SandRidge Energy Inc (SD) 2021 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the SandRidge Energy First Quarter 2021 Earnings Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions) I would now like to hand the conference over to your speaker today, Brandon Brown. Please go ahead.

Thank you, and welcome, everyone. With me today are Carl Giesler, our CEO; Salah Gamoudi, our CFO; and Grayson Pranin, our COO; as well as other members of management.

We would like to remind you that today's call contains forward-looking statements and assumptions, which are subject to risks and uncertainties, and actual results may differ materially from those projected in these forward-looking statements. We may also refer to adjusted EBITDA and adjusted G&A and other non-GAAP financial measures. Reconciliations of these measures can be found on our website.

Thank you, and good morning. Hopefully, you've had time to peruse the earnings release and investor presentation posted yesterday after the market closed. We typically aim to keep brief our prepared remarks. Today, however, we plan on being more expansive. Over the last several years, and particularly during 2020, the Board of management had worked to reset, if you will, our company in almost all respects from focusing our asset base, streamlining our capital organization on cost structures to reassessing and tightening our capital allocation.

Accordingly, we think it would be useful to your assessment of our company, if we walk through the presentation in addition to reviewing our 1Q '21 earnings. Before turning to that presentation, though, Salah will touch on a few highlights from our first quarter earnings.

Thank you. Simply put, 1Q '21 was a strong quarter. During the quarter, our net cash position increased just over $48 million, almost $57 million compared to just over $8 million in the prior quarter. This net cash position reflects more than a full flip from just over $51.5 million in net debt that we had, entering 2020. Our adjusted EBITDA more than doubled from the prior quarter to almost $22 million and just over $9 million in 4Q '20. We should note that 4Q '20 was driven by onetime $5.3 million cash hedge loss due to the unwinding of all of our hedge positions. Even without that hedge online impact, 1Q '21 adjusted EBITDA would still be meaningfully higher. Note that our Board and management made the decision to unwind our calendar '21 gas hedges last November based on an improving 2021 gas price outlook. That decision appears prescient as those swaps were just over $2.60 per MMBTU. Prices this year have been trading, and the 9 months curve remains meaningfully higher.

Our production held fairly steady during the quarter with our MidCon assets producing 17,500 BOE per day compared to 19,000 in the prior quarter. This quarter's production is particularly notable given the substantial 2-plus week negative impact from the snow populous in February.

Note that we closed the sale of our North Park Basin asset on February 5. Only North Park Basin for only 36 days during 1Q '21 makes quarter-over-quarter production comparison less relevant for that asset. Price realizations, particularly for NGLs, appear to be migrating back up to pre pandemic level.

Our 1Q '21 oil and gas realizations were up 41% and 19% from the prior quarter. NGL realizations as a percent of WTI was 29% in 1Q '21, up from 21% in the prior quarter. Our cost discipline continued to improve during the quarter with previously implemented initiatives now manifesting in our financials. This quarter, we saved nearly $1 million off of adjusted G&A compared to the prior quarter lowering it to $1.9 million or $1.14 per BOE. While we continue to aggressively press G&A expenses, we do not expect G&A to remain as low on an ongoing quarterly basis. The team also compressed lease operating expenses by $3 million compared to 4Q '20, reducing it to $8 million or $4.85 per BOE. This general level of LOE should be sustainable going forward. We believe that we compare favorably with our peers on both the G&A and LOE per BOE basis. It's relatively rare for an E&P company to generate net income, we did that. However, this quarter, earning net income of $35 million, including an almost $20 million gain on the sale of North Park Basin.

Also in the (inaudible) category, we have no oil and gas impairments for the first time since the second quarter of 2019. Lastly, in the (inaudible) category, despite still grappling with waning challenges of COVID, our streak without a recordable HS&E incident is now in the 33rd month as of today. We believe few if any public E&P companies can build such a streak which is further detailed on Page 7 of our latest investor presentation. The final notable in 1Q '21 was the simplification of our asset base. Due in large part to an increasingly challenging Colorado regulatory environment, we exited in February our high decline, higher cost North Park Basin asset. We are now focused solely on our core long lived predominantly PDP Midcon property.

