SandRidge Energy Inc (SD) 2022 Q1 法說會逐字稿

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to SandRidge Energy's First Quarter 2022 Earnings Conference Call. (Operator Instructions)

Scott Prestridge, Director of Finance and Investor Relations, you may begin your conference.

Thank you, and welcome, everyone. With me today are Grayson Pranin, our CEO and COO; Salah Gamoudi, our CFO and CAO; as well as Dean Parrish, our SVP of Operations.

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.

With that, I'll turn the call over to Grayson.

Thank you, and good morning. I'm proud to report on another strong quarter results for the company and that the company remains well positioned to capitalize on recent commodity price tailwinds to include focused high-graded drilling in the core of the Northwest STACK and a continuation of our well reactivation, which will add incremental production this year.

Before expanding on this, Salah will touch on a few highlights from the first quarter.

Thank you, Grayson. Despite us having no drilling or completion activity during the past year, we were able to slightly increase 1Q '21 to 1Q '22 production, averaging 17.5 MBOE per day and 17.8 MBOE per day in the Mid-Con over the respective periods. The production for the quarter as well as the last year benefited from the reactivation of over 139 wells that were previously curtailed during commodity price downdraft in 2020. Net cash, including restricted cash, increased to approximately $166 million, which represents $4.51 per share of our common stock issued and outstanding as of March 31, 2022. The approximated $26 million increase over the quarter was supported by production from our well reactivation program as well as higher commodity prices and realization and net of approximately $5 million in prepurchases of materials related to our 2022 capital program.

The company has no term debt or revolving debt obligation as of March 31, 2022, and continues to live within cash flow, funding all of its capital expenditures with organic free cash flow and cash held on the balance sheet. Over the quarter, the company generated adjusted EBITDA of approximately $39 million. Again, despite no new drilling or completion activities. As we have pointed out in the past, our adjusted EBITDA is unique metric for SandRidge due to us having no I and very little T, given that we have no debt and a substantial NOL position shields our cash flows from federal income taxes.

Commodity price realizations in the first quarter, before considering the impact of hedges, increased to $92.35 per barrel and $3.84 per Mcf, which represents 97% and 82% of daily average index spot prices of WTI for oil and Henry Hub for natural gas, and NGL realizations were $33.73 per barrel or 35% relative to WTI. Please note that current natural gas prices in the second quarter of 2022 having recently reached spot prices above $7 per Mcf beginning in April, subsequent to the quarter we are reporting on.

As of today, we have no open hedge positions or commodity derivative contracts. However, as we invest shareholder capital into our drilling completion and well reactivation programs, we will work side by side with our Board to evaluate and potentially enter into hedge positions to help protect investor capital spend. As alluded to earlier, we have maintained our large NOL position, which is estimated to be $1.6 billion as of the end 1Q '22. Our NOL position has and will continue to allow us to shield our cash flows from federal income taxes.

Our cost discipline continued to improve during the quarter, with adjusted G&A decreasing to $2.2 million or $1.35 per BOE from $2.5 million or $1.46 per BOE in the prior quarter. We have also held LOE and expense workovers to approximately $10.9 million or $6.76 per BOE during the quarter, partially driven by an increase in workover activity associated with well reactivations and well repairs at higher commodity price. We still believe we compare favorably with our peers in regard to G&A and LOE on both an absolute and a per BOE basis. We continue to generate net income for our shareholders. During the quarter, we earned net income of approximately $35 million or $0.95 per share.

You should note that our earnings release posted yesterday and the 10-Q that we plan to file later today provide further details on our financial and operational performance during the quarter.

Thank you, Salah. I thought it would be helpful to walk through some of the company's highlights, business strategy and other business details. As I mentioned previously, we are pleased with the results in the first quarter and are positioned to capitalize on robust commodity prices with high rate of return drilling in the Northwest STACK, continued well reactivations and further strengthened cash flows from our already producing properties in Mid-Con.

