SandRidge Energy, Inc.
Q2 2021 Earnings Call Transcript

Published: 11 Aug 2021

[Operator:]

Good day and thank you for standing by. Welcome to the SandRidge Energy Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers' 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. Prestridge, Director of Finance and Investor Relations. Please go ahead.

[Scott Prestridge:]

Thank you and good morning everyone. With me today are Grayson Pranin, our Chief Executive Officer and Chief Operating Officer; Salah Gamoudi, Chief Financial Officer and Chief Accounting Officer; and Dean Parrish, our Vice President of Operations; other members of the management team are joining us this morning as well. We would like to remind you that today’s call contains forward-looking statements and assumptions, which are subject to risks and uncertainties. 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 will turn the call over to Grayson.

[Grayson Pranin:]

Thank you and good morning. Hopefully you've had time to review the earnings release we posted yesterday after the market closed. Over the last couple of years and particularly over the 15 months, the Board and management have worked to transform our company in almost all respects, this transformation focusing on asset base, streamlining our organizational and cost structures, more than full flip of net debt to net cash, have positioned the company well within the adjustment of tailwinds of recent commodity price improvements. To include an anticipated capital program to reactivate over 100 wells in the second half of this fiscal year. Before discussing the end points in more detail, Salah will touch on a few highlights from the second quarter of earnings.

[Salah Gamoudi:]

Thank you, Grayson. Simply put, 2Q 2021 was a strong quarter, despite no new drilling or completion activities our mid-con and daily average production increased from 17,500 BOE per day last quarter to 19,000 BOE per day this quarter, and was flat compared to Q4 of 2020. The quarter-over-quarter growth was driven in part by the reactivation of 49 wells curtailed during last year's commodity price down for us. During the quarter, our cash and cash equivalents balance excluding restricted cash increased to $90.6 million, a $14 million increase from the prior quarter, primarily as a result of higher production, commodity – higher commodity price realizations, and our continued focus on cost utilization and despite being offset by the acquisition of the ORRI held by the SandRidge Mississippian in Trust I for a purchase price of $4.9 million. Total debt outstanding remained at $20 million with de minimis interest expense during the first half of 2021. Despite closing on the sale of our North Park Basin assets during the first quarter of this year, our adjusted EBITDA remained relatively flat from the prior quarter at $20.8 million compared to $21.7 million. As I'll discuss in a moment, I'd like to point out that our EBITDA has very little high and no federal income taxes effecting –commodity price realizations remain strong over the quarter at $64.73 per barrel of oil, a $1.66 per MCF for gas and $17.33 per BOE of NGLs. I would like to remind our investors that these figures represent 2Q averages and do not reflect movements made in benchmark commodity prices over the last several months in the third quarter. As I alluded to earlier regarding our EBITDA, we have maintained our large NOL position, which was over $1.6 billion as of the end of the second quarter of 2021. Our NOL position has and will continue to allow us to shield our future cash flows from federal income tax. Our cost discipline continued to improve during the quarter with previously implemented initiatives further manifesting in our financials, partially offset by an increase in work-over activity associated with well reactivations. This quarter adjusted G&A was approximately $2 million or $1.13 per BOE, and $3.8 million $4.14 per BOE for the first half of the year. The team also held LOE and expense workovers to $9.2 million or $5.33 per BOE during the quarter, while also reactivating 49 wells over the first half of the year. This level of LOE should be sustainable going forward even with an expanded, planned well reactivation program in the second half of the year. We believe we compare favorably with our peers on both G&A and LOE on a per BOE basis. Also it's relatively rare for an E&P company to generate net income. We did that. However, for over the last two quarters earning net income of approximately $16 million for this quarter and $51 million over the first half of the year, which included an almost $20 million gain on the sale of North Park Basin. Also on the rarity category, we had no oil and gas impairments for the second consecutive quarter. Another notable item during the first half of 2021 was a simplification of our asset base. We exited North Park Basin in February, a higher decline higher cost assets. We are now focused solely on our core long lived, predominantly PDP Mid-Con properties and no longer engage in the routine flaring of produced natural gas. As discussed previously during the quarter, we purchased for $4.9 million in cash, all the overriding royalty interest assets of SandRidge Mississippian Trust I, when that trust along with Mississippian Trust II ultimately liquidate, our company will no longer have any affiliated trust. Finally, our board has approved the initiation of a share repurchase program as a means of opportunistically returning capital to shareholders. As a result, the company repurchased up to $25 million worth of outstanding common stock, beginning as early as August 16, 2021. We should note that the release posted yesterday and the 10-Q that we will file later today, provide further detail on our financial and operational performance during the second quarter in the first half of 2021.

