SandRidge Energy, Inc.
Q4 2021 Earnings Call Transcript

Published: 10 Mar 2022

[Operator:]

Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the SandRidge Energy Fourth Quarter 2021 Earnings Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. . Scott Prestridge, Director of Finance and Investor Relations. You may begin your conference.

[Scott Prestridge:]

Thank you, and good morning, everyone. With me today are Grayson Pranin, our CEO and COO; Salah Gamoudi, our CFO and CAO; as well as Dean Parrish, our VP 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.

[Grayson Pranin:]

Thank you, Scott, and good morning. Hopefully, you've had time to review the earnings release and investor presentation we posted yesterday after market closed. We will be referencing both during the call. The company is well positioned to capitalize on recent commodity price tailwinds, to include an expanded capital program this year with focused, high-graded drilling in the core of the Northwest Stack and a continuation of our well reactivation program. Before expanding on this in the presentation, Salah will touch on a few highlights from the fourth quarter and full year 2021 results.

[Salah Gamoudi:]

Thank you, Grayson. Simply put, 2021 was a strong year. Despite no new drilling or completion activity, we were able to keep January to December production flat, averaging 18.6 MBoe per day for the company and 18.4 MBoe per day for Mid-Con. The production for the quarter as well as the year benefited from the reactivation of over 129 wells throughout 2021 that were curtailed during commodity price downdrafts in 2020. Net cash, including restricted cash, increased to approximately $140 million, which represents net cash of $3.80 per share of our common stock issued and outstanding as of December 31, 2021. The $41 million increase from the prior quarter was primarily driven by production from our Well Reactivation program, higher commodity price and commodity price realizations and our continued focus on cost minimization. As of March 7, 2022, the company's cash on hand, including restricted cash, was approximately $161 million. The company has no remaining term debt or revolving debt obligations, as the company repaid its $20 million term loan in full and terminated its previously existing credit facility in early September. Our adjusted EBITDA increased to approximately $37 million for the quarter and approximately $114 million for the year, again, despite no new drilling or completion activities during either period. Adjusted EBITDA is a unique metric for SandRidge as we have no I and very little T, given that we have no debt and a substantial NOL position. Commodity price realizations in the fourth quarter increased by 9%, 36% and 5% from the prior quarter to $75.72 per barrel, $3.94 per Mcf, and $28.39 per barrel for oil, gas and NGLs, respectively, before considering the impact of hedges. As of today, we have no open hedge positions or commodity derivative contracts. However, as we invest shareholder capital into our drilling completion and loader activation program, we will work side-by-side with our Board to evaluate and potentially enter into hedge positions in order to help protect investor capital spend. As alluded to earlier, we have maintained our large NOL position, which was over $1.7 billion as of year-end '21. 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 previously implemented initiatives by the Board and management further manifesting in our financials, partially offset by an increase in workover activity associated with well reactivations. This year, total G&A was lower year-over-year at approximately $9.7 million or $1.42 per Boe, compared to $15.3 million or $1.76 per Boe for the prior year. And adjusted G&A decreased by $5.8 million to $8.3 million or $1.22 per Boe from $14.1 million or $1.62 per Boe in the prior year. The team also held LOE and expense workovers to approximately $36 million or $5.30 per Boe during the year while reactivating over 129 wells. We believe we compare favorably with our peers in regards to G&A and LOE on both an absolute and a current Boe basis. We continue to generate net income for our shareholders. During the quarter, we earned net income of approximately $37 million, an approximately 29% increase from the prior quarter and $117 million or $3.21 per share for the year. Before shifting to our investor presentation, we should note that our earnings release posted yesterday and the 10-K that we will file later today, provide further detail on our financial and operational performance during the quarter and full year ended 2021.

[Grayson Pranin:]

