SD - SandRidge Energy Could Still Generate 2023 FCF Near $2 Per Share

2023-03-17 04:20:49 ET

Summary

• SandRidge is projected to generate $69 million in free cash flow in 2023.
• Production may decline by high-single digits compared to Q4 2022 as it limits development activity.
• Interest income is helping SandRidge, and it may be able to generate $10 million in interest income in 2023 with its substantial cash position.
• This would give SandRidge around $8.85 per share in cash at the end of 2023.
• Despite declining reserves (independent of adjustments for commodity prices), there probably is still enough value left to justify an overall price in the high-teens for SandRidge.

SandRidge Energy ( SD ) is going with a relatively limited capital expenditure budget in 2023 in response to weaker commodity prices. This was largely expected since SandRidge's assets require quite strong prices to provide solid development economics. With service cost inflation, it would probably take sustained $80s oil and $5 gas for SandRidge to put a significant amount of capital towards additional development.

SandRidge looks likely to fall a bit short of my earlier expectations that it would end 2023 with $9 to $10 per share in net cash. This is due to weaker commodity prices, with SandRidge mostly unhedged for 2023 and current strip at around $70 oil and $3 natural gas now.

SandRidge still looks capable of getting close to $9 per share in net cash by the end of 2023 though. Based on guidance it can deliver a bit under $2 per share in free cash flow in 2023, helped by increasing interest income.

I view a high-teens price for SD stock as being reasonable for a long-term $70 oil and $4 natural gas environment.

2023 Development Plans

SandRidge is not expecting to do much new drilling in 2023. It currently plans to drill two wells and complete four wells in 2023, while also doing 28 artificial lift conversions and 12 well reactivations. This is expected to result in $14 million to $19 million in D&C capex and $12 million to $16 million in non-D&C capex in 2023.

At guidance midpoint, this is around $30.5 million in total capex for 2023, down from $49 million capex in 2022 (including $38 million in D&C capex).

SandRidge drilled eight new wells in 2022 and completed six of them. It originally planned to drill and complete nine new wells in 2022 and then increased its plans to twelve wells . Some of its 2022 development program ended up getting shifted into 2023, while it also appears that SandRidge is stopping its development at ten total new wells due to the commodity pricing environment.

The more limited development plans for 2023 are expected to result in a high single-digits decline rate in production for SandRidge compared to Q4 2022 levels.

2023 Outlook

SandRidge has a relatively wide guidance range for 2023 production, ranging from 5.3 MMBOE to 6.5 MMBOE (approximately 14,500 to 17,800 BOEPD) in total production. There is some uncertainty about SandRidge's 2023 production levels as it has a decent number of recent new wells. SandRidge completed three new wells in Q3 2022 and three new wells in Q4 2022 and is aiming to complete four more wells in 2023. SandRidge will need to see how those wells track over time.

The current strip for 2023 is approximately $70 WTI oil and $3 Henry Hub natural gas. At the midpoint of SandRidge's guidance, it is projected to generate $146 million in oil and gas revenue before hedges.

SandRidge's hedges contribute around $6 million in positive value. It has natural gas hedges for Q1 2023 covering 1,044,000 MMBTU at $8.39.

SandRidge's large cash position plus increased interest rates means that it may be able to generate a meaningful amount of interest income in 2023. It generated $2 million in interest income in Q4 2022, and may be able to generate around $10 million in 2023.

SandRidge has $93 million in projected cash expenditures in 2023, resulting in expectations for $69 million in free cash flow during the year at $70 oil and $3 natural gas.

SandRidge had $257.5 million in cash and cash equivalents at the end of 2022, so this free cash flow would boost its total to $326.5 million at the end of 2023 (or approximately $8.85 per share in cash).

Estimated Valuation

SandRidge's proved reserves (all proved developed) increased by 3 MMBOE in 2022, although that was mostly due to higher SEC prices. At my long-term price assumptions of $70 WTI oil and $4 Henry Hub gas, SandRidge's proved reserves would have probably gone down by mid-single digits compared to 2021.

SandRidge's proved developed reserves had a PV-10 of $433 million at the end of 2021 with $66.56 oil and $3.60 gas. I am going to assume that its proved developed reserves at the end of 2023 would have a PV-10 of approximately $400 million at $70 oil and $4 gas.

At a 0.9x multiple to PD PV-10, that would value its reserves at $360 million. Added to its projected year-end 2023 cash balance, that would give SandRidge a value of approximately $18.60 per share in a long-term $70 oil and $4 natural gas environment.

Using a more conservative 0.7x multiple would result in an estimated value of $16.45 per share for SandRidge.

Conclusion

Weaker commodity prices have reduced SandRidge's projected cash position at the end of 2023 to a bit under $9 per share. However, SandRidge is still able to generate close to $2 per share in free cash flow at $70 oil and $3 natural gas in 2023 through limiting its development activities and generating interest income on its significant cash balance.

At $13.60 per share, SandRidge is only valued at around $4.75 per share net of its projected year-end 2023 cash position. Although SandRidge's assets have limited development potential at current strip prices, it should still be able to harvest a fair amount of cash flow from its assets over the next few years. Thus I view a price in the high-teens to be more reasonable for a long-term $70 oil and $4 gas environment.

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