Yahoo Finance SandRidge Energy, Inc. (NYSE:SD) Q4 2023 Earnings Call Transcript
SandRidge Energy, Inc. (NYSE:SD) Q4 2023 Earnings Call Transcript March 7, 2024
SandRidge Energy, Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, thank you for standing by. My name is Desiree, and I will be your conference operator today. At this time, I would like to welcome everyone to the SandRidge fourth-quarter 2023 conference call. [Operator Instructions]. I would now like to turn the conference over to Scott Prestridge, SVP, Finance and Strategy. Please go ahead.
Scott Prestridge: Thank you, and welcome, everyone. With me today are Grayson Pranin, our CEO; Brandon Brown, our CFO; 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 risks and uncertainties, 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.
Grayson Pranin: Thank you and good morning. I'm pleased to report on another consistent quarter of results and year. The company's activity continues to translate to meaningful free cash flow from our producing assets. Before expanding on this, Brandon will touch on a few highlights.
Brandon Brown: Thank you, Grayson. Production averaged approximately 17 MBoe per day for the year with oil production up approximately 10% compared to the prior year, driven by the higher oil content from our Northwest Stack wells. The company generated adjusted EBITDA of nearly $20 million for the quarter and approximately $93 million for the year. 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 T given that we have no debt and a substantial NOL position that shields our cash flows from federal income taxes. On the I portion, we in fact generated approximately $2.8 million of interest income during the quarter and $10.6 million for the year for cash out and diversity of high-yield deposit accounts.
The company initiated a return of capital program last year with a total cumulative dividends paid to date of approximately $137 million or $3.70 per share, including the one-time dividend of $1.50 per share paid on February 20 of this year. In addition, our Board recently approved an $0.11 per share dividend which is a 10% increase over the previous quarter's regular-way dividend. This will be paid on March 29, 2024 to shareholders of record on March 15, 2024. Net cash including restricted cash at year end 2023 was $254 million and adjusted for the $1.50 per share dividend paid on February 20, 2024, approximately $200 million which represents over $5.30 per share of our common stock issued and outstanding. The company has no term debt or revolving debt obligations as of December 31, 2023 and continues to live within cash flow, funding all its capital expenditures and cash flow from operations and cash held on the balance sheet.
Commodity price realizations for the year before considering the impact of hedges were $74.69 per barrel of oil, $1.71 per Mcf of gas, and $20.83 per barrel NGLs. As alluded to earlier, we have maintained our large federal NOL position which is estimated to be $1.6 billion at quarter end. 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 for the quarter of $2.2 million and $8.8 million or $1.42 per BOE for the year. We continue to generate net income for our shareholders. During the year, we earned adjusted net income of approximately $69 million or $1.87 per basic share and net cash provided by operating activities of approximately $116 million.
This has all culminated in the company producing approximately $89 million in free cash flow for the year, which represents a conversion rate of approximately 96% relative to adjusted EBITDA or approximately $2.40 per share of common stock outstanding. Before shifting to our outlook, we should note that our earnings release and 10-K provide further detail on our financial and operational performance during the year.
Grayson Pranin: Thank you, Brandon. 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 had positive results this past year with the Northwest Stack wells adding oilier production while converting over 96% of EBITDA to free cash flow. Production for the year from our Mid-Con assets averaged approximately 17 MBoe per day, roughly 4% over the midpoint of 2023 guidance with oil volumes increasing 10% from the prior year, aided by the oilier content from our Northwest Stack area. The company's largest natural gas purchaser remained in ethane rejection, and we anticipate that a majority of our natural gas stream could remain in ethane rejection this year.
While this impacts the total volume of NGLs, the remaining volume will be composed of more profitable C3-plus components like propane, butane, and gasoline on a percentage basis. Likewise, the ethane remaining in the natural gas stream will improve its BTU quality. Let us 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 unlisted assets are most fully held by production with a long history, shallowing and diversified production profile and double-digit reserve life. 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, reduce lifting as well as water handling and disposal costs, and combined with other advantages help derisk individual well profitability for majority of our producing well down to $40 WTI and $2 Henry Hub. While we have recently seen spot prices below $2 Henry Hub, WTI has been in the mid to high 70s, which has and will buoy our revenue and cash flow this year. Our assets continue to yield meaningful free cash flow with total net cash as of year end and adjusted for recent dividends tolling approximately $200 million. This cash generation potential provides several paths to increase shareholder value realization and is benefited by low G&A burden.
