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SandRidge Energy Q2 2010 Earnings Call Transcript

SandRidge Energy Q2 2010 Earnings Call Transcript

SandRidge Energy (SD)

Q2 2010 Earnings Call

August 05, 2010 9:00 am ET


Dirk Van Doren - Chief Financial Officer and Executive Vice President

Tom Ward - Chairman of the Board, Chief Executive Officer and President

Matthew Grubb - Chief Operating Officer and Executive Vice President


Brian Singer - Goldman Sachs Group Inc.

Philip Dodge - Stanford Group Company

Neal Dingmann - Wunderlich Securities Inc.

Amir Arif - Stifel, Nicolaus & Co., Inc.

Phillip Jungwirth - BMO Capital Markets U.S.

David Kistler - Simmons & Company

Rhett Bruno - BofA Merrill Lynch

Scott Hanold - RBC Capital Markets Corporation

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Good day, ladies and gentlemen, and welcome to your Quarter Two 2010 SandRidge Energy conference call. My name is Denise, and I’ll be your event manager today. [Operator Instructions] And now I would like to hand the presentation to your host for today's call, Mr. Dirk Van Doren.

Dirk Van Doren

Thank you very much, Denise. Last night, the company issued a press release detailing SandRidge's financial and operating performance for the second quarter of 2010, and we'll file our 10-Q on Monday. If you do not have a copy of the release, you can find a copy on the company's website,

Now for the forward-looking statement. Please keep in mind that during today's call, the company will be making forward-looking statements, including statements about our acquisition of Arena Resources and the anticipated benefits of the transaction, which are subject to risks and uncertainties. Actual results might differ materially from those projected in these forward-looking statements. Additional information concerning risk factors that could cause such differences is detailed on the company's filings with the SEC. Today's presentation will include information regarding adjusted net income and adjusted EBITDA and other non-GAAP financial measures. As required by SEC rules, a reconciliation to the most directly comparable GAAP measures are available on our website under the Investor Relations tab.

Now let me turn the call over to Chairman and CEO Tom Ward.

Tom Ward

Thank you, Dirk, and welcome to our second quarter operations call. We also have in our office today, Matt Grubb, COO; and Kevin White, Senior VP, Business Development.

SandRidge has transformed to a diversified oil and natural gas company with the ability to selectively drill for oil and gas as circumstances dictate. Approximately 70% of our revenues are now generated by oil production. With the increased oil production, we've been able to hedge over $2 billion in future revenues. As a result of our hedges, shallow drilling opportunities and certainty of reserves, we are able to implement a sustainable drilling program that wheeled rates of return in excess of 50% on all of our oil projects. Our goal is to have a company with the appropriate mix of low-risk oil and gas assets that will enable us to drill and create value in a broad spectrum of economic circumstances and achieve industry-leading returns on invested capital. We are now that company.

At the end of 2008, we started down a path of hedging our natural gas production, averaging over $8.80 per Mcfe and looking for acquisitions of crude oil. Our total liquids production has risen from 4,000 barrels per day to nearly 24,000 barrels per day today. Let me emphasize that post-Arena, 85% of our liquids production is crude oil. That's an important point, because our industry now commonly uses the term “liquid-rich” to instill value in a particular area or particular a play. As you know, liquid-rich often means natural gas liquids, while currently better than dry natural gas, still sell at 50% to 60% discount to crude oil. Furthermore, even though the price per barrel is more than double for crude versus natural gas liquids, there's a backwardation of the NGO market as compared to a contango in the crude oil market, making it very difficult to effectively hedge NGL prices.

We not only look for pure oil plays, but have also focused on the Central Basin Platform of the Permian Basin. We've now amassed over 200,000 net acres here in less than a year. This acreage position, if valued like large shale plays currently getting JV attention, might be worth $10,000 per acre, or $2 billion. However, we do not pay for unproven acreage, but instead, acquired over $2 billion worth of oil production that we've hedged.

We now have virtually unlimited oil drilling upside with no acreage costs. Our plan was simple: Find an area with scale for growth, opportunities for high rates of return on drilling, low reservoir risk and hedge and commodity prices to sustain that rate of return. We have achieved that goal.

SandRidge currently has 28 rigs drilling. We plan to reduce the gas rig count from eight current to five and could further reduce as natural gas prices dictate. We will maintain 19 rigs drilling for oil.

Our 2010 CapEx will increase to $875 million from $800 million, incorporating the increased rig count from the Arena acquisition. We will spend about $125 million the remainder of this year drilling those wells and installing associated facilities. As you can see, we would have had a decrease in CapEx if not for the Arena acquisition. We maintain our production guidance at 120 Bcfe. That is, we project to produce 6.8 Bcf less gas than previously, but 7.2 Bcfe, or 1.2 million barrels more of oil. The value per Mcf equivalent of oil is about 17x that of gas today. We will generate $50 million more EBITDA with the gain in oil than loss of gas. This is a very clear example of the switch from gas to oil with a focus on EBITDA growth.

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