[Grayson Pranin:]

Thank you, Salah. I thought it would be helpful to walk through some of the company’s highlights, management strategy and other business details. Over the last three years before management has focused the company's assets optimize the productive profile, streamlined organization cost structure has strengthened its balance sheet. With the divestiture of North Park in February of this year, the asset base is now focused in Mid-Continent region but primarily PDP drove that it should not require any routine flaring in produced gas. These well-understood assets are maturely held by reduction, long-lived shallowing in the diversified production profile. We have little to no substantial future development rather more are materially concentrated capital risks across the producing gas. Coming to the point of assets are long lived created along with double-digit reserve enable high growth production inventory. More than 1,000 miles owned and operated by HBP and market infrastructure over our book. This substantial owned and immigrated infrastructure provides company both cost and strategic advantages bolstering asset operating margin, reduced lifting as well as water and disposal costs while reducing positive free cash flow. In addition, the interconnectivity enabled capacity for unproceeding curtailments. Shallow declined, again its base profile decline expectations with upper teens, which are anticipated to extend further with the low teens, driven in part through our well reactivation program. Diversified production profile, both from a gas to liquid hydrocarbon mix perspective, in over 975 producing well based perspective. I think that the mostly HBP which is a breakeven to make the new commitments to minimize. As a result of this focus in Mid-Con, the company was able to increase quarter-over-quarter production from 17.5 to 19 LOE per day despite no new drilling or completion, driven in part by the reactivation of 49 wells in the first half of this year. Our assets that above free cash flow and liquidity, which contributed to the increase of $14 million of cash this quarter, now totaled over $90 million. Our high EBITDA to free cash flow conversion is aided by a low per BOE cost structure and low CapEx required, as well as improving commodity prices and realization. This cash generation process potentially provides central path to increase shareholder value. This all sums up to $90 million, improve development PV-10 reserve value, we believe approximately more than $320 million. And we have began to build on that product, one, SD’s reduction profile is high return on capital and well reactivation. We plan to reactivate a number of wells this year. Two, actively managing our realizations and further reducing cost. Three, growing asset base opportunistically and economically as free cash flow accretive acquisition. Four, maintaining appropriate level of exposure to commodity upside. As we realize value generating cash, as to utilizing market trends including earned cash to maximize shareholder value. Favorable value proposition with materially derisked from a financial perspective, our strengthened balance sheet, our above net cash position, financial flexibility and over $1.6 billion in NOL. Further, the company is not subject to MVP or other significant up balance sheet financial. And with the recent purchase of the overriding royalty interest asset, SandRidge Mississippian Trust I during the quarter, begin to simply our operating net. Our go-forward strategy and to grow the cash value and generating capability of a business in a safe, responsible, efficient manner while remaining design for value opportunities. This certainly has worked. Again when we had our plan to maximize the cash value generating capacity of our home at MidCon PDP assets file. Extending and flattening our production profile with higher return of workover well – actively managing marketing options to maximize personal cash, continuing to put on operating and administrative costs. Third point is to keep vigilant for opportunistic value accretive acquisitions, to focus on PDP weighted assets, A, set of core competencies, cost efficiency and production optimization we have sufficient mid-stream optionality and our unfavourable regulatory areas. The final product is the upward, uphold our ESG responsibilities. Regarding profit for the last several years before the management has implemented measures to less than half way and PDP stock in our ways up 70% more than 30% respectively, since 2016. We will continue to track on operating costs. However, we anticipate expenses with the workover incentives, what is the near term as we reactivate more wealth of major. Fundamental particles, there