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Sandridge 3q results


Zorrofan
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I agree but Ward has promised to live within cash flow, and to fund things with asset sales. Now he is issuing more debt which is convertible at $7, basically when does it end. It looks great but he did the same thing with gas and the bottom feel out. Now everyone is diving into oil (much bigger pool to play in though). I dont like the converts and would prefer asset sales and non convertible debt.

 

50% - 100% returns look great, but I want to see some hedges. I think he can talk his way out of the selloff if he gives them some modeling data. At some point you have to stop betting the farm and have to learn to live within your CF, especially when your capital structure is all screwed up. Anyone drilling for decent oil onshore is getting greater than 30% returns.

 

My guess is the plan is similar to ATPG. Drill your way to a decent capital structure. It looks screwed up now but add in several thousand BOE of production and market cap and it starts to look much better. Its an interesting plan but not a prudent one in my opinion, to his point no one ever said Tom Ward was prudent lol.

 

Aside from the debt I like the quarter. I would have preferred to see $250 million in assets sold.

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the conversion price is $7.76. ~34% above today's close.

I don't like the dilution as well - but it helps accelerate the oil production. It reduces some upside (10%).

 

I think part of the selling has to do with CFO quitting. But if there is a problem, the CFO won't quit now instead of YE.

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Lol I feel its the right business decision but its going to hammer the share price. I am a screw WS kinda guy but eventually we will get no respect and will start to trade like CHK. Ward has to lay out a plan and start to follow. I agree on the CFO, doesnt seem like such a big deal if he is willing to ride out the year.

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Trying to figure out the dilution here.  2,500,000 preferred shares, plus a possible over-allotment of an additional 500,000 shares, so possibly 3,000,000 all told. 

 

Each preferred share is convertible, initially, into 12.8791 shares of common at a conversion price of $7.7645 per share.  This is subject to "customary adjustments", which I would think would mean organic type capitalization changes like stock splits and the like, but is not subject to adjustment for accumulated dividends.  Presumably no strange anti-dilution or other adjustments terms that are rare for public companies (will have to confirm in actual filing later).  So, at the initial conversion price, that means an additional fully-diluted share count of 32,197,750 shares.  This is in addition to a current fully diluted, weighted average share count of 419,137,000 (taken from yesterday's quarterly results press release).  If the extra 500,000 shares are issued, then the share count is increased by 38,637,300. 

 

This offering dilutes existing shareholders, on a share count basis (that is, not worrying about the fact that the shares are underwater right now) anywhere from 7.682% to 9.218%.  Did I miss anything with this?

 

How much runway does this give you, and is it worth giving up 8% of the company to get that time?  Tom Ward thinks so, but it seems like big empire building at the expense of smart capital allocation and shareholder interests to me.  Then again, Wall Street likes bigger empires too, and a deal like this could end up looking very smart to keep oil assets if oil continues rising. 

 

 

 

 

 

 

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The dilution doesnt bother me honestly. Its more the fact that its a never ending cycle. When does it end. What happens if oil falls off a cliff? We are left with tons of debt, and hopefully it recovers in 2 years before our hedges run out. Yep that will never happen, oil is nin a bull market, blah blah blah. Sounds familiar - yes same story with gas.

 

You cant keep selling 10% of the company every few quarters to keep drilling because returns look good now.

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i hear you.

but OTOH, I think they should grab the money while they can. 7% yield vs 50% return is good business.

The new play will be turnkey.

 

I can feel TW was pissed when analysts keep focusing on volume but missing the fact that oil generate much better margin going forward.

 

In a month or two, we should hear some assets sales news which should fill in the puzzle on how they can support their cap ex going forward.

 

 

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alertmeipp you tend to focus on whats important.

 

I can understand TWs frustration. They are building a great oil company but due to declines in gas production wont go up much. Analyst will do what Analyst will do. This is not my usual cup of tea. I am used to pretty boring steady Eddie Management. Plus after watching this for 9 months and jumping in 3-4 months ago - I thought I missed most of the painful moments.

 

Oh well, this too shall pass.

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I think one of the biggest frustrations is not that they are buying 250k acres in the Mississippian which they will be able to hold by production with their ten rig program, but that they have decided to "pull a Chesapeake" and buy more land than they need (500k+ total acres in the Mississippian) in order to flip half of it . . .

 

I own SD and CHK, and I don't mind CHK doing this for the following reasons:

 

1) CHK is the most active driller and runs 15 "information only" rigs that send core for analysis at the industry's largest shale lab.

2) CHK has the most landmen in the industry, allowing them to quickly snap up acreage that they identify as valuable

3) CHK is a known quantity with multiple sources of liquidity and as one of the best operators, Foreign multinationals may pay a premium to enter a JV with CHK in order to learn about shale drilling

 

SD does not have these advantages, is leasing in a play that CHK already knows about and has publicly delineated, and SD does not have the balance sheet to be doing this crap.

 

I am still holding and the rising oil price (SD is now 80% oil . ..  CHK is still less than 15% liquids) will totally bail SD out, but this decision pisses me off. Buying into this play for 100% rates of return is one thing, but to keep leasing when CHK, EOG, and everyone else has the same info - when they will have to flip whatever they lease anyways! - seems stupid to me.

 

Who knows, maybe it'll turn out CHK is desperately leasing up more land right now too . . . but I wouldn't want to be buying up land that the industry leader passed up on in their own back yard.

