SD - SandRidge Energy: NW Stack Development Expected To Boost Near-Term Oil Production

Summary

• SandRidge increased its NW Stack development plan for 2022 from 9 to 12 wells.
• The increased spending trims 2H 2022 free cash flow projections a bit, but it should still end 2022 with around $289 million in cash.
• Current strip may allow SandRidge to continue with NW Stack development in 2023, boosting oil production and getting it to $400+ million in cash at end of 2023.
• NW Stack economics are good at near-term strip, decent at $75 WTI oil and $4.50 NYMEX gas, but not that compelling at lower commodity prices.

SandRidge Energy ( SD ) expanded its 2022 NW development program with the strong commodity pricing environment. The economics for its NW Stack wells also look good for 2023 development. This may allow SandRidge to keep its total production relatively flat while increasing its oil production and still getting to $400+ million in cash on hand by the end of 2023. This is only marginally lower than what I've previously projected for SandRidge, despite more capex spending to keep production levels up.

One concern I've had with SandRidge before is that its assets have relatively mediocre development potential. Thus in a $65 WTI oil and $3.50 Henry Hub gas environment, it would just be trying to harvest cash flow from its PDP reserves since its NW Stack IRRs are in the low-20s at those commodity prices.

The current environment (based on strip) appears good enough to allow SandRidge to do some additional development over the next year or two though, which would add to its reserves and push off the period of production declines.

I now estimate SandRidge's value at approximately $24 to $27 per share based on my longer-term commodity price expectations.

NW Stack Development

SandRidge expanded its 2022 NW Stack development program from 9 wells to 12 wells as commodity prices have remained strong, while the first two wells turned in-line have met expectations so far. The first wells were averaging around 400 barrels of oil and close to 400 Mcf of gas per day at the end of July. SandRidge expects the gas production to peak at around 1,000 Mcf per day

SandRidge also noted that its 2022 NW Stack program was expected to deliver an IRR of nearly 90% at late-July strip prices (which were slightly lower than current strip prices). Based on futures prices, SandRidge should also be generate good returns if it wants to develop the NW Stack further in 2023. Beyond 2023, the NW Stack economics may get more uncertain based on the current strip and type curve though.

2H 2022 Outlook At Strip

SandRidge increased its 2022 production guidance and capex budget as it expanded its NW Stack development program. SandRidge's 2H 2022 development activity is expected to have more of an impact on 2023 production levels.

At current strip for 2H 2022 of $97 WTI oil and roughly $9 Henry Hub natural gas, SandRidge is projected to generate $164 million in revenues for the second half of 2022.

With its boosted capital expenditure budget ($41 million for 2H 2022 at guidance midpoint), SandRidge is now projected to generate $84 million in positive cash flow during 2H 2022.

This would increase SandRidge's cash position to $289 million at the end of 2022. This is a bit lower than what I had previously projected for SandRidge, mainly due to its increased capex budget.

The well activations and NW Stack development are resulting in SandRidge's 2H 2022 production being close to its 2H 2021 production (down -4% at guidance midpoint), while its oil production may increase significantly (up +31% at guidance midpoint).

Notes On Valuation

SandRidge has not finalized its 2023 development plans yet, but at current strip it appears capable of getting to above $400 million in cash by the end of 2023 while roughly maintaining total production levels (compared to 2H 2022 levels) and increasing its oil production.

I have increased my expectations around longer-term natural gas prices. In a scenario where long-term prices (after 2023) end up at $70 WTI oil and $4.00 NYMEX gas, I'd put SandRidge's estimated value at $24 per share now. At long-term $75 WTI oil and $4.50 NYMEX gas, SandRidge's estimated value goes up to approximately $27 per share.

Conclusion

SandRidge should end 2022 with close to $8 per share in cash. At current strip, it has the opportunity to increase oil production and roughly maintain total production levels while boosting its cash position to $11+ per share by the end of 2023.

SandRidge's NW Stack assets have relatively mediocre development potential, but the economics work well at current strip and should be decent down to around flat $75 WTI oil and $4.50 NYMEX gas. SandRidge's estimated value (based on my long-term price expectations for $70 to $75 oil and $4.00 to $4.50 natural gas) is around $24 to $27 per share. This value could be boosted if commodity prices stay higher than that beyond 2023, allowing SandRidge to continue NW Stack development.

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