SD - SandRidge Energy

[AchilliesValue]

According to the 13F I got Arlington Value sold out at what I assume was a loss during the most recent quarter

 

http://whalewisdom.com/filer/arlington-value-capital-llc

[plato1976]

well, not a good news to us holders...

this guy has pretty amazing track records

 

According to the 13F I got Arlington Value sold out at what I assume was a loss during the most recent quarter

 

http://whalewisdom.com/filer/arlington-value-capital-llc

[zippy1]

well, not a good news to us holders...

this guy has pretty amazing track records

 

According to the 13F I got Arlington Value sold out at what I assume was a loss during the most recent quarter

 

http://whalewisdom.com/filer/arlington-value-capital-llc

Maybe you are right, he does have an amazing record.  He also sold out Fairfar, also. Wonder what he saw?!

[racemize]

well, not a good news to us holders...

this guy has pretty amazing track records

 

According to the 13F I got Arlington Value sold out at what I assume was a loss during the most recent quarter

 

http://whalewisdom.com/filer/arlington-value-capital-llc

 

Is there a way to figure out the track record from the website, or did you just know it was good?

[thecynic]

Is there a way to figure out the track record from the website, or did you just know it was good?

 

I am not sure but you might missing that Arlington Value is run by Allan Mecham the 400% man. There is a thread on here about him.

[Philip Morris IV]

That is concerning that he parted with SD and FFH... something must have spooked him.

[fareastwarriors]

That is concerning that he parted with SD and FFH... something must have spooked him.

 

Maybe he spotted an Even better opportunity

[ourkid8]

Latest presentation:

 

http://phx.corporate-ir.net/phoenix.zhtml?c=196066&p=irol-presentations

[Parsad]

That is concerning that he parted with SD and FFH... something must have spooked him.

 

Maybe he spotted an Even better opportunity

 

Nothing spooked him.  He just felt that he has no advantage in that arena.  Cheers!

[muscleman]

Latest presentation:

 

http://phx.corporate-ir.net/phoenix.zhtml?c=196066&p=irol-presentations

 

I am a bit worried about page 11:

Oil

• EUR: 107 MBbl

• IP (30 Day): 140 Bbl/d

• Initial Decline: 76%

• b Factor: 1.5

 

This is quite a high initial decline rate, and the IP is only 140 bbl/d instead of 300. How do they get the 40% rate of return number out of this?

 

I assume for the first 12 months, the average 30 day production per month is 140, 120, 100, 80, 70, 65, 60, 55, 50, 45, 40, 35 bbl. Then the total production in the first year is 25.8 Mbl.

Given the steep decline of 76%, how do they come up with the 107 Mbl EUR for the oil? Perhaps the EUR is only 70 Mbl instead of 107? ::)

[racemize]

I just spoke to a friend of the family about SD.  It turns out an "activist hedge fund" approached him to be a member of the board of directors for SD, but he turned them down (presuming this was TPG, he didn't remember).

 

 

I didn't get a lot of details on SD, but here's what he said:

 

Everyone was pretty confused about selling Permian (crown jewel)

the gulf assets were an odd acquisition

 

Not high on Mississippian generally, due to the amount of water (called them "black water" (or perhaps "backwater") operations), especially since these costs don't show up at the beginning.

 

 

Was not surprised that the initial reports keep coming down, indicated that it was typical (especially for Aubrey, referring at this point to CHK) to show some sexy numbers at the beginning before it really gets calibrated, and usually it comes down over time as it gets more and more tested.

 

Also, said that he thought the price of natural gas would generally be range bound below $5 (e.g., from $4, but he said to "pick your number") due to rational natural gas operations and the large amount of assets.

 

That's about all I remember.

[cemadh]

racemize - thanks for the update.

 

on the GOM assets

          - there is a lot of chatter that TPG/SD are shopping the GOM assets

          - even if they get close to what they paid it is a good deal because they can pay down a lot more debt and they have enjoyed cash flow from the GOM properties till now

 

All this is based on the latest presentation (dropping rig count and capex in GOM) and "word on the street"  - so please take this with a generous dose of salt.