 

/end rant

 

On the bright side, it sounds like asset sales will be no problem and that they have already had offers. The last few transactions in the Wolfberry have been at very encouraging prices.

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i think the bright side is that the market is pissed again because the company is trying to switch to oil as fast as possible and with 80%+ oil , the market won't be pissed again.

 

Cash flow break even in 13 - I think they will get bot out much sooner than that.

 

The majors have lots of cash sitting around earning nothing.

 

 

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Well I gave the conference call a quick listen and went over the new presentation, so here are my $0.02....

 

- the market really hated the dilution. I was not overly thrilled with it but on the other hand if it means they drill more wells at 50%- 100% returns its not all bad. I would like it even more if FFH was the buyer of the majority of the convertibles

 

- the CFO leaving may have spooked the markets but I think it is likely a non-event

 

- the guidance on oil production is a bit confusing. SD is already ramped up to about 28,000 BOD (lets ignore nat gas). They are increasing the number of wells for this year and drilling over 900 wells next year, mostly oil. Yet guidance is only increasing to 11.2 MBO? This is an average of 30,685 BOD for 2011. I would have thought it would be higher than that. i would also liked to have had an estimate of next years exit rate of production of oil

 

- having said all that I think the market hasn't figured out SD is an oil company now with really great nat gas assets

 

. Since SD won't give an exit rate for 2011 oil production  I'll take a crack at it. If they drill 900 wells, 95% oil, it means they are drilling 850 oil wells. 850 wells x 50 BOD x 80% interest on average equals 34,000 BOD added to production. Add the current 28,000 BOD less 15,000 for depletion gives an exit rate of 47,000 BOD by the end of 2011.

 

-  if you believe oil prices are going to stay high or go even higher then SD has some great assests and are poised to do well. It would be nice to see them adding hedges but they may feel they have hedged enough to cover the basic cashflow needs and want to keep the balance of increasing production available for even higher prices. ML is predicting $100 by the end of next year

 

Anyone adding or are you waiting to see if TW can execute going forward?

 

cheers

Zorro

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I plan to check out the call and presentation in more detail today. SAlpha has posted a transcript. I wont be adding and yesterday considered selling half for leaps on other O&G names such as PXP. After sleeping on it, I will likely hold, but may reduce should we get a rebound. The volume yesterday was huge.

 

I think the value is their but Ward will have to play ball with WS for us to get paid. So far he hasnt and doesnt appear to want to. Its a tough one. WS typically loves dilution and M&A but we have had a bit too much of it. They cant model SD and have no idea where its going, and neither do I. I would prefer if he just drilled holes in the ground and paid off debt / played golf for half the day. Hopefully with the ramp up we get there.

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I think they are being conservative here. Plus, I assume the asset sales will reduce production # slightly.

 

I really don't have a problem with the convert. The new Mississippian play could potentially be a home run for them. I think most of the $ raised goes to this new play. Their initial #s from there looks very promising.

 

CFO leaving is a non-issue, he actually said some good things about the company in the CC - he won't do that if he gets forced out or if he smells trouble.

 

Re: hedge:

 

"Since our last call, we've added over $775 million to our hedged book. Over half of the amount is crude oil in 2013 and a portion is natural gas in late '10 as well as '11 in the first half of '12. We currently have $2.3 billion of revenues locked via swaps and that could easily write to over $3 billion in the next three to six months. "

 

I wonder if they will do something like CHK did with their natural gas production. i.e. monetize a big chunk of their future oil production.

 

Re: analyst modeling:

 

I think it's getting pretty straight forward, especially if they hedge more of their production. (Well, at least for the next few quarters.)

 

 

I have been adding all day Friday.

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I think the long term story looks pretty good - we just need to give Ward time to execute. I hope they don't give up any of the new Mississippian play as I think it looks like it really could be the next big thing. I would rather Ward slowed things down and lived within cashflow then give away too much of the potential longer-term.

 

cheers

Zorro

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I read the transcript and will give Ward the benefit of doubt. He knows what he is doing and I guess is a wild catter at heart. It looks like he thinks he has something special in Miss, and I hope he is right. With that said I will likely push out my leaps to 2013 and will rotate 20% of invested capital in a few other O&G names in case he is wrong. Lets hope FFH picks up at least some of the converts. I don’t really see the point in holding shares honestly. You could have picked up converts yielding 10% a few months back and can still get some at 7% based on the issue. You get true downside production and if Ward's right you only give up $2.5 in upside. INMO he is either very right or very wrong. Meaning we get low $5s or in the  teens. I would pick up the converts, but with my small capital base leaps make much more sense.  FFH definitely did the right thing by switching to preferreds.

 

I think the shares will rebound over the next few weeks and should fully recover once asset sales and pricing are announced.

 

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Myth, are the converts trading and do you have the ticker symbols? I thought they were private placements?

 

cheers

Zorro

 

When the stock was in the $4s I remember pulling up 2 of the preferred issues. I can only find one now - SDRXP. This may have something to do with the exchange offer they did recently, or I could have just been a bit off.

 

I plan to rotate into the 2013s when the come out depending on how she trades, and would probably have followed Prem into the converts if I had the right amount of capital and wanted to get paid to wait.

 

http://www.quantumonline.com/ParentCoSearch.cfm?tickersymbol=SD

 

The converts tend to follow the shares so you may be able to get them in the 80s should we continue to sell off.

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