SD - SandRidge Energy

[BG2008]

This is simple math, but if they're pulling out 58 BOD of pure oil, they need a 12 month decline rate of 10% to approach 37% IRR.  By looking at the graph, the well has declined by 17% at the 6 months mark.  Assuming a 34% first year decline, the IRR is 18%.  This number matches the BMO analysts' IRR of 17%.  I will continue to challenge people about the well IRRs.  My IRR is likely higher given that I'm taking a simple average of Month 0 and Month 12 production. 

 

What I've seen is that wells tend to have first year decline of 60-70%.  Given this range of decline, they need about 150-180 BOD of pure oil to get to a 40% IRR figure. 

 

The well economics is too important for me to leave it to Prem and Ward. 

 

Also, look at the Sandridge Trusts, it look like they are under performing.  Sandridge has drilled wells ahead of schedule, yet they are likely to generate cashflow below the subordination threshold. 

[muscleman]

This is simple math, but if they're pulling out 58 BOD of pure oil, they need a 12 month decline rate of 10% to approach 37% IRR.  By looking at the graph, the well has declined by 17% at the 6 months mark.  Assuming a 34% first year decline, the IRR is 18%.  This number matches the BMO analysts' IRR of 17%.  I will continue to challenge people about the well IRRs.  My IRR is likely higher given that I'm taking a simple average of Month 0 and Month 12 production. 

 

What I've seen is that wells tend to have first year decline of 60-70%.  Given this range of decline, they need about 150-180 BOD of pure oil to get to a 40% IRR figure. 

 

The well economics is too important for me to leave it to Prem and Ward. 

 

Also, look at the Sandridge Trusts, it look like they are under performing.  Sandridge has drilled wells ahead of schedule, yet they are likely to generate cashflow below the subordination threshold.

 

IRR means internal rate of return, not initial rate of return. Why do you only look at the first year's decline rate?

[PhatKing]

PlanMaestro, thanks for the summary of some of the background of Postrock . While I am not familiar with all the machinations at Postrock, I understand your disillusionment with management there, including David C Lawler (DCL). Seems like there were a lot of capital mis-allocation issues. And perhaps self dealing - similar to SD and CHK?  My point was that current SD management have given the reins to DCL, as COO. And those are better hands than the hands we had before. Having worked with restructurings and as a CEO (in my past life), such leadership selections are quite a challenge for the Board. Specifically,

 

a) They want to remove the current CEO, which introduces instability, immediately, in upper management ranks. This is more so at SD, as the current CEO appeared to be running the entire show himself, with very little oversight.

b) They want to remove this instability quickly, by transferring day-to-day decision making power smoothly, to the best of available executives. Since the CFO was named the CEO at SD, they needed a COO who would manage day-to-day operations. It is likely that he is putting his team in place that he trusts, to deliver the results that he promised new management (or was told to deliver those results).  So 2 executives were gone (who were probably very close to the CEO) , and a reservoir engineering executive was put in place.

c) I expect many other changes have already occurred, and that there will be even more changes in the organization – though not all will be announced in press releases. The details of reducing overhead by cutting headcount is a tough business, as a lot of “contextual intelligence” goes away with the head count reduction.

d) The financial aspects of SD are likely to be managed well, as we have a financial entity running this company. Plus the CFO is now the CEO at SD.

 

Your point about DCL not having relevant experience should be looked in the context that:  at the COO and CEO level, domain expertise is less important than operational and management expertise. Witness Lou Gerstner who was brought to lead IBM with no tech company experience. And he came from American Express and RJR Nabisco!  And he did a phenomenal job. IMHO, Coal-bed methane exploration/drilling/processing is close enough to the oil and gas industry at the CEO/COO level. Plus Tom Ward thought DCL could offer value to SD, even though he came from the Postrock with all the problems that you enunciated. Now would DCL have been chosen to be the COO at SD if he were still at Postrock? The answer is NO. He happened to be at the right place, at the right time, AND with CEO level experience. So I believe that he is a good choice today, for SD. And he is young, probably ambitious and so likely to produce results to enable him to climb back into an appropriate CEO spot. In general, when somebody is promoted to be a CEO/COO they DON’T have CEO/COO experience because they have never done it. But the second time they become CEO (at a new place), they have experience, and so they do a damn good job of it. “Elephants can Dance” by Lou Gerstner (his one and only book) is a great read and will give an appreciation of operational challenges in restructuring. The new compensation plan at SD, just announced, is another step in improving the culture of accountability, responsibility and pay for results (not activity)..so IMHO the transformation  is proceeding as it should. The new management is focused on operational issues – culture, incentives, right leadership, right management, balance sheet issues, cash flow issues etc, that they can affect right away. .. If all goes right from an operational point-of-view, then the well output dynamics, well curves etc etc. (that is being discussed on this board and on the seeking alpha board) will decide the future of SD. …… Thanks.