We were able to keep Mid-Con production flat with modest increases from Q1 2021 to Q1 2022, despite no new drilling activity during the period, driven in part by the continued benefit of our well reactivations of 139 wells since early 2021. We will continue to reactivate wells, targeting 30 projects over the year averaging over 100% IRRs. In addition, we will convert artificial lift systems of 35 wells to rod pumps that will aid in optimizing lifting efficiencies and lower point forward costs for this well set. With the additional inventory economic at today's commodity prices, together with our Board, we will evaluate the potential for additional capital allocation later in the year.

I'm happy to report that we spud the first of 9 wells budgeted this year, targeting the Meramec in the Northwest STACK play in April. Thus far, drilling is progressing as plan. We're extremely pleased with the planning and approach of our team has taken on this front.

As Salah mentioned earlier, we've prepurchased nearly $5 million of materials that include pipe casing for all of our drilling programs, pumping unit for our capital workovers and other items. The investment made earlier this year is key to warding off inflationary pressures in today's market and has already benefited the program. We hope to share more details on the execution of this program in the next call.

Let's pause for a moment to revisit the key highlights of SandRidge. Our asset base is focused in the Mid-Continent region with a primarily PDP well set, which do not require any routine flaring of produced gas. These well-enlisted assets are most fully held by production with a long historied, shallowing, diversified production profile and double-digit reserve life. These assets include more than 1,000 miles each of owned and operated SWD and electrical infrastructure over our footprint. This substantial owned and integrated infrastructure provides the company's both costs and strategic advantages, bolstering asset operating margins through reduced lifting as well as water handling and disposal costs and, combined with other advantages, help derisk individual well profitability down to $40 WTI and $2 in Henry Hub. In addition, the interconnectivity and ample capacity help buffer against unforeseen curtailments.

Our assets continue to yield significant free cash flow with total net cash now totaling nearly $166 million from 0 debt as of quarter end. This cash generation potential provides several paths to increase shareholder value (inaudible) and is benefited by relatively low G&A burden. As we realize value generate cash, our Board has committed to utilizing our assets, including our cash, to maximize shareholder value.

SandRidge's value proposition is materially derisked from a financial perspective by our strengthened balance sheet, robust net cash position, financial flexibility and over $1.6 billion in NOL. Further, the company is not subject to NDCs or other significant off-balance sheet financial commitment. Currently, the company does not have any open hedging contracts after March 31. However, we could enter into hedges from time to time in support of securing returns for our capital campaign, manage commodity risk or other fundamental drivers.

Finally, it's worth highlighting that we take our ESG commitment seriously and have implemented disciplined processes around it. We remain committed to our strategy to focus on growing the cash value and generation capability of our business in a safe, responsible, efficient manner while prudently allocating capitals to high-return, organic growth opportunities and remain watchful for potential value-accretive opportunity.

This strategy has 4 points. One, maximize the cap value and generation capacity of our incumbent Mid-Con PDP asset by extending and flattening our production profile with high rate of return workover, well reactivations and artificial lift conversion, continuously press on operating and administrative costs.

The second is to ensure we convert as much EBITDA to free cash flow as possible by exercising capital stewardship and investing in projects and opportunities that have a high risk-adjusted fully burdened rates of returns. Executing on our 9 well drilling program in the core of the Northwest STACK to economically add production. Further, to remain open, patient and maintaining optionality for opportunistic value-accretive acquisitions. We're focused on value-adding opportunities that bring synergies, further leveraging SD's core competencies, complement or balance the company's portfolio or otherwise yield a competitive return.

Further, as we generate cash, we will continue to work with our Board to assess path to maximized shareholder value to include investment opportunities, strategic opportunities, return of capital and other uses. The final staple is to uphold our ESG responsibilities.

Now circling back to this year's drilling program. We've had a controlled and purposeful start to drilling, and we will continue to pursue the thoughtful and disciplined execution this year in order to realize high rate to return with these investments. The program consists of 9 wells that are offset to highly profitable horizontal wells and has favorable geologic and reservoir characteristics.

