SandRidge Energy Explores A Significant Capex Reduction For 2020 – SandRidge Energy, Inc. (NYSE:SD)

SandRidge Energy (SD) indicated that it might pursue a minimal capex plan in 2020 in order to maximize positive cash flow. The company’s debt situation is currently fine, but it is challenged by weak prices for NGLs and natural gas. Those low commodity prices are pushing the cash flow from its legacy Mississippian Lime assets down to very modest levels and making it unable to develop its North Park Basin assets without substantial cash burn.

Pricing Environment

SandRidge mentioned that it was reevaluating its 2020 capital plans „with an emphasis on cost control and free cash flow generation“ due to „the current challenging price environment“.

The pricing environment for oil has been pretty good, with 2020 WTI strip around $56-57 at the time of the company’s press release and several dollars higher now. The reference to the challenging price environment appears to be more due to the weak prices for natural gas and NGLs (which are close to 70% of SandRidge’s production). Low prices for those commodities hamper SandRidge’s ability to fund its oily North Park Basin development without major cash burn.

The North Park Basin should offer decent returns at near $60 WTI oil despite some questions about how long-term production holds up versus type curve. However, the payback from the North Park Basin wells aren’t quick enough for the North Park Basin development to be mostly self-funding.

High Decline Rates

SandRidge also faces challenges with the apparent high decline rates at its Mississippian Lime asset, which accounted for around 78% of its total production in Q3 2019. Average daily production for the Mississippian Lime has declined close to 10% quarter over quarter since the beginning of 2019.

(In MBOE) Q1 2019 Q2 2019 Q3 2019
Mississippian Lime 2,650 2,468 2,213
NW Stack 236 309 274
North Park Basin 275 450 363
Total 3,161 3,227 2,850

With the continued Mississippian Lime production declines, the lease operating expense per BOE for those assets may end up over $10 in 2020. This would be pretty high given that the revenues per BOE may only be around $17 with the very low oil percentage for the Mississippian Lime.

2020 Outlook With Minimal Capex

If SandRidge significantly reduces its capital expenditure budget to $50 million in 2020 (from 2019’s $160 million to $170 million budget), then I project that the company would end up with around 10 MMBOE (29.5% oil) production in 2020. This would represent an approximately 15% decline in both total production and oil production from 2019 levels.

At current strip prices, SandRidge would end up with around $224 million in revenues.

Type Barrels/Mcf $ Per Unit $ Million
Oil 2,950,000 $55.30 $163
NGLs 2,530,000 $14.00 $35
Natural Gas 27,120,000 $0.95 $26
Total Revenue $224

It would have $189 million in total cash expenditures in this scenario, resulting in around $35 million in positive cash flow.

$ Million
Lease Operating Expenses $92
Production Taxes $16
Cash General & Administrative $28
Interest Expense $3
Capital Expenditures $50
Total $189

This would help SandRidge pay down a fair bit of its outstanding credit facility balance. The company currently has $62 million borrowed under its credit facility (which has $270 million in elected commitments). SandRidge’s main issue is not debt though, but rather the fact that its Mississippian Lime asset is probably generating only very modest amounts of cash flow at current strip prices. With the Mississippian Lime reserves at only 17% oil and with high lease operating expenses, the EBITDA generated from those properties may only be $30 million in 2020 at current strip prices, without any G&A burden attached.

Conclusion

SandRidge is contemplating a significant reduction in capital expenditures in 2020. This appears to be due to weak prices for NGLs and natural gas, which hamper its ability to fund its North Park Basin development from the cash flow generated by its legacy assets.

SandRidge’s debt and liquidity situation is fine for now. However, the company does need a large increase in natural gas and NGL prices going forward in order for it to be able to substantially grow North Park Basin production without significant cash burn. As time goes on without further development, SandRidge’s Mississippian Lime production will continue declining, pushing up the production costs per BOE and also reducing its ability to provide cash flow to support development of other assets.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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