SandRidge Energy - Earnings Call - Q1 2021

Transcript

Speaker 0

Good day and thank you for standing by. Welcome to the SandRidge Energy First Quarter twenty twenty one Earnings Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Brandon Brown. Please go ahead.

Speaker 1

Thank you, and welcome, everyone. With me today are Karl Biesler, our CEO Salad Gammudi, our CFO and Grayson Brannen, our COO as well as other members of management. 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 D and A and other non GAAP financial measures. Reconciliations of these measures can be found on our website.

Speaker 2

Thank you, and good morning. Hopefully, you've had time to peruse the earnings release and investor presentation posted yesterday after the market closed. We typically aim to keep brief our prepared remarks. Today, however, we plan on being more expansive. Over the last several years, and particularly during 2020, the board of management have worked to reset, if you will, our company in almost all respects, from focusing our asset base to streamlining our capital, organizational and cost structures, to reassessing and tightening our capital allocation.

Accordingly, we think it'd be useful to your assessment of our company if we walk through the presentation in addition to reviewing our 1Q 'twenty one earnings. Before turning to that presentation, though, Talal will touch on a few highlights from our first quarter earnings.

Speaker 3

Thank you. Simply put, 1Q 'twenty one was a strong quarter. During the quarter, our net cash position increased just over $48,000,000 almost $57,000,000 compared to just over $8,000,000 in the prior quarter. This net cash position reflects more than a full flip from just over $51,500,000 in net debt that we had entering 2020. Our adjusted EBITDA more than doubled from the prior quarter to almost $22,000,000 from just over $9,000,000 in 4Q 'twenty.

We should note that 4Q 'twenty was burdened by a onetime $5,300,000 cash hedge loss due to the unwinding of all of our hedge positions. Even without that hedge unwind impact, 1Q 'twenty one adjusted EBITDA would still be meaningfully higher. Note that our board and management made the decision to unwind our calendar 'twenty one gas hedges last November based on an improving 2021 gas price outlook. That decision appears prescient as those swaps were just over $2.6 per MMBtu. Prices this year have been trading, and the NYMEX curve remains meaningfully higher.

Our production held fairly steady during the quarter, with our Mid Con assets producing 17,500 BOE per day compared to 19 in the prior quarter. This quarter's production is particularly notable given the substantial two plus week negative impact from the snow populace in February. Note that we closed the sale of our North Park Basin asset on February 5. Owning North Park Basin for only thirty six days during 1Q twenty one makes quarter over quarter production comparisons less relevant for that asset. Price realizations, particularly for NGL, appear to be migrating back up to pre pandemic levels.

Our 1Q 'twenty one oil and gas realizations were up 4119% from the prior quarter. NGL realizations as a percent of WTI was 29% in 1Q 'twenty one, up from 21% in the prior quarter. Our cost discipline continued to improve during the quarter with previously implemented initiatives now manifesting in our financials. This quarter, we shaved nearly $1,000,000 off of adjusted G and A compared to the prior quarter, lowering it to 1,900,000.0 or $1.14 per BOE. While we continue to aggressively press G and A expenses, we do not expect G and A to remain as low on an ongoing quarterly basis.

The team also compressed lease operating expenses by $3,000,000 compared to 4Q 'twenty, reducing it to $8,000,000 or $4.85 per BOE. This general level of LOE should be sustainable going forward. We believe that we compare favorably with our peers on both the G and A and LOE per BOE basis. It's relatively rare for an E and P company to generate net income. We did that.

However, this quarter, earning net income of $35,000,000 included an almost $20,000,000 gain on the sale of NorthPark Base. Also in the Rarity category, we had no oil and gas impairments for the first time since the second quarter of twenty nineteen. Lastly, in the Rare book category, despite still grappling with the waning challenges of COVID, our streak without a recordable HS and E incident is now in its thirty third month as of today. We believe few, if any, public E

Speaker 2

and P public E and

Speaker 3

P companies can boast such a streak, which is further detailed on Page seven of our latest investor presentation. The final notable in 1Q 'twenty one was the simplification of our asset mix. Due in large part to an increasingly challenging Colorado regulatory environment, we exited in February our high decline, higher cost North Park Basin assets. We are now focused solely on our core long lived predominantly PDP MidCon property. Subsequent to the quarter, we purchased for $4,900,000 in cash all of the overriding royalty interest assets of Standard and Mississippian Trust I.