has been a deliberate set of wealth by organizations. And as a result, we have tailored our organizations to PDP and cash flow growth instructor to be more that prefer. This changes rebalancing the weighting of the 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 and land administration, IT, tax, and HR. Beyond the more than 6 million and per year G&A savings, outsourcing provides us greater flexibility and scalability to adjust to the changes in our business for the market. In regards to production optimization, we focused on relatively low quick payback and high returns workovers over the last year and have enjoyed success in our execution. We are purposely disciplined in our approach as we work to delever our balance sheet, expanded our liquidity and capital assets over the latter part of 2020. Now with a much stronger balance sheet and liquidity position as well as vastly improved and firming price realization, we plan to more aggressively pursue initiatives that will further flatten our already shallowing base decline. Over the first half of the year, we brought back online 49 wells, which collectively added 1,500 gross barrels equivalent per day, and delivered over 100% rate of return. We plan to expand this program into the second half of this year, targeting over 100 wells for reactivation, projected economics for this well set are now also over 100% rate of return. In addition, we will plan to convert a subset of these wells to a more efficient long-term artificial lift method, which will likely reduce their go forward costs. Well reactivation projects are the highest risk adjusted returns in the company's inventory. Unlike drilling, there's very little relative geologic reservoir, mechanical or risk concentration. Recently, we had filed two recompletion permits to the Oswego and Red Fork formation in legacy vertical wells. Mitchell work is scheduled for this year and tested pressure as well as the oil and gas composition will barely influence on completion and capital decisions. We will continue to evaluate the opportunity for these types of relatively low capital high return projects across our almost 375,000 acre footprint to help further than declines in the future. Our performance continued to exceed the expectation that we laid out earlier this year. As we discussed previously, this outperformance driven by material uplift and realized prices, finding the successful well reactivations early this year. We plan to expand this well reactivation program are bringing on additional 100 wells in the second half of this year. As such we are adjusting our guidance that reflect the epileptic production, increasing the midpoint of guidance by over 50%, as well as the associated increase in capital expense needed to do so. Please know that while the expense is estimated to be up, an increase on an absolute basis, it is not increasing on a per unit basis, demonstrating that we are bringing on more production cost effectively. Please note that the revised guidance does not budget for joining in this time. As we'll focus on our well reactivation program near-term and do so in a safe, efficient and cost-effective manner. We will continue to evaluate opportunity for drilling the strengthening prices forming around the current spot or above. In summary of the company and its assets current strength, we have low overhead, top tier G&A of $1.37 per BOE in the first half of 2021. We have low operating costs demonstrating from a large SD and electrical infrastructure requiring a little to no future capital to maintain. A substantial free cash flow and a growing net position supported by diverse production profile, low decline, multi-digit like asset base. Inventory of low call, high return well reactivation will help flatten predominantly decline. No routine playing up produce natural gas among other factors. This concludes our prepared remarks. Thank you for your time. We'll now open the call with questions.

[Operator:]

Your first question Noel Parks with Tuohy Brothers Investment.

[Noel Parks:]

Hello?

[Grayson Pranin:]

Yes. Hi, Noel.

[Noel Parks:]

Hi. Thanks for all the detail on the update. A couple of things, you're talking about converting to more efficient artificial lift; are those like rod pump conversions or?

[Grayson Pranin:]

Yes. We're converting from the initial artificial list, which was predominantly ESP or gas lift to a long-term artificial lift, which is either rock pump or…

[Noel Parks:]

Great. Okay, thanks. And I was – it's been a terrific time to be unhedged given the ups we've seen in commodity prices in the last couple of quarters. And can you just refresh my memory; did you monetize some 2021 hedges at some point early in the year?

