic objectives, and that is safety and environmental excellence.

This operational performance was achieved with no recordable injuries during the first quarter, resulting in a 0.0 total recordable incident rate. We continue to strive for excellence, focusing on safe and low-cost operations, which is a continuation of ongoing efforts to make the safety of our employees and contractors a priority.

With that, I will ask Mike to address to our financial performance.

Thank you, Bill, and good morning to everybody on the call. I'd like to address where we stand from the financial standpoint and review some of our key performance results this quarter that Bill didn't already cover.

What is clear from our first quarter results is that our controllable cost structure is being driven down in all areas as we continue our efforts to be a low-cost operator.

Slide 11 of our investor presentation offers a recap of our financial highlights and cost reductions during the period.

In the first quarter, our production expenses, G&A and adjusted G&A, all came in at or under budget, and each of these cost categories are down considerably year-over-year and sequentially compared to the fourth quarter.

This gives us the confidence to reaffirm our full year guidance that we disclosed back in February.

Production expenses were $24.7 million in the current quarter or $7.71 per BOE compared to $25 million or $6.28 per BOE in the first quarter of 2017 and $25.7 million in the fourth quarter of 2017 or $7.29 per BOE.

The current quarter results suggest that we are likely to end the year at or below the midpoint of guidance.

Adjusted G&A, which excludes stock-based compensation and certain nonrecurring items, was $11 million or $3.46 per BOE in the current quarter. This represents a $2.6 million reduction year-over-year or 19% from the $13.7 million or $3.43 per BOE incurred in the first quarter of 2017 and a $2.7 million reduction sequentially.

As a reminder of the commitment made to our shareholders in the February 8 letter from our board, during the first quarter, we implemented changes to our organizational structure.

Included in the company's first quarter results is $31.6 million in employee termination charges, in connection with these changes.

Of this amount, $18.6 million was paid in cash, and $13 million was in the form of accelerated vesting of stock-based compensation based on valuations of our common stock on the various grand dates.

These termination benefits were the result of 2 separate events. First, as announced on February 8, our then current CEO and CFO separated from the company, and the combined termination benefits provided to both were $21.1 million.

Second, as a result of a 26% reduction in our corporate office workforce in late February, plus a modest reduction on our field employees at the same time, employee termination charges of $10.5 million were incurred.

As a result of these and other cost-cutting measures, our current quarter all-in G&A decreased $5.5 million year-over-year or 28% and decreased $2.8 million or 17%, sequentially, over the fourth quarter.

Shifting to the balance sheet, we begin -- we began the year with $99 million in cash and ended the quarter with $27 million. The biggest drivers of the reduction were our Capex, the payoff of our building note payable in full and payment of cash severance costs and other accrued obligations. The payoff of our $36 million building note currently leaves us with no outstanding debt. The building note had an estimated fair value of $42.5 million at December 31, based on the then current interest rate of 8%, which would have further increased to 10% later this year.

The payoff of the building note was necessary to facilitate the planned sale of one of our downtown corporate properties that served as partial collateral for our increasing rate note.

As for our credit facility, which was reaffirmed last month, we continue to be undrawn leaving us with $418 million in borrowing capacity.

As shown in our appendix, there are no changes to report relative to our hedge portfolio. We have effectively fully hedged our anticipated 2018 liquids production, using fixed-price oil swaps of approximately 3.8 million barrels of oil at an average NYMEX WTI price of $55.75.

And we've also hedged roughly 54% of our anticipated 2018 natural gas production at an average NYMEX price of $3.16.

Looking ahead, we do expect to protect additional 2019 cash flows through hedging if circumstances warrant.

With that, I'll turn it back to Bill for his closing remarks.

Thank you, Mike. While we all share disappointment with recent stock price performance, I would like to reiterate a few important reasons for optimism going forward.

First is the organization's demonstrated ability to focus on results and our continued commitment to delivering solid operational and financial performance on a daily basis.

We have also moved decisively to improve margins while continuing to create asset value growth as shown with the increase in net present value of proved reserves.

I'm confident that a continued focus on lower cost and a demonstrated achievement of profitable organic growth through the drill bit are key components to ultimately unlocking our full market value.

Our strong balance sheet remains a key consideration as we advance the formal process announced in March to assess strategic options to generate meaningful incremental value.

Our ongoing efforts will be governed by the understanding that any process outcome should be complementary to the objectives of returning value to the shareholders and providing a platform and clear go-forward strategy for future value creation.

Combining these initiatives for improvement and change with the strong financial position and operational capabilities will result in a company that is compelling to a broad base of existing and potential new investors.

I appreciate your time today and your interest in SandRidge and turn it back to the operator for questions.

(Operator Instructions) Your first question comes from John Aschenbeck with Seaport Global.

