SandRidge Energy, Inc. (SD) Q4 2017 Earnings Report, Transcript and Summary

Good morning. My name is Mariama, and I will be your conference operator today. At this time, I'd like to welcome everyone to the SandRidge Energy Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions] Thank you. I would now like to turn the call over to Johna Robinson, Investor Relations. You may begin your conference.

Thank you, Operator, and welcome everyone to the conference call. With me today are Bill Griffin, President and Chief Executive Officer; John Suter, EVP and Chief Operating Officer; and Mike Johnson, Chief Financial Officer. We would like to remind you that in conjunction with our earnings release and conference call, we have posted slides to our website under the Investor Relations tab that we'll be referencing during the call. Keep in mind today's call contains forward-looking statements and assumptions which are subject to risk and uncertainty, and actual results may differ materially from those projected in these forward-looking statements. We will also make reference to adjusted G&A, and other non-GAAP financial measures. Reconciliations of these measures can be found on our website. Now, let me turn the call over to Bill.

Good morning, and thank you for joining us today for this review of SandRidge Energy's 2017 performance results along with a discussion about our 2018 expectations, focus and guidance. Today's conversation will be supported with the February 2018 earnings presentation that was posted on our website earlier this morning, and I encourage you to turn to that for reference. As a matter of introduction, I was named the interim-President and CEO of SandRidge on February 8. Additionally and simultaneously, Mike Johnson was named our interim-Chief Financial Officer. Because change creates a level of uncertainty, I feel that's important to devote a meaningful portion of today's call to outlining my personal and the company's strategic priorities as we begin this new chapter. I won't spend time elaborating on the details of our individual background but it is relative to mention that I've been a member of the SandRidge Board of Directors since the Company's emergence in October of 2016. Additionally in partner to SandRidge, I previously spent four years of my career here in Oklahoma City managing engineering and operations for this area. Later I had executive level responsibilities that included all aspects of the E&P business in both the Mid-Continent and the Rocky Mountain regions. I would also like to mention a few things that are important when evaluating this particular senior leadership team and first and foremost is that this is an experienced and proven group. Experienced in our respective areas of responsibility, I am very experienced in the U.S. upstream oil and gas business. I personally have spent more than 36 years in this industry, and most of the past 20 years at the executive level. Mike Johnson who joined SandRidge last year after most recently spending his previous 24 years with Chesapeake as their Controller and Chief Accounting Officer. John Suter who has driven numerous operational improvements during his past 2.5 years with SandRidge remains as our Chief Operating Officer. Lastly Phil Warman has assumed an expanded role as EVP and General Counsel bringing more than seven years of SandRidge perspective along with his broad spectrum of pertinent overall experience. So in short, this is a management team with the full capacity to manage the risk, challenges and obstacles necessary for success in this business but more importantly we have to drive in the enthusiasm to make this happen. There have been a number of public statements, proposals and criticism that obviously create various levels of interesting questions for most of you listening to this call today, and I appreciate that fact. However, today's discussion is for the purpose of reviewing our 2017 results and to provide clarity on our 2018 objectives and guidance. Our Board has been diligent and will continue to be so in its efforts to communicate regularly, openly with regard to the recent events outlined on Slide 4, as well as any other proposals or issues that may present themselves as we move forward. Largely because of this ongoing communications effort, there is essentially no incremental information I will be able to provide during today's call with regard to external dialogue and proposals. However, with regard to some of these recent events, I would like to emphasize two particular items that were addressed in the Board's most recent letter to shareholders, and those were the reduction to our G&A spend rate and our revised strategic objectives. Our recent conversations with shareholders help to provide an impetus to reassess this Company's objectives, priorities and strategic plans. As a result, the stated strategic objectives listed on Slide 5 and provided in the February 8 letter to shareholders were developed. These are all our foundations for success and a proxy for 2018 forward. Because of their importance, I would like to spend some time talking about each of these. First, is that we will operate in a safe, reliable and environmentally responsible manner. This is a core value for me personally and is more than objective, this is the responsibility. We will always be priority and is it is imperative that we protect our employees, our contractors and all stakeholders while remaining mindful of sustainability and mitigating our footprint. Second, is to maintain a culture and track record of operational excellence. Achieving and exceeding financial and operational