Sandridge Energy Inc Q1 FY2022 Earnings Call

Good morning. My name is Julian, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SandRidge Energy's First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. 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 risk and uncertainty, 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. Good morning. I'm proud to report on another strong quarter result 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 widely increase 1Q 2021 to 1Q 2022 production, averaging 17.5 MBoe per day and 17.8 MBoe per day in the Mid-Con over their 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 downdrafts 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. That approximate $26 million increase over the quarter was supported by production from our Well Reactivation program, as well as higher commodity prices and realizations, net of approximately $5 million in pre-purchases 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 a unique metric for SandRidge due to having very little interest and taxes. Given that we have no debt and a substantial NOL position, we shield 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 have 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 program, we will work alongside 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 was estimated to be $1.6 billion as of the end of 1Q 2022. 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 prices. We still believe we compare favorably with our peers concerning 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. We should note that our earnings release posted yesterday and the 10-Q that we plan to file later today provide further detail on our financial and operational performance during the quarter.

Thank you, Salah. We thought it would be helpful to walk through some of the company's highlights, management's strategies, 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 rates of return drilling in the Northwest Stack, continued well reactivations, and further strengthen cash from our already producing properties in Mid-Con. We are 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, which will aid in optimizing lifting efficiency and lower 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 have about the first of nine wells budgeted this year targeting the vertical drilled well in the Northwest Stack play in April. Thus far, drilling is progressing as planned. I'm extremely pleased with the planning and approach our team has taken on this front. As Salah mentioned earlier, we pre-purchased nearly $5 million of materials that include our KP for all of our drilling program, pumping units, capital work overs, 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 focused in the Mid-Con region with a primarily PDP well set, which does not require any routine flaring of produced gas. These assets are most fully helped by production, but the long lead time is only diverted by the 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 both cost and strategic advantages, both bringing asset operating margin through reduced lifting as well as water handling in its total cost, and combined with other advantages help de-risk individual well profitability down to $40 WTI and $2 Henry Hub. In addition, the interconnectivity and ample capacity help buffer against unforeseen curtailment. Our assets continue to yield significant free cash flow with total net cash now totaling nearly $166 million with zero debt as of quarter end. This cash generation potential provides several paths to increase shareholder value and is benefited by a relatively low G&A burden. As we realize value generate path, our board is committed to utilizing our assets, including our cash to maximize shareholder value. SandRidge’s value proposition is materially de-risked from a financial perspective, higher strength of balance, 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 commitments. 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, managing commodity risk, or other fundamental drivers. Finally, it's worth highlighting that we take our ESG commitment seriously and have implemented disciplined processes around us. We remain committed to our strategy to focus on growing the cash value generation capability of our business in a safe, responsible, and efficient manner while prudently allocating capital to high-return organic growth opportunities and remain watchful for potential value-accretive opportunities. This strategy has four points. One, maximize the cash value and generation capacity of our incumbent on PDP assets by extending and flattening our production profile at high return work over well reactivations and artificial lift conversions. Continuously press on operating and administrative costs. But the second is to ensure we convert as much EBITDA to free cash flow as possible by exercising capital stewardship and advancing in projects and opportunities that have a high-risk adjusted fully burden rates of return. Executing on our nine well drilling program in the core of the Northwest stack, that economically adds deduction. We are committed to remain open to maintaining optionality for opportunistic value-creative acquisition. We're focused on value-adding opportunities that bring synergies, further leveraging 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 past maximizing 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 thoughtful and disciplined execution this year in order to realize high rates of return with these investments. The program consists of nine wells that are offset to highly profitable horizontal wells and their 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 that very well, approximately 50% of the program will be infield development with the remaining 40% being first-well section or co-development that again, offsets productive and profitable wells. We are benefiting from having a long-tenured history in Mid-Continent, previous development program, and can lever a very tight cost structure to add incremental barrels to our production in a very capital-efficient way. Growth ESG costs are estimated to be $4.75 million for a single lateral and $7 million for extended lateral, which reflects drilling and other material equipment and services already secured at reasonable costs 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 pricing, program results, commodity price stabilization, or further flattening, well cost, to include expanded inflationary controls, 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 digital future capital allocation in a prudent manner, but simply, we will continue to prove up results first and then go from there. Dipping to expenses, we were able to lower adjusted G&A quarter-over-quarter from $2.5 million or $1.40 per Boe in a prior quarter to $2.3 million or $1.35 per Boe in the first quarter. Benefiting from a core value to remain cost disciplined as well as prior initiatives that have tailored our organization to be fit for purpose. We continued to balance the weighting of field 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 stand at 15 people. We have retained key technical skills 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 work over 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 remained unprofitable 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 and placement will continue to be approved throughout the year. We will continue to combat inflationary pressures as well through rigorous drilling processes, securing material, equipment, and services over an appropriate tenure to offset market increases, as well as continuing 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 represent $4.51 per share of our common stock issued and outstanding. Modest production increases from Q1 2021 to Q1 2022 period in our mid-term position, expanded 2022 capital program of high return projects that further enhance production and the rest decline, to include nine new wells drilled in the core of Northwest Stack and continuation of our well reactivation program. Low overhead as 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 light asset base. $1.6 billion in NOLs, which will shield future free cash flow from federal income taxes; large owned and operated SWD and electric infrastructure that provides cost and strategic advantages requiring 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.