 

[BG2008]

Muscleman,

 

Because after the first year, the production is usually 60-70% less than the 30 day IP and it continues to drop.  Think back to bond math.  If you put up 100 to drill a well, you need at least 12 future streams of $40 to get to a 40% IRR.  Now, due to the steep decline in production, you need more than $40 in the first year to get to an IRR of 40%.  Precisely, you need about $83 cash on cash return in the first year to achieve 40% IRR when your production is declining by 8% a month or 60% for the first year.  From my analysis, it's clear that the OK wells are doing 40% IRR or above, but the KS wells are falling way below the 40% IRR threshold.  Most wells are declining 60-70% in the first year.       

 

 

[muscleman]

Muscleman,

 

Because after the first year, the production is usually 60-70% less than the 30 day IP and it continues to drop.  Think back to bond math.  If you put up 100 to drill a well, you need at least 12 future streams of $40 to get to a 40% IRR.  Now, due to the steep decline in production, you need more than $40 in the first year to get to an IRR of 40%.  Precisely, you need about $83 cash on cash return in the first year to achieve 40% IRR when your production is declining by 8% a month or 60% for the first year.  From my analysis, it's clear that the OK wells are doing 40% IRR or above, but the KS wells are falling way below the 40% IRR threshold.  Most wells are declining 60-70% in the first year.     

 

Your math looks right.

It is a shame that TW didn't go through the details in that presentation. Perhaps he is just a promotional guy who makes unrealistic projections all the time. (Reminds me of ATPG, which is ATPGQ now.)

 

I think TPG will focus on only the OK wells if this is the only one achieving 40% IRR, so it is not the end of the world. The more I think about it, the more I feel that the decision to kick out TW is right.

[muscleman]

I am still trying to figure out why SD's trusts underperform, and what is the relation between the trust performance and SD itself's performance. If anyone can help me understand, I would appreciate it very much!

http://www.benzinga.com/analyst-ratings/analyst-color/13/04/3533398/update-oppenheimer-downgrades-sandridge-mississippian-tr

[ItsAValueTrap]

Perhaps he is just a promotional guy who makes unrealistic projections all the time.

Umm... aren't most public independent oil & gas companies like that?

 

Too bad somebody took Ken Peak's Contango presentations down, but there used to be a E&P 101 presentation where he mentions that independent oil & gas companies tend to lose money.  But, it happens to be on my computer.

 

In summary, we're optimistic about the opportunities we think are in front of us, despite being fully cognizant that most independent oil and natural gas exploration and production companies over the last two decades have been "value destroyers" rather than "value creators".  We think a renewed industry commitment to profitability is absolutely essential.  We believe Contango's sole focus on the highest value added component of the value chain, and low cost structure are key to this profitability.  Finally, and perhaps the single most important investment criteria of all: Incentives Drive Behavior.  Contango’s management and the Board of Directors own collectively ± 60% of Contango's stock and are incentivized to grow asset value and earnings per share. 

E_P_101_The_Short_Course.ppt

[muscleman]

Perhaps he is just a promotional guy who makes unrealistic projections all the time.

Umm... aren't most public independent oil & gas companies like that?

 

Too bad somebody took Ken Peak's Contango presentations down, but there used to be a E&P 101 presentation where he mentions that independent oil & gas companies tend to lose money.  But, it happens to be on my computer.

 

In summary, we're optimistic about the opportunities we think are in front of us, despite being fully cognizant that most independent oil and natural gas exploration and production companies over the last two decades have been "value destroyers" rather than "value creators".  We think a renewed industry commitment to profitability is absolutely essential.  We believe Contango's sole focus on the highest value added component of the value chain, and low cost structure are key to this profitability.  Finally, and perhaps the single most important investment criteria of all: Incentives Drive Behavior.  Contango’s management and the Board of Directors own collectively ± 60% of Contango's stock and are incentivized to grow asset value and earnings per share. 