metrics are key measures of success. However, it is culture that provides the ability for repeatable success. I believe the foundation that culture is in place at SandRidge and has been demonstrated over the past few years with our tangible capital and expense efficiency improvements. We will continue to build on that core competency. Third, maintain top-quality human resource, management, development and utilization. G&A reductions are difficult, however we intend to manage this process thoughtfully and respectfully and there are countless examples we expect to emulate where organizations have successfully improved efficiencies while maintaining it's not improving the capacity for business execution and enhance profitability. Fourth, exercise financial discipline by balancing our economic growth objectives with preservation of our conservatively leveraged balance sheet. We have no current debt and that gives us significant optionality to capture the most attractive opportunities and create meaningful value. We've publicly stated our leverage ceiling of no more than two times the EBITDA and we will work diligently to create growth and shareholder value while preserving this important resource. Fifth, maximize our asset value and risk adjusted returns. This is a critical foundation factor for the long-term success of any E&P company. And by definition, meeting or exceeding return thresholds on invested capital is absolutely necessary to create long-term shareholder value and profitable growth. The foundation of success is achieved through discipline risk assessment, and accurate investment modeling. Earlier I emphasized the experience level of this leadership team. I believe this particular objective is one of those crucial areas where experience matters most by providing incremental insight into potential investment outcomes. We will apply this disciplined approach to analysis of all investment opportunities and then allocate our capital accordingly while giving consideration to the potential size of the value creation. Six, capture economic merger and acquisition opportunities in our existing or complementary development areas. Recent events have generated considerable thought at all levels about this particular objective. While primary focus and priorities of this company will be on our organic value creation within our existing asset base, acquisition, joint ventures and other growth avenues are something we will continue to not just evaluate but we will work to create. The key sideboard with regard to these opportunities is that they must be complementary to our existing area of operations and core competencies. Additionally, the scale of any potential asset addition must fit within our commitment to modest leverage. This is an appropriate time to take a moment to provide an update on the recent [mid-states] merger proposal. We've been in conversation with mid-states management and we have initiated our valuation with support from our financial and legal advisors. Other than that is simply too early to provide any other comment on their proposal or our evaluation timeline. Our last stated objective is to monetize non-core and underutilized assets and infrastructure. Since emergence there's been a steady and continual effort to monetize marginal and non-core assets which resulted in $22 million of proceeds during 2017 with an associated EBITDA of $1.9 million a year resulting in a price to EBITDA multiple of more than 11. This will continue to be an ongoing initiative as we strive to improve margin, focus, and streamline on our core area of operations. Now moving to an overview of 2017 which is outlined on Slide 6. This was a year of solid performance with regard to meeting our cost and production metrics, along with stellar improvement in our health, safety and environmental results. I'm particularly proud of our drilling participation agreement in the Northwest STACK which provides us the cost effective ability to delineate that acreage position. Our North Park Basin capital program provided more clarity about the potential of this large acreage position resulting in significant additions to our proved and profitable undeveloped inventory. This targeted drilling program proved commercial production in two additional Niobrara benches bringing our total commercially productive bench count to three. We've talked repeatedly about delineation of our North Park asset but you must remember that the term delineation applies to more than simply defining the commercial geographic boundaries. We continue to balance our allocation of capital in North Park to ensure overall returns in excess of threshold. While moving forward with testing and evaluating the productivity of different benches in different areas along with the determination of optimal well spacing, and optimal lateral lengths. John will discuss all of this in more detail but I can say that our North Park Basin confidence and understanding has continued to grow. As a result of our efforts, our 2017 proved reserve replacement ratio was 130% with a total increase in proved reserves of 9% as outlined on Slide 7. This is a worthy accomplishment as we continue to incur decline in our PDP base production. However, as a result of this increase in our proved reserves, along with improved commodity prices, the company's net asset value increased significantly year-over-year. The growth is demonstrated on the chart but the key takeaway is that the NPV-10 of our proved reserves is $835 million utilizing year end's strip pricing. With that, I will turn it over to Mike Johnson to provide a financial overview.