When that trust ultimately liquidates, our company will no longer have any affiliated trust. Additionally, we expect to receive back about $1,300,000,000 of that purchase price to reflect our 26.9% ownership in that trust. Before shifting to our investor presentation, we should note that the release posted yesterday and the 10 Q that we will file later today provide further detail on our financial and operational performance during 1Q twenty twenty one.

Speaker 2

Now turning to the presentation. We thought it would be helpful to walk through what we're calling the reset sandwich. Over the last few years, the Board and management have focused the company's assets, optimized production profile, streamlined its organization and cost structure and strengthened its balance sheet. The key highlights are on Page three. We have streamlined our asset base to a mid con focused primarily PDP asset base.

We know these properties especially well as we've had them a long time. They are almost fully HBP, long lived, shallowing and diversified production profile. As detailed later on Page six, overlaid across our acreage position is more than 1,000 miles each of owned and operated SWD and electric infrastructure, representing more than $1,000,000,000 in invested capital and providing the company both cost and strategic advantages. Our assets have robust free cash flow capability, particularly with a low per BOE cost structure and light CapEx requirements as well as improving commodity prices and utilization. This cash generation potential provides several paths to increase shareholder value realization.

At the NYMEX Strip, we believe our PV PV-ten value approximates more than $230,000,000 and we can build on that by extending and flattening our production profile with small ball projects and welding activities, by actively managing our price realizations and further reducing costs, by growing our asset base with opportunistic, economically accretive acquisitions and by maintaining exposure to commodity price upside. As we realize value and generate cash, our Board is committed to utilizing our assets, including our cash, to maximize shareholder value. The reset SD value proposition is materially de risked from a financial distress perspective by our strengthened balance sheet and financial flexibility. At quarter end, we had a significant cash position with net of liquidity approaching $65,000,000 excluding restricted cash. We don't have MVCs or other significant off balance sheet financial commitments.

And with the recent purchase of the overriding working interest at Sandy's Mississippi Trust one, with no affiliated trusts impinging our operating net. On the opposite end of the spectrum, we ended the quarter with approximately $1,700,000,000 in NOLs, which could help meaningfully reduce tax impact of a dividend program or other use of cash. It's finally worth highlighting that we take our ESG commitments seriously. We have implemented system processes around them. The next Page four lays out our Go Forward strategy.

The thought restrictor is that we're completely focused on growing the cash value and generation capabilities of our business in a safe, responsible, efficient manner. This gestalt strategy has four costs. The first is to maximize the cash value and generation capacity of our incumbent MidCon PDP assets. You'll hear a version of these course throughout this call: One, extend and flatten our production profile with high impact workover and other small bar projects as well as low risk well reactivations. Two, actively manage marketing options to maximize our price realizations.

And three, continue to press on costs. Second problem is to ensure we convert as much EBITDA to cash as possible. A good friend once told me, if you can't buy a cheeseburger with it, it doesn't count. So keeping low cost, tight CapEx discipline, active working capital management and limited interest drag is key for us converting EBITDA into true free cash flow. Third pong is to keep vigilant for opportunistic value accretive acquisitions.

We'll focus on PDP weighted assets that: a, set up for competencies, cost efficiency and production optimization b, have sufficient midstream optionality and c, are in favorable regulatory areas. Detailed on Page 11, MidCon asset purchase from Zurich Resources several years back as well as last fall and this spring's purchase of the MidSupreme Trust overriding royalty interest are emblematic in this approach. The final prong is to uphold our ESG responsibilities. Progress a little bit quicker as you move through the remainder of this presentation. Page five details a core Mid Con asset position.

To our view, failing at points one, zero long lived, more than a nine year reserve life two, shallow decline, with expectations of opportunity declines this year downshift into low teens and lower going forward three, diversified production both from: a, hydrocarbon mix where we're gas and NGL weighted and b, well based where we have more than nine fifty producing wells Finally, we're mostly HBP. This makes spending commitment to minimize. All this sums up to an adamant strip PV PV-ten value that we believe approximate more than $230,000,000 Given that we've already discussed materials on Page six and seven, we'll move ahead to Page eight. This page outlines how various initiatives of the Board and management over the last several years have led to an absolute and per view reduction in LOE of 70% and more than 40%, respectively, in 2015. A common theme among the initiatives laid out on the left side of the page is a detailed white paper reassessment of almost every cost aspect of our field operations.

