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spk01: Good day and thank you for standing by. Welcome to the Sandridge Energy first quarter 2021 earnings call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Brandon Brown. Please go ahead.
spk04: Thank you, and welcome, everyone. With me today are Carl Giesler, our CEO, Salah Gamoudi, our CFO, and Grayson Prannon, our COO, as well as other members of Mainland. 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 DNA and other non-GAAP financial measures. Reconciliations of these measures can be found on our website.
spk02: Thank you and good morning. Hopefully you've had time to peruse the earnings release and investor presentation we 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 would be useful to your assessment of our company if you walked through the presentation in addition to reviewing our 1Q21 earnings. Before turning to that presentation, though, Talal will touch on a few highlights from our first quarter earnings.
spk07: Thank you. Simply put, 1Q21 was a strong quarter. During the quarter, our net cash position increased just over $48 million, almost $57 million to compare to just over $8 million in the prior quarter. This net cash position reflects more than a full flip from just over $51.5 million in net debt that we had entering 2020. Our adjusted EBITDA more than doubled from the prior quarter to almost $22 million from just over $9 million in 4Q20. We should note that 4Q20 was burdened by a one-time $5.3 million cash hedge loss due to the unwinding of all of our hedge positions. Even without that hedge-unwind impact, 1Q21 adjusted EBITDA would still be meaningfully higher. Know that our board and management made the decision to unwind our calendar 21 gas hedges last November based on an improving 2021 gas price outlook. That decision appears prescient as those swaps were just over $2.60 per MMETU. Prices this year have been trading and the 9x curve remains meaningfully high. 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 apocalypse in February. We closed the sale of our North Park Basin asset on February 5th. Owning North Park Basin for only 36 days during 1Q21 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 1Q21 oil and gas realizations were up 41% and 19% from the prior quarter. NGL realizations as a percent of WTI was 29% in 1Q21, 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 million off of adjusted G&A compared to the prior quarter, lowering it to $1.9 million, or $1.14 per B a week. While we continue to aggressively press G&A expenses, we do not expect G&A to remain this low on an ongoing quarterly basis. The team also compressed lease operating expenses by $3 million compared to 4G20, reducing it to $8 million or $4.85 per VOE. This general level of LOE should be sustainable going forward. We believe that we can pair favorably with our peers on both the G&A and LOE per VOE basis. It's relatively rare for an E&P company to generate net income. We did that. However, this quarter, net income of $35 million included an almost $20 million gain on the sale of North Park Basin. Also, in the rarity category, we had no oil and gas impairments for the first time since the second quarter of 2019. Lastly, in the rare category, Despite still grappling with the waning challenges of COVID, our streak without a recordable HSME incident is now in its 33rd month as of today. We believe few, if any, public E&P companies can boast such a streak, which is further detailed on page 7 of our latest investor presentation. The final notable in 1Q21 was the simplification of our asset base. Due in large part to an increasingly challenging Colorado regulatory environment, we exited in February our high-declined, higher-cost North Park Basin assets. We are now focused solely on our poor, long-lived, predominantly PDP mid-con properties. Subsequent to the quarter, we purchased for $4.9 million in cash all of the overriding royalty interest assets of Sanford's Mississippi and Trust One. When that trust ultimately liquidates, our company will no longer have any affiliated trust. Additionally, we expect to receive back about $1.3 million 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 10Q that we will file later today provide further detail on our financial and operational performance during 1Q21.
