SandRidge Energy: $9 To $10 Per Share In Cash Likely By 2023 End

SandRidge Energy’s (NYSE:SD) near-term cash flow expectations have been reduced due to the decline in natural gas strip prices. The NYMEX strip for 2023 is now down to under $4, and it may realize under $3 for its natural gas (including hedges) at that price, which is less than half of what it realized in Q3 2022.

Oil prices have held up better recently, so SandRidge should still be able to end up with around $9 to $10 per share in cash by the end of 2023 based on current strip prices. Combined with the value of its reserves, SandRidge’s estimated value ends up at around $20 at long-term $70 WTI oil and $4 NYMEX gas.

SandRidge’s 2022 development plans included 12 NW Stack wells that boosted its oil production, but it may decide to go with a smaller amount of wells or completely halt new development in 2023 as the returns are less certain at the current 2023 strip.

Natural Gas Prices

SandRidge’s oil percentage has been increasing a bit with its new NW Stack wells, but its production is still heavily natural gas weighted (16% oil, 30% NGLs and 54% natural gas) in Q3 2022. The new NW Stack wells are also producing a decent amount of gas currently, and are expected to become gassier over time. For example, SandRidge mentioned that its first two 1-mile lateral wells were producing a pad total of close to 600 barrels of oil per day and over 1,000 Mcf per day after more than 90 days of production.

Thus changes in natural gas prices have a large effect on SandRidge’s financials. Despite its increasing oil percentage, a $1 change in natural gas prices appears to now have around the same effect on SandRidge’s cash flow as a roughly $18 change in oil prices (before the effect of hedges and not including any change in the price of NGLs).

SandRidge realized $5.99 per Mcf (excluding hedges) for its natural gas in Q3 2022, but it may realize an average closer to $2.65 per Mcf in 2023 before hedges based on current strip prices ($3.90 NYMEX) and its typical differentials. SandRidge does have hedges covering some of its Q1 2023 natural gas production that may boost its realized price (at current strip) to around $2.90 for the full year.

NW Stack Economics

SandRidge estimated that its NW Stack wells could generate an IRR of a bit over 40% at $75 oil and $4.50 gas. That combination of commodity prices is close to the equivalent of the current $77 oil and $3.90 gas strip for 2023.

SandRidge has been focusing on cost control efforts, but if there is meaningful projected inflation with its 2023 NW Stack wells, it may reduce (or stop) its development program.

The environment involving a combination of lower commodity prices plus cost inflation pressure may make SandRidge’s NW Stack returns relatively marginal again.

Cash Balance

SandRidge should still be able to add to its cash balance despite the deterioration in natural gas prices. I now estimate that SandRidge will end up with around $265 million in cash and cash equivalents at the end of 2022.

It is uncertain what SandRidge’s 2023 development plans are yet, but at 2022 production levels and 2023 strip prices it would generate approximately $125 million EBITDA, including the effect of its Q1 2023 natural gas hedges. This doesn’t include the potential interest income that it can generate from its cash on hand, given that interest rates are no longer negligible now.

SandRidge should be able to end 2023 with around $9 to $10 per share in cash on hand based on current strip prices.

Estimated Valuation

My outlook for long-term (after 2023) commodity prices remains unchanged. At $70 WTI oil and $4.00 NYMEX gas (after 2023), I now estimate that SandRidge is worth around $20 per share.

As noted above, SandRidge should be able to end 2023 with around $9 to $10 per share in cash. It also reported proved developed reserves with a PV-10 of $433 million at the end of 2021 based on lower prices ($66.56 oil and $3.60 gas). SandRidge’s development program in 2022 should be able to keep its reserve value (at those prices) at least stable, although it may invest less in 2023 development.

A value of $10 to $11 per share (about $369 million to $406 million) for SandRidge’s reserves at the end of 2023 leads to a total estimated value of around $19 to $21 per share for the company at long-term $70 oil and $4 gas.

Conclusion

I project that SandRidge will end up with approximately $9 to $10 per share in cash on hand by the end of 2023 at current strip. SandRidge’s cash flow generation is negatively affected by natural gas prices falling below $4, but should still be able to generate a solid amount of free cash flow with oil remaining in the $70s.

There is uncertainty about SandRidge’s development plans for 2023, given the fall in commodity prices and continued cost inflation pressure. I can see the decision to drill more NW Stack wells in 2023 going either way at this point. I’d estimate SandRidge’s total value at $19 to $21 in a long-term $70 oil and $4 gas environment, though.