We're proud that our per BOE LOE was one of the lowest of our peers. Page nine addresses a topic on which we received a lot of inbound investor calls since our 4Q twenty twenty earnings in early March, namely NGL and gas realizations. The happy news is that we've seen steady progress over the last few quarters that have continued into the current quarter. No doubt, general market tailwinds have helped, so has actively working with the largest off takers and leveraging outsourced market marketing expertise. As we'll detail later in this presentation, gas prices and NGL realizations have material impacts on the PVPFN value of our asset base.

Page 10 addresses our approach to production optimization. Since last June, we focused on relatively low capital, quick payback, high return workovers and small ball projects and candidly enjoyed success in our execution. As we work to delever our balance sheet and expand our liquidity and capital access over the latter part of 2020, we purposefully took a very disciplined approach, limiting spend to projects with a year or less payback. Liquidity was key. Now with a much stronger balance sheet and liquidity position, we plan to comprehensively evaluate well reactivations, drill outs, reconclusions and even tension new drills.

These more aggressive initiatives could significantly help flatten the already showering base decline. Skipping to page 12. Fundamental to a reset has been a deliberate shift from a what if to what is organization. Market headwinds, balance sheet constraints, other realities require the strategic change from a high CapEx production growth strategy to a more cost efficiency PDP optimization cash flow strategy for our company. Rather than preserve the internal capability and people to maybe someday toggle back from the latter to the former, we decided to radically alter our organization to be more fit for purpose.

This alter alteration had several key components. Number one, rebalancing the weighting of the field versus corporate to reflect when we actually create value. Two, outsource necessary but more perfunctory and less core functions, such as our operations accounting, land administration, IT tax, and HR. Beyond the more than 6,000,000 in per annum g and a savings from this, outsourcing provides us greater flexibility and scalability to adjust to changes in our business or the market. Three, contract is needed for drilling, deglution, or other more episodic needs.

One happy outcome of this organizational makeover is that we retained an upgraded multi skilled core a multi skilled core team of fewer, better better incentivized professionals with ample career motivation to drive value for a company. Page 13 hammers home another happy outcome of the organizational streamline, and that's a more than 60% reduction in g and a on both an absolute and a per daily basis since 02/2018. Here, let's pause for a second. Up to this point, we've endeavored to convince you that we have the asset base, strong balance sheet, and execution bona fides to deliver on our overarching strategy to grow the cash value and generation capability of our business in a safe, responsible, efficient manner. Now we'd like to share our view on what delivering on that strategy could be worth.

Page 14 lays out how we think about our p d p d 10 reserve. It's a bit busy, so I'll try to unpack it. The three bars from left to right show a year end 20 audited reserve value at SEC pricing that includes North Park Basin. And then we show the same year end 20 reserves with NYMEX pricing without North Park Basin. And finally, we show our first quarter twenty one reserve value with NYMEX with May 5 NYMEX pricing again without North Park Basin.

All three bars reflect analysis consistent with standard industry reserve practice, including performance commercial updates, price differentials, operating expenses and other commercials based on twelve month average. Note that no bar includes the dollar for dollar value of the company's net cash position on its balance sheet. These bars just reflect the value of our PD reserves. Under each bar is a summary of the key drivers, notably the price deck incorporated, WTI, Henry Hub, realizations, LOE, and average look back period employed. There are two horizontal lines.

The higher line crossing the three vertical bars are being said to be some market cap. The lower horizontal line reflects the enterprise value, essentially a market cap less a move downward for the value of our net cash position. This enterprise value line is, if you will, the market proxy for the vertical bars. It reflects market view of the value of our asset base, separate and apart from the net cash position. So one bumper sticker of this pay from this page in my mind is that our estimate of a one q '21 PV PVPEN value exceeds 230,000,000, which is more than two times our recent market proxy in terms of enterprise value of only 105,000,000.

