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spk00: ladies and gentlemen thank you for standing by and welcome to the q3 2022 sand ridge energy conference call at this time our all lines are in a listen only mode after the speaker's remarks there will be a question and answer session if you would like to ask a question simply press star followed by the one on your telephone keypad now i would like to turn the call over to scott Prestridge, Director of Finance and Investor Relations.
spk04: Thank you and welcome, everyone. With me today are Grayson Prannon, our CEO and COO, Salah Ghamoudi, 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 G&A 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.
spk05: Thank you and good morning. I'm proud to report on another strong quarter of results for Sandridge and that the company's cost focus in efficient activity with high-graded drilling in the core of the Northwest SAC, as well as a well reactivation program, continue to add incremental economic production with strong free cash flow contribution from our producing assets this year and projected into 2023. Before expanding on this, Law will touch on a few highlights from the third quarter.
spk06: Thank you, Grayson. Production for the third quarter remained flat at approximately 17.8 MBOE per day over the last three quarters. Production benefited from the completion of three new wells this quarter, as well as the reactivation of 42 wells during the first nine months of 2022 that were previously curtailed during the commodity price downturn in 2020. The production from the three new wells contributed to an increase of oil production over the prior quarter by 25%. We expect production from this year's drilling program to continue to add to base levels in the fourth quarter of this year and into 2023 as we finish completions on wells drilled in the second half of the year. Net cash, including restricted cash, increased to approximately $241 million, which represents $6.52 per share of our common stock issued and outstanding as of September 30, 2022. The approximate $35 million increase over the quarter was supported by production from our new wells and well reactivation program, as well as strong commodity prices and realizations, net of capital expenditures made for inventory, drilling, and completion activities related to our 2022 capital program. The company has no term debt or revolving debt obligations as of September 30, 2022, and continues to live within free 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 $55 million. As we have pointed out in the past, our adjusted EBITDA is a unique metric for Sandridge due to us having no I and very little T, given that we have no debt and a substantial NOL position that shields our cash flows from federal income taxes. Commodity price realizations in the third quarter before considering the impact of hedges were $92.24 per barrel and $5.99 per MCF for oil and natural gas. And NGL realizations were $30.79 per barrel. The company maintained its commitment to protecting shareholder capital invested in its development program by entering into commodity derivative contracts for natural gas. The commodity derivative contracts of average strike prices of $8.39 for MMBTU with a market-to-market asset value of $4 million after September 30, 2022. As alluded to earlier, we have maintained our large NOL position, which is estimated to be approximately $1.6 billion as of the end of 3Q22. Our NOL position has and will continue to allow us to shield our cash flows from federal income taxes. Our commitment to cost discipline has continued to be impactful, with adjusted G&A of approximately $2 million and approximately $6 million or $1.22 per BOE for the three and nine-month periods ended September 30, 2022. We also held LOE and expense workovers to approximately $9.7 million or $5.92 per BOE during the quarter. This level of expense is partially driven by an increase in workover activity associated with our well reactivation program. We believe we can pair favorably with our peers in regards to G&A and LOE on both an absolute and a per BLE basis. We continue to generate net income for our shareholders. During the quarter, we earned net income of approximately $54 million or $1.46 per share, up from approximately $48 million or $1.32 per basic share, and an 11% increase from the prior quarter. Before shifting to our outlook, we should note that our earnings release posted yesterday and the 10-Q that we plan to file later today to provide further detail on our financial and operational performance during the quarter.
spk02: Thank you, Salah.