Subsequent to the quarter, we purchased for $4.9 million in cash all of the overriding royalty interest assets of standard Mississippian Trust I. When that trust ultimately liquidates, our company will no longer have any affiliated trust. Additionally, we expect to receive back about $1.3 million of that purchase price to reflect our 26.9% ownership in that trust.

Before shifting to our investor presentation, we should note that the release posted yesterday and the 10-Q that we'll file later today provide further detail on our financial and operational performance for 1Q '21.

Now turning to the presentation. We thought it would be helpful to walk through what we're calling the Reset SandRidge. Over the last few years, the Board of management has focused the company's assets, optimized production profile, streamlined its organization and cost structure and strengthened balance sheet. The key highlights are on Page 3. We have streamlined our asset base to a Midcon focused primarily PDP Asset Base. We know these properties, especially well as we've had them a long time. They are almost fully HBP in a long-lived, shallowing and diversified production profile. A detail later on Page 6 overlaid across our acreage position is more than 1,000 miles each of owned and operated SWD and electric infrastructure, representing more than $1 billion in invested capital in providing the company both cost and strategic advantages.

Our assets have robust free cash flow capabilities, particularly with the low-per BOE cost structure and light CapEx requirement as well as improving commodity prices and utilization. This cash generation potential provides several paths to increase shareholder value realization. At the Nymex strip, we believe our PD PV-10 value approximates more than $230 million, and we can build on that by extending and flattening our production profile with small ball projects and well reactivation by actively managing our price realizations and further reducing costs by growing our asset base with opportunistic economically accretive acquisitions and by maintaining exposure to commodity price upside. As we realize value and generate cash, our Board is committed to utilizing our assets, including our cash to maximize shareholder value.

The Reset SD value proposition is materially de-risked from a financial distress perspective by our strengthened balance sheet and financial flexibility. At quarter end, we had a significant cash position with net liquidity approaching $65 million, excluding restricted cash. We don't have MVCs or other significant off-balance sheet financial commitments. And with the recent purchase of the overriding in royalty interests of SandRidge Mississippian Trust I, we have no affiliated Trusts impinging our operating wells.

On the opposite end of the spectrum, we ended the quarter with approximately $1.7 billion in NOLs, which could help meaningfully reduce tax impact of a dividend program or other use of cash. Finally worth highlighting that we take our ESG commitments seriously. We've implemented different processes around them.

The next Page 4 lays out a go-forward strategy. The (inaudible) that we're completely focused on growing the cash value and generation capabilities of business in a very responsible, efficient manner. This (inaudible) strategy has 4 prongs. The first is to maximize the cash value and generation capacity of our incumbent Midcon PDP asset. You'll hear a version of this course throughout this call. One, extend and flatten our production profile with high impact, work-over and other small ball projects as well as low-risk well reactivations; two, actively manage marketing options to maximize the price realizations; and three, continue to press on costs.

The second point is to ensure we convert as much EBITDA accounts as possible. A good friend once told me if you can't buy a cheeseburger with it, it doesn't count. So keeping low cost, high CapEx discipline, active working capital management, limited interest drag is key for us converting EBITDA into true free cash flow.

Third point is to keep vigilant for opportunistic value-accretive acquisitions. We're focused on PDP-weighted assets that: a, fit our core competencies, cost efficiency and production optimization; b, have sufficient midstream optionality; and c, are favorable regulatory areas.

Details on Page 11, MidCon Assets purchased from Enduring Resources several years back as well as last fall and this firm's purchase of the Mississippian Trust overriding royalty interests are emblematic in this approach. The final prong is to uphold our ESG responsibilities.

Progress a little bit quicker as we move through the remainder of this presentation.

