Earnings Call Transcript - SD Q4 2023

Operator, Operator

Ladies and gentlemen, thank you for being with us. My name is Desiree, and I will be your conference operator today. I would like to welcome everyone to the SandRidge fourth-quarter 2023 conference call. I now turn the conference over to Scott Prestridge, SVP, Finance and Strategy. Please proceed.

Scott Prestridge, SVP, Finance and Strategy

Thank you, and welcome, everyone. With me today are Grayson Pranin, our CEO; Brandon Brown, our CFO; 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.

Grayson Pranin, CEO

Thank you and good morning. I'm pleased to report on another consistent quarter of results and year. The company's activity continues to translate to meaningful free cash flow from our producing assets. Before expanding on this, Brandon will touch on a few highlights.

Brandon Brown, CFO

Thank you, Grayson. Production averaged approximately 17 MBoe per day for the year with oil production up approximately 10% compared to the prior year, driven by the higher oil content from our Northwest Stack wells. The company generated adjusted EBITDA of nearly $20 million for the quarter and approximately $93 million for the year. As we have pointed out in the past, our adjusted EBITDA is a unique metric for SandRidge due to us having no interest and very little tax given that we have no debt and a substantial NOL position that shields our cash flows from federal income taxes. On the interest portion, we in fact generated approximately $2.8 million of interest income during the quarter and $10.6 million for the year for cash out and diversity of high-yield deposit accounts. The company initiated a return of capital program last year with a total cumulative dividends paid to date of approximately $137 million or $3.70 per share, including the one-time dividend of $1.50 per share paid on February 20 of this year. In addition, our Board recently approved an $0.11 per share dividend which is a 10% increase over the previous quarter's regular cash dividend. This will be paid on March 29, 2024, to shareholders of record on March 15, 2024. Net cash, including restricted cash at year end 2023 was $254 million and adjusted for the $1.50 per share dividend paid on February 20, 2024, approximately $200 million which represents over $5.30 per share of our common stock issued and outstanding. The company has no term debt or revolving debt obligations as of December 31, 2023, and continues to live within cash flow, funding all its capital expenditures and cash flow from operations and cash held on the balance sheet. Commodity price realizations for the year before considering the impact of hedges were $74.69 per barrel of oil, $1.71 per Mcf of gas, and $20.83 per barrel NGLs. As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be $1.6 billion at quarter end. Our NOL position has and will continue to allow us to shield our cash flows from federal income taxes. Our commitment to cost discipline has continued to be impactful with adjusted G&A for the quarter of $2.2 million and $8.8 million or $1.42 per BOE for the year. We continue to generate net income for our shareholders. During the year, we earned adjusted net income of approximately $69 million or $1.87 per basic share and net cash provided by operating activities of approximately $116 million. This has all culminated in the company producing approximately $89 million in free cash flow for the year, which represents a conversion rate of approximately 96% relative to adjusted EBITDA or approximately $2.40 per share of common stock outstanding. Before shifting to our outlook, we should note that our earnings release and 10-K provide further detail on our financial and operational performance during the year.