spk05: I thought it would be helpful to walk through some of the company's highlights, management strategy, and other business details. As I mentioned previously, we are pleased with the results in the third quarter and have capitalized on strong commodity prices with high rate of return drilling in the northwest back, continued well reactivations, and further strengthen cash flow from our producing properties in MidConn. We're able to keep quarter over quarter production flat in MidConn, with oil increasing by 25% over the quarter, driven in part by three new Northwest Sac wells, as well as the continued benefit from over 170 well reactivations since early 2021. We will continue to reactivate wells for a total of 54 for the year, which will average over 100% IRR. In addition, we have converted artificial lift systems of 22 wells to rod pumps, with 13 planned for the remainder of the year, which will aid in optimizing lifting efficiency and lower point forward costs for this well set. The rod pumps we have or will be installing are tailored for the well's current fluid production and will reduce the electrical demand from the current artificial lift system This is key to offset increases in utility costs associated with the rise in fuel surcharges from elevated commodity prices. These types of investments, optimizing our wells production profile and cost focus, have contributed to flattening expected asset level decline of our producing properties to approximately 8% over the next 10 years. We have successfully drilled five wells and are now producing the first three wells in this year's capital program through the third quarter, which have all targeted the Merrimack Formation in the core of the Northwest Sac Place. Wells four and five were recently completed and are anticipated to have first production this week, with well six completing in mid-November. The first two one-mile lateral wells are producing a pad total of nearly 600 barrels of oil per day and over 1 BCF a day after more than 90 days of production. The third well, with over 8,000 feet of completed lateral length, is producing 460 barrels of oil per day and nearly 2 BCF per day of gas. And it's still increasing after 30 days as we continue open chokes during managed flow back. Let's pause for a moment to revisit the key highlights of Sandridge. 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-understood assets are almost fully held by production with a long history shallowing and diversified production profile and double-digit reserve life. PV10, a future net discounted cash flows to prove developed oil, gas, and NGL reserves of these assets is $807 million based on year-end 2021 reserves and assumptions rolled forward to October 1, 2022 and using 3Q22 SEC pricing. These assets include more than 1,000 miles each of owned and operated SWD and electric infrastructure over our footprint. This substantial owned and integrated infrastructure provides the company both cost and strategic advantages, bolstering asset operating margin, reduced lifting, as well as water handling and disposal costs, and combined with other advantages, help de-risk individual well profitability for more than 70% of producing wells down to $40 WTI and $2 Henry Hub.
spk02: In addition, the interconnectivity and ample capacity help buffer against unforeseen curtailments.
spk05: Our assets continue to yield significant free cash flow, with total net cash now totaling $241 million with zero debt as of quarter end. This cash generation potential provides several paths to increase shareholder value realization and is benefited by a relatively low G&A burden. As we realize value and generate cash, our board is committed to utilizing our assets, including our cash, to maximize shareholder value. Sandridge's value proposition is materially de-risked from a financial perspective by our strength in balance sheet, robust net, cash position, financial flexibility, and over $1.6 billion in NOLs. Further, the company is not subject to MVCs or other significant off-balance sheet financial commitments. The company did enter into commodity derivatives contracts for its natural gas, which have an average strike price of $8.39 per MMBTU with a mark-to-market asset value of $4 million as of September 30, 2022. We could enter into additional commodity derivative contracts from time to time to secure returns for our capital campaign, manage commodity risk, or other fundamental drivers. Finally, it's worth highlighting that we take our ESG commitments seriously and have implemented disciplined processes around them. 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 open to value-accretive opportunities. The company will continue to monitor forward-looking commodity prices, results, costs, and other factors that could influence returns on the investments, which will continue to shape its disciplined development decision in 2022 and beyond.
spk02: This strategy has five points.
spk05: One, maximize the cash value and generation capacity of our incumbent MidCon EDP assets by extending and flattening our production profile with high rate of return work over well reactivation and artificial lift conversions, as well as continuously pressing 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 high risk-adjusted, fully burdened rates of return. to include executing on a drilling program in the core of the Northwest SAC to economically add production. The third is to maintain optionality to execute on value-accretive merger and acquisition opportunities that could bring synergies, leverage the company's core competencies, complement its portfolio of assets, further utilize its approximately $1.6 billion of net operating losses, or otherwise yield attractive returns for its shareholders. Fourth, as we generate cash, we will continue to work with our board to assess paths to maximize shareholder value, to include investment in strategic opportunities, return of capital, and other uses. Please note that the company's cash position is also a strategic advantage and provides competitive leverage in evaluating M&A opportunities, especially given the outlook on interest rates, capital markets, and impact to the optionality on the number and types of opportunities that could become available at certain levels. Know that there is a high bar at both the management and board levels for mergers and acquisitions, and that management weighs the cost of its growing cash balance versus patience to evaluate and execute on accretive opportunities. Management will continue to progress these with earnest on multiple fronts. promote regular way return of capital discussions, advance M&A evaluations, meet with shareholders and investors, and work with our board to advance paths to maximize shareholder value.