Another bumper sticker is the significant sensitivity of that p d p d 10 value to move in WTI, Henry Hub, and NGL realizations as a percent of WTI. That last metric, average NGL realizations, has moved more than 10 percentage points over the last three months compared to the last twelve months on average. If these realizations hold, approved developed reserves should have even greater value. Average LOE per BOE is also set down during the same time frame, also suggesting a higher PD reserve value. Finally, on Page 15, we circle back to where we started this call with our 1Q 'twenty one results.

This page places our first quarter results in the context of our annual guidance shown as initially presented as well as on a divide by four quarterly basis. We're pleased that we're tracking better on production and substantially better on adjusted G and A and NGL and gas realizations. At this time, thank you for your patience during this much longer than normal set of prepared remarks. We'll now open the call for questions.

Speaker 4

Questions.

Speaker 0

And our first question comes from the line of Noel Parks from Tuohy Brothers. Go ahead please. Your line is open. Good morning.

Speaker 2

Good morning.

Speaker 5

Thanks for thanks for the presentation and all of all the context on, you know, where you brought the company to strategically. So at at this point where you have achieved a big improvement in efficiency and as you pointed out, continue to shift away from a high CapEx strategy. From here forward, can you maybe talk a little bit about other than well, I guess, with commodity price sort of at the center of it, of an upside case scenario in terms of what would encourage you to get out get a little bit more aggressive in terms of of spending and and maybe talk a little bit about what the next couple years would look like if if it turned out that we're in a temporary, you know, price price spike for for oil and and, you know, the strip turns out to be more right for gas than than it looks like right now.

Speaker 2

Look. I'll tell him on this question. I don't I want don't wanna talk or project too far into the future. I will say that Sure. Whatever come up prices we get, we're gonna maximize the cash that we get from them.

That is our overarching And so at this point, to kinda answer the front part of your question, I think we're focused on really two things. So organically or internally, there's always things that you can do to press on costs. We still have a little bit of room on LOE, pretty good on G and A, but we'll continue to press. We always find things when we keep looking. The biggest thing that we started to do that we really need to be more disciplined and systematic about is working on with the major off takers and thinking about what optionality we might have to actively manage the price realizations, particularly around gas and NGLs.

That is an area that we just have not put a lot of time until very recently. It should be meaningful going forward. Thirdly, and this is also a meaningful bucket, we have been very conscious of liquidity until we close in the major sales we're building in the Moorpark Basin and actually got the cash. And now our team is starting to do the homework. And homework's very important.

No better way to to lose money than that project. We look at well reactivations, drill outs, maybe some refracts, and things like that. But, of course, when we do that, that's required more capital. We'll have to go to the board. It's a very healthy process to vet those projects and get approval.

But that's something that we're definitely doing. And then finally, and this is a little bit happened in the background, we are very cognizant of the value that you can realize the enterprise by being smart about how you off the play P and A obligations, and there's some well over the coming end of life at various fringe areas or asset based where people will actually pay us positive money for loans that may not be making money and have an ultimate p and a lie liability. And so I'm going into steps with the focus on shedding that. That's a little bit less evident quarter to quarter, but I think something that will be very important. And then finally, like we said, you know, we continue to evaluate m and a that fits our criteria.

Right now, being predominantly PDP is a little bit development risk, and that plays to our core strength of being smart on cost and production profile optimization and, obviously, in the regulatory regime that life jobs at the oil and gas business branch.

Speaker 5

Great. Thanks for, thanks for that explanation. And, you you did just mention that with the cash from the Colorado sale now in the door, the team is beginning to sort of do some homework. That brings me to other thing I was wondering. The inventory of quick return projects, rework, bringing wells back online and so forth.

Can you give a sense of as far as what you identified for those projects, how many of them have you kind of have you kind of worked through at this point? And and as you begin doing more more homework on what what else is possible out there, is is that likely to sort of replenish the the list of of rework jobs you you've done so far? Or or do you think of it maybe just defining, say, list of projects for the coming year or something like that, but not necessarily a long term plan.

Speaker 1

Sure. Good morning. This is Greg, and I'm happy to answer that question. I can't give you an exact number of inventory. I can't say that we have a meaningful inventory set that we are currently evaluating.