Grayson Pranin, CEO

Thank you, Brandon. We 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 had positive results this past year with the Northwest Stack wells adding oilier production while converting over 96% of EBITDA to free cash flow. Production for the year from our Mid-Con assets averaged approximately 17 MBoe per day, roughly 4% over the midpoint of 2023 guidance, with oil volumes increasing 10% from the prior year, aided by the oilier content from our Northwest Stack area. The company's largest natural gas purchaser remained in ethane rejection, and we anticipate that a majority of our natural gas stream could remain in ethane rejection this year. While this impacts the total volume of NGLs, the remaining volume will be composed of more profitable C3-plus components like propane, butane, and gasoline on a percentage basis. Likewise, the ethane remaining in the natural gas stream will improve its BTU quality. Let us 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-listed assets are most fully held by production with a long history, shallow and diversified production profile and double-digit reserve life. These assets include more than 1,000 miles each of owned and operated SWD and electric infrastructure over our footprint. This substantial owned and integrated infrastructure provides the company both cost and strategic advantages, bolstering asset operating margins, reducing lifting costs as well as water handling and disposal costs, and combined with other advantages helps derisk individual well profitability for the majority of our producing wells down to $40 WTI and $2 Henry Hub. While we have recently seen spot prices below $2 Henry Hub, WTI has been in the mid to high $70s, which has and will buoy our revenue and cash flow this year. Our assets continue to yield meaningful free cash flow with total net cash as of year end and adjusted for recent dividends totaling approximately $200 million. This cash generation potential provides several paths to increase shareholder value realization and is benefited by low G&A burden. In fact, interest income earned from our cash assets offset our cash G&A last year. As we realize value from our producing assets and generate cash, our Board is committed to utilizing our assets including our cash to maximize shareholder value. SandRidge's value proposition is materially derisked from a financial perspective by a strengthened balance sheet, robust net cash position, no debt, financial flexibility, and approximately $1.6 billion in NOLs. Further, the company is not subject to MVCs or other significant off-balance sheet financial commitments. Finally, it's worth highlighting that we take our ESG commitments seriously and have implemented disciplined processes around them. We remain committed to our strategy to focus on growing the cash value generation capability of our business in a safe, responsible, efficient manner while prudently allocating capital to high-return, organic growth projects and remain open to value-accretive opportunities. This strategy has five points. The first is to maximize the cash value and generation capacity of our incumbent Mid-Con PDP assets by extending and flattening our production profile with high rate of return workovers and artificial lift conversions, as well as continuously pressing 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 high risk-adjusted fully burdened rates of return that economically add production. The third is to maintain optionality to execute on value-accretive merger and acquisition opportunities that could bring synergies, leverage the company's core competencies, complement its portfolio of assets, further utilize its approximately $1.6 billion of net operating losses, or otherwise yield attractive returns for its shareholders. I'd like to pause here for a moment to touch on the Northwest Stack acquisition that closed last year, which increased our interest in 26 operated wells. We like these types of small ball bolt-ons where we can efficiently add production for accretive returns. We will continue to look for opportunities like this, as well as larger ones that meet the characteristics I described earlier. Fourth, as we generate cash, we will continue to work with our Board to assess paths that maximize shareholder value to include investment and strategic opportunities, return of capital, and other uses. To this end, the company expanded its return of capital program that consisted of, one, a $3.70 per share of cumulative dividends paid to date; two, a $0.11 per share regular cash dividend, an increase of 10% from the prior quarters; and finally, an opportunistic share repurchase program of up to $75 million. Please note that the company's cash position is also a strategic advantage and provides competitive leverage in evaluating M&A, especially given the outlook on interest rates, capital markets, and impacts of the optionality on the number and type of opportunities that could become available at certain levels. Know that there is a high bar, both at the management and Board levels, for mergers and acquisitions. Management will continue to assess and promote regular-way return of capital discussions, advanced M&A valuations, meet with shareholders and investors, and work with our Board to further enhance paths to maximize shareholder value. These topics remain paramount. In the interim, we have secured favorable banking terms and keep our cash position diversified across interest-bearing accounts at multiple significant, well-capitalized financial institutions. As Brandon mentioned before, the company earned $10.6 million in interest income this past year. Final staple is to uphold our ESG responsibilities. Now circling back to our capital program. During the past year, we completed 16 artificial lift conversions as the company continues to focus on high-return, value-adding projects that provide benefits such as lowering forward-looking costs, enhancing production on existing wells, and further moderating its already modest decline profile. The systems we have and will be installing are tailored for the wells current fluid production and will reduce the electrical demand from the current artificial lift system and is key to decreasing future utility costs. This year, our production optimization campaign includes 14 artificial lift conversions as well as heel completions, accessing previously unstimulated intervals, recompletions that would add new uphole zones and proven productive formations, and refracs that would restimulate quality reservoirs. We plan to spend between $8 million to $11 million in CapEx on production optimization and limited opportunistic leasing this year. In addition to our production optimization projects last year, we completed four operated wells in the Northwest Stack, which increased overall oil content on a BOE basis as well as our prior well reactivation program which has returned over 180 wells to production over the past few years. However, given the commodity price dynamics this year in that our Mid-Con assets are 99% held by production which preserves the tenor of our development option, we will not be operating a drilling rig this year and will do for a more meaningful level of well reactivation. We will continue to monitor commodity price dynamics and maintain flexibility to adjust as may be warranted and factor in these considerations. Commodity prices firmly over $80 WTI and $4 Henry Hub or confident tenor and/or reduction in well costs are needed before we can return to exercise the option value of further development or reactivations. The focused efforts over the past several quarters in optimizing our well's production profile and cost focus have contributed to flattening the expected base asset level decline of our already producing assets to single-digit average over the next 10 years before the impact of further production optimizations, development, or acquisitions. Company continues to ensure that all projects meet high-rate of return thresholds and remains capitally disciplined as commodity price landscape changes. While we have prudently reduced activity near term, a tempered commodity price environment could be constructive for M&A. Our producing Mid-Con assets will continue to generate cash flow near term. With the recent strip, natural gas prices projected to increase over the next year plus. In the interim, the lower natural gas and NGL price environment could present more cost-effective opportunities for acquisitions, which would then be positioned to benefit from future price improvement. In addition, to further leverage the temporal low natural gas price environment as well as activity around this, we have allocated capital for targeted high-graded leasing near our footprint this year, which could further bolster our drilling inventory in the future. Now shifting to expenses. We're able to keep adjusted G&A at $2.2 million for the quarter and $8.8 million or $1.42 per BOE for the year, which compares favorably with our peers. It was 7% below the midpoint of 2023 guidance. The efficiency of our organization stems 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 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. Given our efficient structure and ability to flex with both activity and commodity prices, our total personnel has remained consistent at just over 100 people while retaining key technical skill sets at both the experience and institutional knowledge of our area of operations. We believe that this efficiency and structure are favorable advantages that could be effectively applied over a broader asset base and a benefit as the company evaluates potential for M&A. Despite inflationary pressures and an increased well count from our prior well reactivation and development programs, as well as the increased interest associated with our recent Northwest Stack acquisition, LOE and expense workovers for the quarter were $9.9 million or $6.73 per BOE for the quarter and $41.9 million or $6.80 per BOE for the year, which was 3% below the midpoint of 2023 guidance. We are projecting a decrease in expense workovers this year, as well as softening in utility costs and reduced water handling costs. We will continue to actively press on operating costs through rigorous bidding processes, leveraging our significant infrastructure, operation center, and other company advantages. While I have previously addressed commodity price dynamics, I wanted to reinforce a few salient points here. The first being that the majority of our producing properties are economic down to $40 WTI and $2 Henry Hub. While oil made up 17% of total production last year, it contributed over 50% of revenue on a BOE basis. Despite current sub-$2 natural gas prices, the forward-looking future curve remains in Contango and at recent strip projected to nearly double spot prices by this winter. Also, WTI remains constructive in the mid to high $70s this year. While we have judiciously decreased capital spending in light of natural gas prices, more significant reductions in oil prices and a structural change in natural gas futures would be needed before we implemented more severe steps like material proactive well curtailment that would impact our production levels near term. However, we will continue to monitor commodity prices and have the financial and operational flexibility to make further adjustments in response to positive or negative commodity prices in the future to prudently steward the business and optimize cash flows. Please note that our guidance for 2024 includes price realizations between 50% and 70% of Henry Hub for natural gas to capture the potential range of realizations of the year with the high-end more representative of winter pricing and no low in torque sub-$2 Henry Hub. That said, and to reinforce my earlier comment, SandRidge's value proposition is materially derisked from a financial perspective by our strong balance sheet, robust net cash position, no debt, financial flexibility, and approximately $1.6 billion in NOLs. Long and short, the company is well positioned to navigate, if not leverage, the current landscape. In summary, the company has approximately $200 million of net cash and cash equivalents at year end after adjusting for recent dividends, which represents approximately $5.30 per share for common stock issued and outstanding. Average production for the year of approximately 17 MBoe per day, which is a 10% increase in oil from the prior year. Mid-Con position that is 99% held by production, which preserves the option value of future development potential in a cost-effective manner. Low overhead, top-tier adjusted G&A of $1.42 per BOE. No debt, in fact negative leverage. Impactful free cash flow and a growing net cash position supported by a diverse production profile, flattening expected annual base PDP declines at single-digit average over the next 10 years, and a multi-digit reserve life asset base. $1.6 billion in NOLs, which will shield future free cash flow from federal income taxes, and a large owned and operated SWD and electrical infrastructure which provide 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.