In fact, interest income earned from our cash assets offset our cash G&A last year. As we realize value from our producing assets and generate cash, our Board is committed to utilizing our assets including our cash to maximize shareholder value. SandRidge's value proposition is materially derisked from a financial perspective by a strengthened balance sheet, robust net cash position, no debt, financial flexibility, and approximately $1.6 billion in NOLs. Further, the company is not subject to MVCs or other significant off-balance sheet financial commitments. 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 generation capability of our business in a safe, responsible, efficient manner while prudently allocating capital to high-return, organic growth projects and remain open to value-accretive opportunities.
This strategy has five points. The first is to maximize the cash value and generation capacity of our incumbent Mid-Con PDP assets by extending and flattening our production profile with high rate of return workover 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 rate of return that economically add production. The third is to maintain optionality to execute on value-accretive merger and acquisition opportunity 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.
I'd like to pause here for a moment to touch on the Northwest Stack acquisition that closed last year, which increased our interest in 26 operated wells. We like these types of small ball bolt-ons where we can efficiently add production for accretive returns. We will continue to look for opportunities like this as well as larger ones that meet the characteristics I described earlier. Fourth, as we generate cash, we will continue to work with our Board to assess path that maximizes shareholder value to include investment and strategic opportunities, return of capital, and other uses. To this end, the company expanded its return of capital program that consisted of, one, a $3.70 per share of cumulative dividends paid to date; two, $0.11 per share regular-way cash dividend, an increase of 10% from the prior quarters; and finally, an opportunistic share repurchase program of up to $75 million.
Please note that the company's cash position is also a strategic advantage and provides competitive leverage in evaluating M&A, especially given the outlook on interest rates, capital market, and impacts of the optionality on the number and type of opportunities that could become available at certain levels. Know that there is a high bar, both at the management and Board levels, for mergers and acquisitions. Management will continue to assess and promote regular-way return of capital discussions, advanced M&A valuations, meet with shareholders and investors, and work with our Board to further enhance path to maximize shareholder value. These topics remain paramount. In the interim, we have secured favorable banking terms and keep our cash position diversified across interest-bearing accounts at multiple significant, well-capitalized financial institutions.
As Brandon mentioned before, the company earned $10.6 million in interest income this past year. Final staple is to uphold our ESG responsibilities. Now circling back to our capital program. During the past year, we completed 16 artificial lift conversion as the company continues to focus on high-return, value-adding projects that provide benefits such as lowering forward-looking costs, enhancing production on existing wells, and further moderating its already modest decline profile. The systems we have and will be installing our tailored for the wells current fluid production and will reduce the electrical demand from the current artificial lift system and is key to decreasing future utility costs. This year, our production optimization campaign includes 14 artificial lift conversions as well as heel completions, accessing previously unstimulated intervals, recompletions that would add new uphole zones and proven productive formations, and refracs that would restimulate quality reservoir.
We plan to spend between $8 million to $11 million in CapEx on production optimization and limited opportunistic leasing this year. In addition to our production optimization projects last year, we completed four operated wells in the Northwest Stack, which increased overall oil content on a BOE basis as well as our prior well reactivation program which has returned over 180 wells to production over the past few years. However, given the commodity price dynamics this year in that our Mid-Con assets are 99% held by production which preserves the tenor of our development option, we will not be operating a drilling rig this year and will do for more meaningful level of well reactivation. We will continue to monitor commodity price dynamics and maintain flexibility to adjust as may be warranted and factor in these considerations.
