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SandRidge Energy (SD)

Q4 2010 Earnings Call

February 25, 2011 9:00 am ET


James Bennett - Chief Financial Officer and Executive Vice President

Matthew Grubb - President and Chief Operating Officer

Tom Ward - Chairman of the Board and Chief Executive Officer


Jeffrey Robertson - Barclays Capital

Scott Hanold - RBC Capital Markets, LLC

Philip Dodge - Stanford Group Company

Brian Singer - Goldman Sachs Group Inc.

Devin Geoghegan - Zimmer Lucas Partners

David Heikkinen - Tudor, Pickering, Holt & Co. Securities, Inc.

Michael Breard - Hodges Capital Management

Duane Grubert - Susquehanna Financial Group, LLLP

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Neal Dingmann - SunTrust Robinson Humphrey, Inc.

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Richard Tullis - Capital One Southcoast, Inc.

Noel Parks - Ladenburg Thalmann & Co. Inc.



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Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Year End 2010 SandRidge Energy Earnings Conference Call. My name is Kerris, and I will be your coordinator for today. [Operator Instructions] And I would now like to turn the call over to your host for today, Mr. James Bennett, EVP and Chief Financial Officer. Please proceed, sir.

James Bennett

Thank you, Kerris. Welcome, everyone, and thank you for joining us on our fourth quarter and full year 2010 earnings call. Please note 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 may make reference to adjusted net income, adjusted EBITDA and other non-GAAP financial measures. A reconciliation of any non-GAAP numbers that we discuss can be found in our earnings release and on our website.

Now let me turn the call over to our Chairman and Chief Executive Officer, Tom Ward.

Tom Ward

Thank you, James, and welcome to our fourth quarter financial and operational update. Also present with me are Matt Grubb, President and Chief Operating Officer; as you know, James Bennett, EVP and Chief Financial Officer; Rodney Johnson, EVP Reservoir Engineering; and Kevin White, Senior VP, Business Development and Investor Relations.

As most of you know, we have completed the transition to crude oil that started two years ago. While challenging during the process and viewed by many as a contrarian move, we can now look back and see that we not only made the right call on commodities but did so in size and scale that transformed our company. Only two years ago, our revenue consisted of over 80% natural gas and now is more than 80% oil. We remain true to our conviction on developing shallow, low-cost, proven carbonate reserves. First, we expanded our holdings in the Central Basin Platform, with the acquisition of assets from Forest and Arena, and now we have 780,000 acres in the horizontal Mississippi and carbonate play in Oklahoma and Kansas. These two areas have the important characteristics we require in all of our plays: low costs, low reservoir risk, scalability and repeatability. Key infrastructure is in place for oil and gas development. Rigs are readily available. Shallow reservoirs mean fewer drilling days and low horsepower requirements for hydraulic fracturing all contribute to low costs and very high rates of return. Furthermore, because we work in areas that have been proven by thousands of vertical wells over decades of drilling, we take on little reservoir risk in generating these high rates of return. We also have the drilling inventory in place to continue this type of drilling success for many years to come.

Another advantage to our Mississippian play is our low entry cost. We have now basically shut down our leasing efforts. But once all the numbers come in, we expect to have spent less than $200 per acre and should have over 900,000 net acres leased. This is in stark contrast to the entry costs of many of the recent high-profile plays where acreage costs have been 10x to 100x higher. We could only accomplish putting together our holdings in the Central Basin Platform by being ahead of the industry and deciding to make this a core area in early 2009. Today, it would be impossible to duplicate. Also, it would be impossible to have our acreage position on the Mississippian play had we not moved aggressively during the last year.

We spent two years acquiring oil production and oil drilling locations in areas that most others have overlooked. These areas are traditional carbonate reservoirs, with better permeability than most plays being developed today. It takes less horsepower to frac due to the rock's characteristics. In fact, we've seen almost no increase in overall service costs since mid-2009 because an average Central Basin Platform well is shallow, and there's an excess of shallow drilling and completion equipment. The entire industry has moved to tight deep plays that require high-pressure drilling and completions. Consequently, there is an abundance of low-pressure equipment as virtually no one drills shallow vertical wells anymore, and these shallow traditional reserves are what the industry was built on over the last several decades.

Production history is the other key variable in deciding what kind of play to be involved in. We want to know our wells, how they’ll perform in future years, be aware of rate of decline and profitability. Again, this is in stark contrast to much of the industry that appears comfortable with the first year decline of 80% to 90% and little certainty of the subsequent years’ decline because there's very little vertical or horizontal well production history. We decided to build our oil asset base with much less risk in areas where there were decades of producing wells that show how the reservoir will perform. So finding shallow, predictable carbonate reserves with certainty of economic outcome and little service cost inflation has been our strategy. Even though we continue to be bullish oil for the long term, to further mitigate economic risk, we have hedged a significant portion of our production into 2013, and we are now locking in some more oil at above $100 per barrel.

We continue to drill aggressively in our two core areas: the Central Basin Platform and the Mississippian. The Central Basin Platform will receive 65% of our total drilling budget this year, and the Mississippian the rest. We have also drilled 14 disposal wells and have increased our rig count to 12, as we now plan to increase our CapEx to $1.3 billion and increase our production to 23.3 million barrels equivalent.

As I discussed earlier, we've been in a mode of buying land and acreage for the last two years, and we will use 2011 as the time to use our rich oil properties as a source for raising capital. We already have a clear path to more than $700 million of capital raises in the first half of 2011. Our goal will be not only to fund the shortfall in 2011 but to move EBITDA up and begin to fund our 2012 drilling program.

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