SandRidge Energy - Q1 2023

Transcript

Operator (participant)

Good morning, welcome to SandRidge Energy's Q1 2023 earnings conference call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question-and-answer session. To ask a question, you will need to press star followed by 1 on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Scott Prestridge, Vice President, Finance and Treasury. Thank you. Please go ahead.

Scott Prestridge (VP of Finance and Treasury)

Thank you, welcome everyone. With me today are Grayson Pranin, our CEO and COO, Salah Gamoudi, our CFO and CAO, as well as Dean Parrish, our SVP of Operations. 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 G&A and other non-GAAP financial measures. Reconciliations of these measures can be found on our website. With that, I'll turn the call over to Grayson.

Grayson Pranin (CEO and COO)

Thank you and good morning. I'm pleased to report on another good quarter of results, that the company's efficient activity continues to translate to meaningful free cash flow from our producing assets this past quarter and projected into 2023. Before expanding on this, Salah will touch on a few highlights.

Salah Gamoudi (CFO and CAO)

Thank you, Grayson. Production for the quarter averaged 16.7 MBOE per day, and oil production increased approximately 22% from the first quarter of 2022, driven by the higher oil content of our new Northwest STACK wells. Over the quarter, the company generated adjusted EBITDA of approximately $31 million. As we have pointed out in the past, our adjusted EBITDA is a unique metric for SandRidge, due to us having no I and very little T, given that we have no debt and a substantial NOL position that shields our cash flows from federal income taxes. Net cash, including restricted cash, increased to approximately $288 million, which represents $7.79 per share of our common stock issued and outstanding as of March 31st, 2023.

The company has no term debt or revolving debt obligations as of March 31, 2023, and continues to live within cash flow, funding all of its capital expenditures with cash flow from operations and cash held on the balance sheet. Commodity price realizations over the first quarter, before considering the impact of hedges, were $74.26 per barrel and $2.73 per Mcf for oil and natural gas, which were 98% and nearly 100% compared to average WTI and Henry Hub benchmarks before the impact of any hedges. NGL realizations were $24.62 per barrel, or 32% of WTI. The company realized commodity derivative settlement gains of approximately $5.9 million in the first quarter. As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be approximately $1.6 billion at quarter end.

Our NOL position has and will continue to allow us to shield our cash flows from federal income taxes. Our commitment to cost discipline has continued to be impactful, and despite increased activity, adjusted G&A for the quarter was approximately $2.5 million, or $1.68 per BOE. We also held LOE and expense workovers to approximately $11.7 million for the quarter. We believe we compare favorably with our peers in regards to G&A and LOE on both an absolute and a per BOE basis. We continue to generate net income for our shareholders. During the quarter, we earned net income of approximately $24 million, or $0.64 per basic share, and net cash provided by operating activities of nearly $40 million. The company has also generated approximately $2.5 million in interest income during the first quarter.

This has all culminated in the company producing approximately $30 million in free cash flow during the first quarter, which represents a conversion rate of approximately 98% relative to adjusted EBITDA and approximately $0.82 per share of common stock outstanding at the end of the first quarter. Before shifting to our outlook, we should note that our earnings release and 10-Q provide further detail on our operational and financial performance during the quarter.

Grayson Pranin (CEO and COO)

Thank you, Salah. We thought it would be helpful to walk through some of the company's highlights, management strategy, and other business details. As I mentioned previously, this past quarter had good results, adding relatively oily production from new wells in the Northwest STACK, while converting over 98% of EBITDA to free cash flow and benefiting from our commodity derivative settlements of nearly $6 million, as well as $2.5 million from interest income during the quarter. Production from our MidCon assets averaged 16.7 MBOE per day for the quarter, with oil volumes increasing 22% compared to the first quarter of 2022, aided by the oilier production content of our new Northwest STACK wells. The company's largest natural gas purchaser was in ethane rejection for two months during the quarter, with more ethane staying in natural gas stream.

While this resulted in less NGL and BOE barrels, it helped improve realizations, which were nearly 100% compared to Henry Hub for natural gas and 32% of WTI for NGL. We anticipate that a majority of our natural gas stream could remain in ethane rejection for the remainder of the year. While this could impact the total volume of NGLs, price realization for NGLs will be relatively improved on a per barrel basis as it will be composed of more profitable C3+ components like propane, butane, and gasoline on a percentage basis. The ethane remaining in the natural gas stream will improve its BTU quality. Since the beginning of 2021, the company has returned 182 wells to production.

We have converted artificial lift systems of four wells to their long-term systems over the first quarter, with 24 planned for the remainder of the year, which will aid in optimizing lifting efficiency and lower point forward costs for this well set. The systems we have and will be installing are tailored for the well's current fluid production and will reduce the electrical demand from the current artificial lift system and is key to decreasing utility costs. These type of investments, optimizing our wells production profile, and cost focus have contributed to flattening the expected asset level decline of our already producing assets to an average of approximately 8% over the next 10 years. Over the quarter, we have successfully drilled, completed, and are now producing 2 operated wells, targeting the Meramec formation in the core of the Northwest STACK play.

