SandRidge Energy, Inc.

Good morning. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Sandridge Energy's first quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. Thank you. Scott Prestridge, Director of Finance and Investor Relations, You may begin your conference.

Thank you and welcome, everyone. With me today are Grayson Pranin, our CEO and COO, Shilas Gavridi, 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 GNA 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. Thank you, and good morning. I'm proud to report on another strong quarter result for the company and that the company remains well-positioned to capitalize and Recent Commodity Price Selwyn to include focused high-graded drilling in the core of the northwest DAC and a continuation of our well reactivation, which will add incremental production this year. Before expanding on this, Bob will touch on a few highlights from the first quarter.

Thank you, Grayson. Despite us having no drilling or completion activity during the past year, we were able slightly increased 1Q21 to 1Q22 production, averaging 17.5 MBOE per day and 17.8 MBOE per day in the mid-con over their respective periods. The production for the quarter, as well as the last year, benefited from the reactivation of over 139 wells that were previously curtailed during commodity price downdrafts in 2020. Net cash, including restricted cash, increased to approximately $166 million, which represents $4.51 per share of our common stock issued and outstanding as of March 31, 2022. The approximate $26 million increase over the quarter was supported by production from our well reactivation program, as well as higher commodity prices and realizations, a net of approximately $5 million in pre-purchases of materials related to our 2022 capital program. The company has no term debt or revolving debt obligations as of March 31, 2022, and continues to live within cash flow, funding all of its capital expenditures with organic free cash flow and cash held on the balance sheet. Over the quarter, the company generated adjusted EBITDA of approximately $39 million, again, despite no new drilling or completion activities. As we have pointed out in the past, our adjusted EBITDA is a unique metric for Sandwich, due to us having no I and very little T. Given that we have no debt and a substantial NOL position, fields are cash flows from federal income taxes. Commodity price realizations in the first quarter, before considering the impact of hedges, increased to 92.35 per barrel and 384 per MCF, which represent 97% and 82% of daily average index spot prices of WTI for oil and Henry Head for natural gas, and MGL Realizations were $33.73 per barrel or 35% relative to WTI. Please note that current natural gas prices in the second quarter of 2022, having recently reached spot prices above $7 per MCF beginning in April, subsequent to the quarter we are reporting on. As of today, we have no open hedge positions or commodity derivative contracts. However, as we invest shareholder capital into our drilling completion and well reactivation programs, will work side-by-side with our board to evaluate and potentially insert into hedge positions to help protect investor capital spent. As alluded to earlier, we have maintained our large NOL position, which is estimated to be $1.6 billion as of the end of 1Q22. Our NOL position has and will continue to allow us to shield our cash flows from federal income taxes. Our cost disciplines continue to improve during the quarter. with adjusted DNA decreasing to $2.2 million or $1.35 per VOE from $2.5 million or $1.46 per VOE in the prior quarter. We have also helped L&V and expense workovers to approximately $10.9 million or $6.76 per VOE during the quarter, partially driven by an increase in workover activity associated with well reactivations and well repairs at higher commodity prices. We still believe we can pair favorably with our peers in regard 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 earn net income of approximately $35 million, or $0.95 per share. We should note that our earnings released yesterday and the 10-Q that we plan to file later today provide further detail on our financial and operational performance during the quarter.