spk02: 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 of management has 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 phase to a mid-con focused primarily PDP asset base. We know these properties especially well, as we've had them a long time. They're almost fully HVP. They're long-lived, shallowing, and diversified production profile. Detailed later on page six, overlay the cross or acreage position is more than 1,000 miles each of owned and operated SWD and electric infrastructure, representing more than $1 billion in invested capital and providing the company both cost and strategic advantages. Our assets have robust free cash flow data. particularly with their low cost structure and light cap-edge requirements, as well as improving commodity prices and realizations. This cash generation potential provides several paths to increase shareholder value realizations. At the 9M strip, we believe our PD-PD10 value approximates more than $230 million, and we can build on that. by extending and flattening our production profile with small ball projects and well-made activations, by actively managing our price realizations and further reducing costs, by growing our asset base with opportunistic, economically creative 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 Propagation is materially de-risked from a financial distress perspective by our strengthened balance sheet and financial flex code. At quarter end, we had a significant cash position with net liquidity approaching $65 million, excluding restricted cash. We don't have MVCs or other significant off-balance sheet financial commitments. And with the recent purchase of the overriding wealth and interest of standards of Mississippi and Trust One, we have no affiliated trust in pending or operating net. On the opposite end of the spectrum, the end of the quarter was approximately $1.7 billion in NOLs, which could help meaningfully reduce the tax impact of a dividend program or other use of cash. It's finally worth highlighting that we take our ESG commitments seriously. We've implemented different processes around them. The next page four laid out a fair-forward strategy. The bumper sticker is that we're completely focused on growing the cash value and generation capabilities of business in a safe, responsible, efficient manner. This gestalt strategy has four calls. The first is to maximize the cash value and generation capacity of our incumbent mid-con PDP asset. You'll hear a version of this course throughout this call. One, extend and flatten our production profile with high-impact work over and other small-bought projects, as well as low-risk well reactivations. Two, actively manage marketing options to maximize our price realizations. And three, continue to press on cost. The second prong 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 point is to keep vigilant for opportunistic value accrued of acquisitions. will 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. As detailed on page 11, MidCon asset purchases from enduring resources several years back, as well as last fall on this spring's purchase of the Mississippi Trust's overriding loyalty interests, are emblematic in this approach. The final prong is to uphold our ESG responsibilities. We'll go back a little bit quicker as we move through the remainder of this presentation. Page 5 details a coordinate con-athlete position. To our view, the selling points are one, long-lived, more than a nine-year reserve line. Two, shallow decline, with expectations of upper-team decline this year downshifting to low-teams and lower going forward. Three, diversified production, both from A, hydrocarbon mix, where the gas and energy are weighted, and B, well-based, where we have more than 950 producing wells. Finally, we're mostly HPP. This makes spending commitments de minimis. All this sums up to an at-the-9-max strip PV-PV10 value that we believe is approximately more than $230 million. Given that we've already discussed materials on page 6 and 7, we'll move ahead to page 8. This page outlines how various initiatives of the Board of Management over the last several years have led to an absolute and current 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, quote-unquote, white-paper reassessment of almost every cost aspect of our field operations. We're proud that our per-year fee, Halloween, is among the lowest of our peers. Page 9 addresses a topic on which we receive a lot of inbound investor calls since the 4Q20 earnings in early March, namely NGL and gas releases. The happy news is that we've seen steady progress over the last three quarters that has continued into the current quarter. No doubt, general market tailwinds have helped. So has actively working with our largest off-takers and leveraging outsourced market smuggling expertise. As we'll detail later in this presentation, gas prices in MGL locations have material impacts on repeating PDFM value of our assets. Page 10 addresses our approach to production optimization. Since last June, we focused on relatively low capital, quick payback, high return workovers, and small-bought projects, and candidly enjoyed success in our execution. As we worked to deliver a 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. the quiddity was key. Now, with a much stronger balance sheet in the quiddity position, we plan to comprehensively evaluate relative reactivations, drill outs, re-completions, and even potentially new drills. These more aggressive initiatives could significantly help flatten the already shallowing phase decline. Skipping to page 12. Fundamental to a reset has been a deliberate shift from a what-if to a what-is organization. Market headwinds, balance sheet constraints, and other realities required a strategic change from a high-cap-X production growth strategy to a more cost-efficiency PDP optimization cash flow strategy for a 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 alteration had several key components. Number one, rebalancing the weighting of the field versus corporate to reflect where we actually create value. Two, outsource necessary but more perfunctory and less core functions such as operations accounting, land administration, IT, tax, and HR. Beyond the more than $6 million in per annum G&A savings from this, outsourcing provides us greater flexibility and scalability to adjust to changes in our business or the market. Three, contractors needed for drilling, degreasing, or other more episodic needs. One happy outcome of this organizational makeover is that we've retained and upgraded 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 streamlines. And that's a more than 60% reduction in G&A on both an absolute and a per billion basis since 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 a 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 PD, PD-10 reserve value. It's a bit busy, so I'll try to unpack it. The three bars from left to right show a year-end to 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 a first quarter 21 reserve value with May 5th 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 12-month average. Note that no bar includes 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 represents a recent market cap. The lower horizontal line reflects an 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 from this page, in my mind, is that our estimate of a 1Q21 PV, PV10 value exceeds 230 million, which is more than two times our recent market proxy in terms of enterprise value of only 105 months. Another bumper sticker is the significant sensitivity of that PD, PD10 value to move from 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 12 months on 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 a 1Q21 result. 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 GMA and MGL and gas usage. 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.
