SandRidge Energy, Inc. (SD) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to the SandRidge Energy First Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mr. Brendan Brown [ph]. Please go ahead, sir.

Thank you and welcome everyone. With me today are Carl Giesler, our CEO; Salah Gamoudi, our CFO; and Grayson Pranin, our COO, as well as other members of management. We would like to remind you that today’s call contains forward-looking statements and assumptions, which are subject to risks and uncertainties and actual results may differ materially from those projected in these forward-looking statements. We may also refer to adjusted EBITDA and adjusted G&A and other non-GAAP financial measures. Reconciliations of these measures can be found on our website.

Thank you and good morning. Hopefully you've had time to peruse the earnings release and the investor presentation we posted yesterday after the market closed. We typically aim to keep brief our prepared remarks. Today however, we plan on being more expansive. Over the last several years and particularly during 2020, the Board and management have worked to reset, if you will, our company in almost all respects; from focusing our asset base, to streamlining our capital organization on cost structures, to reassessing and tightening our capital allocation. Accordingly, we think it'd be useful to your assessment of our company, if we walk through the presentation, in addition to reviewing our 1Q 2021 earnings. Before turning to that presentation, though, Salah will touch on a few highlights from the first quarter earnings.

Thank you. Simply put, 1Q 2021 was a strong quarter. During the quarter, our net cash position increased just over $48 million to almost $57 million to compared to just over $8 million in the prior quarter. This net cash position reflects more than full flip from just over $51.5 million in net debt that we had entering 2020. Our adjusted EBITDA more than doubled from the prior quarter to almost $22 million and just over $9 million in 4Q 2020. You should note that 4Q 2020 was burdened by one-time $5.3 million cash hedge loss due to the unwinding of all of our hedge positions. Even without that hedge line impact, 1Q 2021 adjusted EBITDA would still be meaningfully higher. Know that our board and management made the decision to unwind our calendar 2021 gas hedges last November, based on an improving 2021 gas price outlook. That decision appears prescient, as those swaps were just over $2.60 per Mmbtu. Prices this year have been trading and the NYMEX curve remains meaningfully higher. Our production held fairly steady during the quarter, with our Mid-Con assets producing 17,500 BOE per day compared to 19,000 BOE per day in the prior quarter. This quarter’s production is particularly notable, given the substantial two-plus-week negative impact from the snowpocalypse in February. Note, that we closed the sale of our North Park Basin asset on February 5, on the [ph] North Park Basin for only 36 days are in 1Q 2021 makes quarter over quarter production comparison less relevant for that asset. Price realizations, particularly for NGL appear to be migrating back up to pre pandemic low, our 1Q 2021 oil and gas realization were up 41% and 19% from the prior quarter. NGL realizations as a percent of WTI was 29% in 1Q 2021, plus to 21% in the prior quarter. Our cost discipline continues to improve during the quarter with previously implemented initiatives now manifesting in our financial. This quarter, we saved nearly $1 million off of adjusted G&A compared to the prior quarter, lowering this $1.9 million or $1.14 per BOE. While we continue to aggressively press TNA expenses, we did not expect G&A to remain as low and an ongoing quarterly basis. The team also compressed with operating expenses by $3 million compared to 14 points, reducing to 8 million or $4.85 per BOE. This general level of LOE should be sustainable going forward. We believe that we compare favorably with our peers on both a TNA and LOE per BOE base. It's relatively rare for an easy company to generate net income. We did that. However, this quarter, from a net income of $35 million included in almost $20 million gain on the sale is North Park basis. Also in the rare category, we have no own gas impairments for the first time since the second quarter of 2019. Lastly, in the rare category, despite still grappling with the winning challenges of COVID, our street without a recordable HFT incident is now in its 33rd month as of today. We believe any public end companies can both as a street, which is further detailed on page seven of our latest investor presentation. The final notable in 1Q 2021 was a simplification of our assets. Due in large part to an increasingly challenging Colorado regulatory environment, we exited in February our high defined, higher costs North Park basin assets. We're now focused solely on our core long list predominantly TDC mid con property. Subsequent to the quarter, we purchased for $4.9 million dollars in cash, all of the overriding royalty interest assets of standards Mississippian trust one. When that trusts ultimately liquidate, our company will no longer have any affiliated trust. Additionally, we expect to receive that about $1.3 million of that purchase price to reflect our 26.9% ownership in that trust. Before shifting to our investor presentation, we should note that the release posted yesterday and the 10 key