Page 5 details our core MidCon asset position. To our view the salient points are: one, long-lived with more than a 9-year reserve life; two, shallow decline with expectations of upper teen declines this year down shifting to low teens and lower going forward; three, diversified production, both from a, hydrocarbon mix well with gas NGL weighted and b, well based, where we have more than 950 producing wells; finally, we're mostly HBP. This makes spending commitment to minimum. All this sums up to an active Nymex strip PD PV-10 value that we believe is approximately more than $230 million.

Given that we've already discussed materials on Page 6 and 7, we'll move ahead to Page 8. This page outlines how various initiatives of the Board of management over the last several years have led to an absolute and per Boe reduction in LOE of 70% and more than 40% respectively since 2016. A common thing among the initiatives laid on the left side of the page, which is a detailed "white paper reassessment" upon every cost aspect of our field operations. We're proud that our per Boe LOE is among the lowest of our peers.

Page 9 addresses topic on which we received a lot of inbound at investor call in the 4Q '20 earnings in early March, mainly NGL and gas realizations. The happy news is that we've seen steady progress over the last few quarters that have continued into the current quarter. No doubt, general market tailwinds have helped. So has actively working with the largest offtakers and leveraging outsourced marketing expertise. As we will detail later in his presentation, gas prices and NGL realization have material impact on the PD PV-10 value of our asset base.

Page 10 addresses our approach to production optimization. Since last June, we focused on relatively low capital, quick payback, high-return workover small ball projects and candidly enjoying success in our execution. As we work to delever our balance sheet and expand our liquidity and capital access at the latter part of 2020, we purposely took a very disciplined approach, limiting (inaudible) projects with a year or less payback.

Liquidity is key. Now with a much stronger balance sheet and liquidity position, we plan to comprehensively evaluate well reactivations, drill outs, recompletions, and even (inaudible) drills. These more aggressive initiatives could significantly help flatten the already shallowing base decline.

Skipping to Page 12. Fundamental to a reset has been a deliberate shift from a what if to a what is organization. Market headwinds, balance sheet constraints and other realities required a strategic change from a high CapEx production growth strategy to a more cost efficiency, PDP optimization cash flow strategy for our company. While that preserves the internal capability and people to maybe someday toggle back from the latter to the former, we decided to radically alter our organization to be more fit for purpose.

This operation had several key components: number one, rebalancing to ratio of the field versus corporate to reflect where we actually create value; two, outsource necessary the more perfunctory and less core functions, such as operations, accounting, land administration, IT, tax and HR. Beyond the more than $6 million in current annum G&A savings from this, outsourcing provides us greater flexibility and scalability to adjust to changes in our business or the market; three, contract-as-needed for drilling and completion and other more episodic needs. One happy outcome of this organization makeover is that we retained and upgraded multiskilled core team of fewer, better incentivized professionals with ample career motivation to drive value for company.

Page 13 (inaudible) another happy outcome of an organizational streamline. And that is more than 60% reduction in G&A on both an absolute and per Boe basis since 2018. Here, let's pause for a second. Up to this point, we've endeavored to convince you that we have the asset base, strong balance sheet and execution bonafides to deliver on our overarching strategy to grow the cash value and generating capability of our business in a safe, responsible, efficient manner. Now we'd like to share our view on what delivering on that strategy could be worth.

Page 14 lays out how we think about our PD PV-10 reserve value. It's a bit busy, so I'll try to unpack it. 3 bars from left to right show a year-end '20 audited reserve value at SEC pricing that includes North Park Basin. And then we share the same year-end '20 reserves with Nymex pricing without North Park Basin. And finally, we show our first quarter '21 reserve value with Nymex -- with May 5 Nymex pricing, again, without North Park Basin. All 3 bars reflect analysis consistent with standard industry reserve practice, including performance, commercial updates, price differentials, operating expenses and other commercials based on 12-month outage.

Note that no bar includes dollar-for-dollar value of the company's net cash position on its balance sheet. These bars just reflect the value of our PD reserves.