spk01: At this time, I'd like to remind everyone, in order to ask a question, please press star, then 1 on your telephone keypad. And we will pause for a moment while we compile the Q&A roster. And again, if you'd like to ask a question, please press star then one on your telephone keypad. And our first question comes from the line of Noel Parks from Toohey Brothers. Go ahead, please. Your line is open.
spk05: Good morning.
spk06: Good morning. Thanks for the presentation and all the context on where you brought the company to strategically. So 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, more of an upside case scenario in terms of what would encourage you to get a little bit more aggressive in terms of spending and maybe talk a little bit about what the next couple years would look like if it turned out that we're in a temporary price spike for oil and the strip turns out to be more right for gas than it looks like right now.
spk02: I'll handle this question. I don't want to talk too far into the future I will say that whatever commodity prices you get, we're going to maximize the cash that we get from them. That is our overarching aim. And so at this point, to kind of 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. There's still a little bit of room on LOE. Pretty good on GMA. It will continue to press. You always find things when you keep looking. The biggest thing that we started to do that we really need to be more disciplined and systematic about is working on major off-takers and thinking about what optionality we might have to actively manage our price realizations, particularly around gas and MGLs. 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 closed some of the major sales we're building in the North Park Basin and actually got the cash. And now our team is starting to do the homework. And homework is very important. There's no better way to lose money than bad projects. to look at well reactivations, drill outs, maybe some refracts and things like that. But of course, when you do that, that's a requirement of capital. We'll have to get it through the board, which is 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 happens in the background, we are very cognizant of the value that you can realize to the enterprise by being smart about how you offlay P&A obligations. And there's some wells that are coming into life at very fringe areas or asset base, where people will actually pay as positive money for wells that may not be making money and that have an ultimate P&A liability. And so from an oil perspective, we'll 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, we continue to evaluate M&A that fits our criteria right now, being predominantly PDP with a little bit of 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 likes the jobs that the oil and gas business brings.
spk06: Great. Thanks, sir. Thanks for that explanation. And you did just mention that with the cash from the Colorado sale now in the door, the team is beginning to do some homework. That brings me to the 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, um, how many of them had to kind of, to be kind of, uh, worked through at this point. And, um, and as you begin doing more, more homework on, uh, what, what else is possible out there is, um, is that likely to sort of replenish the, the list of, um, of rework jobs you you've done so far or, um, Or do you think of it maybe as just defining, say, a list of projects for the coming year or something like that, but not necessarily a long-term plan?
spk05: Sure. Good morning. This is Grayson. I have 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. will be opportunistic as market conditions sustain and continue to improve. I do think that this union choice set is potentially robust enough to be meaningful both this year, next year, and potentially in the following year.
spk06: Okay, terrific. So then that really does kind of give you a line of sight. past our our current commodity cycle and um and i guess that in turn would give you a good deal of strategic flexibility uh looking ahead as far as what you want to do on the capital or the acquisition side is that that's fair that's fair and well i would just point out that you know while we had a little bit over down there in fiji operated wells we have a lot of wells on our property that have been temporarily
spk02: abandoned or shut in, there's a lot for us to evaluate and play with. And the good thing is these wells have already been drilled, so bringing them back on doesn't require nearly as much capex as re-drilling.
spk06: Gotcha. And then just the last one for me. We've seen quite an uptick in corporate-level transaction activity, M&A, and In just about every basin you can think of, and really just in the last few weeks, I'm just curious what you're seeing in the mid-con, and curious in particular if you have any private or PE-backed assets that have come to the market. I understand more things have come to the market in recent weeks than we've seen in some time.
spk02: I think really all I can say on this front is things come to market that are kind of in our wheelhouse, and as it could, we certainly look at them. And you're right, there has been an uptick in activity in the mid-con, and we feel like we're in the flow of being able to look at those opportunities.
spk06: Great. Thanks a lot for all the strategic backdrop. Thanks for me.