that we file later today, provide further detail on our financial and operational performance for 1Q 2021. Now turning to the presentation, decidedly helpful to walk through what we're calling the reset standard. Over the last few years, board and management focus the company's assets, optimized production profile, streamline organization and cost structure and strengthened balance sheet. The key highlights on page three. We streamlined our asset base to mid-con focus primarily PDP assets. We know this property especially well as we've had them a long time. They're almost fully HBP, the long list shallowing and diversified production profile detailed later on page six, overlay the cost of acreage position is more than 1,000 miles each of owned and operate SWD in electric infrastructure, representing more than 1 billion in invested capital and providing the company both cost and strategic advantages. Our assets have robust free cash flow capabilities, particularly with a low cost – cost structure and revised CapEx requirements as well as improving quality prices realization. The cash generation potential provides several paths to increase shareholder value realization. At the NYMEX strip, we believe our PV10 value approximates more than $230 million. And if we build on that by extending and flattening our production profile with small ball projects well as the acquisitions by actively managing our price realizations and further reducing costs. Our goal to face with opportunities economically accretive acquisitions by maintaining stable commodity price subtle. As we realize value and generate cash, our board is committed to utilizing our assets including our cash to maximize shareholder value. The retail SD value proposition is materially derisk from a financial distress perspective by a strengthened balance sheet and financial flexibility. At quarter end, we had a significant cash position of a liquidity approaching 65 million excluding restricted cash. We don't have any other significant off balance sheet financial commitments. And with the recent purchase of the overriding royalty interest of SandRidge Mississipp Trust I, we have no affiliated trust and changing our operating mix. On the opposite end of the spectrum, we ended the quarter with approximately 1.7 billion from NOLs, which could help meaningfully reduce tax impact of a dividend program of other use of cash. Finally worth highlighting, that we take our ESG [indiscernible] we have implemented different processes around. The next Page 4, lays out of core strategy. The [indiscernible] that were completely focused on growing the cash value and generation capabilities of business is fairly responsible and efficient manner. This stock strategy has four points. The first is to maximize the cash value generation capacity of an incumbent Mid-Con PDP asset. We'll hear version of this course throughout this call. One, can we flatten our production profile with high NPAT workers and other small ball projects, as well as low risk well reactivations. Two, actively managed marketing options to maximize a price realizations. And three, continue to press on cost. Certain products to ensure we convert as much EBITDA cash as possible. A good friend once told me, if you can’t buy a cheeseburger with it, it doesn't count. So keeping low cost, high CapEx discipline, active working capital management, limited interest drag is key for us converting EBITDA and operating free cash flow. Third point is to keep vigilant for opportunistic value accretive acquisitions, to focus on PDP weighted assets, A, set of core competencies, cost efficiency and production optimization B, we have sufficient mid-stream optionality and C, our unfavourable regulatory areas. If we go on Page 11, mid-term asset position during resources several years back, as well as last fall and this spring purchase of the Mississippian Trust overriding working interests are emblematic in this approach. The bottom point is to uphold our ESG responsibility. We got to a little bit quicker as you move through the remainder of this presentation. Page 5 details the quarterly Midcon assets. To our view, there’s two points. One long list, more than nine years of life. Two shallow declined with expectations of opportunity declined this year downshifting to low tunes and lower going forward. Three, diversified production flows from a, hydrocarbon mix with gas NGL level; b, well base. We have more than 950 producing wells. Finally, we're mostly HBP. This makes spending to – divestment to minimum. All this sums in Nymex strip PDP PV-10 values that we believe is approximate more than $230 million. Given that we've already discussed materials on page 6 and 7, we'll move ahead to page 8. This page outlines a very initiative the board management over the last several years, have led to an absolute and per BOE reduction of LOE 70% and more than 40%, respectively BOE exchange. A common theme among the image displayed on the left side of the page is a detailed, “white paper reassessments upon the every cost aspect of our field operations”. We're proud that our purview in yellow amongst the lowest of our figure. Page nine addresses topics on which we speak a lot at investor call in 4Q 2020 earnings in early March, mainly NGL and gas realizations. The happy news is that we've seen steady progress over last few quarters that have continued into the current quarter. No doubt general market tailwinds