The focus area we will be developing with this year's program has been previously delineated by SandRidge and other reputable operators. We know this very well. Approximately 60% of the program will be infill developments, with the remaining 40% being first welded section or co-development that again offset productive and profitable well.

Of note is that we are benefiting from having a long-tenured history in Mid-Con, previous development programs and can lever a very tight cost structure to add incremental barrels to our production in a very capital-efficient way. Gross ESG costs are estimated to be $4.75 million per single lateral and $7 million for extended laterals, which reflects 18 drilling and other materials, equipment and services already secured at reasonable cost and current market estimates.

We will continue to lean forward in repositioning the remaining items for the program to further offset inflationary pressure. However, inflation will be a central focus this year and has bearings on unsecured costs and future drilling decisions. So additional inventory is economic at today's commodity prices, program results, commodity price stabilization or further flattening, well cost to include expanded inflationary control, denser well spacing and other factors will guide future drilling decisions and inventory considerations.

In addition to well reactivation, we will continuously assess these factors and, along with our Board, evaluate the potential for additional future capital allocation in a prudent manner. Put simply, we will continue to prove out the results first and then go from there.

Shifting to expenses. We were able to lower adjusted G&A quarter-over-quarter from $2.5 million or $1.40 per BOE in the prior quarter to $2.3 million or $1.35 per BOE in the first quarter. Benefiting from our core values to remain cost disciplined as well as prior initiatives which have tailored our organization to be fit for purpose. We continue to balance the weighting of fields versus corporate personnel to reflect where we actually create value and outsource necessary, but more perfunctory and less core functions such as operations, accounting, land administration, IT, tax and HR.

Despite expanding activity and producing well count, our total personnel remain at roughly 100 people. Although corporate personnel stands at 15 people, we have retained key technical skill sets that have both the experience and institutional knowledge of our area of operations for drilling and completions, as well as the ability to flex through additional outsourcing of specialized areas to do more.

While we continue to press on operating costs, we anticipate expenses, specifically workover expenses, to remain near this quarter's level as we reactivate and repair more wells this year. The increase in commodity price has improved the economics of the wells that may have been or would have remained shut in otherwise. The good news is that this will translate to additional production. However, while profitable, the remaining tranche of well reactivations have relatively higher operating costs, which will increase power, water, chemical and other expenses.

In addition to the cost of an increasing producing well count, inflation will continue to be a theme throughout the year. We will continue to combat inflationary pressures as well through rigorous bidding processes, securing material, equipment and services over an appropriate tenure to offset market increases, as well as continue to leverage our significant infrastructure, operation center and other company advantages.

In summary, the company has $166 million net cash and cash equivalents at quarter end, which represents $4.51 per share of our common stock issued and outstanding. Modest production increases from Q1 2021 to Q1 2022 period in our Mid-Con position. We expanded 2022 capital program of high-return projects that further enhance production and arrest decline to include 9 wells high-graded in the core of the Northwest STACK in continuation of our well reactivation program.

Low overhead and top-tier G&A of $1.35 per BOE. No debt, in fact, negative leverage. Significant free cash flow and a growing net cash position supported by a diverse production profile, low decline, multi-digit life asset base. $1.6 billion NOL, which will shield future free cash flow from federal income tax. Large owned and operated SWD and electric infrastructure that provides cost and strategic advantages require little to no future capital to maintain.

This concludes our prepared remarks. Thank you for your time. We'll now open the call to questions.

(Operator Instructions) And our first question comes from Josh Young from Bison Interests.

Great quarter. Can you talk a little bit about -- well, I guess I have a few quick questions. So one, you guys historically had disclosed your net cash position as of like the day before the press release, and I noticed that, that was missing. And I guess I was curious about that. And I guess that's probably a quick answer. And then your LOE was up but also your realized gas price was up. Was there a connection there? And if not, could you guys address the combination of kind of the change in LOE, kind of where that came from and then kind of why your realized gas price versus the hub price improved?

