SandRidge Energy Increases Its Oil Production By 25% In Q3 2022 (NYSE:SD)

SandRidge Energy’s (NYSE:SD) new NW Stack wells have performed as expected, helping boost its Q3 2022 oil production around 25% above Q2 2022 levels (while keeping total production flat). SandRidge’s oil production should increase further in Q4 2022, although its free cash flow is likely to be lower in Q4 2022 compared to Q3 2022 due to weaker commodity prices (particularly for natural gas).

SandRidge is approximately 20% hedged on natural gas production for Q4 2022 and Q1 2023, but otherwise its cash flow is directly affected by fluctuations in commodity prices. As a result of decreased near-term free cash flow projections (due to lowered strip), I have trimmed my estimate of SandRidge’s value by $2 from my earlier calculations, and now believe it to be worth around $22 to $25 per share at long-term (after 2023) $70 to $75 WTI oil combined with $4.00 to $4.50 NYMEX gas.

Notes On Production

SandRidge kept its total production flat between Q2 2022 and Q3 2022 at approximately 17,800 BOEPD. SandRidge’s new NW Stack wells have boosted its oil production, which increased approximately 25% quarter-over-quarter. SandRidge’s oil production should see another noticeable increase in Q4 2022, although perhaps slightly less than my prior expectations due to some completions being pushed into early 2023.

Notes On NW Stack Development

SandRidge had drilled five wells and completed three wells by the end of Q3 2022 as part of its renewed NW Stack development program. It completed another two wells recently and expects to complete its sixth well in mid-November.

So far its wells have met expectations, with its first two wells (1 mile laterals) each averaging close to 300 barrels of oil per day and over 500 Mcf of gas per day over three months after first production.

Some of the wells under SandRidge’s 2022 development plan are being delayed until early 2023, so it believes it will end up below the midpoint of its guidance for $56 million to $70 million in capex, and will perhaps end up below the low end of that guidance.

While oil prices have come down since I looked at SandRidge at the end of August, it still expects to deliver 60% IRRs for NW Stack wells based on current costs (a bit over $5 million in D&C costs for a one mile lateral) and strip prices as of the end of October.

Cash Position

SandRidge has continued to add to its cash position, with approximately $241 million in cash and cash equivalents at the end of Q3 2022, after generating $36 million in free cash flow in Q3 2022. This is approximately $6.50 per diluted share in cash and cash equivalents.

I currently expect SandRidge to end up with approximately $270 million in cash and cash equivalents at the end of Q4 2022. Despite increasing oil production, SandRidge’s free cash flow is likely to be lower in Q4 2022 (compared to Q3 2022) due to weaker commodity prices, particularly for natural gas. This is partially offset by SandRidge’s natural gas hedges, which cover approximately 20% of its natural gas production in Q4 2022 and Q1 2023 at an average swap price of $8.39.

Notes On Valuation

My expectations around long-term commodity prices remain at $70 to $75 for WTI oil and $4.00 to $4.50 for NYMEX gas. In a scenario where commodity prices follow current strip until the end of 2023 and then long-term prices of $70 oil and $4.00 gas after that, I estimate SandRidge’s value at $22 per share. This increases to $25 per share at long-term $75 WTI oil and $4.50 NYMEX gas.

SandRidge does have over $1.6 billion in NOLs and it mentioned potentially using its cash to purchase PDP assets. This may add some value to SandRidge in the future since PDP-only assets can be found for a significant discount to PDP PV-10, and SandRidge can harvest the cash flows from those assets without having to deal with cash income taxes.

Conclusion

SandRidge’s NW Stack wells have performed to expectations so far, boosting its Q3 2022 oil production by approximately 25% compared to Q2 2022. SandRidge’s oil production should see a further boost in Q4 2022, although some of the wells it originally planned to complete in late 2022 have now been bumped to early 2023.

SandRidge also has around $241 million in cash that it may use to purchase PDP assets that will help utilize its large amount of NOLs. This may add a bit to its value, although I currently estimate its value at around $22 to $25 per share based on long-term commodity prices.