Thank you, Salaf. We thought it would be helpful to walk through some of the company's highlights, business strategy, and other business details. As I mentioned previously, we are pleased with the results in the first quarter and are positioned to capitalize on robust commodity prices with high rate of return drilling in the northwest stack, continued well reactivations, and further strengthened cash flow from our already producing properties in mid-cons. We were able to keep mid-con production flat with modest increases from Q1 2021 to Q1 2022, despite no new drilling activity during the period, driven in part by the continued benefit of our well reactivation of 139 wells since early 2021. We will continue to reactivate wells, targeting 30 projects over the year, averaging over 100% IRRs, In addition, we will convert artificial lift systems of 35 wells to rod pumps, which will aid in optimizing lifting efficiency and lower point forward costs for this well set. With the additional inventory economic at today's commodity prices, together with our board, we will evaluate the potential for additional capital allocation later in the year. I'm happy to report that we've got the first of nine wells budgeted this year, targeting the Merrimack and the Northwest stack plate in April. Thus far, drilling is progressing as planned. I'm extremely pleased with the planning and approach that our team has taken on this front. As the law mentioned earlier, we pre-purchased nearly $5 million of materials to include casing for all of our drilling programs, pumping units for our capital workovers, and other items. The investment made earlier this year is key to warding off inflationary pressures in today's market and has already benefited the program. We hope to share more details on the execution of this program in the next call. Let's pause for a moment to revisit the key highlights of Sand Ridge. Our asset base is focused in the mid-continent region with a primarily PDP well set, which do not require any routine flaring of produced gas. These well-enlisted assets are most fully held by production with a long history, doweling, diversified production profile, and double-digit reserve life. These assets include more than 1,000 miles each of owned and operated SWD and electrical infrastructure over our footprint. This substantial owned and integrated infrastructure provides the company both cost and strategic advantages both bring asset operating margin through reduced lifting as well as water handling and its global cost. And combined with other advantages, help de-risk individual well profitability down to $40 WCI and $2 Henry Hub. In addition, the interconnectivity in ample capacity help offer against unforeseen cryptail risk. Our assets continue to yield significant pre-cash flow with total net cash now totaling nearly $166 million with zero debt as of quarter end. This cash generation potential provides several paths to increase shareholder value realization and is benefited by relatively low T&A burden. As we realize value to generate cash, our board is committed to utilizing our assets, including our cash, to maximize shareholder value. Sandridge's value proposition is materially dereft from a financial perspective, higher strength of balance sheet, robust net cash position, financial flexibility, and over $1.6 billion in NOL. Further, the company is not subject to FDCs or other significant off-balance sheet financial commitments. Currently, the company does not have any open hedging contracts after March 31st However, we could enter into hedges from time to time in support of securing return for our capital campaign, manage commodity risk, or other fundamental drivers. Finally, it's worth highlighting that we take our ESG commitment seriously and have implemented disciplined processes around it. 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 remain watchful for potential value-accretive opportunities. This strategy has four points. One, maximize the cap value and generation capacity of our incumbent mid-term PDP assets by extending and flattening our production profile with high rate-of-return workover Well Reactivations, and Artificial Lift Conversions. Continuously stress on operating and administrative costs. The second is to ensure we convert as much EBITDA to free cash flow as possible by exercising capital stewardship and investing in projects and opportunities that have a high risk-adjusted, fully burdened rates of return. executing on our nine-well drilling program in the core of the Northwest stack to economically add production. Supported to remain open, patient, and maintain optimality for opportunistic value-accretive acquisitions. We'll focus on value-adding opportunities that bring synergies, further leveraging SE's core competencies, complement or balance the company's portfolio, or otherwise yield a competitive return. As we generate cash, we will continue to work with our board to assess, pass, and maximize shareholder value to include investment opportunities, strategic opportunities, return of capital, and other uses. The final table is to uphold our ESG responsibilities. Now, circling back to this year's drilling program. We've had a controlled and purposeful start to drilling, and we will continue to pursue with thoughtful and disciplined execution this year in order to realize high rates of return with these investments. The program consists of nine wells that are offset to highly profitable horizontal wells and have favorable geologic and reservoir characteristics. The focus area we will be developing with this year's program has been previously delineated by Sandridge and other reputable operators. We know this area well. Approximately 50% of the program will be infill development, with the remaining 40% being first-welded sections or co-development that, again, offsets productive and profitable wells. Of note is that we are benefiting from having a long tenured history in mid-cost. Previous development programs can lever a very tight cost structure to add incremental barrels to our production in a very capital-efficient way. Growth C&C costs are estimated to be $4.75 million for single laterals and $7 million for extended laterals, which reflects casing, drilling, and other material, equipment, and services already secured at reasonable costs and current market estimates. We will continue to lean forward in requisitioning the remaining items for the program to further offset inflationary pressures. However, inflation will be a central focus this year and has bearings on unsecured costs and future drilling decisions. So additional inventory is economic at today's commodity prices. Program results, commodity price stabilization, are further flattening well costs to include expanded inflationary controls and other factors will guide future drilling decisions and inventory considerations. In addition to well reactivation, we will continuously assess these factors and along with our board, evaluate the potential for digital future capital allocation in a prudent manner. But simply, we will continue to prove out the results first and then go from there.

Shifting to expenses.

We were able to lower Jeff's G&A quarter-over-quarter from $2.5 million, or $1.46 per BOE in the prior quarter, to $2.3 million, or $1.35 per BOE in the first quarter. Benefiting from our core values to remain cost-disciplined, as well as prior initiatives, we 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 expanding activity and producing well count, our total personnel remain at roughly 100 people. Although corporate personnel stand at 16 people, we have retained key technical skill sets that have both the experience and institutional knowledge of our area of operations for drilling and completions, as well as the ability to flex through additional outsourcing of specialized areas to do more. While we continue to press on operating costs, we anticipate expenses, specifically work-over expenses, to remain near this quarter's level as we reactivate and repair more wells this year. The increase in commodity price has improved the economics of the wells that may have been or would have remained shut in otherwise. The good news is that this will translate to additional production. However, while profitable, the remaining amounts of well reactivations have relatively higher operating costs which will increase power, water, chemical, and other expenses. In addition to the cost of an increasing producing well count, inflation will continue to be a theme throughout the year. We will continue to combat inflationary pressures as well through rigorous fitting processes, securing material, equipment, and services over an appropriate tenure to offset market increases. as well as continue to leverage our significant infrastructure, operations center, and other company advantages. In summary, the company has 166 million net cash and cash equivalents at quarter end, which represent $4.51 per share of our common stock issued and outstanding. Modest production increases from Q1 2021 to 2021 Q1 2022, periods in our mid-con position. Expanded 2022 capital program of high-return projects that further enhance production and arrest decline. To include nine new wells migrated in the core of the Northwest Sac and continuation of our well reactivation program. Low overhead has popped here at GNA of $1.35 per BOE. No debt has backed negative leverage. Significant free cash flow and a growing net cash position supported by a diverse production profile, low decline, multi-digit life asset base. $1.6 billion in a well, which will shield future fee cash flow from federal income tax, large owned and operated S&V and electrical infrastructure that 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.

