SD - SandRidge Energy Starts To Return Capital To Shareholders

2023-06-08 13:13:48 ET

Summary

• SandRidge Energy, Inc. paid out a $2 per share special dividend and also instituted a $0.10 per share quarterly dividend.
• It also announced a $75 million share repurchase program.
• SandRidge should still end 2023 with over $7 per share in cash, before the impact of any share repurchases.
• SandRidge is likely to continue with a below maintenance capex budget in the current commodity pricing environment.
• Drawing down reserves and its cash balance may result in SandRidge providing a high amount of dividend income combined with capital losses.

SandRidge Energy, Inc. ( SD ) announced a $2 per share special dividend in May 2023, while it also instituted a $0.10 per share quarterly dividend and a $75 million share repurchase program.

The return of capital to shareholders is a welcome move, although SandRidge no longer looks undervalued based on the long-term $75 WTI oil and $3.75 NYMEX commodity prices that I use. At those commodity prices, I estimate SandRidge's value at $14.85 to $17.00 per share, down from last month due to the special dividend payment reducing its cash on hand.

Dividends And Share Repurchases

SandRidge declared a one-time $2 per share dividend to shareholders of record on May 24th. This dividend is payable on June 7th and adds up to approximately $74 million.

SandRidge had around $288 million in cash on hand at the end of Q1 2023, so pro forma for this special dividend payment, it would have $214 million in cash remaining.

SandRidge also announced an ongoing quarterly dividend of $0.10 per share, which adds up to around $15 million in dividend payments per year (at its current share count). The first quarterly dividend payment is expected in August 2023.

As well, SandRidge has gained approval for a $75 million share repurchase program. The repurchases will be done on the open market using cash on hand.

Updated Outlook For The Remainder Of 2023

The current strip for the last three quarters of 2023 has improved slightly to $72 to $73 WTI oil and $2.55 Henry Hub natural gas. At those commodity prices, SandRidge is projected to generate $114 million in oil and gas revenues during the last three quarters of 2023.

SandRidge's projected interest income has been trimmed due to its reduced cash balance (after dividend payments) as well as the potential for further spending on share repurchases.

With $54 million in projected free cash flow during the last three quarters of 2023, SandRidge would end the year with $261 million in cash on hand (a bit over $7 per share) if it didn't do any share repurchases and assuming no further changes in working capital.

Estimated Valuation

Due to the $2 special dividend (with an ex-dividend date in May), SandRidge's estimated value now ends up at approximately $14.85 per share to $17.00 per share in a long-term $75 WTI oil and $3.75 Henry Hub gas environment.

SandRidge's dividend-adjusted share price has increased by over $4 since I looked at it last month, while commodity prices have gone up only modestly. SandRidge's share price is now within my valuation range for it, albeit towards the low end of that range.

Potential For Additional Special Dividends

At $75 WTI oil and $3.75 Henry Hub natural gas, I believe that SandRidge could generate around $70 million in free cash flow in 2024. This assumes a limited capex budget that results in a high-single digits decline in production. At current strip (close to $70 WTI oil and $3.45 NYMEX gas) instead, SandRidge's free cash flow would end up closer to $60 million in 2024.

Thus depending on how much it spends on share repurchases, SandRidge could also declare another significant special dividend (such as $1.50 per share) without reducing its cash balance by much.

A total of $1.90 in dividends in 2024 would be a 12.6% dividend yield at SandRidge's current share price.

Portfolio Management

SandRidge may continue with a strategy of having a limited capex budget ( it was requiring over $80 oil and $4 natural gas to consider higher development activity levels) resulting in declining production levels. This situation combined with large dividends (combined special plus quarterly) would likely result in SandRidge's share price declining as its reserves and cash balance shrinks. The total returns could still be decent due to the dividends though.

Thus, SandRidge Energy, Inc. could have a place in one's portfolio as a security that generates a significant amount of dividend income combined with capital losses.

Conclusion

SandRidge Energy has started to return money to shareholders. It has paid out a $2 per share special dividend and is initiating a regular $0.10 per share quarterly dividend. It has also started a $75 million share repurchase program.

SandRidge is still projected to end 2023 with a large amount ($261 million) in cash on hand, less whatever it spends on share repurchases. This cash balance plus its potential to generate $60 million to $70 million in free cash flow in 2024 with a below maintenance capex budget would allow it to declare a significant special dividend in 2024 as well if it chooses to do so.

At over $15 per share, SandRidge Energy, Inc. stock is now trading within my estimated valuation range for it at $75 oil and $3.75 natural gas. Significant dividend payouts would decrease the estimated value of its shares, though, due to the depletion of SandRidge's reserves and cash balance in the current commodity pricing environment.

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