SD - SandRidge Energy Generates $30 Million FCF In Q1 2023

2023-05-06 08:04:11 ET

Summary

• SandRidge generated $30.4 million free cash flow in Q1 2023.
• It benefited from derivative settlements and working capital changes, while interest income added $2.5 million for the quarter.
• SandRidge should continue to generate interest income, although it is unhedged after Q1 2023.
• Excluding further working capital changes, I'd expect SandRidge to generate around $17 million per quarter in free cash flow during the rest of 2023.
• This would give it over $9 per share in cash by the end of 2023.

SandRidge Energy (SD) generated over $30 million in free cash flow in Q1 2023, boosting its cash position to approximately $288 million. SandRidge's Q1 2023 results were boosted by working capital changes and derivative settlements though.

SandRidge doesn't have any hedges after Q1 2023 and I'd expect it to average around $17 million per quarter in free cash flow during the remaining three quarters of 2023 before any changes in working capital. This would put its cash balance over $9 per share by the end of the year.

This is a bit higher than what I had modeled for SandRidge in March, so I am bumping up its estimated value slightly to approximately $16.80 to $18.95 per share.

Q1 2023 Free Cash Flow

SandRidge Energy delivered a high amount of free cash flow in Q1 2023, generating $30.4 million in free cash flow. This boosted its cash balance to $287.6 million (including restricted cash), which is approximately $7.80 per share in cash on hand.

SandRidge's free cash flow for the quarter was boosted by a number of items that will likely not be repeated during the rest of the year though. It realized $5.9 million in commodity derivative settlement gains in Q1 2023, as it had natural gas swaps covering 1,044,000 MMBTU in the quarter at a swap price of $8.39. SandRidge doesn't have any remaining hedges though.

As well, SandRidge benefited from changes in working capital. For example, SandRidge's accounts receivable went down by $8.2 million during the quarter, while its accounts payable went up by $2.8 million.

Notes On Other Results

SandRidge's Q1 2023 production ended up declining around -4% compared to Q4 2022, as it averaged approximately 16,700 BOEPD in Q1 2023 versus approximately 17,400 BOEPD in Q4 2022. SandRidge's oil production was only down -1% in Q1 2023 compared to Q4 2022 though as it put two NW Stack wells into production during the quarter.

SandRidge noted that the largest purchaser of its natural gas was in ethane rejection for two months during Q1 2023. This contributed to a lower amount of NGL barrels (and total BOE), but improved SandRidge's realized prices for its natural gas and NGLs.

Outlook For Q2 To Q4 2023

I currently expect SandRidge to average approximately 15,500 BOEPD in production during the remaining three quarters of 2023. This would put SandRidge a couple percent below the midpoint of its production guidance for the full year, but this is due to the effect of ethane rejection on production volumes.

The current strip for the rest of 2023 is around $71 WTI oil and $2.50 Henry Hub gas. If SandRidge can realize 90% of Henry Hub for its natural gas during the rest of 2023 (with most of its natural gas stream in ethane rejection), then it may be able to generate $118 million in total revenues during those three quarters.

SandRidge generated $2.5 million in interest income in Q1 2023, in-line with my expectations, and it should continue to benefit from interest income going forward.

This results in a projection that SandRidge could generate $52 million in free cash flow during the last three quarters of 2023.

SandRidge could now end 2023 with around $340 million in cash on hand, before additional changes in working capital. This is approximately $9.20 per share in cash on hand.

Estimated Valuation

SandRidge's free cash flow generation appears to be tracking better than what I had modeled for it in March. Thus I am increasing its estimated value to around $16.80 per share (using a 0.7x multiple to PD PV-10 at $75 oil and $3.75 gas) to $18.95 per share (using a 0.9x multiple). I am assuming that SandRidge's development plans remain quite limited due to commodity prices.

SandRidge's current share price is approximately $5 per share more than its projected year-end 2023 cash balance. It is uncertain what SandRidge will do with its large cash position, but at least it is now able to generate a meaningful amount of interest income.

Conclusion

SandRidge Energy generated over $30 million in free cash flow in Q1 2023. This was helped by its hedges and changes in working capital, so I'd expect SandRidge to generate a lower amount of quarterly free cash flow during the rest of the year. At current strip it still appears capable of generating around $17 million per quarter in free cash flow during the rest of 2023 before working capital changes.

This would result in SandRidge ending up with over $9 per share in net cash by the end of 2023. SandRidge is continuing to harvest cash flow from its assets and I believe that its oil and gas assets are worth close to $9 per share. This gives a combined estimated value of around $16.80 to $18.95 per share for SandRidge.

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