Thank you, Salah. Now turning to the presentation. We thought it might be helpful to walk through some of the company's highlights, management, strategy and other business details. Over the past few years, the Board and management have focused the company's assets, optimize its production profile, streamlining its organization and cost structure, and strengthened its balance sheet. As a result, we entered the year positioned to capitalize on robust commodity prices with high rate of return drilling in the Northwest Stack, continued well reactivations and further strengthened cash flow from our already producing properties in Mid-Con. Let's start on Page 4. As Salah mentioned, 2021 was truly an exceptional year for the company. We were able to beat production by more than 6% relative to the midpoint of guidance, which is driven by our well reactivation program was more than 20% increase to guidance at the beginning of last year. Note that we were able to add this production offsetting annual decline for the year with $11 million of capital, which was 9% below the midpoint of guidance. On the expense side, we're able to come under adjusted G&A midpoint of guidance by 35% and kept LOE to $36 million despite increased activity and inflationary pressures. In other notable accomplishments for the year, we paid off our previous $20 million term loan and ended the year with zero debt. We closed the sale of North Park Basin assets in February of last year, simplifying and focusing our asset base in the Mid-Continent region, and completed the purchase of all overriding royalty interest assets of Mississippian Trust I. The key highlights of SandRidge are on Page 5. Again, 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-understood assets are almost fully held by production with a long history, shallowing and diversified production profile and double-digit reserve life. As a result of this focus on the Mid-Con, the company was able to keep annual production relatively flat at 18.6% MBoe per day, despite no new drilling or completion activities, driven in part by the reactivation of over 129 wells throughout 2021. In addition to a continuation of our well reactivation program this year, we plan to resume drilling with a focus purposeful high-return program in the Northwest Stack, consisting of 9 wells. We will expand on this later in the presentation on Page 8. Our assets continue to yield significant free cash flow, which added $41 million of net cash included restricted cash this past quarter, now totaling nearly $140 million, net of debt paydown as of year-end 2021. As detailed on Page 14, the company has demonstrated and been the leader in efficiently converting EBITDA to free cash flow, given our low per BOE cost structure and light CapEx last year, as well as improved commodity prices and realizations. Further, over 75% of operated wells and produced profitably down to $40 WTI and $2 Henry Hub. This cash generation potential provides several paths to increase shareholder value realization and has benefited by a relatively low G&A burden. As we realize value 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 our strengthened balance sheet, robust net cash position, financial flexibility and over $1.7 billion in NOL. Further, the company is not subject to MVCs or other significant off-balance sheet financial commitments. Currently, the company does not have any open hedging contracts after March of this year. 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. It's finally worth highlighting that we take our ESG commitment seriously and have implemented disciplined processes around that. Page 6 lays out our go-forward strategy. In summary, we are focused on growing the cash value and generation capability of our business in a safe, responsible and efficient manner. While prudently allocating capital for high return organic growth projects, remaining vigilant for value-accretive opportunities. This strategy has 4 points

[Operator:]

We'll take our first question from Michael Furrow with Johnson Rice.

[Michael Furrow:]

So SandRidge is in a free cash flow generating mode now. And combined with a healthy balance sheet opens up plenty of options for you guys for uses of cash, whether that be shareholder returns or drilling new wells or some combination of both. And so we haven't seen any share repurchases in the third or the fourth quarter, despite the initiation of that program at 2Q reporting. So I think it would be helpful if you could sort of explain management's view on capital allocation going forward, specifically on buying back shares versus drilling new wells?

[Grayson Pranin:]

Great question, Michael. I think that overall, I'd like to highlight, number one, that the buyback program that we put in place was meant to maximize strategic optionality. And we did that via entering into a 10b-18 program. And so just to ensure that all of our investors are aware of some of the dynamics and challenges with the 10b-18 8, while it does give you, the Board and management ultimate flexibility, in executing on a share repurchase or a buyback program, it also can be very restrictive, because we have to act very similar to any other shareholder. And so if we have any material non-public information that restricts us. And so for instance, in the preparation of the financials, that starts 2 weeks before every quarter until we file, and then if we're in any sort of strategic discussion, whether that's M&A, whether that's even discussing other modes of returning capital with our Board and key investors, that set of discussions can restrict us from being able to execute on the buyback. So while we have it in place to maximize strategic optionality, we are constantly reviewing ways that we can maximize shareholder returns. And -- but that also can limit us on being able to execute at the right time in place via the buyback program. With that said, we are working with our Board continuously and constantly having discussions on this topic. I think that the inertia that we have right now is basically pointing us in the direction of saying, "Hey, we really do have something special in our space with a large NOL position, a lot of cash on our balance sheet with no debt and plenty of free cash flow", as you mentioned. And we're wanting to make sure that we deploy that capital in the most strategically accretive manner to our investors. And so share buybacks are one option. We are evaluating dividends. And then we are also evaluating more strategic optionality outside of organic inventory to try to maximize our shareholder returns.

[Michael Furrow:]

Great. That makes plenty of sense to me. So my next question is on the well reactivation program. So SandRidge reactivated just close to 130 wells last year, but it looks like in the '22, plan is to complete just 30. This kind of leads me to believe as a result of this allocation of capital towards the Northwest Stack drilling program. But Slide 8 very clearly illustrates the profitability of the program, especially with these commodity prices. So the well reactivation program also appears to have some favorable economics as well. So is there any sort of reason why the company has decided to reinitiate a drilling program versus continuing with the same reactivation pace seen in 2021? And why exactly was this specific area chosen in the acreage?

