Q1 2024 SandRidge Energy Inc Earnings Call

Participants

Scott Prestridge; SVP - Finance Strategies; SandRidge Energy Inc

Grayson Pranin; President & CEO; SandRidge Energy Inc

Brandon Brown; CFO & SVP; SandRidge Energy Inc

Dean Parrish; Chief Operating Officer, Senior Vice President; SandRidge Energy Inc

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the First Quarter 2024 SandRidge Energy conference call. (Operator Instructions) As a reminder, today's call is being recorded. I will now hand today's call over to Scott Prestridge, SVP of Finance Strategies. Please go ahead, sir.

Scott Prestridge

Thank you, and welcome, everyone. With me today are Grayson Pranin, our CEO; Brandon Brown, our CFO; as well as Dean Parrish, our COO. We would like to remind you that today's call contains forward-looking statements and assumptions, which are subject to risks and uncertainty, 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. With that I'll turn the call over to Grayson.

Grayson Pranin

Thank you and good morning. I'm pleased to report on another quarter that the company's activity continues to translate to free cash flow from our producing assets. Before expanding on this, Brandon will touch on a few highlights.

Brandon Brown

Thank you, Grayson. Despite the downdraft of natural gas pricing during the period, the Company generated adjusted EBITDA of nearly $15 million. As we have pointed out in the past, our adjusted EBITDA is a unique metric for SandRidge due to us having no, I and very little TI given that we have no debt and a substantial NOL position that shield our cash flows from federal income taxes on the IR portion, we in fact generated $2.7 million of interest income during the quarter from cash held in various high yield deposit accounts. The Company initiated a return of capital program last year with total cumulative dividends paid to date of $141 million or $3.81 per share, including the one-time dividend of $1.50 per share paid on February 28th of this year. In addition, our Board declared an $0.11 per share dividend in Q1 2024, which represents a 10% increase over the regular way dividends paid in 2023 and was paid on March 29th. Our Board declared another $0.11 per share quarterly dividend last week. That will be paid on May 31st, 2024 to shareholders of record on May 17th, 2020 for cash, including restricted cash at the end of the first quarter was more than $208 million, which represents over $5 and $0.6 per share of our common stock issued and outstanding. The Company has no long-term debt or revolving debt obligations as of March 31st, 2024 and continuing to live within cash flow, funding, all capital expenditures and dividend distributions with cash flow from operations and cash held on the balance sheet. Commodity price realizations for the quarter before considering the impact of hedges for $75.8 per barrel of oil, $1.25 per Mcf of gas and $23.65 per barrel of NGLs. As alluded to earlier, we have maintained our large federal NOL position, which is estimated to be $1.6 billion at quarter end. Our NOL position has and will continue to allow us to shield our cash flows from federal income taxes.
Our commitment to cost discipline continues to yield results with adjusted G&A for the quarter of $2.8 million or $2.3 per BOE. We continue to generate net income for our shareholders. During the quarter, we earned net income of approximately $11 million or $0.3 per basic share. Net cash provided by operating activities were approximately $16 million quarter concluded with the company producing approximately $15 million in free cash flow for the quarter, which represents a conversion rate of approximately 99% relative to adjusted EBITDA.
Before shifting to our outlook, we should note that our earnings release contain key provide further details on our financial and operational performance during the quarter.