Thank you, Bill. And by way of further introduction, I have been employed at SandRidge for roughly 6 months now. I came here following 24 years at Chesapeake Energy with most of those years in the role of Senior Vice President and Chief Accounting Officer. At SandRidge I'm currently serving the company as Chief Accounting Officer and will assume the additional responsibility of interim-CFO after we file our Form-10K. I'm honored to step into this role and I'm eager to do what I can to address both the challenges and opportunities ahead. Now I’d like to address where we stand from a financial standpoint. My thoughts and comments will broadly cover the financial data included in our earnings release and various slides included in the investor presentation with an emphasis on Slide 8. Beyond this small $38 million building note which will be paid off later this month, we have no debt outstanding whatsoever. We have $418 million in liquidity currently available under our revolving credit facility and $78 million in cash. This strong position will allow us to develop our portfolio of assets and take advantage of growth opportunities as they arise while carefully managing our liquidity and maintaining conservative leverage. As illustrated in our earnings release, 2017 LOE adjusted G&A and CapEx all came in at or under the midpoint of our guidance and our total production volumes exceeded the midpoint. Production for 2017 was 14.9 million barrels of oil equivalent. For 2018 our guidance is 11.3 million to 11.9 million barrels of oil equivalent, a 22% reduction year-over-year at the midpoint. The lower forecasted volumes reflect the impact of the natural decline of our PDPs partially offset by additional production resulting from our two rig drilling program in 2018. More specifically, our Mississippi line production is the primary driver of our decline rates. For 2018, we expect the Miss to contribute approximately half of our oil and most of our BOE production declines of 39% and 29% respectively. However, North Park oil production and to a lesser extent the Northwest STACK oil production is expected to increase for the year and should exceed Miss Lime oil production by midyear 2018 with total company oil production expected to increase in 2019. LOE was $103 million in 2017 compared to an adjusted or normalized $128 million for the prior-year. This $25 million year-over-year decrease was attributable primarily to a 23% reduction in production volumes. On a per BOE basis, LOE was $6.89 and $6.63 for [2007] and 2016, a modest increase of just under 4%. We are guiding to a range of $8 to $9 per BOE for 2018 a reflection of lower anticipated production in 2018 and the fact that a significant portion of our LOE is a fixed as opposed to a variable-type cost. Historically, our ops teams have done an outstanding job of reducing cost below our forecasted LOE, keeping LOE per BOE relatively flat over the last two years in spite of production declines. These LOE reductions come throughout the year and are difficult to predict early - this early. Our team works with urgency and as seen in previous years, we hope to see improvements that reduce our LOE per BOE below forecasted levels. Adjusted G&A which excludes stock-based compensation and certain nonrecurring items was $55 million or $3.72 per BOE per 2017. This represents a $13 million reduction from the $68 million or $3.55 per BOE incurred in 2016. As we look ahead to 2018, and as further reflected in the February 8 letter to shareholders from our Board, we are in the process of implementing very difficult changes in our organizational structure to efficiently execute our strategic objectives. These changes will impact many hard-working dedicated and loyal employees that have served our company over the years, and these decisions will not be taken lightly. These changes are expected to reduce our ongoing G&A cash and non-cash expenses and to specifically reduce our ongoing G&A cash expenses by approximately one-third to a range of $36 million to $39 million per year. The cost reductions will be in the form of both payroll and non-payroll related expenses and will be achieved throughout 2018. Therefore, we are guiding 2018 adjusted G&A to a range of $41 million to $44 million. We will incur one-time charges in 2018 in connection with certain of these actions although we're not providing an estimate of those costs at this time. Our 2017 income statement also includes the line item for terminated merger cost of $8.2 million. As part of the December 28 termination agreement, we reimbursed demands for transaction related fees of $3.7 million. In addition, we incurred $4.5 million in financial advisory, legal, accounting and other consulting fees in connection with this terminated merger and related shareholder activism. Next I'll briefly address capital expenditures. Excluding acquisitions, we came in $7 million below the midpoint of guidance at $248 million. We are currently looking to spend a reduced amount in 2018 with guidance in the range of $180 million to $190 million. The lower CapEx is primarily the result of having a full year of reduced spending in the Northwest STACK under our drilling participation agreement that commenced in the fourth quarter of 2017, and a reduction of our rig count to two rigs in 2018. We expect this will result in a modest cash flow outspend of approximately $30 million to $40 million in 2018 such that our liquidity still remains very strong, and our net leverage days near zero. Last, I’ll talk about our hedging position. As reflected in our earnings release and investor presentation, we've hedged 86% of our anticipated 2018 liquids production using fixed price oil swaps of approximately 3.8 million barrels of oil at an average NYMEX WTI price of $55.75. Due to the high historical correlation between NGL and NYMEX WTI prices, the company manages its natural gas liquids price exposure using these contracts based on a three to one natural gas liquid to crude oil ratio. We've also hedged roughly 54% of our anticipated 2018 natural gas production at an average NYMEX price of $3.16. As we go forward, look for us to continue to protect 2019 cash flow through hedging. In summary, our balance sheet continues to be strong with no leverage and impressive liquidity. We are poised to develop our existing project areas and take advantage of growth opportunities as they surface. With that, I’ll turn it to John for his comments.