[racemize]

one other thing he mentioned was the "drilling info" website, which he considered to be truly excellent and not to expensive.  I think it is this one:

 

http://info.drillinginfo.com/

 

 

[muscleman]

I just spoke to a friend of the family about SD.  It turns out an "activist hedge fund" approached him to be a member of the board of directors for SD, but he turned them down (presuming this was TPG, he didn't remember).

 

 

I didn't get a lot of details on SD, but here's what he said:

 

Everyone was pretty confused about selling Permian (crown jewel)

the gulf assets were an odd acquisition

 

Not high on Mississippian generally, due to the amount of water (called them "black water" (or perhaps "backwater") operations), especially since these costs don't show up at the beginning.

 

 

Was not surprised that the initial reports keep coming down, indicated that it was typical (especially for Aubrey, referring at this point to CHK) to show some sexy numbers at the beginning before it really gets calibrated, and usually it comes down over time as it gets more and more tested.

 

Also, said that he thought the price of natural gas would generally be range bound below $5 (e.g., from $4, but he said to "pick your number") due to rational natural gas operations and the large amount of assets.

 

That's about all I remember.

 

Is this possibly why TPG couldn't bring in a board team of E&P experts?

[cemadh]

muscleman -

TPG's board nominees are Stephen C. Beasley, Edward W. Moneypenny, Alan J. Weber and Dan A. Westbrook

 

Look up the bio's for Stephen C. Beasley, Edward W. Moneypenny - they have experience in the O&G industry.

 

Also, look at the bios of some of the existing directors. Jeffrey S. Serota, William A. Gilliland and Everett R. Dobson for instance.

They were appointed to SD's board years ago and have ZERO experience in the O&G industry.

 

Also - there may be more board changes if Ward stays after June 2013.

 

In any case, TPG is priming SD for a sale. One could argue that the board members should all be from Wall Street if that is the objective :)

 

 

[muscleman]

muscleman -

TPG's board nominees are Stephen C. Beasley, Edward W. Moneypenny, Alan J. Weber and Dan A. Westbrook

 

Look up the bio's for Stephen C. Beasley, Edward W. Moneypenny - they have experience in the O&G industry.

 

Also, look at the bios of some of the existing directors. Jeffrey S. Serota, William A. Gilliland and Everett R. Dobson for instance.

They were appointed to SD's board years ago and have ZERO experience in the O&G industry.

 

Also - there may be more board changes if Ward stays after June 2013.

 

In any case, TPG is priming SD for a sale. One could argue that the board members should all be from Wall Street if that is the objective :)

 

Of course TPG tries to sell SD. That was the inital plan. But with CHK's stupid $1 bn deal, this plan seems very unlikely now.

The more likely plan is to develop on their own.

 

I am a bit worried about the type curve which got revised again and again. Now the initial decline rate is 76% instead of 40 or 60%. That is my concern.

So the IRR may end up to be 10% instead of 40%. What is the MoS then?

[nkp007]

For my curiosity, is there a reason to invest in SD over CHK or vice-versa? Do many of you own stakes in both companies?

 

 

[BG2008]

I second Muscleman's concern about the type curve.  IMHO, for SD to be a true value investment, the well economics need to work if we are forced to hold the assets and drill to get our money back. With all the data points that I have seen, the wells are not doing 40% IRR.  A few people have brush this off and mentioned that they have looked at the datas and confirmed it's okay.  My take is that if the wells do generate 40% IRR, SD should not have a financing issue.  IWith 40% IRR and 76% first year decline rate, it means that you should get almost all of your cash back within the first year.  This is not "a I put $100 out and I sit around and collect $40 back every year till eternity."  This is I put up $3.0mm, and I should get $2.4mm back in cash the first year and then the residual stream should pay the debt fairly easily going forward.  If the wells are not economical at today's oil price, what do you think will happen if we hit a hiccup in the economy?  I've spoken with a few oil and gas specialist and they are skeptical of SD's well economics.

 

I'm amazed that so many people chose on this board choose to ignore the well economics.  How could you believe in any MOS if the wells generate 0 IRRs? 