Operator, Operator

Your first question comes from Josh Young with Bison Interests.

Josh Young, Analyst

So first of all, your results are great considering how little you're reinvesting, so I wanted to commend you on that very low decline rate, and you're also not reinvesting into gas production at low prices. So I wanted to commend you for that. I wanted to ask on the cash balance. So you guys have done some special dividends which are fun to receive as a shareholder but don't really compound value over time, and you are sitting on a very large cash balance. How do you think about the maximum return approach towards deploying that and what the opportunity cost is of sitting on such a large cash balance considering the free cash flow profile?

Grayson Pranin, CEO

Know this is something that we consistently spend a lot of time on and have meaningful conversations with our Board and are constantly evaluating. We're trying to balance our growing cash position with maintaining the optionality of M&A, especially given the reduced natural gas price environment today that we think that we can take advantage of, as well as the other things that I mentioned on the call, as well as returning capital to shareholders. And we're looking at that as a three-pronged approach, right, on making sure that we have a good regular-way dividend that we can consistently approve quarter after quarter and balance that out over time. Second is, to top off the special dividends, again, just balancing the time that we're taking to review M&A versus being capitally disciplined in the current environment, as well as opportunistic share repurchases. So I don't think that we're sticking to any one option and know that as dynamics change this year going forward, we'll re-evaluate. So if something's not working, we'll have additional discussions and try to account for all the facts at the time.

Josh Young, Analyst

Okay. But I guess two quick follow-ups on that. One, have you guys actually repurchased a single share since you went net cash positive at, I think, it was $5 a share three years ago? There has been discussion of getting approval of it. Have you guys actually bought a single share back?