have help, so has actively working with the largest offtakers in leveraging outsourced market marking as the key. As a detail later in this presentation, gas prices and NGL realizations have material impacts on PDP PV-10 valuable assets. Page 10 addresses our approach to production optimization. Since last June, we focus on relatively low capital, quick payback, high returns work-over in small ball projects and candidly enjoyed success in our execution. As we work to deliver our balance sheet has standard liquidity and capital assets at the latter part of 2020, we purposefully took a very disciplined approach, limiting spend projects with a year or less payback. Liquidity is key. Now, with a much stronger balance sheet and liquidity position, we plan to comprehensively evaluate really activations, drill outs, conclusions, even tends to drills. It is more aggressive initiatives, which significantly help flatten the already shallowing space decline. Skipping to the page 12. Fundamental to our rest has been a deliberate shift from one end to what is organization. Lots of headwinds, balance sheet constraints and other realities require the strategic change from a high CapEx, production growth strategy to a more cost efficiency PDP optimization, cash flow strategy for our company. While that preserve the internal capability and people who maybe someday toggle back from the ladder to the former, we decided to radically alter our organization to be more fit for purpose. This operation has several key components. Number one, rebalancing the weighting of the field versus corporate through flexible we actually create value. Two, outsource necessary the more perfunctory and less core functions, such as our operations, accounting and administration, IT, tax, HR. Beyond the more than 6 million per annum G&A savings from this, outsourcing provides us greater flexibility and scalability to adjust -- to change in our business for the market. Three, contract is needed to deal the integration of our other more episodic business. One happy outcome of this organizational makeover is that the team is upgraded multi skills, core – and multi skills core team are fewer, better, better incentivized professionals with ample career motivation to drive value for company. Page 13 handed out another happy outcome of the organizational streamline. And that's a more than 60% reduction in G&A on both the absolute and per BOE basis since 2018. Here let's pause for a second, up to this point we've endeavored the convention of the asset base, strong balance sheet and execution bonafides to deliver on our overarching strategy to grow the cash value of generation capability of a business in a safe possible business spend. Now, we'd like to share our view on the what’s delivering on that strategy to be worth. Page 14 lays out how we think about our PDP reserve asset. This is -- so I'll try to unpack it. Three bars from left to right show a yearend ’20 audited reserve value at SEC pricing, that includes four part basic and then we share the same yearend 20 reserves with NYMEX pricing without your participation. Finally, we show our first quarter ’21 reserve value which was not met -- it made sense fifth NYMEX pricing again, without assortment. All three bars reflect analysis consistent with standard industry reserve practice, including performance, commercial updates, price differentials, operating expenses, and other commercials based on 12 month average. Though, that – those bar included the dollar for dollar value that the company's net cash position on its balance sheet. These bars just reflect the value of our PDP reserves. Under each bar is a summary of the key drivers, know the blue the price tag incorporated at BCI and rehab, realizations, ROE and average look back period employed. There are two horizontal lines, the High Line crossing the three vertical bars at the market cap, the lower horizontal line reflects the enterprise value, essentially a market cap less a move downward for the value or net cash position. This enterprise value line is, if you will, the market proxy for the vertical bar, it reflects market – the value of assets base, separating apart from the net cash position. So one bumper sticker of the state from the state in my mind is that, our estimate of a one key ’21 PDP retail value exceeds $230 million, which is more than two times our recent market proxy in terms of enterprise value of only 105. Another bumper sticker is a significant sensitivity of that PDP recent value in WTI and rehab, NGL realizations as a percent of WTI. That last metric average NGL rate realizations has moved more than 10 percentage points in the last three months compared to the last 12 months on average. These realizations whole approve for development results we had even greater than that. Average LOE per BOE is also set down during the same timeframe, also suggesting a higher PDP reserve value. Finally, on page 15, we circle back to where we started this call, with 1Q 2021 results. This take place of the first quarter results in the context of an annual guidance shown and as initially presented, as well as on a divide by for work quarterly basis. We're pleased that we're tracking better on production and substantially better on adjusted G&A and NGL and gas usage. At this time thank you for your patience during this much longer than normal setup prepared remarks. We will now open the call for questions.