Under each bar is a summary of the key drivers, the blue price deck incorporated WTI, Henry Hub, realizations, LOE and average look back period employee. There are 2 horizontal lines: the higher line crossing the 3 vertical bars represents recent market cap. The lower horizontal line reflects enterprise value, essentially a market cap less, move downward for the value of our net cash position. This enterprise value line is, if you will, the market proxy for the vertical bar. It reflects market view of the value of our asset base, separate apart from the net cash position. So 1 bumper sticker of this page -- from this page in my mind, is that our estimate of a 1Q '21 PD PV-10 value exceeds $230 million, which is more than 2x our recent market proxy in terms of enterprise value of only $105 million.

Another bumper sticker is significant sensitivity of that PD PV-10 value to move in WTI, Henry Hub and NGL realizations as a percent of WTI. That last metric, average NGL realizations has moved more than 10 percentage points over the last 3 months compared to the last 12 months on average. If these realizations hold, approved well reserves should have even greater value. Average LOE per BOE is also set down during the same time frame, also suggesting a higher PD reserve value.

Finally, on Page 15, we circle back to where we started this call with our 1Q '21 results. This page places our first quarter results in the context of our annual guidance, shown as misrepresented as well as on a divide by for quarterly basis. We're pleased that we're tracking better on production and substantially better on adjusted G&A and NGL and gas realizations.

At this time, thank you for your patience during this much longer than normal set of prepared remarks now. We'll now open the call for questions.

(Operator Instructions) Our first question comes from the line of Noel Parks from Tuohy Brothers.

So at this point, where you have achieved a big improvement in efficiency and as you pointed out, continue to shift away from a high CapEx strategy, from here forward, can you maybe talk a little bit about other than -- well, I guess, with commodity price sort of at the center of it, more of an upside case scenario in terms of what would encourage you to get a little bit more aggressive in terms of spending and maybe talk a little bit about what the next couple of years would look like if it turned out that we're in a temporary price spike for oil and the strip turns out to be more right for gas than it looks like right now?

Yes. I'll handle this question. I don't want to talk or project too far in the future. I will say that whatever commodities we get, we're going to maximize the cash that we get from them. That is an overage. And so at this point, to kind of answer the front part of your question, I think we're focused on nearly 2 things. So organically or internally, there's always things that you can do to press on costs. We still have a little bit of room on LOE pretty good on G&A that we will continue to press. We always find things, and we keep looking.

The biggest thing that we started to do and we really need to be more disciplined and systematic about is working on major offtakers and thinking about what optionality we might have to actively manage our price realizations, particularly around gas and NGLs. That is an area we just have not put a lot of time until very recently. It can be meaningful going forward.

Thirdly, and this is also a meaningful bucket. We have been very conscious of liquidity until we close some of the major sales we're building in the North Park Basin as we got the cash.

And now our team is starting to do the homework. And homework is very important. There is no better way to move in that project than we look at well reactivations, drill outs, maybe some refracs and things like that. But of course, we do that as we require more capital, we'll have to get to the Board, it's a very healthy process to bet those projects and get the approval. But that's something that we're definitely doing and then finally, and this is a little bit happened in the background. We are very cognizant of the value that we can realize the enterprise by being smart about how you off play P&A obligations, and there are some wells that are becoming end of life, (inaudible) asset base, but people will actually pay positive money for wells that may not be making money and then have an open P&A liability. So from a (inaudible) perspective, we're focused on shedding that.

That's a little bit less evident quarter-to-quarter, but I think something that will be very important. And then finally, like we said, we continue to evaluate M&A that fits our criteria right now being dominantly PDPs with a little bit of development risk, and that plays to our core strength of being smart on cost and production profile optimization. And obviously, in the regulatory regime that like, jobs the oil and gas business brings.