[Salah Gamoudi:]

I know yes, this is Salah. We did end up doing that. We monetized our hedges in 4Q 2021 – 4Q 2020, sorry.

[Noel Parks:]

Okay, thanks. And I was just curious in your program, returning wealth to production are there any third-party infrastructure issues that are you're standing in the way of returning any of the wells. I guess with better commodity prices, especially on the gas and NGL side. I was just thinking about the possibility of infrastructure getting a little bit more taxable spend in recent times?

[Grayson Pranin:]

No. No. That's the benefit of having owned and operated large infrastructure system, and we're better able to take advantage of the ample tasks that we have in each of those systems.

[Noel Parks:]

Okay, great. And I think it's my last one. Just thinking about the transaction environment we've seen, a lot of activity across the – a number of different basins. I am just thinking about in the MidCon particularly conventional reservoirs, are there PE that, private players still out there and in your area and I'm just curious if among those is, if any of them also are spend any significant CapEx these days?

[Grayson Pranin:]

Sure, yes. That there continues to be private equity players in around MidCon. We like to remain wide, hide to both their operations as well as public company operations, just, so that we can benchmark our performance relative to them. And we think that we compare favorably. In addition, we remain vigilant and research potential for opportunities in the market in MidCon and, really they looking for something that's the appropriate fit at the right price. I hope I address that question correctly?

[Noel Parks:]

Great, thanks. That's all I had.

[Operator:]

Your next question is line of Brett Hendrickson with Nokomis Capital.

[Brett Hendrickson:]

Hey, it's Brett with Nokomis Capital. Thanks for taking the question. And I'd love to follow-up with you guy’s offline and this maybe but congrats on, what looks like a really high return reactivation program. I am assuming that you guys are probably pretty rational access. You did the, I imagine you did the best reactivations first in the 49, or are they more linear in terms of the uptick that you get from an incremental reactivation on the next 100? Just any color would be appreciated?

[Grayson Pranin:]

Sure. It's a mix, there were subset of there, that didn't require any well interventions or workover. So it's just a matter of going on and turning on the well. So those got turned on quickly. We did go in high grade and as we've had continued price upwards. We felt was appropriate to bring on that the next 100 wells throughout – back half of this year.

[Brett Hendrickson:]

Okay, so you had some more leverages easy to turn on, to turn them on, but there might not have been much production. So that I guess of the follow up would be how many of the next 100? I think 30 of the first 49 required workovers, how to the next 100 or so require workover. Yes.

[Grayson Pranin:]

100 wells.

[Brett Hendrickson:]

One and remind me what's the average cash, cash flow on a workover?

[Grayson Pranin:]

These workover is very average about $65.

[Brett Hendrickson:]

Okay, good. Okay. Thank you very much. I'll follow-up offline.

[Grayson Pranin:]

Thank you. Appreciate that.

[Operator:]

Your next question is line of Josh Young, Bison Interests.

[Josh Young:]

Hey, guys so a couple of questions. One on the price realizations, it looks like realizations for gas and NGL you weren't up that much, even though the headline price for those commodities were up or I guess if you could help reconcile kind of where, we're at that differences and if there are any opportunities to improve your realizations versus the other houses?

[Grayson Pranin:]

Yes. Thanks Josh. Good morning. I'll touch on a few points, and then I'll turn over to Salah to reinforce some others. So we've seen improvement in realization since last year, we're focused on further improving these realizations by actively working with our largest purchasers. In addition, we believe that as a benchmark increases, sales realization will also improved at the fixed cost components are less impactful subject to change in local market conditions.