[Operator Instructions] And our first question comes from the line of [Indiscernible]. Go ahead, please. Your line is open.

Good morning.

Good morning.

Thanks for thanks for the presentation and all the, context on where you brought the company to, strategically, so, at this point, where you have achieved a big improvement in efficiency. And as you plan it out, continue to shift away from a high CapEx strategy. From here forward, can you maybe talk a little bit about, other than, what well, I guess, with commodity prices, sort of at the centre of it more of an upside case scenario, in terms of what would encourage you to do get out -- get a little bit more aggressive in terms of spending and maybe talk a little bit about, what the next couple years would look like, if it turned out that we're in a temporary price spiked for oil and the script turns out to be more ready for gas than it looks like right now.

Yes. Yeah I will handle this question. And I don't want to talk where we get Q4 and the future I will say.

Sure.

I will say that, the level price we get we're going to maximize the cash where we get them up and that is our overarching goal. And so at this point to kind of answer the first part of your question. I think we're focused on new and few things. So organically or internally there's, always things that you can do to price on costs. So a little bit of brand and as we previewed on G&A will continue to impress you always find things and keep moving. The biggest thing that we started to do and really will do is pointing to systematic about is working on major automakers. And thinking about what optionality we might have to actively manage the price realizations particularly around gas and NGLs. That is an area that just have not put a lot of times or very recently to be meaningful, going forward. Thirdly, and this is also the meaningful bucket, we have been very conscious with liquidity until closing the major sales. We’re building in more population that actually got the cash. And now our team is planning to do their homework and homework is very importantly. There's no better way to lose money in that project. We look at well reactivations, drill outs, maybe some refracs and things like that. But of course, we do that as we require more capital, we'll have to go through the board to get healthy process to get those projects and get approval. That's something that we're definitely doing. And then finally, this is a little bit happened in the background. We are very cognizant of the value that you can realize the enterprise by being smart how you often play PMA obligations. And they're so well over the coming into live various fringe areas of asset base, where people actually pays positive money for well -- for making money and have an open PMA liability. And so [indiscernible] with focus on shedding that, that's a little bit less every quarter-to-quarter, but I think something that will be very important. And then finally, like we said, we continue to evaluate M&A that fits up criteria. Right now, being predominantly PDP is a little bit developed risk, and that plays to our core strength of being smart on costs and production profile optimization. And obviously, in the regulatory regime like jobs if you won’t get experience.