And then finally, and I guess this is probably people's biggest question is just, what are you guys doing with the cash? And how do you avoid losing a bunch of money drilling wells like every other operator has in the area that you guys are active in over -- I mean, over a multiyear period since people have been drilling wells of the types that you're planning or actively drilling in that area?

Thanks, Josh. This is Salah, and I'll go ahead and take the cash disclosure question. So we in the past quarters did report cash on hand. I just want to be clear that the -- that was not true net cash. That was strictly what was available in the bank. It was an unreconciled balance that didn't take out things like outstanding checks and things like that. So we did not report that this quarter because we are currently spending money on our capital program. And so unlike in prior years, where our capital program was very small and had de minimis impact on our free cash flow. Capital being spent on our drilling and workover program this year is a lot more meaningful.

And so we want to make sure that we give investors the full picture through sets of financials quarterly and give them context. And unlike past years and past quarters, there isn't just sort of a cash build every single quarter that's sequential and routine. Our capital program will dip into some of those cash balances as we go, so we didn't feel like it was as meaningful of a disclosure this quarter. And I'll go ahead and let Grayson take a few other questions.

Josh, thanks for calling in, and great questions. I'll tackle LOE and differentials. First, there was no connection between LOE and differentials, very different drivers between the 2. First, on the differentials, we were happy to see that improvement and the decrease in the relative differentials on a percentage basis. A lot of that is driven by 2 things; a, as the index prices move up, the fixed components of those fees are reduced and diluted. The second is just marketing when the molecules are traded on what day. So some positive benefits there and exceeded our guidance, and I think we have some tailwinds behind us in general with the WTI and Henry Hub.

On LOE, there's really 3 drivers there. The first, we have more producing wells today that add to power, water, chemical and other similar type costs. The second is continued workover activity as we reactivate and report -- repair more wells. As commodity price increases, that helps us bring more wells online. So as we anticipate, that workover activity sort of remains kind of at this quarter's level going into next quarter. And the third is inflation. I think all E&Ps are having to work through that environment in addition to other markets. We have a proactive approach. We're going and bidding out all of the services, equipment and materials to gain favorable prices in the current market and appropriate tenure, and we'll continue to lean into that throughout the year.

And then third, potential use of cash. This is something that's important to us and very much a priority. We're actively discussing with our Board to assess best use of those cash assets. I do think we don't want to repeat the sins of others or in the past. So we want to make sure that that's appropriately put to use and in a sound investment. We're definitely conservative and not wanting to overrun our skis, and that's why we're having a controlled and purposeful start to our drilling program, but we have had a meaningful increase in commodity prices over the last quarter. In fact, over the last weeks and days. So as we see that, we continue to assess the potential for increased capital allocation, but want to, again, do that in a prudent manner.

In addition to that, Josh, to kind of round out Grayson's points on our cash reserves, we do want to make it clear to our investors and our shareholder base that we will be extremely prudent in the current commodity price environment for any material cash M&A. So use of this cash will need to be very, very value accretive and secure for us to use it on any sort of cash, M&A-type transaction or combinations.

(Operator Instructions) Our next question comes from (inaudible), a private investor.

Well done on the quarter. I have 3 questions for you today, if I may. First, you said like you were pleased with the results like that. I mean it's more than pleased. Like I think one of your peers like Talos' CEO today said things like Talos is one of the most compelling investment opportunity in energy sector, I'm quoting. And I would agree, but I found like SandRidge is even a superior investment and just I mean the quick math is incredible, like you disclosed that $166 million or about of cash, like it's an increase of $26 million since Q4, and you pay like $5 million of material. Just using the forward curve, very low cost. I'm not talking about LOE, but just like total cost, I think it's like $10.82 per barrel, like the cash so mathematically go up in Q2, in Q3, in Q4. I mean it could be like $7 a share at the end of the year. It's incredible.

On top of that, you have the -- some of the 9 new wells will be coming and contributing at the end of the year. And based on the deck, I think Page 8, like I mean we're literally on uncharted territory. It will be like over like 100% return. So that could be even more cash coming. So -- and repeating what you said Salah, like the $1.7 billion NOL that shield you from taxes, no tax, meaning like no interest and no debt amortization. I mean $20 a share is really undervalued, despite like the $350 as $350 -- sorry, 250% return over the last 12 months.

