Earnings Call Transcript - SD Q1 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the SandRidge Energy First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Brendan Brown. Please go ahead, sir.

Unidentified Company Representative, Unidentified Representative

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.

Carl Giesler, CEO

Thank you and good morning. Hopefully you've had time to peruse the earnings release and the investor presentation we posted yesterday after the market closed. We typically aim to keep our prepared remarks brief. Today however, we plan on being more expansive. Over the last several years and particularly during 2020, the Board and management have worked to reset, if you will, our company in almost all respects; from focusing our asset base, to streamlining our capital organization and cost structures, to reassessing and tightening our capital allocation. Accordingly, we think it'd be useful to your assessment of our company, if we walk through the presentation, in addition to reviewing our 1Q 2021 earnings. Before turning to that presentation, though, Salah will touch on a few highlights from the first quarter earnings.

Salah Gamoudi, CFO

Thank you. Simply put, 1Q 2021 was a strong quarter. During the quarter, our net cash position increased just over $48 million to 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 2020. You should note that 4Q 2020 was burdened by a one-time $5.3 million cash hedge loss due to the unwinding of all of our hedge positions. Even without that hedge line impact, 1Q 2021 adjusted EBITDA would still be meaningfully higher. Know that our board and management made the decision to unwind our calendar 2021 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 NYMEX curve remains meaningfully higher. Our production held fairly steady during the quarter, with our Mid-Con assets producing 17,500 BOE per day compared to 19,000 BOE per day in the prior quarter. This quarter’s production is particularly notable, given the substantial two-plus-week negative impact from the snow in February. Note, that we closed the sale of our North Park Basin asset on February 5, so the North Park Basin for only 36 days are in 1Q 2021 makes quarter over quarter production comparison less relevant for that asset. Price realizations, particularly for NGL appear to be migrating back up to pre-pandemic lows; our 1Q 2021 oil and gas realizations were up 41% and 19% from the prior quarter. NGL realizations as a percent of WTI was 29% in 1Q 2021, compared to 21% in the prior quarter. Our cost discipline continues 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 this to $1.9 million or $1.14 per BOE. While we continue to aggressively manage TNA expenses, we do not expect G&A to remain as low on an ongoing quarterly basis. The team also compressed operating expenses by $3 million compared to 4Q 2020, reducing 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 a TNA and LOE per BOE basis. It's relatively rare for an E&P company to generate net income. We did that with a net income of $35 million, which included almost a $20 million gain on the sale of the North Park Basin. Also in the rare category, we have no gas impairments for the first time since the second quarter of 2019. Lastly, despite still grappling with the lingering challenges of COVID, our team has now gone 33 months without a recordable HFT incident. The final notable thing in 1Q 2021 was a simplification of our assets. Due in large part to an increasingly challenging regulatory environment in Colorado, we exited in February our higher cost North Park basin assets. We're now focused solely on our core long-lived predominantly TDC mid-con properties. Subsequent to the quarter, we purchased for $4.9 million in cash all of the overriding royalty interest assets of SandRidge Mississippian Trust I. When that trust ultimately liquidates, our company will no longer have any affiliated trusts. Additionally, we expect to receive 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 file later today, provide further detail on our financial and operational performance for 1Q 2021.

Carl Giesler, CEO

Now turning to the presentation, it will be helpful to walk through what we're calling the reset standard. Over the last few years, the board and management focused the company's assets, optimized production profile, streamlined organization and cost structure, and strengthened our balance sheet. The key highlights on page three are that we streamlined our asset base to mid-con focus primarily on PDP assets. We know this property especially well as we've had it for a long time. They're almost fully held by production, and we have a long list of shallow and diversified production profiles detailed later on page six. Our assets have robust free cash flow capabilities, particularly with a low-cost structure and revised CapEx requirements as well as improving price realizations. The cash generation potential provides several paths to increase shareholder value realization. At the NYMEX strip, we believe our PV10 value approximates more than $230 million. If we build on that by extending and flattening our production profile with small ball projects as well as acquisitions by actively managing our price realizations and further reducing costs. Our goal is to address opportunities for economically accretive acquisitions while maintaining stable commodity pricing. As we realize value and generate cash, our board is committed to utilizing our resources, including our cash, to maximize shareholder value. Finally worth highlighting that we take our ESG responsibility seriously and have implemented different processes around it. The next page lays out our core strategy. Our strategy focuses completely on growing the cash value and generation capabilities of the business in a responsible and efficient manner. This strategy has four key points. The first is to maximize the cash value generation capacity of our incumbent Mid-Con PDP assets. One, we aim to flatten our production profile with high NPAT projects and other small ball projects, as well as low-risk well reactivations. Two, actively manage marketing options to maximize our price realizations. And three, continue to manage costs to ensure we convert as much EBITDA cash 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, and limited interest drag is key for us converting EBITDA to operating free cash flow. The third point is to remain vigilant for opportunistic value-accretive acquisitions, focusing on PDP weighted assets that align with our core competencies, cost efficiency, and production optimization. The bottom point is to uphold our ESG responsibilities.

Grayson Pranin, COO

Good morning. This is Grayson. I will handle the question. I don't want to speculate on where we get to Q4 and the future, but I will say that the level price we get focuses on maximizing the cash flow, and that is our overarching goal. I think we're focused on new and few things. Internally, there are always areas where we can improve costs. We will continue to seek efficiencies as we’ve previewed on G&A. The biggest thing we've started to do is to methodically evaluate working with major automakers on what optionality we might have to manage price realizations, especially around gas and NGLs. The second significant area is being very conscious with liquidity following the major sales. We’re fully planning our opportunities. There's no better way to lose money than rushing into projects without proper evaluation. We are currently looking into well reactivations, drill outs, and potentially some refracs, although all these require board approval as they need more capital investment. Furthermore, we continue to evaluate M&A that fits our criteria to enhance our operations. In terms of the inventory of quick return projects, we are evaluating opportunities. While I can’t provide an exact number, we have identified several projects that could be beneficial to proceed with as market conditions improve. This backlog provides strategic flexibility moving forward.

Carl Giesler, CEO

Thanks for your interest in SandRidge and we look forward to talking next quarter, if not before with some of you all.

Operator, Operator

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