spk01: And again, as a reminder, if you'd like to ask a question, please press star and then one on your telephone keypad. Our next question comes from the line of Josh Young with Bison Interest. Go ahead, please. Your line is open.
spk00: 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 implied bar that's missing, but implies kind of even better reserve value at a PDP-PB10 basis on kind of current differentials, 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, PD10, 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. And Noel is 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 that could help.
spk02: Josh, thanks for listening and for the kind words. Let me start off. On page 14, what we've endeavored to do, and I think it's appropriate, is show our proximity, what we believe our PD reserve, PD10 value is, in a manner consistent with industry audited reserve practice, right? 12 months looks back, so on and 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% NGL utilization. We can't say that for the last 12 months at this point. But that held through. We gave you some sensitivities to suggest what that might do to value. And then I believe you 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 million 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. Didn't really feel the need to kind of do the math. People can take the numbers and add them together and divide by the share count and get to an asset value and do whatever they want to do for PMA 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 Sloss said, we had a significant step up from roughly $8 million to your current net cash position. And And as I mentioned, our board is committed to using that cash and using all our assets in a way to maximize the shareholder value. 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 the most money for shareholders and how they use that cash, whether it be deployment, acquisition, or eventually some type of retirement.
spk00: Okay. So, I mean, I guess, again, it just sounds like you don't really have a clear, 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 paths It sounds like that's a reasonable interpretation of what you're saying.
spk02: Yeah. I think that's right. It's not dithering. I mean, you have all the traditional return of capital options, of course. If you look at the stock, does that have implications for how you might do it? To my mind, yes. If you put in some sort of regular dividend, what level? If you did a special dividend, 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 in 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 you were ever... to entertain a merger, our cash should have a lot of value in that context. We could help partner with a company and immediately deliver them or provide low-cost capital for them to accelerate high-value drilling inventory. So it's very important to think through all the ways that that cash can add value to the enterprise, and our board is actively doing that. Nothing's doing it in an inappropriate fashion.
spk00: 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 slide we've seen on this 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?
spk02: Yeah. It's a good question. You know, my understanding is that this company in its past did look somewhat thoroughly at monetizing this. You know, from where we sit, we think it's more, maybe it's primarily customers who are kind of, you know, using it as almost a financing vehicle, right? And we just don't need to do that. I think it would add unnecessary complication and artificial pricing dynamics. And so we think using significant capital that's been invested in this very substantial system provides a lot of cost benefits that we're seeing in their cash flow. And it also provides us very real strategic benefits to the extent that assets in the round available. That means we'll just be able to operate them more efficiently than someone else and can 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.
spk00: Great. Thank you very much.
spk01: Our next question comes from the line of Michael Melby with Gate City. Go ahead, please. Your line is open.
spk03: Yeah, thanks. Thanks for the question. Mine was actually on slide 6-2 with the saltwater disposal wells. Could you confirm just the cash balance you mentioned on May 7th after the purchase of the Sandridge Trust and all that additional cash is from operations?
spk07: Yes, so the cash balance that we disclosed of over $8 million was just cash on hand, and that was after the acquisition of SDT, the overriding royalty interest of SDT, and was from... So that was a negative impact, and then obviously cash flow from operations increased the balance in quarter minutes.
spk02: Yeah, we're also expecting... our payment, so we paid to all of SDT, and as Sloan mentioned, we're expecting to get $1.3 million back with that action.
spk03: Got it. Thanks. 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.
spk05: Sure, if we're looking at slide 14, note that that third column from the left, Q1 21, reserves includes the net impact of the FTT acquisition. And then in reference to slide 15, we're reconfirming our 2021 guidance and not planning to change that at this time.
spk02: Yes. You know, the press release that we put out on the acquisition of the overriding loyalty interest in SBC, we stated that it was our belief that we were buying them at PD, PD 55. And so you can imagine, we're showing them in one of these bars at PD 10. It is a meaningful, meaningful amount, which it counts. So that does have an impact on that far-right bar 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 of the general timing of the liquidation process at STT. We factored that into our annual guidance.
spk03: Got it. Thanks for your help.
spk01: And there are no further questions in queue at this time. I would like to turn the call back over to our presenters.
spk02: Thank you all very much for your interest in Sandridge. And we'll look forward to talking next quarter, if not before, with some of you all. Thank you.
spk01: And this concludes today's conference call. You may now disconnect.
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