 

To answer Muscleman's question earlier, the Oklahoma wells do show IRRs closer to 40%.  But this is based purely on the select well data the company provided.  Heck, I don't know if they are representative of all the wells in Oklahoma.  But the Kansas wells really are troubling. 

[value-is-what-you-get]

Perhaps a good path to a quick sale would be to oust Ward in June.  Then Prem, who has publicly stated he would back Ward, can back Ward in a new O&G Company.  We then sell the SD assets which he was recently touting as having a 40% IRR to Ward's new company at a steep discount to his own numbers.  Say, $12 a share?  ::)

[muscleman]

I second Muscleman's concern about the type curve.  IMHO, for SD to be a true value investment, the well economics need to work if we are forced to hold the assets and drill to get our money back. With all the data points that I have seen, the wells are not doing 40% IRR.  A few people have brush this off and mentioned that they have looked at the datas and confirmed it's okay.  My take is that if the wells do generate 40% IRR, SD should not have a financing issue.  IWith 40% IRR and 76% first year decline rate, it means that you should get almost all of your cash back within the first year.  This is not "a I put $100 out and I sit around and collect $40 back every year till eternity."  This is I put up $3.0mm, and I should get $2.4mm back in cash the first year and then the residual stream should pay the debt fairly easily going forward.  If the wells are not economical at today's oil price, what do you think will happen if we hit a hiccup in the economy?  I've spoken with a few oil and gas specialist and they are skeptical of SD's well economics.

 

I'm amazed that so many people chose on this board choose to ignore the well economics.  How could you believe in any MOS if the wells generate 0 IRRs? 

 

To answer Muscleman's question earlier, the Oklahoma wells do show IRRs closer to 40%.  But this is based purely on the select well data the company provided.  Heck, I don't know if they are representative of all the wells in Oklahoma.  But the Kansas wells really are troubling.

 

As long as the OK wells are truly 40% IRR, this should be ok. They don't have money to drill everywhere anyway, so it makes sense that TPG says they should drill the core areas.

But as you said, I am skeptical about the IRR being 40%.

Also remember according to their presentation, the IRR if oil drops to $80 is only 20%. So there is not much MoS.

I would be very happy if their management who came up with this 40% number was using very conservative esitmates. But I felt like it is possible to be the opposite.

 

Thank you for bringing this IRR issue to my attention. I am pretty inexperienced in investing, and only until recently, when I read your IRR comments, and David Einhorn's book did I realize that for most companies, per unit economics is the most important thing to look at.

For oil companies, it is the per well economics. In the past I only looked at a company's production projection, and think oh, if they can grow production by 60% per year, that would be x EPS in 2 years, and the forward P/E is only 4, so it must be a 3 bagger. It probably doesn't work that way. Same for financial companies. It is the per loan economics that truly matters. Companies can make more and more loans to dilute the NPA rate, but eventually will blow up.

 

I am not saying the investment in SD won't work out because I am not very experienced. But for very capital intensive industries like oil and gas, there is not much room for error.

 

BTW, I lost money before on ATPG. (It is ATPGQ now)

[cemadh]

BG2008 - I am going to ask a newbie question that has probably been answered in this thread already. So apologies in advance.

 

If a barrel is hedged at $90 and costs $50 (I seem to remember $50 as the cost from SD's presentations). Then "profit" per barrel is $40.

40% of $3million (well cost) is $1.2 million.

 

According to the company's latest presentation, EUR is 107MBbl for the Mississippian Lime (ML). That works out to total revenues of $9.63MM per well and "profit" of $4.28MM per well. Are you saying that these numbers cannot be believed? Or have I got my math wrong.

 

Also - there is associated gas production of about 15% at each well. This gas becomes very profitable if gas goes up to $6 per thousand cubic feet (or so I am told).

Then there is the Salt Water Disposal system and other midstream assets.

 

So it is more than ML oil economics at play here.

Thoughts?

[muscleman]

BG2008 - I am going to ask a newbie question that has probably been answered in this thread already. So apologies in advance.