 

Yes. I saw that presentation and learned a lot from it. I was even considering to buy MCF, but gave up on the news of their merger with some random company.

[Parsad]

Fairfax comments on TPG's decisions.  I still think alot of TPG's decisions have been great.  Cheers!

 

http://finance.yahoo.com/news/analysis-tpg-axon-wont-quick-050951703.html;_ylt=AkOefEnQ0T2qO.36a1UOV9eiuYdG;_ylu=X3oDMTNyNWVrZWZnBG1pdANGUCBUb3AgU3RvcnkgTGVmdARwa2cDMzQ0NDYzYzEtMzdjZC0zNDc5LTgxOTAtNzk5ODNlMGJlZDM4BHBvcwMxBHNlYwN0b3Bfc3RvcnkEdmVyA2YyYTRlZTAwLWIzYWYtMTFlMi1iYmZmLTIxYWY0N2ZhMTk2Mg--;_ylg=X3oDMTFkcW51ZGliBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3BtaA--;_ylv=3

[muscleman]

Fairfax comments on TPG's decisions.  I still think alot of TPG's decisions have been great.  Cheers!

 

http://finance.yahoo.com/news/analysis-tpg-axon-wont-quick-050951703.html;_ylt=AkOefEnQ0T2qO.36a1UOV9eiuYdG;_ylu=X3oDMTNyNWVrZWZnBG1pdANGUCBUb3AgU3RvcnkgTGVmdARwa2cDMzQ0NDYzYzEtMzdjZC0zNDc5LTgxOTAtNzk5ODNlMGJlZDM4BHBvcwMxBHNlYwN0b3Bfc3RvcnkEdmVyA2YyYTRlZTAwLWIzYWYtMTFlMi1iYmZmLTIxYWY0N2ZhMTk2Mg--;_ylg=X3oDMTFkcW51ZGliBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3BtaA--;_ylv=3

 

I am surprised that they think TPG is short term and TW is long term! No managers who focuses on long term shareholder value creation would do what TW did.

[BargainValueHunter]

http://www.reuters.com/article/2013/05/03/us-fund-sandridge-idUSBRE94206A20130503

 

"The one thing that I fear the most is that some of the second-tier people, the engineers, might leave," said Mike Breard, analyst at Hodges Capital Management in Dallas. "I'm sure they've got their resumes out there."

 

Halting SandRidge's stock slide will be crucial if TPG-Axon wants to make any return on its investment. The hedge fund has not disclosed how much money it has lost in total, but it has said that one third of its 36.2 million shares have lost around a quarter of their value.

 

TPG has said SandRidge is worth as much as $14 a share, while Mount Kellett has suggested $20 a share.

 

Others take a more pessimistic view. Morningstar's Hanson believes SandRidge's stock is fully valued at $8 per share, citing underperformance by the company's wells. The stock had traded above $60 in June 2008.

 

Although some investors are disappointed by the results so far, the company can change the way it drills and operates wells in a bid to improve productivity. Every shale formation is different, so it often takes time for a company to "crack the code" and perfect its drilling, Breard said.

[CorpRaider]

Probably too soon for any of the changes to be reflected in operating results to be reported next week, eh?  Guess I will get ready for potential buy opportunity.

[Matson125]

SandRidge Energy, Inc. Reports Financial and Operational Results for the First Quarter of 2013

 

http://finance.yahoo.com/news/sandridge-energy-inc-reports-financial-200500620.html

[BargainValueHunter]

Tuesday, May 7, 4:21 PM ET

SandRidge Energy (SD): Q1 non-GAAP EPS of $0.00 beats by $0.06. Revenue of $511.7M (+34% Y/Y) beats by $32M. Shares +1.5% AH.

[Parsad]

Tuesday, May 7, 4:21 PM ET

SandRidge Energy (SD): Q1 non-GAAP EPS of $0.00 beats by $0.06. Revenue of $511.7M (+34% Y/Y) beats by $32M. Shares +1.5% AH.