We'll be opportunistic as the market conditions sustain and continue to improve. I do think that, this inventory set is potentially robust enough, to be meaningful both this year, next year, and potentially in the following year.

Speaker 5

Okay. Terrific. So then that that really does kinda give you a a line of sight past our our current commodity cycle. And and I guess that in turn would give you a good deal of strategic flexibility looking ahead as far as what you want to do on the capital or the acquisition side. Is that that fair?

Speaker 2

That's fair. Well, I I would just point out that, you know, while we have a little bit overdone 100 for the operated wells, we have a lot of wells on our property that have been temporarily abandoned or shut in. There's a there's a lot for us to evaluate and play with. And the good thing with these wells have already been drilled, So bringing it back on doesn't require nearly as much CapEx as we drill them.

Speaker 5

Gotcha. And then just the last one for me. We, we've seen quite an uptick in corporate level transaction activity, M and A, in just about every basin you can think of and really just in the last few weeks. Just curious what you're what you're seeing in in the Mid Con and curious in particular if you you have any private or or PE backed assets that have come to the market. I I understand more more things have come to the market in recent weeks than we've seen in some time.

Speaker 2

I think, really, all I can say on this front is things come to the market that are they can, you know, wheelhouse and as it could, we certainly look at them. And you're right. There has been an uptick in activity in the MidCon, and, you know, we feel like we're in the flow of of being able to look at those opportunities.

Speaker 5

Great. Thanks a lot for all the strategic backdrop. Thanks for me.

Speaker 0

Next question comes from the line of Josh Young with Bison Interest. Go ahead please. Your line is open.

Speaker 4

Hey, good morning, guys. These are great results. Just have a couple of questions on this presentation and follow ups. So one, on slide 14, you guys show, you know, three bars and there's kind of the fourth and five bar that's missing but implies kind of even better reserved value at a PDP PV-ten basis on kind of current differentials, which have improved versus Q1. I guess, how do you guys think about, you know, it looks like you're kind of anchoring the value of the company to the PDP, PV 10, but you're building a cash position.

There's no dividend. There's no buybacks. There's just kind of this increasing cash balance, which, of course, is great. But I guess there's this overriding high level question of like what's next that doesn't seem to get answered in these materials or hasn't been answered. I know it was kind of, I guess, more politely and directly asking kind of the same thing.

But to the extent you guys could provide just more clear guidance at a high level, maybe maybe doctor Tom.

Speaker 2

Yeah. Josh, thanks for listening and and for the kind words. Let me based off on on page 14, we've never did, I think it's appropriate, is show our approximate our what we believe our PD reserve PD 10 value is in a manner consistent with industry audited reserve practice. Right? You know, twelve month looks back, so on so forth.

And we did feel it was useful to lay out, as you mentioned, where there is no bar, kind of where things are currently. And we are seeing over the last three months. Last quarter, we had 29% We can't say that the last twelve months at this point. Did that help through?

We gave you some sensitivities. It's just that what that might do to that. And then I believe we said we're not just focusing on we don't believe our value is tethered just to the value of our reserve base. Obviously, the roughly 60,000,000 of net cash we have on our balance sheet is very valuable as well, and that is in addition to the value of the reserve base. So in some ways, we're a very simple company.

We have PD reserves, and we have cash. Net cash. Not that complicated. We didn't really feel the need to kinda do the math. People can take the numbers and add them together and divide by the share count and get to an asset value, do it if they want to do it for G and A and other things.

We didn't feel the need to go there. In terms of the cash balance, this is really the first quarter. As Slaus said, we had a significant step up from roughly 8,000,000 to your current net cash position. And, you know, as I mentioned, our board is committed to doing using that cash, using all our assets in a way to maximize the shareholder value. And and they're thinking through in a methodical fashion what the best use for that is.

And I think that's the best way to put it at this point. I think they'll be very disciplined and focused on what makes most money for shareholders and how to use that cash, whether it be the deployment, acquisition, or eventually some type of return.

Speaker 4

Okay. So, I mean, I guess, again, it just sounds like you don't really have a clear that you're still evaluating and, you know, knowing that the cash would come in ahead of the North Park sale. Obviously, there's a number of months where this kind of deliberation is going on. It sounds like there isn't like a specific clear path forward. There's kind of this multiple, potential, path that you guys could take.