Grayson Pranin

Thank you, Brandon. I thought it would be helpful to walk through some of the Company's highlights, management strategy, operations and other business details as I mentioned previously, we had positive results in free cash flow this quarter, while converting over 99% of EBITDA to free cash flow production for the quarter from our Mid-Con assets averaged over 15 MBOE per day with oil volumes benefited from our prior development in the Northwest STACK area. While we did experience higher than normal seasonal downtime associated with cold weather earlier in the quarter. Our operations and field team did a great job in responding and bringing wells back online. Dean will expand on operations later in the call. The company's largest natural gas purchaser remained in ethane rejection during the quarter shifted to recovery in April. The duration of ethane recovery is dependent on the dynamics of pricing between natural gas and ethane moving forward, NGL volumes will increase while ethane recovery as more ethane is extracted out of the natural gas stream, which could also benefit total BOE volumes.
I'll just pause for a moment to revisit the key highlights of SandRidge. Our asset base is focused in the Mid-Continent region, but the primarily PDP well set, which do not require any routine flaring of produced gas fields. Well, unlisted assets are most fully held by production long history, shallowing and diversified production profile and double digit reserve life. These assets include more than 1,000 miles, each of owned and operated SWD and electric infrastructure over our footprint. This substantial owned and integrated infrastructure provides company with both cost and strategic advantages, bolstering asset operating margin to reduce lifting as well as water handling and disposal costs and combined with other advantages, help derisk individual well profitability for a majority of our producing wells down to $40 WTI and $2 Henry Hub. While we have recently seen spot prices below $2, Henry Hub WCI. has been in the mid 70s to 80s, which has and will buoy our revenue and cash flow this year. Our assets continue to yield free cash flow with total net cash as of quarter end of more than $208 million this cash generation potential provide several paths to increase shareholder value realization and has benefited by a low G&A burden. In fact, interest income earned from our cash assets nearly offset our cash G&A this quarter as we realize value from our producing assets and generate cash. Our Board is committed to utilizing our assets, including our cash to maximize shareholder value, SandRidge's value proposition is materially derisked from a financial perspective by our strengthened balance sheet for both net cash position, no debt financial flexibility and approximately $1.6 billion in the wells further the company is not subject to MVCs or other significant off-balance sheet financial commitments.
Finally, it is worth highlighting that we take our ESG commitments seriously and have implemented disciplined processes around them. We remain committed to our strategy to focus on growing the cash value and generation capability of our business in a safe, responsible, efficient manner while prudently allocating capital to high return organic growth projects remaining open to value accretive opportunities. This strategy has five points. The first is to maximize the cash value generation capacity of our incumbent Mid-Con PDP assets by extending and flattening our production profile with high rate of return production optimization projects as well as continuously pressing on operating and administrative costs. The second is to ensure we convert as much EBITDA to free cash flow as possible by exercising capital stewardship and investing in projects and opportunities that have high risk adjusted fully burdened rate of return to economically add production in the current commodity environment. The third is to maintain optionality to execute on value, accretive merger and acquisition opportunities. It could bring synergies leverage to the Company's core competencies complement its portfolio of assets for the utilizes approximately $1.6 billion of net operating losses for otherwise yield attractive returns for our shareholders for as we generate cash, we will continue to work with our Board to assess path to maximize shareholder value to include investment in strategic opportunities for return of capital and other uses. To this end, the Company expanded its return of capital program this past quarter, which consists of a $1.61 per share of dividends paid this year and a total of $3.81 per share since establishing our return of capital program last year and $0.11 per share regular weight dividend, an increase of 10% from last year, as well as an opportunistic share repurchase program of up to $75 million. Please note that the Company's cash position is also a strategic advantage and provides competitive leverage in evaluating M&A, especially given the outlook on more persistent interest rates, capital markets and impact of the optionality on the number and type of opportunities that could become available at certain levels know that there is a high bar at both the management and Board levels for mergers and acquisitions. Management will continue to assess and promote regular way of return of capital discussions. Advanced M&A evaluations meet with shareholders and investors and work with our Board to further enhance path to maximize shareholder value. These topics remain paramount. In the interim, we have shared that the favorable banking terms and keep our cash position diversified across interest-bearing accounts, it multiple significant well-capitalized financial institutions. As Brandon mentioned before, the Company earned $2.7 million in interest income this past quarter. Final table to uphold our ESG responsibilities.
Now shifting operations, I will turn things over to Dean.

Dean Parrish

Thank you, Grayson. Let's start on our capital program. This year, we plan to complete 14 Artificial Lift conversions as the Company continues to focus on high return and value, adding projects that provide benefits such as lowering forward-looking costs, enhancing production on existing wells and further moderating its decline profile. The systems we have and will be installing are tailored for the wells current fluid production and will reduce the electrical demand from the current artificial lift system is key to decreasing future utility costs in addition to artificial lift conversions, our production optimization campaign this year includes fuel completions accessing previously unstimulated intervals, recompletions that would add new uphole zones and proven productive formations and re-frac that would restimulate quality reservoir activity. And first production for a majority of the heel completion recompletion and refrac projects will occur in mid to late second quarter, given the lower natural gas prices in the near term and that our Mid-Con assets are 99% held by production, which cost effectively preserves the center of our development option. We did not operate a drilling rig this quarter and will defer more meaningful levels of development to maximize returns on our inventory in an appropriate commodity environment.
That said, we will continue to monitor commodity price dynamics and maintain flexibility to adjust as we have in the past, while being disciplined in the near term, commodity prices firmly over $80 WTI and $4 Henry Hub over a confident tenor and or reduction in well costs are needed before we would return to exercise the option value of further development or well reactivations. The focused efforts over the past several quarters and optimizing our well's production profile and cost focus has contributed to flattening the expected base asset level decline of our already producing assets to single digits average over the next 10 years before the impact of further production optimization development or acquisitions. The Company continues to ensure that all projects with high rate of return thresholds and remain carefully discipline as the commodity price landscape changes.
Now shifting to lease operating expenses, despite continued inflationary pressures and an increased well count from our prior well reactivation and development programs. Loe and expense workovers for the quarter were approximately $10.9 million, or $7.92 per BOE. As Grayson highlighted earlier, our operations and field team successfully managed the operational impacts of seasonal cold weather throughout the first quarter, which impacted the timing of expense workover activities as we work to repair Artificial Lift failures to bring wells back online quickly, while production in the first quarter was also impacted by seasonal cold weather. Our projected long term decline rates remained stable due to the nature of the Company's asset base and the continued focus on production optimization efforts. We are projecting a decrease in expense for flavors over the year as well as a softening in utility costs and reduced water handling costs. We will continue to actively press on operating costs through rigorous bidding processes, leveraging our significant infrastructure operations center and other company advantages.
With that, I'll turn things back over to Grayson.