So my question is would you be comfortable like paraphrasing Talos' CEO saying like SandRidge is one of the most compelling investment opportunity in the energy sector? And I guess I will sneak one, if so like, why would you not buy back some shares?

Yes. (inaudible), thank you for the kind words and for joining the call and the challenging question. I think, for us, we really focused in on the blocking and tackling. Let's make sure that we keep cost as low as possible and convert as much EBITDA to free cash flow in hand and make prudent investment decisions. So I think this has shown evidence over the last few quarters and we benefited from the commodity price this quarter and certainly the strip looks positive going forward. So we really focus on what we can control in the business and making good decisions.

And the other instances I'll leave to you (inaudible). But I do think -- some of this hard work is showing up in our low G&A. We've been able to, again, blocking and tackling, keeping production up into the right. We're able through that well reactivation program to actually have a slight increase in Q1 of this year relative to Q1 of last year, which is really meaningful. And so if you look at this year, we look at base declines and we anticipate high teens and with reactivations getting to low single digits. And then you add on Northwest STACK drilling with results coming online in the back half of the year, that can meaningfully add to that and even begin some production growth in that relative period.

So we really, again, focus on what we can control.

In addition (inaudible), in relationship to your question about share repurchases and the repurchase program. I'd just like to remind our shareholders that share repurchase program is a 10b-18. So if the company has any material inside information or any sort of -- in sort of any restricted trading period, we can't exercise that. So there are times and places where perhaps we feel it might be opportunistic to buy back shares. But again, if we're in any sort of strategic discussions or have any inside information that can be any further limiting on what we can do from a securities law perspective.

Yes, of course. And I think you said it, I said it earlier like you have these 9 wells in the high-graded program in the Northwest STACK. Do you know like how many other additional wells will be there for 2023 or 2024, should you decide to drill more?

Yes. Again, as I mentioned earlier, we continue to assess the potential for additional capital allocation with our Board. The further increase in commodity prices certainly helped. I think, before we get into inventory, we want to resume drilling, get a couple of strong wells behind this, and then you'll see us come out with additional commentary on inventory, but there's certainly additional well economic at today's price.

And in fact, how many wells do you need to stay flat in '23? Do you have an idea or indication?

Yes. I think that the 9-well program, we actually plan to have a production increase from January to December. And again, because of the timing, not all of that production wedge is hitting for full effect over the 2022 period, if you look at the full fiscal year, but it will materially impact annual decline this year with additional production uplifts going into next year.

Well done. And just last for me on carbon capture. Last year, I think in one of the deck you had, like you disclosed like 1,000 miles of pipeline right of way, 51 disposable wells. And I think like water disposal were divided by 5 over the last few years of SandRidge. So I mean, order of magnitude at least. So I know there is no value in the carbon capture play today, and you said it in the press release, like you're only exploring the technical and commercial viability, but would these assets be used for it?

Yes, (inaudible) this is Salah, and absolutely. I mean, we are exploring using our incumbent asset base. Everything that you described is accurate. And we have taken steps along this path and have gotten some initial reads with our partnership with the University of Oklahoma, that there is substantial potential for carbon sequestration on our asset base. However there is a lot of things to be done in regards to technical feasibility, commercial viability, finding an emitter. I mean, all of those things kind of need to come into place before we could ascribe any value to it. But we have taken steps and continue to move the football down the field, so to speak, on those efforts.

It's appropriate and for us to do the due diligence here just because we have these material assets in Northwest Oklahoma that are underutilized today, in some places only using a portion of the total capacity, and how can we further leverage that. But I will caveat that there is no capital currently being allocated to that, and we need to prove out the commercial viability before we do. So as soon as we have meaningful news that, that could be the case, we'll come out and disclose that. But right now, I would not ascribe any value to it.

Thank you. Well, continue the hard work and congratulations again.

We have no further questions in queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.