SandRidge Energy (SD) Q2 2012 Earnings Call August 03, 2012 9:00 am ET Executives 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 Analysts Neal Dingmann - SunTrust Robinson Humphrey, Inc., Research Division David W. Kistler - Simmons & Company International, Research Division Duane Grubert - Susquehanna Financial Group, LLLP, Research Division Amir Arif - Stifel, Nicolaus & Co., Inc., Research Division Craig Shere - Tuohy Brothers Investment Research, Inc. Scott Hanold - RBC Capital Markets, LLC, Research Division Joseph D. Allman - JP Morgan Chase & Co, Research Division Charles A. Meade - Johnson Rice & Company, L.L.C. Richard M. Tullis - Capital One Southcoast, Inc., Research Division James Spicer David Snow Presentation Operator
Please note that this call's intent is to discuss SandRidge Energy and not our Royalty Trust. The trust will be addressed on separate calls on August 10. Also SandRidge will file its 10-Q on Monday, August 6.Now let me turn the call over to Tom Ward. Tom L. Ward Thank you, James. Welcome to our second quarter operational update. As you've read, we announced another very solid performance this quarter, driven by the growth in oil production. The key themes I will discuss this morning that differentiate SandRidge are as follows: low-risk shallow carbonate drilling with low cost; willingness to lock in future profits through hedging; and our increasing balance sheet strength. The SandRidge management team has operated differently than most of our peers over the last few years. We've built our foundation on shallow, conventional, low-risk well assets. The Central Basin Platform in the Permian Basin is a good example. In 2008, we produced 4,000 barrel of oil equivalent per day from this area. And we -- and today, we produce over 30,000 net barrel of oil equivalent per day from shallow carbonate vertical wells. The Central Basin Platform continues to provide repeatable, low-risk, high rate of return drilling opportunities. Even though the wells only average 53 barrels of oil equivalent per day during the 30-day peak period, the low cost associated with the drilling and completion of these wells make them very attractive investments and efficient use of capital. By buying in an area of with a long history of production, we not only lowered our drilling risk but also do not have the issues with takeaway capacity as others experienced in newer, more crowded areas of the Permian. This last quarter, we drilled 206 Central Basin Platform wells and plan to continue with this program into the future and maintain a 10-year inventory of drilling locations.
The Gulf of Mexico properties we acquired this year have gotten off to a good start. The integration of DOR has been smooth and production has been in line with our expectations through the second quarter. We do not plan to risk capital exploring for large, new fields but exploit existing properties and generate higher rates of return through recompletions and infill drilling to help us fulfill our 3-year goals. We were able to capitalize on a region of cheap oil with this acquisition, and it gave us a platform with a great operating team to further exploit inexpensive oil at a time of dislocation in the marketplace. Not only did we buy inexpensive oil, we are now able to sell expensive oil.As of August 1, the LLS mark was positive $18.75 per barrel over WTI, plus the acquisition of the Gulf of Mexico properties lowered our debt ratio a full turn and gives us more debt capacity to stay within our goal of approximately 3x leverage. We continue to feel comparable we can maintain our 25,000 barrel of oil equivalent per day production rate by spending $200 million of CapEx on drilling and recompletions. The Mississippian continues to be our growth engine. Last quarter, we drilled 91 horizontal wells and our production continues to meet or beat our expectations. This play also is a shallow, low-risk carbonate reservoir, where our production per well on a 30-day rate has continued to improve over time. The value driver of the horizontal Mississippian play is the ability to consistently drill thousands of high rate of return oil wells over hundreds of miles. It's a story of scale. Our team has assembled 1.7 million net acres with room to drill more than 8,000 horizontal wells. And now nearly 50% of that acreage has been proven by the 872 horizontal wells that have been drilled. Each quarter, we become more convinced in the size and scope of the play. SandRidge has now drilled 382 producing wells across the original acreage we put together from 2007 to 2011. And we are seeing consistent results from Comanche County, Kansas through Grant County, Oklahoma. This covers an area of more than 150 miles and area where we have nearly 850,000 net acres for a 10-year inventory at today's rig count at only 3 wells per section.
We also have optimism about our extension acreage in Western Kansas, where we control nearly 900,000 net acres and where there have been more than 7,000 vertical Mississippian producers drilled. We are now drilling oil wells in the extension portion of the play with 3 rigs. And we'll know more about the results by the end of this year.The second quarter was very good from a production standpoint. It seems that every operator believes investors only care about the large producers in each field. We do continue to have high initial production wells, but that's not the driver behind our growth. For example, we mentioned in the press release that during the second quarter, we completed 5 Mississippian wells that produce more than 1,000 barrels of oil equivalent for 30 days. They actually average 2,000 barrels a day. However, it's more important to note that we completed 90 wells that drove our production increase. Read the rest of this transcript for free on seekingalpha.com