 

They also reduced 2013 Capex to pretty much where I said they would...about $1.45B.  Excluding the $398M one-time loss on sale of assets, they cut their 1st Q loss by 60% year over year.  You have a stronger balance sheet and more prudent capital management.  I suspect more asset sale or asset monetization...if not an outright sale at some point.  Cheers!

[oldye]

Tuesday, May 7, 4:21 PM ET

SandRidge Energy (SD): Q1 non-GAAP EPS of $0.00 beats by $0.06. Revenue of $511.7M (+34% Y/Y) beats by $32M. Shares +1.5% AH.

 

They also reduced 2013 Capex to pretty much where I said they would...about $1.45B.  Excluding the $398M one-time loss on sale of assets, they cut their 1st Q loss by 60% year over year.  You have a stronger balance sheet and more prudent capital management.  I suspect more asset sale or asset monetization...if not an outright sale at some point.  Cheers!

 

In addition there was the 82 million non recurring expense from paying back the debt.

 

They hedged 56% of their nat gas production this year at $4.10 (reads: they must be reading this forum) compare that to the $3.19 nat gas price they realized in Q1. 

 

 

[alertmeipp]

Wonder Tom will stay or allowed to stay.

[muscleman]

Tuesday, May 7, 4:21 PM ET

SandRidge Energy (SD): Q1 non-GAAP EPS of $0.00 beats by $0.06. Revenue of $511.7M (+34% Y/Y) beats by $32M. Shares +1.5% AH.

 

They also reduced 2013 Capex to pretty much where I said they would...about $1.45B.  Excluding the $398M one-time loss on sale of assets, they cut their 1st Q loss by 60% year over year.  You have a stronger balance sheet and more prudent capital management.  I suspect more asset sale or asset monetization...if not an outright sale at some point.  Cheers!

 

I don't get it... If the return is 40% a year and they can borrow at 7%, why is it bad to have more capex for now? They can borrow and drill for the next two years, and when they can't borrow anymore, cut the capex by then. Wouldn't they get more money in that way?

[Parsad]

Tuesday, May 7, 4:21 PM ET

SandRidge Energy (SD): Q1 non-GAAP EPS of $0.00 beats by $0.06. Revenue of $511.7M (+34% Y/Y) beats by $32M. Shares +1.5% AH.

 

They also reduced 2013 Capex to pretty much where I said they would...about $1.45B.  Excluding the $398M one-time loss on sale of assets, they cut their 1st Q loss by 60% year over year.  You have a stronger balance sheet and more prudent capital management.  I suspect more asset sale or asset monetization...if not an outright sale at some point.  Cheers!

 

I don't get it... If the return is 40% a year and they can borrow at 7%, why is it bad to have more capex for now? They can borrow and drill for the next two years, and when they can't borrow anymore, cut the capex by then. Wouldn't they get more money in that way?

 

I'm not a fan of the "grow it any way you can, and profits will come" business plan.  I like businesses to grow their operations with the profits they generate...think See's Candies or Google.  Because often CEO's get taken in by their own abilities and analysis, that by the time they realize they are too leveraged, it's too late.  Look how leveraged Sandridge became before the Permian asset sale.  If the average person should live within their own means, I don't see why corporate America can't do the same.  Cheers!

[Kiltacular]

 

I'm not a fan of the "grow it any way you can, and profits will come" business plan.  I like businesses to grow their operations with the profits they generate...think See's Candies or Google.  Because often CEO's get taken in by their own abilities and analysis, that by the time they realize they are too leveraged, it's too late.  Look how leveraged Sandridge became before the Permian asset sale.  If the average person should live within their own means, I don't see why corporate America can't do the same.  Cheers!

 

Amen!

 

Moreover, these guys don't know where prices will go in the short or medium term -- and possibly even in the long-term. 

 

At the CB&F dinner three years ago -- the last one at Joe Badali's -- I remember Ward saying that natural gas prices should be at $7 (or something like that price) by the end of the year...that would have been the end of 2011.

 

They don't know and we don't know.  You've got to run these smaller oil and gas companies especially prudently once you've collected the assets.  Access to capital can disappear fast.