As a reminder, if you would like to ask a question over the phone, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. We'll pause for just a moment to compile the Q&A roster. and our first question comes from Josh Young from Bison Interests. Please go ahead. Your line is open.

Great. Thank you. Thanks, Grayson and Salah. Great quarter. Can you talk a little bit about, well, I guess I have a few quick questions. So one, you guys historically had disclosed your net cash position as of the day before the press release and I noticed that that was missing and I guess I was curious about that. and I guess that's probably a quick answer. And then your LOE was up, but also your realized gas price was up. Was there a connection there? And if not, could you guys address the combination of kind of the change in LOE, kind of where that came from and then kind of why your realized gas price versus the hub price improved? And then finally, and I guess this is probably people's biggest question is just What are you guys doing with the cash, and how do you avoid losing a bunch of money drilling wells like every other operator has in the area that you guys are active in over a multi-year period since people have been drilling wells of the type that you're planning or actively drilling in that area?

Thanks, Josh. This is Salah, and I'll go ahead and take the cash disclosure question. We in past quarters did report cash on hand. I just want to be clear that that was not true net cash. That was strictly what was available in the bank. It was an unreconciled balance that didn't take out things like outstanding checks and things like that. But we did not report that this quarter because we are currently spending money on our capital program. And so unlike in prior years where Our capital program was very small and had de minimis impacts on our free cash flow. Capital being spent on our drilling and workover program this year is a lot more meaningful. And so we want to make sure that we give investors the full picture through sets of financials quarterly and give them context. And unlike past years and past quarters, there isn't just sort of a – a cash build every single quarter that's sequential and routine. Our capital program will dip into some of those cash balances as we go, so we didn't feel like it was as meaningful of a disclosure this quarter. And I'll go ahead and let Grayson take the other questions.

Yeah, morning, Josh. Thanks for calling in and great questions. I'll tackle LOE and differentials first. There was no connection between, you know, LOE and differentials, very different drivers between the two. First on the differentials, we were happy to see that improvement in the decrease in the relative differentials on a percentage basis. A lot of that is driven by two things. A, as the index prices move up, the fixed components of those all of those fees are reduced and diluted. The second is just marketing, when the molecules are traded on what day. So some positive benefits there and exceeded our guidance and I think we have some tailwinds behind us in general with the WTI and Henry Hub. On LOE, there's really three drivers there. The first, you know, we have more producing wells today that add to, you know, power, water, chemical, and other similar type of costs. The second is continued work over activity as we reactivate and repair more wells. You know, as commodity price increases, that helps us bring more wells online. So I would anticipate that work over activity to remain kind of at this quarter's level. going into next quarter. And the third is inflation. I think all EMPs are having to work through that environment in addition to other markets. We have a proactive approach. We're going and bidding out all of the services, equipment, and materials to gain favorable prices in the current market and appropriate tenure. And we'll continue to lean into that throughout the year. and then third, potential use of cash. This is something that's important to us and very much priority. We're actively discussing with our board to assess best use of those cash assets. I do think we don't want to repeat the sins of others or in the past, so we want to make sure that that's appropriately put to use and a sound investment. We're definitely conservative in not wanting to overrun our skis, and that's why we're having a controlled and purposeful start to our drilling program. But we have had a meaningful increase in commodity prices over the last quarter, in fact, over the last weeks and days. So as we see that, we continue to assess the potential for increased capital allocation, but want to, again, do that in a prudent manner.

In addition to that, Josh, to kind of round out Grayson's points on our cash reserves, we do want to make it clear to our investors and our shareholder base that we will be extremely prudent in the current commodity price environment for any material cash M&A. So use of this cash will need to be very, very value accretive and secure for us to use it on any sort of cash M&A type transaction or combination.

Great. Thank you, guys.

Once again, if you'd like to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Gonzague de Morichal, a private investor. Please go ahead. Your line is open.