Great. Thanks for that explanation. And did you just mention that with the cash from the Colorado sale now in the door, the team is beginning to do some homework. That brings me to the other thing I was wondering, the inventory of quick return projects, we were bringing wells back online and so forth. Can you give a sense of as far as what you identified for those projects, how many of them maybe kind of -- they will be kind of worked through at this point? And as you begin do more homework on, what else is possible out there? Is that likely to sort of replenish the list of rework jobs you've done so far, or do you think of it maybe just defining sake, list of projects for the coming year or something like that, but not necessarily a long-term plan? A – Grayson Pranin: Sure. Good morning. This is Grayson. Happy to answer that question, I can't give you an exact number of inventory, can't say that we have a really important inventory set that we are currently evaluating will be opportunistic, as market conditions sustain and continue to improve. I do think that this thing resources that is potentially robust not be meaningful both this year, next year, potentially in the fall.

Okay. Terrific. So then that really does kind of give you a line of sight, past our current commodity cycle. And I guess that in turn will give you a good deal of strategic flexibility looking ahead, as far as what you want to do on the capital or the acquisition side, is that fair?

That's fair. And well -- I would just point out that while we are little bit predominate for the operating wells. As we have a lot of wells on our property that have been temporarily abandoned or shut in. It’s more hot for us to evaluate play with. And the good thing these wells have already been drilled. So bringing them back on and acquire nearly as much CapEx as we drill in.

Got you. And then just the last one for me. We've seen quite an uptick in corporate level, transaction activity M&A, in just about every basin you can think of, and really just in the last few weeks, just curious what you're seeing in the Midcon? And curious in particular, if you have any private or PE-backed assets that have come to the market? I understand more things have come to the market in recent weeks than we've seen in some time.

I think really, I'd say on this part is things come to the market that are, it came to -- real panel and zip code, we certainly look at them. And you're right, there has been an uptick in activities in Midcon and we feel like we're in the flow of being able to look at those opportunities.

Great. Thanks a lot for all the strategic backdrop. Thanks. That’s it from me.

[Operator Instructions] Our next question comes from the line of Josh Young with Bison Interest. Go ahead, please. Your line is open.

Hi. Good morning, guys. These are great results. Just have a couple of questions on this presentation and follow-up. So one on slide 14, you guys show -- you the three bars, and there's kind of the fourth and five bar that's missing. But – and five is kind of even better preserved value at a PDP, PV-10 basis on, kind of, current differentials with which have improved versus Q1. I guess, how do you guys think about -- it looks like you're kind of anchoring the value of the company to the PDP PV-10. But you're building your cash position, there's no dividend, there's no buybacks. There's just, kind of, this increasing cash balance, which of course is great, but I guess there's this overriding high level question of like, what's next? That doesn't seem to get answered in these materials or hasn't been answered. I know that’s, kind of, I guess more politely, indirectly asking, kind of, the same thing. But to the extent you guys could provide just more clear guidance at a high level may be at the top?

Yes. Josh, thanks for listening, and for the kind words. Let me start off. On page 14, we endeavor to do, I think, it's appropriate is show all possible that our -- what we believe our PD Reserve, PV-10 value did in manner consistent with industry-audited reserve practice, right? 12-month its back, so on so forth. And we did it was useful to layout, as you mentioned where there is no bar, kind of, where things are currently. And we are seeing over the last three months last quarter, we have 29% NGL utilization. You can't say that last 12-months at this point, does that help through, we gave you some sensitivity it's just that what that might do to that. And then I believe you said, we're not just focusing on global values tethered just to the value of our reserves reserve base. Obviously, the roughly $60 million in net cash we have on balance sheet is very valuable as well. And that is an addition to the value of reserves. So, in some ways, we're very simple company. We have PV reserves and we have cash. That gets not that complicated. We didn't really feel the need to kind of do the math, people can take the numbers and add them together and divide by the share count and get to an asset value, if they want to, the G&A and other things, we need to go there. In terms of the cash balance, this is really the first quarter, as Salah said, we had a significant step up roughly $8 million current net cash position and then as I mentioned, our Board is committed to increasing that cash and using our assets to maximize the shareholder value. And they're thinking through and the fashion what the best use for that is, and the best way to put this point, I think they'll be very disciplined and focused on what makes most money for shareholders and how they use that cash, whether it be deployment acquisition, or eventually some type of return.