 

 

 

 

 

[Cunninghamew]

Short Commentary on SD at http://zmansenergybrain.com/

 

This guy doesn't follow SD, but here were the passing comments he made (I thought the fourth bullet was the most interesting)

 

*They have found capital discipline after a 2 month search for it

 

* EBITDA of $270 vs $243 mm expected

 

* But back to the main story, 2 month review of company strategy, assets and spending levels has led them to embrace capital discipline via a 17% reduction in capex for this year from prior estimates and a 33% reduction vs 2012 levels  …  they are inching volume guidance back however only slightly from 34.3 MMBOE to 32.7 MMBOE (4% lower) with the majority of the hit coming on the natural gas side of the ledger.

 

*Noted some Miss Lime wells with IPs >1,000 BOEpd (3 of them) and four wells with 30 day IPs over 462 BOEpd … little OEDV, who drills A LOT less wells on the eastern side of the play can probably given them a run for their money on those results and sport a higher oil cut.  SD after all drilled 122 wells in the play in the quarter … talking about 3 or 4 of them seems rather choosy.

 

*I don't own it. They have $2 B in liquidity and I do wish them good luck, realy, but I don't see a reason to own it here either though I do think that if the Street buys the capex chop vs the production trim that the name will likely rally in the short term.  I'll let the dust settle and take another look soonish when I run out of other stuff to look at after quarter end.

[muscleman]

Short Commentary on SD at http://zmansenergybrain.com/

 

This guy doesn't follow SD, but here were the passing comments he made (I thought the fourth bullet was the most interesting)

 

*They have found capital discipline after a 2 month search for it

 

* EBITDA of $270 vs $243 mm expected

 

* But back to the main story, 2 month review of company strategy, assets and spending levels has led them to embrace capital discipline via a 17% reduction in capex for this year from prior estimates and a 33% reduction vs 2012 levels  …  they are inching volume guidance back however only slightly from 34.3 MMBOE to 32.7 MMBOE (4% lower) with the majority of the hit coming on the natural gas side of the ledger.

 

*Noted some Miss Lime wells with IPs >1,000 BOEpd (3 of them) and four wells with 30 day IPs over 462 BOEpd … little OEDV, who drills A LOT less wells on the eastern side of the play can probably given them a run for their money on those results and sport a higher oil cut.  SD after all drilled 122 wells in the play in the quarter … talking about 3 or 4 of them seems rather choosy.

 

*I don't own it. They have $2 B in liquidity and I do wish them good luck, realy, but I don't see a reason to own it here either though I do think that if the Street buys the capex chop vs the production trim that the name will likely rally in the short term.  I'll let the dust settle and take another look soonish when I run out of other stuff to look at after quarter end.

 

Regarding bullet four, I am not too worried about it. Looking at the 8-k filing again, the original words from SD is:

 

•  

Stacked pay testing program yields early success in three Oklahoma counties:

 

 

•  

Four successful horizontal tests in the following zones: Chester Sandstone, Middle and Lower Mississippian intervals

 

 

•  

Initial production from the four wells exceeded the company’s Mississippian type curve with an average 30-day IP of 462 Boe per day (201 Bopd)

 

 

I think this means they are testing a new technology here, and the results look good.

[CorpRaider]

Lots of consternation on the call from analysts about how mgmt is projecting 20% growth in the miss with even higher growth in the oil production therefrom but flattish overall production projected.  Sounded like the miss was already the largest portion of production.  Did anyone figure that out?  The analysts never did with the last one asking to take the question offline.  I sort of thought management was saying we aren't updating the annual guidance for production at this time just the quarter over quarter run rate.  One would expect the two to come close at some point barring any large non productive assets.  Also interesting to note the discussion about the midstream assets and the discussion about those trading at a premium multiple of EBITDA as compared with pure E&P plays.  It also sounds like they think they have primo midstream infrastructure.  Potential to monetize or just spin that?

[Myth465]

If they can pull off a sale or IPO of the Midstream / SWD assets that would be nice.

Yield is going for 4%, and REITs and MLPs are overvalued. Listen to the last Wealthtrack podcast.

 

Anything with a yield thats not an E&P is trading in the 4% to 6% range, which is 20 times earnings.

Quite nice if the IPO or spin those assets off some how.

[CorpRaider]

Which episode of wealthtrack?  The one with Charles Ellis?  I've been having problems with that podcast updating automatically.