 

If a barrel is hedged at $90 and costs $50 (I seem to remember $50 as the cost from SD's presentations). Then "profit" per barrel is $40.

40% of $3million (well cost) is $1.2 million.

 

According to the company's latest presentation, EUR is 107MBbl for the Mississippian Lime (ML). That works out to total revenues of $9.63MM per well and "profit" of $4.28MM per well. Are you saying that these numbers cannot be believed? Or have I got my math wrong.

 

Also - there is associated gas production of about 15% at each well. This gas becomes very profitable if gas goes up to $6 per thousand cubic feet (or so I am told).

Then there is the Salt Water Disposal system and other midstream assets.

 

So it is more than ML oil economics at play here.

Thoughts?

 

There are two concerns from me:

1. The 107 Mbls number seems aggressive. If you enlarge that type curve chart, you could see that the first 12 months have approximately 140, 120, 100, 80, 75, 70, 65, 60, 55, 50, 45, 40, 37, 33 bbl. This is just a rough plot. My eyes could be wrong though. So first year production in total is 25.8 Mbl. Let's look at the chart closely, and it seems like we can assume year 2-5's average daily production is 25 bbl. (It is slightly higher than 25 in year 2, but less than 25 in year 5, so I assume it is 25 in average.) And it seems like year 6-10's daily production is 15 bbl in average.

So in total we get 25 * 30 * 12 * 4 + 15 * 30 * 12 * 5 = 36 Mbl + 27 Mbl = 63 Mbl from year 2 to 10.

So total production in 10 years is 63 + 25.8 = 89 Mbl, which is less than the 107 Mbl figure. I could be wrong though. My sense is that the higher the initial decline rate, the more likely that the EUR number will be wrong. Could any Oil expert please help me understand the type curve? Am I right about this?

 

2. It is not clear to me yet what the cost of $50 means to me. They lift a mixture of oil, gas and NGL, and they convert the gas into BOE in terms of oil. So I am worried when they talk about $50 per barrel, is that per pure barrel of oil, or it is per BOE? As we know, one BOE contains 28% oil, 16% NGL and 56% of gas. So the net revenue per BOE is far less than the $90 price that you assumed. This is not yet clear to me, but associated gas is over 50%, not 15%.

[plato1976]

I think CHK is more about NG price recovery, and SD is more about their oil reserve

I own both but not very big position

 

 

For my curiosity, is there a reason to invest in SD over CHK or vice-versa? Do many of you own stakes in both companies?

[plato1976]

really hope the well economics won't deteriorate more, given a flat oil price

 

At 40% IRR it's still a very nice investment;

at 20% , maybe not a lot MOS

at 10%, we may be losers...

 

 

BG2008 - I am going to ask a newbie question that has probably been answered in this thread already. So apologies in advance.

 

If a barrel is hedged at $90 and costs $50 (I seem to remember $50 as the cost from SD's presentations). Then "profit" per barrel is $40.

40% of $3million (well cost) is $1.2 million.

 

According to the company's latest presentation, EUR is 107MBbl for the Mississippian Lime (ML). That works out to total revenues of $9.63MM per well and "profit" of $4.28MM per well. Are you saying that these numbers cannot be believed? Or have I got my math wrong.

 

Also - there is associated gas production of about 15% at each well. This gas becomes very profitable if gas goes up to $6 per thousand cubic feet (or so I am told).

Then there is the Salt Water Disposal system and other midstream assets.

 

So it is more than ML oil economics at play here.

Thoughts?

 

There are two concerns from me:

1. The 107 Mbls number seems aggressive. If you enlarge that type curve chart, you could see that the first 12 months have approximately 140, 120, 100, 80, 75, 70, 65, 60, 55, 50, 45, 40, 37, 33 bbl. This is just a rough plot. My eyes could be wrong though. So first year production in total is 25.8 Mbl. Let's look at the chart closely, and it seems like we can assume year 2-5's average daily production is 25 bbl. (It is slightly higher than 25 in year 2, but less than 25 in year 5, so I assume it is 25 in average.) And it seems like year 6-10's daily production is 15 bbl in average.

