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Sandridge 2q results


Zorrofan
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I think its more of an issue that they bought Arena resources for something like $1.5 billion and they kept their production target for the year unchanged.

 

They are actually less levered now but, as always, market wants growth.  Also, they took off natural gas hedges while at the same time reduced gas drilling, which is a mixed signal.

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They took off the gas hedges because they think midstream bottlenecks in the Haynesville and Marcellus shale plays will cause production to fall before the end of the refill season.

 

One guy on the call asked about covenant issues towards the end of 2011 (the short thesis had been that at current spending plans they would get into covenant trouble by the end of next year). The Arena deal fixed this and they don't project problems with any covenants through 2013

 

I think this was something of a kitchen sink quarter. There were a number of one-time expenses and dissapointments ($4MM to workover permian wells, a non-operating GOM well was choked back due to water infiltration, G&A up due to merger costs). They also took off the rest of the 2010 gas hedges in the quarter, generating a large one-time gain (which was the reason for the beat). The stock is down because they raised most expense items for the rest of 2010 in their guidance. Again, I think they are purposefully setting the bar a little low.

 

Their permian basin properties (which they added to with Forrest and Arena deals) are generating IRRs greater than 50% right now, without high-grading. They have their own drilling and service units, so the only cost inflation they could see is in diesel and pipe for the forseeable future.

 

 

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I am adding to my position today. This is going to be a great natural gas company when gas prices recover, with some of the lowest costs in the industry. According to Sam Mitchell this is why FFH bought in.

 

In the meantime, the company is over 50% oil and has a great margins. Their oil properties and gas properties are about 35 miles apart, so depending on prices they can drill for oil or gas . . . right now they only have 5 rigs in their gas field.

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I plan on adding leaps after I review the report and call. Though I think this may be a long type deal so I will probably go in the money and plan on exercising / rolling them over.

 

I dont see a recovery for gas anytime soon (everyone is drilling and hoping others stop so prices go up, The only hope for us is a hurricane in the gulf). I like SD because of the oil with the nat gas kicker. I dont think the market is really grasping how fast they can ramp up cheap oil production. $70+ oil should take care of the debt issue overtime.

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A hurricane in the gulf won't have much of an effect, at this point gulf production is only 10% of US gas production . . . ten years ago it was 25%.

 

A lot of the drilling going on right now is to hold leases by production. Companies bought billions of dollars worth of leases (with 3-5 year terms) over the last 2-3 years. They lose those leases if they don't drill before they expire, so companies are drilling one well on each lease, then they will go back and drill 7-15 more over the next ten years. If they didn't need to hold these leases (SD, for example, doesn't have this problem), they wouldn't be drilling for gas right now.

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I think Prem & FFH invested in SD because: Tom Ward has a fairly smart management team in place, SD has good assets - better now with the Arena merger bringing more oil into the production mix, a focus on building value not production for productions sake and given Wards holdings of 25 million shares (approx) a vested interest in building SD for the long-term. Not sure why the market is selling....

 

cheers

Zorro

 

 

going to listen to conf call replay now....

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Good point on the gulf. I remember the first huge run up in Gas was due to Katrina, didnt realize how big of a game changer the shale and other onshore gas has been.

 

I dont have much faith in nat gas. We need a monumental shift and not just less people drilling. There are a huge amount of rigs availalbe and the moment gas hits $5, $6, or $7 anyone with marginal production below that will drill the prices back down. We need nat gas vehicles, old nuclear and coal plants to be closed, electric vehicles to spike demand, or a huge amount of gas going offline for more than a few months (maybe a ban on fracing due to water issues).

 

All of these are speculative and may require a long wait for higher prices. What I love about SD, is we have oil which is a world wide commodity and has a much tighter supply / demand ratio. SD doesnt have to play the bet on gas rebound game, they can wait and pick there spots between liquids / gas / and oil.

 

We win regardless (unless oil usage drops off a cliff). It seems like a much better play then MCF or some of the other Gas names. Also I like the execution, SD seems to be competent operators. They just need to fix the capital structure. Hopefully the Kingdom is built, and now they can keep on to making money...

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Lol, now thats good news (I wonder how much legs it has, in terms of the nation). I always thought that fracking would be a problem and wanted to avoid the shale areas.

 

When a man can light the water coming out of his tap on fire. You know you have a problem.