Commodity prices firmly over $80 WTI and $4 Henry Hub of our confident tenor and/or reduction in well costs are needed before we can return to exercise the option value of further development or reactivations. The focused efforts over the past several quarters in optimizing our well's production profile and cost focus have contributed to flattening the expected base asset level decline of our already producing assets to single-digit average over the next 10 years before the impact of further production optimizations, development, or acquisitions. Company continues to ensure that all projects meet high rate of return threshold and remains capitally disciplined as commodity price landscape changes. While we have prudently reduced activity near term, a tempered commodity price environment could be constructive for M&A.
Our producing Mid-Con assets will continue to generate cash flow near term. With the recent strip, natural gas prices projected to increase over the next year plus. In the interim, the lower natural gas and NGL price environment could present more cost-effective opportunities for acquisitions, which would then be positioned to benefit from future price improvement. In addition, to further leverage the temporal low natural gas price environment as well as activity around this, we have allocated capital for targeted high-graded leasing near our footprint this year, which could further bolster our drilling inventory in the future. Now shifting to expenses. We're able to keep adjusted G&A at $2.2 million for the quarter and $8.8 million or $1.42 per BOE for the year, which compares favorably with our peers.
It was 7% below the midpoint of 2023 guidance. The efficiency of our organization stems from our core values to remain cost disciplined as well as prior initiatives, which 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. Given our efficient structure and ability to flex with both activity and commodity prices, our total personnel has remained consistent at just over 100 people while retaining key technical skill sets at both the experience and institutional knowledge of our area of operations.
We believe that this efficiency and structure are favorable advantages that could be effectively applied over a broader asset base and a benefit as the company evaluates potential for M&A. Despite inflationary pressures and an increased well count from our prior well reactivation and development programs, as well as the increased interest associated with our recent Northwest Stack acquisition, LOE and expense workovers for the quarter were $9.9 million or $6.73 per BOE for the quarter and $41.9 million or $6.80 per BOE for the year, which was 3% below the midpoint of 2023 guidance. We are projecting a decrease in expense workovers this year, as well as softening in utility costs and reduced water handling costs. We will continue to actively press on operating costs through rigorous bidding processes, leveraging our significant infrastructure, operation center, and other company advantages.
While I have previously addressed commodity price dynamics, I wanted to reinforce a few salient points here. The first being that the majority of our producing properties are economic down to $40 WTI and $2 Henry Hub. While oil made up 17% of total production last year, it contributed over 50% of revenue on a BOE basis. Despite current sub $2 natural gas prices, the forward-looking future curve remains in Contango and at recent strip projected to nearly double spot price by this winter. Also, WTI remains constructive in the mid to high 70s this year. While we have judiciously decreased capital spending in light of natural gas prices, more significant reductions in oil prices and a structural change in natural gas futures would be needed before we implemented more severe steps like material proactive well curtailment that would impact our production levels near term.
However, we will continue to monitor commodity prices and have the financial and operational flexibility to make further adjustments in response to positive or negative commodity prices in the future to prudently steward the business and optimize cash flows. Please note that our guidance for 2024 includes price realizations between 50% and 70% of Henry Hub for natural gas to capture the potential range of realizations of the year with the high-end more representative of winter pricing and no low in torque sub $2 Henry Hub. That said, and to reinforce my earlier comment, SandRidge's value proposition is materially derisked from a financial perspective by our strong balance sheet, robust net cash position, no debt, financial flexibility, approximately $1.6 billion in NOLs. Long and short, the company is well positioned to navigate, if not leverage, i.e., M&A, the current landscape.
In summary, the company has approximately $200 million of net cash and cash equivalent at year end after adjusting for recent dividends, which represents approximately $5.30 per share for common stock issued and outstanding. Average production for the year of approximately 17 MBoe per day, which is a 10% increase in oil from the prior year. Mid-Con position that is 99% held by production, which preserves the option value of future development potential in a cost-effective manner. Low overhead, top-tier adjusted G&A of $1.42 per BOE. No debt, in fact negative leverage. Impactful free cash flow and a growing net cash position supported by a diverse production profile, flattening expected annual base PDP declines at single-digit average over the next 10 years, and a multi-digit reserve life asset base.
$1.6 billion in NOLs, which will shield future free cash flow from federal income taxes, and a large owned and operated SWD and electrical infrastructure which provide 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.
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