SD - SandRidge Energy: Projected To End 2023 With Near $7 Per Share In Cash

2023-08-18 00:05:21 ET

Summary

• SandRidge Energy reported decent Q2 2023 results and is performing in line with my expectations.
• It is projected to generate $44 million in free cash flow in 2H 2023, ending 2023 with approximately $6.75 per share in cash on hand.
• SandRidge's average daily oil production increased by 9% from Q1 2023 to Q2 2023.
• With its development program complete for 2023, organic production is expected to decline in the second half of the year.
• At around $16 per share, I believe SD stock is fairly valued based on my long-term commodity pricing expectations.

SandRidge Energy ( SD ) reported decent Q2 2023 results and is largely performing in-line with my expectations . It is projected to generate $44 million in free cash flow during the second half of 2023 at current strip prices, giving it approximately $6.75 per share in cash on hand at the end of 2023.

At around $16 per share I believe SandRidge is fairly valued for a long-term $75 WTI oil and $3.75 Henry Hub gas scenario. I estimate that it is valued at approximately 0.8x PD PV-10 at those commodity prices, after factoring in SandRidge's cash on hand.

Minor Acquisition

SandRidge closed on a minor acquisition in July 2023 in which it paid $11.25 million to increase its working interest in 26 producing NW Stack wells. SandRidge noted that acquired net production was approximately 500 BOEPD (around 30% oil) in Q1 2023.

At that production level I would expect the acquired production to contribute around $4.5 million to $5 million per year in annualized EBITDA (at mid-to-high $70s oil). However, since those are producing wells, their production and oil cut will decline over time.

Q2 2023 Results

SandRidge's Q2 2023 results looked decent , with its average daily production increasing by 5% from Q1 2023 to Q2 2023. Its average daily oil production increased by 9% over the same period. SandRidge finished its 2023 development program in Q2 2023, having drilled and completed two NW Stack wells in each of the first two quarters.

With its development program completed, SandRidge's production (not including the impact of its recent acquisition) is expected to decline during the remainder of the year. It appears to be on track to meet its full-year guidance without the acquired production though.

SandRidge's realized prices decreased significantly in Q2 2023. While benchmark oil and gas prices declined compared to Q1 2023, SandRidge's realized prices (as a percentage of those benchmarks) also went down.

For example, SandRidge realized 22% of WTI for its NGLs in Q2 2023, down from 32% of WTI in Q1 2023. As a result, its realized price for NGLs went down from $24.62 per barrel in Q1 2023 to $15.97 per barrel in Q2 2023.

Source: SandRidge's Q1 and Q2 Earnings Reports

SandRidge's realized price for natural gas went down from $2.73 per Mcf in Q1 2023 to $1.31 per Mcf in Q2 2023, although SandRidge's realized price for natural gas as a percentage of Henry Hub is still tracking above its original guidance for the year to date.

SandRidge's lease operating expenses went down during the quarter to $8.8 million ($5.53 per BOE) compared to $11.7 million ($7.79 per BOE) in Q1 2023. This was attributed to reduced utility costs and lower workover expenses.

2H 2023 Outlook

I have attempted to model SandRidge's results for the second half of 2023 based on current strip prices (including high-$70s WTI oil). This includes the impact of its recent acquisition.

SandRidge is now projected to generate $80 million in revenues in 2H 2023, including $5 million in interest income. SandRidge does not have any hedges and its realized prices for natural gas and NGLs should be improved from Q2 2023 levels in the second half of 2023, although still likely to be lower than what it realized in Q1 2023.

SandRidge has completed its 2023 drilling and completion plans, but may spend more on workovers in the second half of the year to help mitigate production declines.

This results in a projection that SandRidge can generate $44 million in free cash flow in 2H 2023. SandRidge's $0.10 per share quarterly dividend will result in approximately $7 million in 2H 2023 dividend payments, and it has not reported any share repurchases under its $75 million share repurchase program.

SandRidge had $224 million in cash on hand at the end of Q2 2023 and may end up with $249 million in cash on hand at the end of the year, after factoring in dividend payments and the cost of its acquisition. This also assumes there are no changes in working capital. This is approximately $6.75 per share in projected year-end cash.

Notes On Valuation

At around $16 per share, I believe that SandRidge is fairly valued based on my long-term commodity prices of $75 WTI oil and $3.75 Henry Hub gas. I estimate that its current price is approximately a 0.8x multiple to SandRidge's PD PV-10 at those commodity prices, and factoring in SandRidge's cash on hand. I have typically used a 0.7x to 0.9x multiple to value SandRidge.

Conclusion

SandRidge's Q2 2023 earnings report was decent. It increased its average daily oil production by 9% compared to Q1 2023, but has now completed its 2023 development program. SandRidge's lease operating expenses went down considerably compared to Q1 2023, but its realized prices (as a percentage of benchmark prices) also declined considerably.

SandRidge is now projected to generate $44 million in free cash flow in 2H 2023 at current strip prices, allowing it to end 2023 with approximately $249 million in cash on hand. This would be only $7 million less than its year-end 2022 cash balance, despite being projected to spend $93 million on dividend payments and acquisitions during the year.

I believe that SandRidge remains fairly valued (at around $16 per share) for a long-term $75 WTI oil and $3.75 Henry Hub gas scenario.

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