Thank you, Mike. I'm pleased with the team's 2017 performance and successfully achieving all of our objectives for the year which I'll cover in detail beginning on Slide 9. In addition to meeting our operational goals, we also achieved a company record for safe operations with an annual total recordable incident rate of 0.4. As Bill described earlier, safety will continue to be a key tenet of our culture. We successfully met or exceeded our operational guidance in 2017. Our total company capital expenditures were $248 million, $7 million below midpoint of guidance. We also delivered at the high-end of guidance range with annual production of $14.9 million barrels oil equivalent comprised of 28% oil, 23% NGLs, and 49% natural gas. Also as anticipated, during the fourth quarter oil production increased approximately 8% over the third quarter to over 1 million barrels of oil. This increase is primarily from new North Park Basin wells. As you will note on the right side of this slide, we've been very active throughout the year in North Park accomplishing several initiatives that I'll cover later. For the year total company lease operating expenses were $6.89 per BOE which is $0.19 below midpoint of guidance. We were able to reduce our lease operating guidance twice primarily from efficiency and cost reduction gains in the Mid-Continent. As shown on Slide 10, we significantly lowered Mississippian and LOE over the past three years from $160 million in 2015 to $71 million in 2017. More recently, we captured 29% in cost reductions from 2016 to 2017. During the year, we continued to expand our operation center which now remotely oversees all by exception operations in the field. By centralizing supervision and dispatch, we reduced associated headcount by 28% and were able to reduce water all-in cost by 13%. We also made well maintenance improvements that resulted in significant annual savings as shown on this slide. Reducing cost will continue to be a priority and several new initiatives we've highlighted provide line of sight for further reductions in 2018. Total Mid-Con production for the year was 37,588 BOE per day comprised of 22% oil, 24% NGLs, 54% natural gas primarily producing from our Mississippian assets. As described on Slide 11, our Mississippian Lime footprint covers 360,000 net acres in Oklahoma and Southern Kansas largely held by production. We have nearly 1200 Mississippian wells averaging 31,500 BOE per day with 122 million BOE of proved reserves with a PV-10 of 494 million based on year end strip prices. We continue to view our Mississippian assets as a significant value and a cash flow generator. We will continue to review opportunities to enhance asset value with our core area of operations that leverages our existing saltwater disposal and electrical infrastructure. Analysis based on total return will provide us with optionality to deploy capital effectively between our primary development assets. Let's move to Slide 12, this shows we ran up to two rigs in the Northwest STACK targeting the Meramec with a total 2017 drilling and completion budget of $66 million. Of the 17 wells drilled in the Northwest STACK during the year, three were funded by the drilling participation agreement which allows us to more quickly delineate the Northwest STACK with minimal capital outlay. Our 2018 program will be a continuation of drilling under this agreement giving us the flexibility to allocate more capital to develop other place. Also on Slide 12, you will see that we characterized areas within the Northwest STACK play based on geology and well performance. In Central major County, we've seen upside potentials with high IPs and near type curve performance. As seen on Slide 13, seven wells turned online in the fourth quarter with an average 30 day IP of 623 BOE per day 72% of oil. Western major County demonstrates the strongest performance against our Meramec type curve, and will be our focus of the 2018 Northwest STACK delineation effort. Now I’ll shift to North Park. Our oil production in the basin totaled 674 MBO for the year. As you’ll recall, we resumed drilling in June with one rig and have drilled eight XRLs and brought five XRLs to sales with drilling and completion budget of $56 million. We entered 2018 with four wells in various stages of completion. We accomplished four main objectives during 2017. First, to further delineate the commercial boundaries of the field primarily through three obligatory step-out wells to the West and East. These three federal units will hold 37,400 acres total. Second, we determined a primary development area for more predictable results. Third, we initiated an eight well spacing test that would support a 16 wells per section pattern, and finally prepared our facility in [indiscernible] network for additional capacity. Two Western step-out wells in combination with our technical data support three areas of focus as shown on Slide 14. Our primary development area highlighted in bright yellow on the map, holds all of the producers in the field outside of the three federal obligation wells. All of our type curve wells and PUD locations exist within these boundaries. The three confirmed commercial benches Bill mentioned earlier, fall within the primary development area. A fourth bench has been proven hydrocarbon productive and is being evaluated for commerciality. We can develop in this area with hundreds of locations with a higher degree of technical economic certainty. The upside area defined in lighter yellow on the map is generally deeper and more structurally complex in places but does have the benefit of higher reservoir pressure. Our Mallard 1-15 is the first test flow within the area, and it is an early flowback right now. Further delineation of this area is subject to capital allocation but the large acreage position represents significant expansion potential of the primary development area. The commercial risk area shaded in gray is lower priority as indicated by the results from the two federal step-out wells on the western edge. Both add well production between 102 to 100 barrels of oil per day or below type curve expectations and exhibited higher water cuts. The commercial risk areas is shallower structural position make it less attractive for now versus our other development opportunities. All of our current location inventory falls within the primary development and upside areas. Slide 15 shows our updated type curve for the 14 wells with our currently preferred generation three completions including four wells brought to sales in 2017. Two highlight wells are the Castle 5 and 6 XRLs with 30 day IP's of 1169 BOE per day with 90% oil and 1049 BOE per day 92% oil respectively. The 14 wells are collectively outperforming our type curve by 8%. As seen on Slide 16, the wells on the map highlighted in orange represent the 14 type curve wells. All are well dispersed across the primary development area, and transverse all four Niobrara benches A through D. As seen on Slide 17, our wine rack configuration is testing a 16 wells per section spacing pattern and is underway with four wells drilled out of eight initially planned. The previously mentioned Castel 5 and 6 are the first two. The remaining six wells will be completed upon finishing pad drilling and first sales is scheduled for early June. An additional test utilizing a 32 well per section pattern is scheduled for 2018. It will consist of eight wells, two per bench each on 80 acre well spacing. This has tremendous upside potential for increasing net asset value. Finally, on Slide 18 you can see our reduced cost - our well cost progression. As we firm up our well spacing methodology, there will be the opportunity to do substantially more pad drilling to further lower costs. Steps are in progress to achieve less than $6.5 million per well for pads of four or more wells. The table on the right shows an attractive rates of return increasing to 51% to 67% due to improved pricing relative to Q3 2017. The PV-10 of an XRL well is currently an impressive $4 million to $5 million. I'm pleased with the objectives we accomplished in 2017, and once again would like to thank the SandRidge team for record safety performance in the process. I'll now turn the call back over to Bill.