Wells 3 and 4 were recently completed and are anticipated to have first production early this month. Let's pause for a moment to revisit the highlights of Sandridge. Our asset base is focused in the Midcontinent region with a primarily PDP well set, which do not require any routine flaring of produced gas. These well-understood assets are almost fully held by production with a long history, shallowing, and diversified production profile and double-digit reserve life. PV10 of future net discounted cash flow to proved developed oil, gas, and NGL reserves of these assets is approximately $757 million based on 1Q 2023 SEC pricing and assumptions and an effective date of April 1, 2023. These assets include more than 1,000 miles each of owned and operated SWD and electric infrastructure over our footprint.

This substantial owned and integrated infrastructure provides the company both cost and strategic advantages while bolstering asset operating margins, reduced lifting, as well as water handling and disposal costs, and combined with other advantages, help de-risk individual well profitability for majority of our producing wells down to $40 WTI and $2 Henry Hub. In addition, the interconnectivity and ample capacity help buffer against unforeseen curtailment. Our assets continue to yield meaningful free cash flow, with total net cash now totaling approximately $288 million and zero debt as of quarter end. This cash generation potential provides several paths to increase shareholder value realization and is benefited by relatively low G&A burden. As we realize value and generate cash, our board is committed to utilizing our assets, including our cash, to maximize shareholder value.

SandRidge's value proposition is materially de-risked from a financial perspective by our strengthened balance sheet, robust net cash position, financial flexibility, and approximately $1.6 billion in NOLs. The company is not subject to MVCs or other significant off-balance sheet financial commitments. It's worth highlighting that we take our ESG commitments seriously and have implemented disciplined processes around them. We remain committed to our strategy to focus on growing the cash value and generation capability of our business in a safe, responsible, efficient manner while prudently allocating capital to high return organic growth opportunities and remaining open to value accretive opportunities.

This strategy has five points. One, maximize the cash value and generation capacity of our incumbent MidCon PDP assets by extending and flattening our production profile with high rate of return workover and artificial lift conversions, as well as continuously pressing on operating and administrative costs.

The second is ensure we convert as much EBITDA to free cash flow as possible while exercising capital stewardship and investing in projects and opportunities that have high risk-adjusted, fully burdened rates of return to economically add production. The third is to maintain optionality to execute on value accretive merger and acquisition opportunities that could bring synergies, leverage the company's core competencies, complement its portfolio of assets, further utilize its approximately $1.6 billion of net operating losses, or otherwise yield attractive returns for its shareholders. Fourth, as we generate cash, we'll continue to work with our board to assess paths to maximize shareholder value to include investment and strategic opportunities, return of capital, and other uses.

Please note that the company's cash position is also a strategic advantage and provides competitive leverage in evaluating M&A opportunities, especially given the outlook on interest rates, capital markets, and impact to the optionality on the number and types of opportunities that could become available at certain levels. Know that there is a high bar at both the management and board levels for mergers and acquisitions, and that management weighs the cost of its growing cash balance versus the patience to evaluate and execute on accretive opportunities. Management will continue to progress these with earnest on multiple fronts, promote regular way return of capital discussions, advance M&A evaluations, meet with shareholders and investors, and work with our board to advance paths to maximize shareholder value. Besides executing this year's capital plan and operating in a safe and responsible manner, these topics remain paramount and a top priority.

In the interim, we have secured favorable banking terms and keep our cash position diversified across interest-bearing accounts at multiple financial institutions. The final staple is to uphold our ESG responsibilities. Circling back to this year's drilling program, while oil has fluctuated around the $70 per barrel range, Henry Hub has fallen to the mid to low twos near term, but is in contango, approaching near $4 per MMBtu by year-end. Given these near-term dynamics and that our MidCon assets are 99% held by production, which preserves the tenor of our development options, we have concluded our drilling program, with the remaining operator wells coming online later this month. We will continue to monitor commodity price dynamics and maintain flexibility to adjust as may be warranted.

Commodity prices firmly over $80 WTI and $4 Henry Hub or reduction in well costs are needed before we would return to exercise the option value of further development or reactivations. With that said, our team's efforts to combat inflationary pressures and execute operationally have and will translate to attractive returns in our remaining capital program, which will further enhance the meaningful cash flow from our base PDP assets. While this reduced activity is not enough to keep overall BOE production flat, we expect oil volumes to increase. With relatively more attractive pricing near term, enhanced oil production will further bolster our per BOE realizations and translate to cash flow. The recent commodity price environment could be constructive for M&A. Our producing MidCon assets will continue to generate meaningful cash flow in the near term.