[Salah Gamoudi:]

Well, that's correct. And one thing we just wanted to make sure that everybody was and Josh, I know you are, but it's just all of our listeners are aware of that 2Q of 2021. The commodity prices that, posted commodity prices weren't. They weren't as gangbusters as they have been in the third quarter. And so I know there's a lot of excitement about where Henry Hub is going and things like that. We still saw certainly saw commodity price improvements from the prior year. And just as a Grayson said, we continue to expect that the realizations will continue to improve as we go along here. So, with our efforts on the marketing side of that as well, fixed cost component that Grayson speaking I that will move with – here

[Josh Young:]

Great. Okay. That's helpful. Thanks. And then my other question is on – it looks like there are couple of drilling permits that were filed for you guys. Are those work-over wells or new wells? And then I guess to the extent that they aren't – to the extent they're just kind of workovers that require rigs. Is there a price that you guys are tracking where you see new wells in drilling your pads, is there a breakeven price that you’d track where at a certain price or higher, it would start to become economic and a compelling call for capital to just start drilling new Mississippi landmarks?

[Grayson Pranin:]

Yes. Thanks, Josh. You may have heard it during the call, but the two recompletions that I've mentioned out of the late to the permits in question and there were looking at testing the apps in existing vertical files. As I mentioned, we're really focused on what's the highest risk adjusted return in our inventory right now, which is a well react basins, we remains focused on potential or drilling opportunities and I think you can see it lean into that at firm around current spots of greater. But right now we do have inventory that's economic, but you'll see it be a little bit more conservative in ensuring that we deliver a very high risk adjusted fully burdened return out to shareholders, as we realize those success. So we're not going to drill in low double-digit return properties.

[Josh Young:]

Got it. That's really helpful. And then just one quick follow-on on that. It looks like you guys, amended your credit agreement to be able to start to hedge if you choose to – you did a great job in covering your hedges at a cost and took a market kind of penalty for that late last year that we saw in filings this year. Do you guys have plans to hedge or could you kind of clarify a little bit in terms of like what the thinking there is in getting that change in the credit agreement?

[Grayson Pranin:]

Yes, Josh. The change in the credit agreement really was administrative in nature in the sense that we wanted to be able to enter and exit hedges in the normal course. The way that the credit agreement was structured, it made that – it made that difficult. And so, we discussed that with our lender and about that past. With that said, we'll always continue to look at the potential for hedging, especially as our capital program here has been increased. And we'll continue evaluating that, but that the change in the credit agreement in and of itself was really just allowing us to act in the normal courses, any other typical EMT company work.

[Josh Young:]

Got it. Great. Thank you.

[Operator:]

And your next question is from Michael Melby with Gate City Capital Market.

[Michael Melby:]

Hi, good morning; and congrats on the good results. Could you update us, you had a nice slide last quarter on your infrastructure assets, and I appreciate just here. Have you talked about any other strategic or other ways you might be looking to gain value off of your infrastructure assets? Thanks.

[Grayson Pranin:]

Yes. Good morning, Michael. Thank you for the question. That's something that we continue to evaluate. We have the benefit of having that large infrastructure position and we're always looking at ways to increase profitability or cash flow around them, but don't have anything to report out today.

[Michael Melby:]

Thanks. And the share repurchase was nice to see, I guess my understanding is with a dividend you could deliver capital back without in a tax efficient way, I guess I should say. Could you talk about your decision for share repurchases versus the dividend? Thanks.

[Grayson Pranin:]

Thanks, Michael. That's a great question. The way that we saw it is upon implementing the program and viewing the facts and figures internally, we still believe as a company, that's there is still a value disconnect between our share price in our intrinsic value. And so, we thought it would be prudent to allocate capital in such a way that we get our investors the highest return, and when we reviewed that buying back stock to potentially be an avenue for that. And I also like to point out that the share repurchase program is completely out of expression, it is a 10b-18 program, which allows us to purchase when and where we want and how much. And so, the $25 million that's approved is an up queue amount. And we will evaluate each one of those decisions in isolation as we go.

[Michael Melby:]

Got it. Thanks.

[Operator:]

And I have no other questions at this time. This concludes today's conference call. Thank you for participating, you may now disconnect.