Grayson Pranin, CEO

We have not, but we continue to maintain the program. And since there's opportunistically repurchased during market dislocations compared to our NAV, the program is not intended to buy back certain amounts at certain times or do it under any circumstances. So we're not trying to make a goal of repurchasing all $75 million this year. But for example, if there's a dislocation between our share price and we still have strong support commodity, a high NAV, those are perfect opportunities to buoy our share price and repurchase shares. Fortunately or unfortunately, the share prices have performed relatively well since the announcement of the return of capital program with the recent changes that we made last year and then again this year with less instances of market dislocation.

Josh Young, Analyst

Okay, great. And then just the last follow-up. Aren't you better off buying much smaller assets of this sort? You did buy one last year of this sort at a very high discount rate with a lot of cash flow versus the purchase cost. Aren't you better off focusing on that rather than on sort of this M&A where you'd be advantaged with having a large cash balance, and aren't you better off going on hiring more land, men, and doing many million dollar to $10 million sorts of deals rather than trying to preserve this optionality?

Grayson Pranin, CEO

No, it's a great question. The answer is we are looking at those opportunities. We try to take advantage of them as they arise. We're continually exploring new possibilities. However, perfect timing between buyers and sellers isn't always present. We need to ensure we can execute on smaller acquisitions, while also keeping options open for more significant deals. We're assessing a variety of opportunities that range from a few million to several hundred million and understand we have high standards. Any actions we take will benefit our shareholders. We are pursuing both smaller acquisitions and larger ones.

Operator, Operator

Your next question comes from the line of David Cardell with BluePond Capital.

David Cardell, Analyst

I'm interested in learning more about the M&A environment, specifically whether smaller deals or larger deals have better prices. I'm also curious about the size of the deals you think you could pursue. Given the current pricing environment, which seems favorable with many opportunities available, particularly in the Mid-Con region where the pricing is low compared to Henry Hub gas prices, I would expect there to be potential deals. I appreciate your careful approach to this process, as I fully support it. However, I'm trying to gain a realistic understanding of what to expect this year regarding deal flow and whether the opportunities appear to be improving. I know I've asked several questions about M&A, but any insights you could share would be beneficial.

Grayson Pranin, CEO

I'll try to address as many of your questions as possible. If I overlook anything, please feel free to reach out again. We believe the M&A environment in the Mid-Continental region is promising. We concur that this area allows us to generate significant cash flow similar to our existing assets. We can enhance this by expanding our asset portfolio and maintaining a focus on cost management, covering both expenses and back-office operations, since we have a strong understanding of the region. As I mentioned to Josh, the main challenge lies in achieving alignment between buyers and sellers. The Board and management team are dedicated to prioritizing this. While returning capital is important, pursuing M&A opportunities closely follows, ensuring we actively evaluate options that are beneficial and seeking to capitalize on the currently lower natural gas prices. However, we cannot predict success, but we are committed to exploring both smaller opportunities that make sense and possibly larger ones as well. The evaluation often depends on the type of asset. For instance, where we have previously purchased interests in the wells we manage, we hold an operational advantage. These scenarios are straightforward and yield strong margins. When considering opportunities outside our current operations, we can find better discount rates on various sizes depending on asset quality. We assess factors such as historical performance versus newer assets, identifying potential upside. All of these criteria influence our evaluation of different assets. I hope I answered your questions, David, but let me know if there's something I missed.

David Cardell, Analyst

There is one more. I'm just curious, are you more likely to find good deals on small-sized acquisitions or maybe big deals? Are they better deals because there are fewer bidders? And I'm also curious, how big a deal could you do?

Grayson Pranin, CEO

Sure. Again, go back to my previous comment. I think there are great small ball deals. I think there are really good larger deals. We would have to have a string of pearls on the smaller deals where they may have a better cash-on-cash return. They're harder to string together to be as impactful. It's like the differences for our organic opportunities with our capital workover program that have really high rates of return versus our prior drilling campaign that still had high rates of return, a little bit less but contributes more meaningfully on a value basis. So we think there's justification for looking at both because there's different drivers between each of those options and know that we're going to do something that makes sense.

David Cardell, Analyst

Okay. I'll just say that personally I think there is dislocation in your share price given your net cash balance, your asset, your low-cost operations. Personally, I think that the stock is dislocated from the value that it offers shareholders.

Grayson Pranin, CEO

Well, appreciate your comment, David. I think that's something that we look at consistently from day to day, make sure we're making good long-term decisions. And we want to ensure that when we do repurchase shares, we're doing it at a level that also have good returns. So we're valuing that option right alongside all the other options, so it's not an either-or answer. But know that will continue to assess as we move forward through the year.

Operator, Operator

There are no further questions at this time. Ladies and gentlemen, this concludes today's conference call. You may now disconnect.