Great. And you did just mention that with the cash from the Colorado sale now in the door, the team is beginning to sort of do some homework. That brings me to the other thing I was wondering. The inventory of quick return projects, we work bringing wells back online and so forth. Can you give a sense of -- as far as what you identified for those projects, how many of them have you kind of -- kind of worked through at this point? And as you begin doing more homework on what else is possible out there, is that likely to sort of replenish the list of rework jobs you've done so far? Or do you think of it maybe just defining list of projects for the coming year or something like that, but not necessarily a long-term plan?

Sure. This is Grayson. Happy to answer that question. I can't give you an exact number of inventory. I can't say that we have a meaningful inventory set that we are currently evaluating. We will be opportunistic as the market conditions sustain and continue to improve. I do think that this inventory set is potentially robust enough to be meaningful, both this year, next year, particularly and the following year.

Okay. Terrific. So then that really does kind of give you a line of sight past our current commodity cycle and I guess that, in turn, would give you a good deal of strategic flexibility, looking ahead as far as what you want to do on the capital or the acquisition side, is that fair?

No, that's fair. Well, I would just point out that while we had a little bit over 950 operated wells, we have a lot of wells on our property that have been temporarily abandoned or shut in. There's a lot for us to evaluate play with. And the good thing is these wells have already been drilled. So bringing it back on does not require nearly as much CapEx as redrilling.

Got you. And then just the last one for me. We've seen quite an uptick in corporate level transaction activity, M&A in just about every basin you can think of and really just in the last few weeks, just curious what you're seeing in the MidCon. And curious, in particular, if you have any private or PE-backed assets that have come to the market. I understand more things have come to the market in recent weeks than we've seen in some time.

I think really, all I could say at this time, is as things come to the market that are kind of that real house and look good, we certainly look at them. And you're right, there has been an uptick in activity in the MidCon, and we feel like we're in the flow of being able to look at those opportunities.

(Operator Instructions) Our next question comes from the line of Josh Young with Bison Interests.

These are great results. Just have a couple of questions on this presentation and follow-ups. So one, on Slide 14, you guys show 3 bars, and there's kind of the fourth implied bar that's missing that implies kind of even better reserve value at a PDP PV-10 basis on kind of current differentials, which have improved versus Q1. I guess, how do you guys think about it looks like you're kind of anchoring the value of the company to the PDP, PV-10, but you're building your cash position, there's no dividend, there's no buybacks. There's just kind of this increasing cash balance, which, of course, is great. But I guess there's this overriding high-level question of like what's next that doesn't seem to get answered in these materials or hasn't been answered. And I know I was kind of, I guess, more politely, indirectly asking kind of the same thing. But to the extent you guys could provide just more clear guidance at a high level, maybe that could help.

Yes. Josh, thanks for listening in and for the kind words. Let me start off. On Page 14, we endeavor to do, and I think, it's appropriate is show our approximated or what we believe our PD reserve PV-10 is in a manner consistent with industry audited reserve practice, right? 12-month looks back, so on and so forth.

And we did feel it was useful to lay out, as you mentioned, where there is no bar kind of where things are currently. And we are seeing over the last 3 months, last quarter, we had 29% NGL realization. We can't say that for the last 12 months at this point. That held through, we gave you some sensitivity, it's just what that might do to value. And then I believe we said, we're not just focusing on normally the values tethered just to the value of our reserve base.

Obviously, roughly $60 million of net cash we have on our balance sheet is very valuable as well. And that is in addition to the value of reserving. So in some ways, we're a very simple company. We have PD reserves and we have cash, net cash. Not that complicated.

We didn't really feel the need to kind of do the math. People can take the numbers and add them together and divide by the share count and get to an asset value, do if they want to do for G&A and other things. (inaudible) In terms of the cash balance, and it's really the first quarter. As Salah said, we had a significant step-up from roughly $8 million to our current net cash position. And as I mentioned, our Board is committed to doing using that cash, using all our assets in a way to maximize the shareholder value. And they're thinking through in a methodical fashion, what the best use for that is.

And I think that's the best way to put at this point. I think they'll be very disciplined and focused on what makes most money for shareholders and how to use that cash, whether it be the deployment, acquisition or eventually some type of return.