 

Thanks for the Link.

 

SD just became a slightly better investment.

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T-bone pretty much summed it up. I spoke to 2 BB analysts today covering the company, and they are both pretty bullish on valuation, yet cautious on long term nat gas prices and SD's leverage. Costs were a little higher in the Q than expected. Both commented that costs were higher this Q than modeled. They couldn't reveal too much till they updated their reports, so i'll give them a call back if they write anything worthwhile, I'm not aware of.

 

IMO, the oil production switch is a no brainer. It's more profitable. With nat gas prices so low and the hedges off, there is quite a bit of optionality based on future nat gas prices, that can quickly swing the reserve value, once they switch back  production to nat gas. The ceiling impairment of the past few years has really hit the company hard (and is based entirely on lower nat gas prices). This caused their equity value to turn negative, wiping out a couple billion with the stroke of a pen. Century plant expected to ramp up in 4-8 weeks too. Their plan is just to keep making high roc oil production until natty prices steadily come back up, and then move more rigs over when they do. The option to switch from nat gas to oil at their choosing is quite an underrated benefit.

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Comments on Natural Gas prices from Oakmark

 

http://www.oakmark.com/opencommentary.asp?commentary_id=578&news_from=c&fund_id=20

 

Energy and Disruptive Technologies

Those of you who have paid attention to our discussions concerning our energy investments over the years might remember that at one point we strongly favored domestic producers of natural gas, given what we saw as a favorable supply-demand dynamic with natural gas—the favored carbon fuel of the environmentally conscious. At the time we thought that a business that could develop and produce natural gas for under $4 per mmbtu and then could sell it at prices in excess of $7 per mmbtu was a good business. It was even better in those periods when a substantial amount of yearly production could and would be hedged for sale at prices in the range of $8 - $10 per mmbtu. In recent months, the dynamics of the natural gas marketplace have changed and we have reduced our exposure to gas considerably. Moreover, our other energy investments, primarily in Concho Resources, Cenovus, and Apache, have taken on a more oily mix. Because of these changes, we felt that a discussion of disruptive technology was in order. Our thanks to Nathan Weiss of TIS GROUP of North Oaks, MN for his extensive review and discussion of disruptive technologies impacting commodities and energy in a recent report.

 

Commodity prices are of course primarily affected by supply and demand issues. Commodities that are in short supply might have higher prices due to the increased costs of meeting environmental and safety standards, the continued deterioration in the size and grade of resource deposits, and the difficulty of accessing these deposits. Often, new technology can mitigate these upward price trends. For example, seismic imaging can help locate petroleum and mining deposits. Farmers employ genetically modified seeds and use larger GPS-equipped tractors. New chemicals and drilling techniques can extract more oil and gas from a well. The impacts on production costs might be incremental, but if the technology change is great enough, new technologies can lower production costs while increasing the supply of the commodity. We classify a technology as disruptive, then, when it significantly lowers the supply/demand equilibrium price while it simultaneously causes a surge in production capacity.

 

Offshore drilling was one of the first disruptive technologies in the petroleum market. Even though it started in the 1960s, the technology was not widely adopted until the late 1970s during the oil price shock. Initially, drilling occurred at depths less than 400 feet, and it moved quickly to the Gulf of Mexico, the North Sea, and other locations, resulting in increased oil production, even though demand increased only marginally. This geographic expansion was the result of the OPEC-producing countries cutting production by 40% from 1975 to 1985. Given an oversupply of the commodity, prices remained flat for two decades after the introduction of the disruptive technology. The end result of this price suppression, however, was a production peak, which led to substantial and sustainable real increases in the price of oil. We think that natural gas prices are now at a similar tipping point. Horizontal drilling techniques have been used in this country for more than twenty years. However, since 2003, new fracturing techniques for wells (especially in shale) have led to a 10x increase in horizontal drilling rigs. Horizontal drilled wells are now thought by some commentators to be responsible for more than 80% of incrementally produced natural gas in the U.S.