Hi, good morning, Grayson and Salah, and well done on the quarter. I have three questions for you today, if I may. First, you said you were pleased with the result. I mean, it's more than pleased. I think one of your peers, like the Talos CEO today, said he thinks Talos is one of the most compelling investment opportunities in the energy sector, I'm quoting here. And I would agree, but I found that Sandwich is even a superior investment. The quick math is incredible. You disclose $166 million of cash. It's an increase of $26 million since Q4, and you pay $5 million of material. Just using the forward curve, you're very low cost. I'm not talking about LOE, but just total cost. I think it's $10.82 per barrel of cash. should mathematically go up in Q2, in Q3, in Q4. I mean, it could be like $7 a share at the end of the year. It's incredible. On top of that, some of the nine new wells will be coming and contributing at the end of the year. And based on the deck, I think page eight, I mean, we're literally on uncharted territory. It will be like over 100% return. So that could be even more cash coming. So, and repeating what you said, Sarah, like the 1.7 billion NOL that shield you from taxes, no tax, meaning like no interest and no debt amortization. I mean, $20 a share is really undervalued despite like the $350, $350, sorry, $350 person return over the last 12 months. So my question is, would you be comfortable paraphrasing Kyle's CEO saying that Sandwich is one of the most compelling investment opportunities in the energy sector? And I guess I will sneak one in, if so, why would you not buy back some shares?

Yes, Simzak, thank you for the kind words and for joining the call and the challenging question. I think For us, we really focus in on the blocking and tackling. Let's make sure that we keep costs as low as possible, convert as much EBITDA to free cash flow as we can, and make prudent investment decisions. So I think this is shown evident over the last few quarters, and we've benefited from the quantity price this quarter and certainly The Strip looks positive going forward. So we really focus on what we can control in the business and making good decisions. And the other inferences, I'll leave to you, Ghazog. But I do think some of this hard work is showing up in our low G&A. We've been able to, again, blocking and tackling, keeping production up and to the right. are able, through that well reactivation program, to actually have a slight increase in Q1 of this year relative to Q1 of last year, which is really meaningful. And so if we look at this year, we look at base declines and we anticipate high teens and with reactivations getting a low single-digit. And then you add on northwest stack drilling with results coming online in the back half of the year. that can meaningfully add to that and even begin some production growth in that relative period. So we really, again, focus on what we can control.

In addition, John, in relationship to your question about share repurchases and the repurchase program, I'd just like to remind our shareholders that that share repurchase program is a 10B18, so if the company has any material inside information, in sort of any restricted trading period, we can't exercise that. So there are times and places where perhaps we feel it might be opportunistic to buy back shares. But again, if we're in any sort of strategic discussion or have any inside information, that can be fairly limiting on what we can do from a securities law perspective.

Yeah, of course. Thanks. And I think you said it, I said it earlier, like you have these nine wells, the high-graded program in the core of the Northwest stack. Do you know how many other additional wells will be there for 2023 or 2024 should you decide to drill more?

Yeah, again, as I mentioned earlier, we can continue to assess the potential for additional cap allocation with our board. The further increase in commodity prices certainly help. I think, you know, before we get into inventory, we want to resume drilling, get a couple of strong wells beside us, and then you'll see us, you know, come out with additional commentary on inventory. Okay. but there's certainly a well economic at today's price.

And how many wells do you need to stay flat in 2023? Do you have an idea, an indication?

Yeah, I think the nine-well program, we actually plan to have a production increase from January to December. And again, because of the timing, all of that production wedge is hitting for full effect over the 2022 period if you look at the full fiscal year but it will materially impact annual decline this year with additional you know production uplifts going into next year.

Well done and just last for me on carbon capture last year I think one of the decks you had like you disclosed like Thank you very much. Thank you.

would these assets be used for it?

Yes, Gandak, this is Salad, and absolutely. I mean, we are exploring using our incumbent asset base. Everything that you described is accurate. And, you know, we have taken steps along this path and have gotten some initial reads with our partnership with the University of Oklahoma that there is and others. There is substantial potential for carbon sequestration on our asset base. However, there is a lot of things to be done in regards to technical feasibility, commercial viability, finding an emitter. All of those things need to come into place before we can ascribe any value to it. But we have taken steps and continue to move the football down the field, so to speak, on those efforts.

Thank you for taking my question.

It's appropriate for us to do the due diligence here just because we have these material assets in northwest Oklahoma that are underutilized today and in some places only using a portion of the total capacity and how can we further leverage that. But I will caveat that there is no capital currently being allocated to that. and we need to prove out the commercial liability before we do. So as soon as we have meaningful news that that could be the case, we'll come out and disclose that. But right now, I would not subscribe any value to it.

Thank you. We'll continue to have work and congratulations again. Bye-bye. Thank you.

We have no further questions in queue. This will conclude today's conference call. Thank you for your participation. You may now disconnect.