Okay. So I mean, I guess, again, it just sounds like you don't really have a clear -- you're still evaluating and knowing that the cash would come in ahead of the North Park sale. Obviously, there's a number of months where this kind of deliberation is going on. It sounds like there isn't like a specific clear path forward. There's kind of this multiple potential paths that you guys could take. Does that sound like that's a reasonable interpretation of what you're saying?

Yes. I think that's right. It's not dithering. I mean, you have all the traditional return of capital options, of course, if you look at the (inaudible) stock, they have implications for how you might do it, in my mind, yes, if you put in some sort of regular dividend at what level, if you have special dividend, what does that do longer-term to you value, you should cash aside and returning it to shareholders has a very strategic element. I think it's pretty well accepted that there is economies of scale on this business is highly intensive. Lowering cost can be the better you perform. So sometimes being bigger is better. If we ever entertain a merger, our cash can have a lot of value in that context. We could help partner with the company and immediately delever them or provide low-cost capital for them to accelerate high-value drilling inventory. So it's very important to think through all the ways if that cash can add value to the enterprise, and our Board is actively doing that. Nothing being inappropriate fashion.

Great. Okay. Just one last thing on the saltwater disposal on Page 6 of the presentation and integrated power as well. I don't think this is something people really -- this is, I think, the first slide we've seen on this in maybe many years for SandRidge, and it's like very exciting to see. I guess, is this something that you guys would look at monetizing? Or is the point of showing this just to highlight kind of where some of the cost savings and opportunities are coming from?

It's a good question. I -- my understanding is that this company is past (inaudible) somewhat early in monetizing this. From where we sit, we think it's more moving its primary customers who kind of using it as almost a financing vehicle, and we just don't need to do that. I think it would add unnecessarily complication and artificial pricing dynamics. And so we think significant capital that's been invested in a very substantial system provides a lot of cost benefits that we're seeing in their cash flow, and it also provides us very, I mean, real strategic benefits to the extent that assets around the system (inaudible) available. That means we'll just be able to operate more efficiently than someone else and can be more competitive and get more out of them.

So to answer your question, distinctly, I don't think we're actively considering monetizing these assets.

Our next question comes from the line of Michael Melby with Gate City.

Mine was actually on Slide 6 too with the saltwater disposal wells. Could you confirm just the cash balance you mentioned on May 7 spends after the purchase of the SandRidge Trust and additional cash from operations?

Yes. So the cash balance that we disclosed of over $80 million was just cash on hand. And that was after the acquisition of SDT, the overriding royalty interest of SDT and was from -- so that was -- and then negative impact. And then obviously, cash flow from operations increased the balance in quarter end?

Yes. We're also expecting our payment. So we paid to all of SDT. And that's why I mentioned, we are expecting to get $1.3 million back and actually (inaudible).

Got it. And could you update us at a high level on how the acquisition of the trust impacts, I guess, Slide 15 and maybe even Slide 14, if it moves the needle at all?

Sure. So looking at Slide 14. Note that, that third column from the left Q1 '21 reserves includes the net impact of the SDT acquisition. And then in reference to Slide 15, we're reconfirming our 2021 guidance, we do not plan to change that at this time.

Yes. I mean it in the press release that we put out on the acquisition, the overriding royalty interest in SDT. We stated that (inaudible) them and the PD PV-10. And simply imagine we're showing them in what it was PV-10, it is a meaningful (inaudible) account. That does have an impact on that far right bar on Page 14. And on Page 15, we provide guidance once a year, and we were well aware maybe not the exact timing, but the general timing of the liquidation process at SDT, and we factored that in to our annual guidance.

And there are no further questions in queue at this time. I would like to turn the call back over to our presenters.

Thank you all very much for your interest in SandRidge. And we look forward to talking next quarter, if not before with some of you all. Thank you.

And this concludes today's conference call. You may now disconnect.