So in total we get 25 * 30 * 12 * 4 + 15 * 30 * 12 * 5 = 36 Mbl + 27 Mbl = 63 Mbl from year 2 to 10.

So total production in 10 years is 63 + 25.8 = 89 Mbl, which is less than the 107 Mbl figure. I could be wrong though. My sense is that the higher the initial decline rate, the more likely that the EUR number will be wrong. Could any Oil expert please help me understand the type curve? Am I right about this?

 

2. It is not clear to me yet what the cost of $50 means to me. They lift a mixture of oil, gas and NGL, and they convert the gas into BOE in terms of oil. So I am worried when they talk about $50 per barrel, is that per pure barrel of oil, or it is per BOE? As we know, one BOE contains 28% oil, 16% NGL and 56% of gas. So the net revenue per BOE is far less than the $90 price that you assumed. This is not yet clear to me, but associated gas is over 50%, not 15%.

[muscleman]

really hope the well economics won't deteriorate more, given a flat oil price

 

At 40% IRR it's still a very nice investment;

at 20% , maybe not a lot MOS

at 10%, we may be losers...

 

 

BG2008 - I am going to ask a newbie question that has probably been answered in this thread already. So apologies in advance.

 

If a barrel is hedged at $90 and costs $50 (I seem to remember $50 as the cost from SD's presentations). Then "profit" per barrel is $40.

40% of $3million (well cost) is $1.2 million.

 

According to the company's latest presentation, EUR is 107MBbl for the Mississippian Lime (ML). That works out to total revenues of $9.63MM per well and "profit" of $4.28MM per well. Are you saying that these numbers cannot be believed? Or have I got my math wrong.

 

Also - there is associated gas production of about 15% at each well. This gas becomes very profitable if gas goes up to $6 per thousand cubic feet (or so I am told).

Then there is the Salt Water Disposal system and other midstream assets.

 

So it is more than ML oil economics at play here.

Thoughts?

 

There are two concerns from me:

1. The 107 Mbls number seems aggressive. If you enlarge that type curve chart, you could see that the first 12 months have approximately 140, 120, 100, 80, 75, 70, 65, 60, 55, 50, 45, 40, 37, 33 bbl. This is just a rough plot. My eyes could be wrong though. So first year production in total is 25.8 Mbl. Let's look at the chart closely, and it seems like we can assume year 2-5's average daily production is 25 bbl. (It is slightly higher than 25 in year 2, but less than 25 in year 5, so I assume it is 25 in average.) And it seems like year 6-10's daily production is 15 bbl in average.

So in total we get 25 * 30 * 12 * 4 + 15 * 30 * 12 * 5 = 36 Mbl + 27 Mbl = 63 Mbl from year 2 to 10.

So total production in 10 years is 63 + 25.8 = 89 Mbl, which is less than the 107 Mbl figure. I could be wrong though. My sense is that the higher the initial decline rate, the more likely that the EUR number will be wrong. Could any Oil expert please help me understand the type curve? Am I right about this?

 

2. It is not clear to me yet what the cost of $50 means to me. They lift a mixture of oil, gas and NGL, and they convert the gas into BOE in terms of oil. So I am worried when they talk about $50 per barrel, is that per pure barrel of oil, or it is per BOE? As we know, one BOE contains 28% oil, 16% NGL and 56% of gas. So the net revenue per BOE is far less than the $90 price that you assumed. This is not yet clear to me, but associated gas is over 50%, not 15%.

 

If you look at my calculations here, SD folks are basically saying they can get the 107 Mbls EUR number, and even though the first year decline rate is a whopping 76%, and they could only get 25 Mbls in year 1, the IRR could still be 40% because of the very low decline rate after year 1. So whether the Mississippian Lime story could be successful does not depend on the initial data in the first year, but depends on the data from year 2 to year 10.

 

Again I am not an oil expert, but my intuition tells me that as the well density increases in their focus areas, their decline rate from year 2 to 9 might increase a lot.

 

Meanwhile, TPG will do a good job cutting costs, but whether they will achieve the eventual success still depends on the IRR of the wells, which would be unknown until quite a few years later.