spk02: The final step is to uphold our ESG responsibilities.
spk05: Now circling back to this year's drilling program, despite recent downdrafts in commodity prices, oil has maintained around $80 per barrel or more in natural gas between $5 and $6 per MCS. This commodity price environment, combined with our team's efforts to combat inflationary pressures and execution, has and will translate to high rates of return in our capital program. The average performance of the direct offsets for our current drilling program at the October 31st strip, as well as today's estimated costs, average an approximate 60% rate of return. 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 and have a long tenured history in the MidCon. Previous development programs can lever a very tight cost structure to add incremental barrels to our base production in a very efficient way. Approximately 60% of the program will be infill development, with the remaining 40% being first wells in section or co-development that, again, directly offset productive and profitable wells. I'm extremely pleased with the planning and approach our team has taken to help control costs. We have continued to buy ahead of planned activity, pre-purchasing nearly $5 million of materials to include casings for the drilling program, pumping units for capital workovers, and other items, as well as high-grading, cost-efficient co-development opportunities utilizing company-owned equipment and other best practices. We are targeting gross DNC for one mile lateral to average just over $5 million, roughly $1,000 per foot. The investments made earlier this year and could continue to do is key to warding off inflationary pressures in today's market, which has already benefited the program. While we will continue to lean forward into cost control efforts, Inflation will continue to be a central focus this year and is bearing on unsecured costs, which could influence future drilling decisions. Also, the service sector has continued to be choppy as the service industry has ramped to meet activity demand through adding new employees, pulling rigs out of the yard, and stretching across supply chain weak points. While we have been able to secure the equipment, material, and services, needed to execute on the program thus far. Service efficiency and equipment quality will continue to be pressure points across the industry in the near term. As we look forward to the remainder of the year, we anticipate to maintain drilling activity at a one-rig pace, with both drilling and completions to carry over into next year. From a production timing perspective, we anticipate that the wells turn in line in the fourth quarter to add more than 25% more oil on top of the PDP levels. with the total program adding 13% on a BOE basis next year. In respect to capital, we project to come in below the midpoint of guidance, if not the low end of guidance, due to project shifting from late 2022 to early next year. We'll provide more details on 2023 activity on the next call. Shifting to expenses, we were able to keep adjusted G&A to an average of roughly $2 million per quarter over the last nine months. despite meaningful increases in activity, benefiting from our core values to remain cost-disciplined, as well as prior initiatives, while having tailored our organization to be fit for purpose. We continued 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 remains just over 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 to support drilling and completions, as well as the ability to select through additional outsourcing specialized areas to do more. Despite inflationary pressures, we were able to keep LOE and expense workovers to within 2% of the previous quarter at $9.7 million, or $5.92 per BOE, or roughly 10% below the midpoint of guidance on an annualized basis. While we will continue to actively press on operating costs, we anticipate expenses, specifically workover expenses, to remain near these levels as we reactivate and repair more wells this year. Strong commodity prices have improved the economics of the wells that would have remained shut in otherwise. The good news is that this will translate to additional production. However, while profitable, remaining staunch of well reactivations have relatively higher operating costs, which will increase power, water, chemical, and other expenses, both on an absolute and per BOE basis. In addition to the cost of an increasing producing well count, inflation will continue to be a theme throughout the year and into next year. We will continue to combat inflationary pressures on expenses as well through rigorous bidding processes, securing material, equipment, and services over an appropriate tenure to partially offset market increases, as well as continuing to leverage our significant infrastructure, operations center, and other company advantages. In summary, the company has $241 million net cash and cash equivalent at quarter end, which represents $6.52 per share of our common stock issued and outstanding. Consistent production over the last three quarters, with a 25% increase in oil over the last quarter from our mid-con producing assets. High-graded capital program with infill and development drilling in the core of the Northwest stack and continuation of our well reactivation program. which will economically enhance production and deliver strong rates of return. Low overhead, top tier adjusted G&A of $1.22 per POE. No debt, in fact, negative leverage. Significant free cash flow and a growing net cash position supported by a diverse production profile, flattening expected annual PDP decline to an average of approximately 8% over the next 10 years. multi-digit reserve life asset base. $1.6 billion in NOL, which will shield future free cash flow from federal income taxes. Large owned and operated FWD and electrical infrastructure, which provides costs and strategic advantages requiring little to no future capital to maintain. This concludes our prepared remarks.
