SD - SandRidge Energy: Continues To Generate Substantial FCF As It Minimizes Development Spending

2023-11-07 00:10:34 ET

Summary

• SandRidge Energy generated $24.2 million in free cash flow in Q3 2023 as it spent only $0.5 million on capex.
• I expect it to generate around $21 million to $22 million in Q4 2023 free cash flow, resulting in $250 million in year-end cash on hand.
• SandRidge is generating $2.5 million per quarter in interest income.
• The minimal capex spend is resulting in declining oil production. SandRidge's oil cut is around 17% currently, but its proved reserves had a 11% oil cut at the end of 2022.
• SandRidge's estimated value remains at $16 per share, as its operational performance is in line with my expectations.

SandRidge Energy ( SD ) generated $24.2 million in free cash flow in Q3 2023 as it spent a minimal ($0.5 million) amount on capital expenditures in the quarter.

Due to the lack of development spending, SandRidge's daily oil production declined by approximately 8% from Q2 2023 to Q3 2023 despite its minor July acquisition . SandRidge's daily total production decline by around 2% during that timeframe.

SandRidge's oil cut is currently 17%, but its proved reserves (at the end of 2022) had an oil cut of 11%, so its oil production is likely to continue declining significantly faster than its overall total production if SandRidge does not do further development.

Overall, SandRidge continues to generally track in-line with my expectations. I now expect it to end 2023 with around $250 million in cash on hand. I am maintaining an estimated value of $16 per share for SandRidge (which is approximately $9.25 per share net of SandRidge's projected net cash at the end of 2023).

I believe this valuation fairly reflects the value of SandRidge's PDP assets at $75 WTI oil and $3.75 Henry Hub natural gas, which are my long-term commodity price estimates.

Q3 2023 Results

SandRidge reported approximately 17,200 BOEPD (17% oil) in production during Q3 2023, a slight decline from the roughly 17,500 BOEPD (18% oil) that it reported in Q2 2023. This decline would have been a bit higher without SandRidge's July acquisition of additional working interests in a number of NW Stack wells.

The decline in production was due to the lack of development activity, with SandRidge completing zero wells during Q3 2023 and only spending $0.5 million in capex.

Sandridge appears to be on track to meet its initial full-year guidance around the production of oil and NGLs, while it could end up above the high-end of its full-year guidance range for natural gas production. This higher than guidance natural gas production would have likely been achieved even without SandRidge's July acquisition.

SandRidge's lease operating expenses did increase to $7.22 per BOE in Q3 2023, compared to $6.63 per BOE in the first half of 2023. It attributed this increase to inflationary pressures, the effect of well reactivations and its recent acquisition. SandRidge still appears to be on track to meet its full-year guidance around lease operating expenses though.

In terms of realized prices, SandRidge is likely to end up slightly lower than guidance around realized prices for NGLs, but slightly above guidance for its realized natural gas prices.

Projected Cash Balance

I had previously projected that SandRidge would end 2023 with $249 million in cash on hand. SandRidge reported having $232.2 million in cash on hand at the end of Q3 2023 and is paying out $3.7 million per quarter in dividends. Thus if it generates $20.5 million in free cash flow in Q4 2023 it will match my projections (assuming no changes to other working capital items).

Based on current strip prices, SandRidge should be able to generate around $21 million to $22 million in free cash flow and I am currently projecting it to end 2023 with $250 million in cash on hand. This assumes that it continues to spend relatively minimal amounts on capex.

Estimated Value

I had previously estimated SandRidge's value at approximately $16 per share at long-term $75 WTI oil and $3.75 Henry Hub gas. I am maintaining that estimated value after SandRidge's Q3 2023 earnings report. SandRidge's Q3 2023 results were quite in-line with my expectations overall, with natural gas production and lease operating expenses both coming in a bit higher than anticipated, while SandRidge's capex was lower than expected.

This attributes around $9.25 per share in value to SandRidge's assets, excluding cash on hand. SandRidge is spending little on capex, so this basically represents the value of its proved developed producing assets. If SandRidge does more development, then I would re-evaluate the value of its assets.

Conclusion

SandRidge's Q3 2023 results were basically as expected. It generated $24.2 million in free cash flow with minimal spend on capex. Oil production declined despite its July acquisition due to no new wells being completed in Q3 2023. Oil production is likely to continue declining significantly faster than SandRidge's other production if it continues to do no new development. SandRidge's oil cut is currently 17%, but its proved reserves (at the end of 2022) had an 11% oil cut.

SandRidge is now projected to end 2023 with $250 million in cash on hand (close to $6.75 per share) and I am maintaining its estimated value at $16 per share based on long-term $75 WTI oil and $3.75 Henry Hub natural gas. Further acquisitions or development spending may change this estimated value.

SandRidge does have a lot of cash on hand, but it is uncertain whether it will do anything in the near-term with that cash as it is currently generating a high amount of interest income ($2.5 million in Q3 2023).

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