Is is that it sounds like that's a reasonable interpretation of what you're saying.

Speaker 2

Yeah. I I think that's right. It's not dithering. I mean, if you I mean, you have all the the the traditional return of capital options, of course. You know?

If you're looking at all of stock, you know, does that have implications for how you might do it? In my mind, yes. If you put in some sort of regular dividend, what level? If you did special dividend, you know, what does that do longer term to your value? Your cash aside from returning it to shareholders has a very strategic element.

I think it's pretty well accepted that there's some economies of scale on this business. It's highly intensive. The lower your cost can be, the better you perform. So sometimes being bigger is better. You know, if we were ever or they entertain a merger, our cash should have a lot of value in that context.

We could help partner with the company and immediately delever them or provide low cost capital for them to accelerate high value drone inventory. So it's very important to think through all the ways of that cash can add value to the enterprise. And, you know, board is actively doing that. Nothing's doing in the appropriate fashion.

Speaker 4

Great. Okay. Just one last thing on the saltwater disposal on page six of the presentation, and, integrated power as well. I don't think this is something people really this is, I think, the first time you've seen on this in in maybe many years for Sandridge, and it's, like, very exciting to see. I guess, is this something that you guys would look at monetizing, or is the point of showing this just to highlight kind of where some of the cost savings and opportunities are coming from?

Speaker 2

It's a good question. I you know, my understanding is that this company in its past we look somewhat thoroughly at monetizing this. You know, from where we sit, we think it's more moving its primary customers. You're kinda, you know, using it as almost a financing vehicle. Right?

You know? And and we just don't need to do that. I think it add would add unnecessary complications and artificial pricing dynamics. And so we think using this it's with the capital that's been invested in some very substantial system provides a lot of cost benefits that we're seeing in their cash flow, and it also provides us very, I mean, real strategic benefits to the extent that assets in the round that that's the system unavailable. That means we'll just be able to operate and work more efficiently than someone else and, to be more competitive and get more out of them.

So to answer your question distinctly, I don't think we're actively considering, monetizing these assets.

Speaker 4

Great. Thank you very much.

Speaker 0

Our next question comes from the line of Michael Melby with Gate City. Go ahead, please. Your line is open.

Speaker 1

Thanks. Thanks for the question. Mine was actually on Slide 6 too with the saltwater disposal wells. Could you confirm just the cash balance you mentioned on May 7 that's after the purchase of the Sandridge Trust and all that additional cash is from operations?

Speaker 3

Yes. So so the the the the cash balance that we disclosed of of over $80,000,000 was was just cash on hand, and and that was after the acquisition of SDT, the the overriding royalty interest of SDT, and and was from from so that was and and then negative impact, and then obviously cash flow from operations increased the balance

Speaker 2

in quarter end. Yeah. We're also expecting our payment. So we paid to all of STT. And as Swan mentioned, we're expecting to get 1,300,000 back.

Is that actually

Speaker 1

Got it. Thanks. And and could you update us at a high level on how the acquisition of the trust impacts, I guess, slide 15 and maybe even slide 14, if it moves the needle at all? Thanks. Sure.

If we're looking at Slide 14, note that that third column from the left, Q1 'twenty one reserves includes the net impact of the STT acquisition. And then in reference to slide 15, you know, we're reconfirming our 2021 guidance. We do not plan to change that at this time.

Speaker 2

Yeah. I mean, I'll I'll be you know, the press release that we put out on the acquisition of the overriding royalty interest in SDC, we said stated that it was always that you're buying them at p d p d 55. And

Speaker 0

so you

Speaker 2

can imagine we're showing them in one of these bars at p d 10. It it it isn't meaningful within the match, the account. So that does have an impact on that far right bar on on page 14. And then page 15, we provide guidance once a year, and we were well aware, maybe not of the exact timing, but in the general timing of the liquidation process at STT, we factored that into our annual guidance.

Speaker 0

And there are no further questions in queue at this time. I would like to turn the call back over to our presenters.

Speaker 2

Thank you all very much for your interest in Sandbridge, and we'll look forward to talking next quarter if not before with some of you all. Thank you.

Speaker 0

And this concludes today's conference call. You may now disconnect.