spk02: Thank you for your time. We'll now open to the call to questions.
spk00: At this time, I would like to remind everyone in order to ask a question, simply press star one on your telephone keypad.
spk03: One moment while we compile the roster.
spk00: Your first question comes from the line of Josh Young with Bison. Your line is open.
spk07: Hey, guys. Great results. So a question and a follow-up. My question is on the PDP decline rate that you showed in your announcement. You said there was an 8% PDP decline rate. Could you elaborate on that a little bit? Are you guys saying that your existing wells are in aggregate declining by 8% a year, or is there sort of more power on that?
spk02: Sure, Josh, and good morning.
spk05: Yes, we're saying that the base decline of our producing assets will average an 8% decline over the next 10 years without capital.
spk02: Great. Okay. That's helpful. Thank you.
spk07: And then can you talk about your estimate of inventory of additional well locations that may be similar to the wells that you're drilling right now. So this is less of a proved undeveloped or probable and more of an estimation of similar locations to what you're drilling currently that seems to be hitting, like you guys said, 100% or so rates of return.
spk05: Sure, and I think you're hitting on the inventory of well reactivation. So we're planning to do 54 for the year through the end of this year, and we continue to monitor prices and costs as we look forward to next year. We have additional inventory that's economic today, but we are economic animals, and we'll continue to adjust that plan as conditions change.
spk02: you know, change over the quarter.
spk07: Thanks. Sorry, I meant the Northwest stack wells that you guys have drilled and that you have, it sounds like, two or three online right now.
spk05: Sure. We're focused on executing the current program and monitoring results right now. What we've seen, you know, in the first, you know, less than four months on the first two wells are within expectation ranges. And the third well is just cleaning up after the first 30 days of production. So we don't see anything that causes a change. However, if we telegraphed in previous quarters, we're going to be controlled and disciplined before we lean further outside of what we've come out with this year's capital program. And we'll continue to monitor and hope to provide some more detail in next quarter's call.
spk00: Your next question comes from the line of Jeff Robertson with Water Tower Research. Your line is open.
spk01: Thank you. Grace and Ursula, can you all talk just in very general terms how you might be able to use the NOLs for shareholder value in the context of an acquisition?
spk02: Yeah, sure. You know, in the context of the acquisition, I think
spk05: The cash balance that we currently have, you know, provides, like I said on the call, strategic advantage and competitive leverage in today's market, giving the outlook on interest rates, the capital markets themselves, and what actual opportunities you might be able to look at. So I do believe that it provides that advantage. However, we're also, you know, looking at other uses like return of capital. I think there is a scenario contingent of that think you can walk and chew gum at the same time by implementing a regular weight dividend, buying back opportunistically during market dislocations, and maintaining that optionality. However, the larger that you maintain in that dry powder, the more attractive opportunities it can look at, and it brings you into that next tier of things that become viable.
spk01: On the NOL, Salah, are there certain structures or certain types of acquisition characteristics where the NOL could be a big benefit for Sandridge?