Great. Thank you. Thanks, Grayson and Salah, 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 you 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 multi-year period, since people have been drilling the wells of the type that you’re planning or actively drilling in that area?

Sure. Thanks, Josh. This is Salah, and I’ll go ahead and take the cash disclosure question. So, we in past quarters did report cash on hand. I just want to be clear that that was not true net cash; that was strictly what was available in the bank. It was an unreconciled balance that didn’t account for things like outstanding checks and things like that. But 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 impacts on our free cash flow, the capital being spent on our drilling and work over program this year is a lot more meaningful. And so we want to make sure that we give investors the full picture through set the financials quarterly and give them context. 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 the other questions.

Yeah. Morning, Josh, thanks for calling in, and great questions. I’ll tackle LOE and differentials. First, there was no connection between LOE and differentials; they are driven by very different factors. 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 two things: a, as the index prices move up, the fixed components of those fees are reduced and diluted. The second is just marketing when molecules are traded on what day. So, some positive benefits there exceeded our guidance. I think we have some tailwinds behind us in general with the WTI and Henry Hub. On LOE, there’s really three drivers: the first, we have more producing wells today that add to power, water, chemical, and other similar type costs. The second is continued work over activity as we reactivate and repair more wells; as commodity prices increase, that helps us bring more wells online. So I anticipate that work over activity to remain at this quarter’s level going into next quarter. The third is inflation; I think all EMPs 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 will continue to lean into that throughout the year. And then the third potential use of cash. This is something that’s important to us, and it is a priority. We’re actively discussing with our board to assess the best use of those cash assets. I do think we don’t want to repeat the mistakes of others from the past. So, we want to make sure that's appropriately put to use in sound investments. We're definitely cautious and not wanting to overextend ourselves, 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 you, 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, the 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 combination.

Great. Thank you, guys.

Hi, good morning. Grayson and Salah, well done on the quarter. I have three questions for you today if I may. First, you said like you were pleased with the result; like, I mean, it's more than pleased like I think one of your peers, like the CEO today said, you think SandRidge is one of the most compelling investment opportunities in the energy sector; I'm quoting here. And I would agree, but I found like SandRidge is even a superior investment. The quick math is incredible. Like you disclose like $166 million or about cash; it's an increase of $26 million since Q4, and you pay like $5 million of material just using the four very low cost. I'm not talking about LOE but just like total cost. I think it's like $10.82 per barrel; like, cash should mathematically go up in Q2, in Q3, in Q4. I mean, it could be accidental numbers at the end of the year; it’s incredible. On top of that you have some of the nine new wells will be coming and contributing at the end of the year. Based on the deck, I think on Page 8, I mean, we were literally in uncharted territory; it will be like over 100% return, so that could be even more cash coming. So, and repeating what you say, Salah, like the $1.7 billion NOL that shields you from taxes, no tax meaning like no interest and no depreciation. I mean, $20 a share is really undervalued despite a 250% return over the last 12 months. So my question is, would you be comfortable like paraphrasing the other CEO saying like SandRidge is one of the most compelling investment opportunities in the energy sector? And I guess I will sneak one, if so, why would you not buy back some shares?

Yes. Thank you for the kind words and for joining the call, and the challenging question. I think for us to really focus in on the blocking and tackling, let's make sure that we keep costs as low as possible and convert as much EBITDA to free cash flow as we can and make prudent investment decisions. So I think this is shown evident over the last few quarters and we've benefited from the commodity price this quarter and certainly this trip looks positive going forward. So we really focus on what we can control in the business and making good decisions, and the other inferences I'll leave to you. 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. If you look at this year as we look at base declines, we anticipate high returns, and with reactivations getting the low-single digit. 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 again focus on what we can control.

In addition to that, in relation to your question about the share repurchase program, I'd just like to remind our shareholders that that share repurchase program is under SEC Rule 10b-18. If the company has any material insider information or any sort of 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 strategic discussion or have any insider information, that can be fairly limiting on what we can do from a security law perspective.

Yes, of course. Thanks. And I think you said earlier, like you have these nine wells integrated program in the core of the Northwest stack; do you know how many other additional wells there be for 2023 or 2024, should you decide to drill more?

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

And how many wells do you need to stay flat in 2023? Do you have an idea, or any indication?

Yes, I think the nine-well program we actually plan to have a production increase from January to December. Again, because of the timing, not all of that production wedge is hitting for full effect over the 2022 period. 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 one of the decks you had, you disclosed like thousand miles of pipeline wide of ways 51 disposable Wells. I think like what a disposal were divided by five of the last few years. 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 useful?

Yes. This is Salah. Absolutely. I mean, we are exploring using our incumbent asset base. Everything that you described is accurate. We have taken steps along this path and have gotten some initial readings 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, and finding an emitter. 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 on those efforts.

Thank you. Thank you for taking my question.

It's appropriate. And for us due diligence here, just because we have these material assets in Northwest Oklahoma that are underutilized today in some places is 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 liability before we do. So as soon as we have meaningful news that could be the case, we'll come out and disclose that. But right now, I would not assign any value to it.

Thank you. Continue to have work and congratulations again. Bye-Bye

Thank you.

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