Okay, so I mean I guess, again, it just sounds like you don't really have a clear -- you're still evaluating and knowing that the cast would come in ahead of the North Park sale. Obviously, there's a number of non-spreaders kind of deliberation is going on. It sounds like there isn't like a specific clear path forward. There's kind of -- there's multiple potential paths that you guys could take. It sounds like that's a reasonable interpretation of what you're saying.

Yeah, I think that's right, it's not deterring. I mean, it'd be I mean, you have all the traditional return on capital options. Of course, if you live in the favorite stock, they have implications for how you might do it, to my mind, yes. If you put in some sort of regular dividend, what level, it is special dividend? What does that do longer term to your value? Your cash asides returning it shareholders at the very strategic elements. I think it's pretty well accepted that there's economies of scale on this business is our intensive, low cost to be the very performed, so sometimes being bigger is better. We will ever entertain a merger, our cash can have a lot of value in that context. We should help partner with a company and immediately delever them, or provide low cost capital for them to accelerate high value inventory. So, it's very important to think through all the ways that that cash can add value to the enterprise and avoided actively doing nothing very inappropriate Josh.

Okay, just one last thing on the saltwater disposal on page six of the presentation and integrated power as well. I don't think this is something people really -- this is I think, the first time you've seen on this and maybe many years for SandRidge, and it's like very exciting to see, I guess, is this something that you guys would look at monetizing, or is the point of showing us just to highlight kind of where some of the cost savings and opportunities are coming from?

It’s a good question. I -- you know my understanding is that this company is passed somewhat slowly and monetizing this year, from where we see, we think it's more of this primary customers who using it as almost a financing vehicle, right. And we just don't need to do that. I think that would add unnecessary complication and artificial pricing dynamic. And so we think it's going to be capital as an investment substantial system, it provides a lot of cost benefits that we're seeing in their cash flow. And it also provides us very real strategic benefits, the extent that assets and around that that's available, that means we'll just be able to operate more efficiently than someone else and be more competitive and get more out of them. So to answer your question distinctly, I don't think we're actively considering monetizing these assets.

Okay. Thank you very much.

Our next question comes from the line of Michael Melby with Gate City. Go ahead please. Your line is open.

Yeah, thanks. Thanks for the question. Mine is actually on slide 6, too, with the salt water disposal wells. Could you confirm just the cash balance you mentioned on May 7th after the purchase of the SandRidge Trust and all the additional cash from operations?

Yeah. So the cash balance that we disclosed of over $80 million was just cash on hand. And that was after the acquisition of SDT, the overwriting royalty interest of SDT was from -- so that was negative impact, and then obviously, cash flow from operations increased the balance in the quarter.

Yeah, we're also expecting our payments, so we paid all of that to SDT. And that’s why I mentioned, we're expecting to get $1.3 million back.

Guys thanks. And could you update us at a high level on how the acquisition of the Trust impacts, I guess, slide 15, and maybe even slide 14, if it moves the needle at all? Thanks.

Sure. If we’re looking at slide 14, note that that third column from left Q1 2021, reserves includes the net impact of the SDT acquisitions. And then in reference to slide 15, we're reconfirming our 2021 guidance does not find change at this time.

In the press release that we put out on the acquisition of the overwriting royalty interest to SDT, we said that it was always your time when you're buying them and sharing them this year and wanting PDP [ph], it is a meaningful match. That does have an impact on that far right arm on page 14. And in 15, we provide guidance once a year, and we were well aware, maybe not an exact timing, but in the general timing, liquidation process of SDT, we factored that into a new data.

Got it. Thanks for your help.

And there are no further questions in queue at this time. I would like to turn the call back over to our presenters.

Thank you all very much for your interest in SandRidge and we look forward to talking next quarter, if not before with some of you all. Thank you.

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