spk06: Yes. So, Jeff, there's acquisitions whereby there's not a lot of tax basis or capital intensity needed. to maintain or develop an asset. So those specifically are typically late-life PDP-type assets in the E&P space. And then there's also other potential assets that we could acquire outside of traditional upstream energy, looking at midstream gathering systems, services, and things like that. So we'll always make sure that we're looking at acquisitions and M&A. in light of what's most value or creative to our investors. We want to make sure that we have a cohesive story in that M&A scenario. But that would be the typical type of characteristics because an asset with a lot of HUD inventory or drilling locations and things like that that takes a lot of capital intensity is going to defer a lot of taxable income down the line, and so you might not use as much of those NOLs in those sorts of assets than you would, let's say, a PDP asset that you buy for a discount or just beat up on OPEX.
spk01: So on a PDP asset, you could use the NOLs to shield all the cash taxes, correct? Or at least for some period of time?
spk06: Correct. Correct. Because in theory, a PDP asset doesn't require a lot of additional capital investment outside of the initial acquisition. And so you're making your margin by beating up on OPEX and gathering more efficiency and scale by expanding your number of barrels that you're producing and number of wells that you're operating. And the way that you would tap into the NOLs in that scenario is that because you're not putting a lot of dollars into the ground and therefore deferring taxes, you're generating a lot of taxable income near-term post-acquisition of those assets. Therefore, you'll be able to tap into the NOL very quickly.
spk02: Great. Thank you.
spk00: Your next question comes from the line of Harvey Sachs with Alpha Wealth Funds. Your line is open.
spk02: Thank you.
spk08: I met you back in August, and I had a question for you. Your company's valuation looks incredibly low. I'm not an expert in this oil and gas industry, but with not factoring the NOLs, what do you think the company's fair value should be?
spk02: It's clearly undervalued. Can you hear me? Yeah, yeah, we can hear you. We can hear you.
spk06: So this is Salah. So we don't put out specific guidance that speaks to a holistic net asset value. We do share some of your thoughts that there are value dislocations between our share price and the market at times. But we can't really comment on our internal views at this time because we haven't I mean, you must have some idea.
spk08: I mean, you're looking at evaluating acquisition opportunities. You must have some idea of what your company is worth. Is it 20% undervalued, 50% undervalued? Can you just talk in some generalities? Because I don't understand how you're going to increase Shareholder value, if you're looking at your cash as an asset and an acquisition, then you only have your stock to use as currency. And if your stock is way undervalued, then it becomes very difficult, if not impossible, to make an accretive acquisition. So how do you plan on increasing your the value in the shareholder value. How do you plan on increasing the price of the stock? I mean, you're doing an excellent job of managing expenses and activating wells, and the stock looks incredibly cheap to me, but I'm just one person.
spk02: I think great questions and points.
spk05: This is Grayson. You know, I point you, you know, if you're looking for evaluation metrics, You know, the value of future discounted cash flows of our approved developed properties for oil, gas, and the NGL is approximately $800 million at 3Q SEC prices. I would say as far as, you know, increasing the share price performance here, you know, it's executing on the program that we just laid out. It's, you know, continued investor outreach and all the things that we laid out during the call that we've kind of focused in our overall strategy, I think that will continue to be impactful. So I'm happy to visit in more detail, but that's our short view.
spk08: Now, I think some insider buying by management would draw some attention to the valuation discrepancy, because clearly, the U.S.' 's position in natural gas is going to be greatly enhanced by the loss of Russia as a supplier to Europe. This is a long-term, significant change in valuation, in my opinion. I would like to see you guys buy some stock. I'd like to you know, see more competence from management in the valuation. That's all.
spk05: Yeah, I would say, you know, relative to that, a large portion of our personal income is tied to Sandridge and the continued, you know, performance and increase in valuation of Sandridge. So we are very much aligned on that front. And I would say, you know, a second point, because you're so active at looking at opportunities in the M&A space, any time that we have material nonpublic information, it keeps us from trading.
spk02: All right. All right. Well, thank you, and good luck. Great job.
spk03: There are no further questions at this time. This concludes today's call. You may now disconnect.
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