SandRidge Energy, Inc.

Ladies and gentlemen, thank you for standing by and welcome to Sandwich Energy third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star and then one on your telephone keypad. Please be advised today's conference is being recorded, and if you require any further assistance, please press star zero. I would now like to hand the conference over to David Zhu, Director of Finance. Thank you. Please go ahead.

Thank you and welcome, everyone. With me today are Carl Giesler, our CEO, Salah Ghamoudi, our CFO, and Grayson Pranin, our VP of Engineering and Reservoir, 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 G&A and other non-GAAP financial measures. Reconciliations of these measures can be found on our website.

Thank you and good morning. Our earnings released yesterday, as well as 10Q that we will file later today, both provide substantive detail on our financial and operating performance during the third quarter. Accordingly, as usual, we'll keep our prepared marks brief. We've seen a lot of our hard work over the last six months come together in this third quarter, starting with HSE, despite sharp personnel reductions, substantial outsourcing, numerous well adjustments in response to volatile commodity prices and other distractions, the company's streak without a recordable incident stands at 26 months and counting, quite a remarkable feat. From a debt and liquidity perspective, our financial position became considerably stronger during the quarter. We ended 3Q with less than $1 million net debt. versus more than $45 million the previous quarter. And at the beginning of this week, we had approximately $16 million of cash on hand versus debt of $12 million. This substantial deleveraging reflects not only the approximately $35 million proceeds from the sale of our headquarters building, but also the significant cost and capital efficiencies implemented by our team. From a production and financial performance perspective, the Small Ball and Capital Efficient Workover Program and cost curtailment initiatives that we implemented over the last six months have become evident in our results. Yesterday's earnings release again reaffirmed our 2020 guidance from May. We're increasingly confident that we should achieve and, on several metrics, better those targets. We held production steady this quarter with 22.3 MBOE a day compared to 23.6 MBOE a day in the prior quarter. At this point in the year, we should approach, if not surpass, 8.2 billion BLE high end of the 2020 guidance from May. LOE continues to fall, coming in at $8.1 million, or $3.94 per BOE, compared to just under $9 million and just over $4 per BOE in the prior quarter. We believe our per BOE LOE compares favorably with almost all our public small capital and gas peers. Looking to year end, we should have a good chance to be meaningfully below the $48 million low end of the 2020 LOE guidance from May. Adjusted G&A similarly continues to fall, coming in at $2.3 million or $1.11 per BOE, compared to $3.7 million or $1.74 per BOE in the prior quarter. As with LOE, we believe our per BLE adjusted GMA stacks up well against almost all our public small cap oil and gas peers. For the year, we should be able to land safely within the $11 million to $15 million range of 2020 adjusted GMA guidance for May. Finally, on the financial front, adjusted GMA came in at $15.4 million, rebounding approximately 75% from the prior quarter. From a corporate structure perspective, the company is becoming simpler. We closed on the acquisition of the overriding royalty interest held by Sandridge Mississippi & Trust II for a net purchase price of $3.3 million. We have one remaining affiliated trust, Sandridge Mississippi & Trust I, left. That trust has announced that, per the agreement given to the trust, it will need to commence winding up this month. Finally, from a strategic perspective, due to our building sale, cost efficiencies, and capital discipline, we now find ourselves in the happy position of being one of the few, if not the only, small-cap, publicly traded gas-oriented oil and gas companies transitioning to an increasing net cash positive balance. This position affords us the benefits of time and patience, as well as wide strategic birth. will continue to evaluate adding assets with a focus on those with high PDP weighting that we believe we can acquire in an equity value accretive manner, as well as divesting assets that no longer align with our strategic direction. We'll also assess returning capital to shareholders, ensuring we do it in a financially prudent and economically efficient manner. We'll now open the call to questions.

Ladies and gentlemen, in order to ask a question, you will need to press star and then 1 on your telephone keypad. Again, that is star 1. Please stand by while we compile the Q&A roster. Our first question is from Noel Parks with Cochlear Palmer Institute. Your line is open.

Good morning. Good morning. I hope everyone's doing well there. I just had a couple questions. The absorption of the Sandridge Trust No. 2 that you did, actually, is the original trust, the Mississippian one, is that still independent at this point? I haven't really kept up with it.

It is. Independent in the sense that it has not completed its liquidation. That trust announced this month that it will begin the process of unwinding later this month. And that announcement was made by the trustee for the trust. We own a significant portion, roughly 25% of that trust, but we don't control it. And we have some of the same whites during the wind down that we had with the Mississippian Trust, too. In other words, we imagine the trustee will follow through on fiduciary duty, which typically involves a marketing program where they will solicit for the override and the Board of Directors.

and so forth, began its plans for unwinding. Was that something that you were aware of well in advance or is that something they can just do at whatever point they decide?

The answer to the first question is we had an inkling, and I'll explain that. And the answer to the second question is no. So the ability for the trust to wind up is actually fairly formulaic per the trust documents. And once they meet or fail to meet a certain level of distributions for four quarters in a row, they are required to wind down. and so they don't have discretion. That's what drives the wind down. And so we can monitor what the distributions are and then, like other analysts, project what we think based on the wells that we operate. We know they have a world's interest on what their distributable cash flow might be and have a pretty good sense of when they wind down. But just for clarity, we have no particular non-public insight into what their plans are. We just can do the math.

Gotcha. Okay. And I just also wanted to ask you, you pointed out that the LOE trends have been positive and you think there is still more room for that to come down going forward. Can you just talk a little bit about what the drivers of that would be?

Yeah. I mean, the drivers have been your kind of classic blank page review of how you operate your producing wells. everything from making sure we right size our compression so we're not paying for more compression that we need on a well that you know two years ago may have justified more compression and now it doesn't. It means you're visiting how what chemicals you use and how you source them. It means being very aggressive on your RFPs particularly on trucking saltwater disposal. It means thinking through how you staff your field operations and making sure that you have the right size personnel force. It means making sure that we're taking full advantage of the telemetry SCADA that we use to rebuild monitor wells. It means that when we do workovers, expense workovers, we first ask if we have an extra part laying around rather than buying a new part. It's a lot of the small details that that you implement. And to be fair, one of the things that I'm proud of for Grayson and Dean, who have really been tipped at the spear in implementing this, as well as our teams led by Cain and Dylan, they do a really nice job of focusing on these details and that LOE reduction isn't just based on a curtailment of the number of wells that we have. In fact, it's only a small part of it. So it's really, you know, You had to say in a sentence, focusing on details.

Great. I think that's all I have. Thanks a lot.

Thank you. And again, ladies and gentlemen, it is star and then one to cue yourself for a question. Ladies and gentlemen, this concludes the Q&A and today's conference call. Thank you for your participation, and at this time you may now disconnect.