[Grayson Pranin:]

Sure. I think that's a great series of questions. I'll try to address all of them. First, I think we'll talk about the area. The Meramec and the Northwest Stack is the highest rate return within our drilling inventory. So I think that makes the most sense to high grade. I think the Miss Lime and the Chester could become more meaningful with the stabilization around the current spot or further flattening and also, we'd like to see the D&C for the Miss Lime be sub-$2 million. In regards to capital allocation decisions, it's 1 thing to high-grade based off rate return, but we also consider PV-10 and PVI or present value index on how much meaningful value that the investment is actually bringing to the table, because some of these well reactivations have a high return, but they add significantly less PV-10. And that's just a product of our high-grading the program from last year, accelerating the most meaningful portion of the well reactivations and the remaining inventory is very gradational. So we continue to high-grade and try bring on the most profitable within the program, but they have much less relative PV-10 impact. So that's why you see more capital being allocated to drilling in the Northwest Stack.

[Operator:]

Next, we'll go to Josh Young with Bison Interests.

[Joshua Young:]

So I have a couple of questions for you. The first is on this drilling program. So it's good to see, and it's helpful to see the rate of return you guys are expecting, which I'm assuming is probably at least somewhat rest given the history. Can you talk to how much of the spend for that program might be reflected in the net cash number you provided as of early March?

[Grayson Pranin:]

Sure, happy to. I think you're picking up some of the comments we made during the call that we're being proactive and competing inflationary pressures in repositioning material equipment and advance the program in order to ward off future increases. So we've spent a lot of time early this year securing casing, pumping units, and other equipment and material, just to make sure that we have a successful program and deliver the well cost that we've underwritten. So I'm not prepared to disclose an absolute number today, but that has impacted our cash balance as of March 7 of this year.

[Joshua Young:]

Okay. Great. Okay. Yes, that was my understanding. I just wanted to get clarification, because it does look a little light in terms of the cash build, but you guys also disclosed the program. So that's helpful. I guess my other question is similar to the prior questioner regarding return of capital. Given the substantial build of cash, what's management's view -- I guess I can't really ask about the Board, because they're not on this call. But what's management's view on returning that capital, if not through a share repurchase, through a dividend? It just looks like there is this huge amount of free cash flow based on guidance and based on the historic cash build that there would be a meaningful dividend that could be payable just from this. It might not even cut into the cash balance. It could just reduce the amount of cash build.

[Salah Gamoudi:]

Josh, great question. I think that the view of management and the process that we go through and how we think about this is that all options are on the table. I think that if we do not find a highly accretive strategic option, within the energy space or otherwise, to deploy this capital and again, to use the same a highly accretive way for our investors that's both prudent and highly profitable. I think that those options are on the table, and we would be supportive of that. And we will work with our Board to discuss that and just make sure that that's the most economically accretive as well as be a consensus with our Board and shareholders that we can get to. Also, on the other side of that, there are options for an expanded capital and drilling program as we go along. We are very prudent and conservative in regards to what we want to put out there for our investors and how we spend your money. And so as we go along in the year and we drill and complete new wells, and bring more wells back on to production. And we kind of see where these commodity tailwinds as well as the volatility goes, you could see us expand that drilling program if it's the most accretive and prudent thing to do.

[Operator:]

. We'll go to Patrick Retzer with Retzer Capital.

[Patrick Retzer:]

So first of all, I'd like to congratulate you on doing a great job of bringing this company to the point you have, very efficiently and economically. So thank you for that. Secondly, I'm a bit puzzled given the price levels for oil and gas currently, as to -- I believe your guidance for 2022 is for a production decline of 17% up to about flattish. Is that right?

[Grayson Pranin:]

Sure. Thanks for joining the call. It's a great question and I appreciate the comments. I think what we anticipate with this program is much of the production impact from the drilling of the 9 wells were incurred in the second half of the year. And if you look at over the next 2 years, about half of the production volume impact is going to occur this year and next year. So the long story short is that the drilling program is going to meaningfully spend declines and grow production by about 5% January to December. And then it will further spend from base declines next year.

[Patrick Retzer:]

Okay. So you've got no debt, a pile of cash, you can reactivate wells at very low cost, yet you're doing maybe 30 wells this year versus over 100 last year, and letting your production decline in a high price environment. Can you talk about how we should think about that? And perhaps what the inventory of wells is that you have that can be reactivated at some point?

[Grayson Pranin:]

Sure. Let me address the well reactivations first. So we do have a meaningful inventory of previously curtailed wells that not only occurred in 2020, but further back than that. So we're constantly assessing which wells that we can reactivate in the current environment. The 30 wells was really a proxy of our initial budget planning. And of course, we've seen a tremendous surge in pricing over the last week that does not factor that in. So we continue to assess that and remain flexible to relook at things for further potential activations for us. And again, the drilling program is going to be pretty meaningful adding economic barrels on the back half of the year. So our goal is to flatten to increase production. If that answers your question?

[Operator:]

That concludes today's question-and-answer session. We thank you for your participation in today's call. You may now disconnect.