Thanks John. As I wrap up today's presentation with our 2018 outlook on Slide 20, it's important to realize that this company - the progress this company has made and continue to make as we make some difficult and significant changes. These actions are driven by our strategic objectives and are focused on creating the most effective and efficient possible organization sized to fit our existing asset base, while maintaining our core competencies. Our commitment is to expedite this change process and mitigate the impact across all spectrums. The foundation for success is already in place at SandRidge and has been demonstrated by the positive results discussed today. We entered 2018 with a revised strategy and strong platform for economic growth. We will renew our focus on increased profitability of our Mississippian Lime position. We will continue to prudently develop, delineate and quantify the value of our Northwest STACK and North Park Basin assets. Our 2018 program includes a modest outspend of cash flow. However, we will be diligent in our stewardship of the balance sheet, and our allocation capital to the best possible risk-adjusted return opportunities. We will stringently monitor near-term and long-term results to ensure the overall returns on total capital achieved or exceed thresholds. While our focus will be on the fundamentals, we will work diligently to identify and evaluate both acquisition and divestiture opportunities that fit our strategic objectives, and value creation expectations. We are committed to transparency and encourage open dialogue, and I truly look forward to updating you on our progress in a few months. That concludes our prepared remarks. However, before we take questions, I would like to remind everyone that the purpose of today's presentation was to discuss our 2017 earnings and operational results along with our outlook and guidance for 2018. We will not be providing any additional information on unrelated items at this time but are happy to address any questions you may have related to our earnings release and today's presentation. Thank you.

[Operator Instructions] You have a question from the line of [indiscernible] from Titan Capital. Your line is open.

Relative to the Mississippi Lime, would you talk about your long-term focus on production there? You mentioned that focus in 2018 is on increasing profitability. Where are your thoughts relative to production over the long period of time?

Well I guess to begin with, I would offer that I bring a new set of eyes to - looking at this asset. The Mississippi Lime is the key cash generator for the company and we've learned over the years that it's not a blanket resource play where you park a rig and run it nonstop without thinking about the specifics of the geology and the complexity there. Meaning that each location is unique and has its own pros and cons. And so one of my commitments coming into this job is to do a deep dive into this asset base and look at those undeveloped opportunities. John and his team have already done a good job and continue to do a good job on looking at the profitability side but the decline is still significant there and we're going to do what we can to mitigate it. As we reassess, I would say more the undeveloped potential of this large asset-base - large acreage position, we will keep in mind each and every one of these opportunities with regard to potential capital allocation in the future whether it's this year or in the out years. There's a lot of oil in place, lot of gas in place across this acreage position, and I'm confident there are numerous additional commercial locations to be drilled. So as we go back and revisit all of this, it will continue to be in the queue for consideration for capital allocation although right now we don't have any current plans to drill.

We are out of time for questions. I will now turn the call back over to Bill Griffin for closing remarks. Again I thank you for your time today and encourage you to reach out with any additional questions you may have. I appreciate it and look forward to visiting with you again in three months. Thank you.

This concludes today's conference call. You may now disconnect.