With the recent strip, natural gas price is projected to improve by year-end. In the interim, the relatively lower commodity prices, down from the previous year's highs, could present more cost-effective opportunities for acquisitions, which would then be positioned to capitalize on future price improvements. In addition to drilling, we will be investing in approximately 28 artificial lift conversions this year and limited leasing to support future development in attractive commodity environments. We could lean further into focused well reactivations in the second half of the year if natural gas prices improve as forecasted with the recent strip. We have continued to buy ahead of planned activity, having pre-purchased casing for the drilling program, pumping units for capital workovers, and other items. These prior investments in equipment and material have been key to combating inflationary pressures in today's markets.

While we will continue to lean forward into cost control efforts, inflation will likely persist and remain a central focus this year and is bearing on unsecured costs. Also, the service sector has continued to be choppy as it has ramped to meet increased activity demand last year and now adjusting in response to a more tempered environment this year. Although we are able to secure the equipment, material, and services needed to execute, service efficiency and equipment quality have been a persistent pressure point across the industry. While recent or future deceleration may provide some relief to these issues, it may take additional time or further activity reduction before any associated benefit or cost reduction will be realized. Now shifting to expenses, we were able to keep adjusted G&A to $2.5 million or $1.68 per BOE for the quarter, which compares favorably with our peers.

The efficiency of our organization stems from our core values to remain cost disciplined as well as other prior initiatives which have tailored our organization to be fit for purpose. We continue to balance the weighting of field versus corporate personnel to reflect where we actually create value and outsource necessary but more perfunctory and less core functions, such as operations accounting, land administration, IT, tax, and HR. Despite capital activity with drilling and completion and increased operating and producing well count, our total personnel remains just over 100 people, which includes key technical skill sets that have both the experience and institutional knowledge of our area of operations. Despite inflationary pressures, we were able to keep LOE and expense workovers to approximately $11.7 million for the quarter.

Besides rising costs associated with inflation, expenses for the period were impacted by increased workovers in response to winter weather events, as well as more producing wells from the company's well reactivation program, as well as utility costs that are just now beginning to cool from last year's peak natural gas prices. We will continue to actively press on operating costs and anticipate workover expenses and utility costs to begin to decrease over the year. We will continue to combat inflationary pressures on expenses through rigorous bidding processes, securing materials, equipment, and services over an appropriate tenor to partially offset market increases, executing on a planned artificial lift conversion program, as well as continue to leverage our significant infrastructure, operation center and other company advantages.

In summary, the company has approximately $288 million net cash and cash equivalent at quarter end, which represents nearly $7.79 per share of our common stock issued and outstanding. Average production over the quarter of 16.7 MBOE per day, with a 22% increase in oil compared to the first quarter of 2022 from our MidCon producing assets. Efficient capital program over the remaining infill and development drilling in the core of the Northwest STACK with MidCon position that is 99% held by production. Low overhead, top-tier adjusted G&A of $1.68 per BOE. No debt, in fact, negative leverage. Meaningful free cash flow and a growing net cash position supported by a diverse production profile. Flattening expected annual PDP decline to an average of approximately 8% over the next 10 years.

Multi-digit reserve life asset base. Approximately $1.6 billion in NOLs, which will help shield future free cash flow from federal income tax. Large owned and operated SWD and electrical infrastructure, which provides cost and strategic advantages requiring little to no future capital to maintain. This concludes our prepared remarks. Thank you for your time. We'll now open the call to questions.

Operator (participant)

As a reminder to ask a question, please press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star 1 again. We'll pause for just a moment to compile a Q&A roster. Once again, to ask a question, please press star followed by the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question comes from Ephraim, from Contract Accounting Services. Please go ahead. Your line is open.

Speaker 4

Hi. Good morning. My question. I think the stock has come under a lot of pressure as all oil and gas companies have recently. Is there any update on maybe possibly using some of the cash to buy back some of the shares and seem like a very good use. I know everybody's asking about that. If there's any updates on any kind of dividend that may be coming down to be paid with all this cash we have? Those are my two questions. Thank you.

Grayson Pranin (CEO and COO)

Thanks, Ephraim. No, that's some great questions and happy to discuss. Return of capital is always top of mind for management and the board. You know, we believe that with increasing cost of capital and Fed rate hikes this year, that we'll continue to see pressure from an economic perspective and that should open up some acquisition opportunities and lower valuations as we proceed throughout the year. As well, we think competition for capital and low cost of capital will continue to be challenging for some of our competitors, which should give us a strategic advantage if we're holding on to dry powder with our current cash position and cash flow from operations.

You know, that should allow us to execute on some very accretive, potential M&A. With that said, you know, if we continue to be unable to execute on any highly value accretive M&A, our board, investors and management, you know, will continue to evaluate the possibility of return of capital. Ultimately, the goal, regardless of if we do M&A or not, is to make sure that we have a means of returning cash flow to shareholders through accretive buybacks and dividends.

Operator (participant)

As a reminder to ask a question, please press star followed by the number one on your telephone keypad. We have no further questions in queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.