Grayson Pranin

Thank you, Dean, and wanted to circle back briefly to reinforce a few salient points on commodity prices. First is that a majority of our producing properties are economic down to $40 WTI and $2 Henry Hub. In addition, while oil made up 15% of our total production this quarter, it contributed over 50% of oil and gas revenue by current natural gas prices at around $2 before booking future curves remain in contango and at recent strip projected to nearly double spot price by this winter also WGI.'s remain constructive in the high 70s to 80s. While we have judiciously decreased capital spending in light of natural gas prices, more significant reduction in oil prices and a structural change in natural gas futures would be needed before we implemented more severe steps like material proactive well for Chairman. However, we will continue to monitor commodity prices and have the financial and operational flexibility to make further adjustments in response to positive or negative commodity prices in the future to prudently steward the business and optimize cash flows that's set to reinforce my earlier comments.
Enbridge's value proposition is materially derisked from a financial perspective by a strong balance sheet, robust net cash position, no debt financial flexibility of approximately $1.6 billion in NOLs, long and short, the company is well positioned to navigate, if not leverage, i.e., M&A. The current landscape. While we have prudently reduced activity near term, it tempered commodity price environment to be constructive for M&A are producing Mid-Con assets will continue to generate cash flow near term with the recent strip natural gas prices projected to increase over the next year plus in the interim, the lower natural gas and NGL price environment to present more cost effective opportunities for acquisitions, which would then be positioned to benefit from future price improvements in addition to further leverage that temporal low natural gas price environment as well as activity around us, we have allocated capital for targeted high-graded leasing near our footprint this year, which could further bolster our drilling inventory in the future.
Shifting back to administrative expenses were able to keep adjusted G&A to $2.8 million for the quarter or approximately $2 per BOE, which compares favorably with our peers. The efficiency of our organization stems from our core values to remain cost disciplined as well as prior initiatives which have tailored our organization to be fit for purpose. We continue to balance the weighting of field versus corporate personnel to reflect where we actually create value and outsource necessary, but more perfunctory and less core functions such as operations, accounting, land administration, IT tax and HR. Given our efficient structure and ability to flex with both activity and commodity prices, our total personnel has remained consistent at just over 100 people while retaining key technical skill sets that both the experience and institutional knowledge of our area of operations. We believe that this efficiency and structure are favorable advantages that can be effectively applied over a broader asset base and a benefit as a Company evaluates the potential for M&A.
In summary, the Company has more than $208 million net cash and cash equivalent at quarter end, which represents over $5.60 per share of our common stock issued and outstanding amid composition that at 99% held by production, which preserves the option value of future development potential in a cost effective manner. Low overhead, top-tier adjusted G&A of approximately $2 per BOE for the quarter, no debt and in fact, negative leverage, positive free cash flow and a growing net cash position supported by the first production profile, flattening expected annual PDT. decline to single digit average over the next 10 years in a multi digit reserve life asset base, $1.6 billion in NOLs, which will shield future free cash flow from federal income taxes and a large owned and operated SWD and electrical infrastructure, which provides cost and strategic advantages requiring little to no future capital maintain.
This concludes our prepared remarks. Thank you for your time. We will now open the call to Q&A.

Question and Answer Session

Operator

(Operator Instructions) At this time, there are no questions. This does conclude today's call. Thank you for joining, and you may now disconnect your lines.