 

Over the past five years natural gas needed to trade at $6 - $7 per mmbtu to encourage new production of natural gas. Lower prices tended to cause a reduction in drilling and production to slow accordingly, resulting ultimately in a supply-demand imbalance that would increase prices until the demand was met again. In the past twelve months, prices have remained under $5 per mmbtu with the expectation that production would again be shut-in and drilling curtailed until pricing corrected back towards the $7 mmbtu range. The problem with these assumptions is that many companies have improved their horizontal drilling techniques to a point where they can earn attractive returns with gas at much lower prices than had been the case even a few years ago. As this technique becomes increasingly adopted by more companies, we are concerned that horizontal drilling will become a truly disruptive technology, resulting in lower price highs for natural gas. The prices at which producers will continue to expand production now appear to be in flux and drifting lower towards a new clearing price. Horizontally drilled wells may actually only generate negative cash flow when gas prices fall to $3 per mmbtu for the most efficient producers. Higher cost wells can be shut without ending oversupply because of the greater efficiency of horizontally drilled wells. Each horizontal rig can surge production by 5-10x the previous capability of vertically drilled wells. Thus, companies can adjust supply to meet demand in a much shorter time frame than the months historically required to correct imbalances. Thus, for the foreseeable future we expect natural gas prices to remain under $5.50 per mmbtu. Capacity should come off line as prices go below $3.50.

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Thanks alot for the link. These mirror my thoughts. We seem to have unlimited supply and demand is more or less the same. We need a huge shift to bring these two closer, and lower drilling short term wont do it.

 

I also have a problem with PDS, because new rigs keep being ordered dispute the supply / demand issues. Tom Ward made a really smart move with his purchase, now they just need to execute. I like having access to gas but being able to drill oil in the meantime. LNG, a Ban on Shale Gas, or Electric / Gas Vehicles are needed to bring things where they need to be.

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Lol, now thats good news (I wonder how much legs it has, in terms of the nation). I always thought that fracking would be a problem and wanted to avoid the shale areas.

 

When a man can light the water coming out of his tap on fire. You know you have a problem.

 

Thanks for the Link.

 

SD just became a slightly better investment.

 

I was thinking, I wonder if Gasland made any impact on that decision. 

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http://finance.yahoo.com/news/SandRidge-Energy-posts-2Q-apf-672819752.html?x=0&.v=1

 

"After the markets closed on Wednesday, SandRidge said it turned a profit of $44.9 million, or 20 cents per share. A year ago, SandRidge posted a loss of $91.2 million, or 52 cents per share, because of write-downs on the fair value of commodity contracts, and losses related to asset sales.

 

Revenue grew 36 percent, to $182.4 million from $134.1 million.

 

Excluding one-time items the company said it earned 22 cents per share. On that basis, analysts were expecting a profit of 12 cents per share and revenue of $242.8 million, according to a Thomson Reuters survey."

 

Let me see - the company made more money than expected, but because management is not going to simply produce more natural gas (at little or no profit) in order to hit an arbitrary revenue target the stock price falls. Gosh, makes sense to me.... (sarcasm off)

 

thanks Mr. Market!

 

cheers

Zorro

 

 

 

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the earning beat was due to monetizing the rest of the 2010 hedges in this quarter.

 

I am long the stock and very bullish on the future of this company, but there was nothing impressive in this report.

 

If you refer to the earnings press release (link up top) it states that excluding gains on derivative contracts SD earned $0.23 per share in Q2. Market expectations were $0.12 per share. What impresses me, listening to the conference call yesterday, is that management seems to be acting in a rational manner, reducing gas production when prices are low and maximizing oil production instead. Many other companies are drilling because they need to, either to keep their leases or they need the cashflow. ward seems to be working hard to postion SD to capitalize long-term....

 

 

cheers

Zorro

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the earning beat was due to monetizing the rest of the 2010 hedges in this quarter.

 

I am long the stock and very bullish on the future of this company, but there was nothing impressive in this report.

 

If you refer to the earnings press release (link up top) it states that excluding gains on derivative contracts SD earned $0.23 per share in Q2. Market expectations were $0.12 per share. What impresses me, listening to the conference call yesterday, is that management seems to be acting in a rational manner, reducing gas production when prices are low and maximizing oil production instead. Many other companies are drilling because they need to, either to keep their leases or they need the cashflow. ward seems to be working hard to postion SD to capitalize long-term....

 

 

cheers

Zorro

 

that is exluding the unrealized gain on derivative contracts. The gain in the quarter was realized when they monetized the hedges. I agree with you completely about the company, but things are pretty messy right now and it might take a few more quarters for them to get all of their ducks in a row

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