My first question here is just regarding the reassessment of the company's drilling inventory, a 2-part question. But here's the first, approximately how long do you expect the process to take? And then secondly, once you've completed the assessment, should we expect some type of larger update to be communicated to investors in terms of your inventory depths, type curves and associated economics across your 3 major plays?

John, the assessment is something that was initiated shortly after my stepping into this role. We felt that it was probably prudent to relook at the entire inventory and how we were projecting to spend capital to develop that. And, in particular, the Northwest STACK being as young as it was, and still being under delineation, required a little more thought and analysis. And so we're -- this is a critical component of the strategic process that we currently have underway is at full and confident understanding of the underlying net asset value of the company. And so we're very, very close to wrapping it up, and with that -- because this will really provide the foundation for all the decisions and analysis that we'll perform during the strategic process. The additional benefit and outcome of this is, as mentioned, is the opportunity to look at reallocating capital with changes in these commodity prices. And so, all of this is leading to more disclosure and more transparency that I would expect to be discussed in our next quarter's call.

Okay, perfect. That was great color. Appreciate that. And then my second one here is just a follow-up on the potential acceleration options that you're considering now. Again, 2-part question. First, is there any one play in particular that you'd be more inclined to accelerate in? And then secondly, disappointed here to fully finance acceleration internally? Or are you also potentially considering an expansion of your current JV, or perhaps finding another JV partner?

I'll answer the second question first. I think part of the strategic process would be to explore potential joint venture opportunities, in particular I think, North Park would lend itself to a joint venture partner. And that would be something that we look at as an option as we move forward. With regard to any particular play, I think it's premature. There is pros and cons with each one. The North Park basin is already consuming a significant amount of capital. The stipulations and other things have some impact on timing and our ability to accelerate or not. And we don't want to move too fast out there until we have the ability to better manage our gas flaring and keep that at a manageable level. The Northwest STACK, as I mentioned, I think, is appropriate still at this point in time to continue with the existing Drilling Participation Agreement and further delineate, but we would look at, possibly, doing some incremental drilling later in the year as we continue to gain confidence this -- with our results there. And then, the Mississippi Lime, we just have a really broad spectrum of fairly low-reserve to fairly high-reserve undeveloped opportunities there. Obviously, the 4 we selected for 2018 are going to be some of our better, oilier opportunities, and therefore, on the higher end of the return spectrum. And we just have to be prudent, not overrun ourselves out there. So it's a little bit of a challenge, and probably -- and reality would be somewhat of a mix of all of the above if we choose to deploy additional drilling capital.

(Operator Instructions) Your next question comes from David Beard with Cooker Palmer (sic) [Cooker & Palmer].

My question kind of follows on your deployment of capital relative to how much outspend you would tolerate or can handle because obviously your balance sheet is in great shape. Can you kind of bracket where you'd be uncomfortable outspending? And what makes sense?

Well, I would say right now, our current outspend level is where we want to stay until we bring some conclusion to this process. And the status quo more or less is the best option for us until we make some decisions as far as other strategic options as we move forward. The -- a part of this reserve reassessment is the -- is a rebuilding of our reserve development plan and the associated capital with that. And until we finalize that process and have a good risk reserve development profile, it's -- I think that's the key for us making some decisions about outspending it as we try to move this thing toward an organic growth profile and a stand-alone basis. And I guess the short answer is, our current outspend is appropriate, but oil prices are increasing, returns will be compelling to start looking at, trying to do some additional work, and we certainly have the capacity to increase our outspending, but again, just waiting on more resolution of the process.

Okay. Just as a follow-up to that, when you look at the latter question of maximizing shareholder value, it would seem that resuming Mississippi Lime, was this sort of a shorter-term [STACK GAAP] measure or saying, "Hey look, we can get some very high-return oily wells, but we're still evaluating the bigger picture." Is that a fair characterization? Or I'm missing something there?

Well, no, David, as I mentioned, we had a situation on the timing in our North Park fourth quarter completion program and shifted some capital into 2019, and we just felt it was prudent to adjust and reallocate that capital. And as we've -- as I've been in here, and we've looked at the Miss Lime, there are some very viable opportunities. These are 4 of them. So it was just more redeployment of capital into an area that I -- to be frank, needed a little jolt. And so I think this is a -- sends a good, positive message that the Miss Lime is still there, and it's alive and kicking. And that was the biggest driver in making that decision.

And there are no further questions in the queue at this time. I'll turn the call back over to Bill Griffin.

Thank you. And once again, I appreciate everybody's time, and I hope that this provided some insight and some color on our go-forward plans. I remain excited about the opportunities at SandRidge and look forward to, potentially, some significant, major changes as we move through our evaluation of these strategic options. Thank you, have a good day.

This concludes today's conference call. You may now disconnect.