SandRidge Energy (SD)

Q1 2012 Earnings Call

May 04, 2012 9:00 am ET


James D. Bennett - Chief Financial Officer and Executive Vice President

Tom L. Ward - Chairman and Chief Executive Officer

Matthew K. Grubb - President and Chief Operating Officer

Kevin R. White - Senior Vice President of Business Development


Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

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

Joseph D. Allman - JP Morgan Chase & Co, Research Division

David W. Kistler - Simmons & Company International, Research Division

Craig Shere - Tuohy Brothers Investment Research, Inc.

Unknown Analyst

Charles A. Meade - Johnson Rice & Company, L.L.C.

Brian Singer - Goldman Sachs Group Inc., Research Division

Duane Grubert - Susquehanna Financial Group, LLLP, Research Division

Daniel J. Morrison - Global Hunter Securities, LLC, Research Division

Richard M. Tullis - Capital One Southcoast, Inc., Research Division

Patrick Lee

Graham Yoshio Tanaka - Tanaka Capital Management, Inc.

Alex Heidbreder

Joseph Stewart - Citigroup Inc, Research Division

Anne Cameron - BNP Paribas, Research Division

Robert Carlson



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Good day, ladies and gentlemen, and welcome to the First Quarter 2012 SandRidge Energy Earnings Conference Call. My name is Dominique, and I'll be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. James Bennett, Chief Financial Officer. Please proceed, sir.

James D. Bennett

Thank you, Dominique. Welcome, everyone, and thank you for joining us on our first quarter 2012 earnings call. This is James Bennett, Chief Financial Officer. And with us today, we have Tom Ward, Chairman and Chief Executive Officer; Matt Grubb, President and Chief Operating Officer; and Kevin White, Senior Vice President of Business Development.

Keep in mind that today's call will contain 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. Additionally, we'll make reference to adjusted net income, adjusted EBITDA and other non-GAAP financial measures. A reconciliation of any non-GAAP measures we discuss can be found in our earnings release and on our website.

Please note that this call is intended to discuss SandRidge Energy and not our public royalty trust, SandRidge Mississippian Trust I, Mississippian Trust II or SandRidge Permian Trust. SDT and PR will be a addressed on separate calls on May 11. Also, SandRidge will file its 10-Q on Monday, May 7.

Now let me turn the call over to Tom Ward.

Tom L. Ward

Thank you, James. Welcome to our first quarter operational update. We had another great quarter where, once again, we achieved record oil production, which drove our earnings. SandRidge is fully financed for 2012, as we have now closed on our Dynamic acquisition and completed the IPO of our second Mississippian Royalty Trust.

We averaged 36 rigs operating during the first quarter and drilled 250 wells. Currently, we have 42 rigs operating, including 5 rigs drilling disposal wells. It is quite remarkable the change that has happened at our company over the last 4 years. In the spring of 2008, there were few industry people worried about being a natural gas company. However, as large integrated companies begin to surface in North America after a 30-year hiatus, our management team did take notice. And by the end of 2008, decided that change needed to take place at our company, and change we did. We first hedged our natural gas through 2010 at above $8 an Mcf, then embarked on finding the very best conventional oil assets in the U.S.

We went to our Board of Directors in early 2009 when natural gas was $4.13 and oil was $39.96 per barrel, with a bold plan to start acquiring the least expensive oil in the most prolific place, the Permian Basin. We not only chose the Permian, but the Central Basin Platform where the shallowest, most inexpensive oil was produced. Today, we produce over 30,000 barrels of oil equivalent from this asset, and we've drilled more than 750 wells here this year.

In 2009, we also identified one of the largest stratigraphic traps in the U.S., with tremendous oil reserves and untapped horizontal drilling potential that was not being exploited because of high water production.

At that time, there was much industry excitement about emerging shale gas plays, leaving little attention to the Mississippian play. However, for other saltwater, we saw vast amounts of oil over an area of 17 million acres across Oklahoma and Kansas. The Mississippian play had begun. During the next 2 years, we leased 2.2 million acres for about $415 million and created one of the largest oil resource plays in the world. Now it is widely known that the Mississippian is among the very best places to drill. And in our opinion, it is the very place best place to drill in the United States. It is important to note that SandRidge is focused on only 2 drilling plays and 1 resource play to lease land in the last 3 years. Our company standard is to be the most efficient operator of each area we choose to develop.

We are efficient because of our relentless focus on a single place. In the Mississippian, this allows us to prepare lead time to install electricity and disposal before we drill and to watch our drilling cost very closely. We see a lot of companies talk about how much a well might make in a particular play on a particular day, but not many discuss what really matters, which is how much you spend, how you prepare and how much you find after drilling several hundred wells on our way to several thousand.

SandRidge has now drilled nearly 300 of the 640 horizontal wells in the Miss and currently operates 29 rigs in the play, of which 19 are drilling horizontally in Oklahoma, 5 are drilling horizontally in Kansas and 5 are drilling saltwater disposal wells. We drilled 68 wells in the first quarter, with 55 of those in Oklahoma and 13 in Kansas.

We anticipate ending the year at 32 horizontal rigs and project ending 2013 45 horizontal rigs drilling for shallow, conventional oil across Northern Oklahoma and Kansas. We believe our industry will create over 100,000 jobs across this area over the next 5 years, and we'll play -- and we'll have a play as large and as important as the Bakken is to North Dakota and Montana. So we think it's a good use of capital to increase land in an area we have already sold for more than 10 times your investment and are drilling exceptional wells instead of trying to find a new area to buy and start all over again.

Our type curve EUR of 456,000 barrels equivalent has an average peak 30-day rate of 275 barrels of oil equivalent per day. However, we do have prolific success stories. One well we recently completed in Alfalfa County, Oklahoma averaged more than 2,200 barrels of oil equivalent per day at 92% oil and is calculated to be the third highest 30-day rate oil well drilled in the United States in the last 3 years. Another well is even better and appears to be on track to be the highest 30-day rate oil well drilled in the U.S. in the last 3 years. This well has averaged over 3,750 barrels of oil a day and 1.5 million cubic feet of gas a day or 4,000 barrels of oil equivalent per day and paid the $3 million well back during the initial flow-back period of 10 days. However, we have chosen to not only discuss our best wells, but the nearly 300 wells we've built across more than 150 miles from Comanche County, Kansas to Noble County, Oklahoma. A well that averages only 244 barrels of oil equivalent per day, which is what our type curve was at the end of 2010, would have a rate of return more than 80%. And a well that averages 310 barrels of oil equivalent per day during the 30-day peak rate will have a rate of return of over 125%. We are very happy with both of these outcomes or really any in between because even at the low end of the range, we can meet our 3-year goal of tripling EBITDA, doubling oil production and improving our credit metrics.

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