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SandRidge Energy, Inc. (NYSE:SD) is making a $144 million cash acquisition of Western Anadarko Basin assets. This helps address SandRidge’s challenges around diminishing free cash flow as its existing production (particularly oil) declines without additional development.
I had highlighted SandRidge’s oil production decline as something to monitor before, and its Q2 2024 oil production declined more than I expected. SandRidge’s Q2 2024 oil production was down by 11% compared to Q1 2024 and 36% compared to Q2 2023.
With SandRidge indicating it would need prices to be firmly above $80 WTI oil and $4 Henry Hub gas to do additional NW Stack development, SandRidge’s oil production was likely going to continue declining. This could have reduced SandRidge’s projected EBITDA to around $40 million in 2026 at current strip prices.
The assets that SandRidge is acquiring generated over $50 million in annualized EBITDA (based on production up to May 2024). Current production from those assets is higher now, but the near-term decline rates also appear to be quite high.
The acquired assets also include development opportunities that work at lower commodity prices than SandRidge’s NW Stack acreage. SandRidge will provide updated guidance once the deal closes, so there will be a better idea at that point around SandRidge’s development.
I am now valuing SandRidge at approximately $13 to $15 per share.
Acquisitions
SandRidge pulled the trigger on a major acquisition (expected to close in Q3 2024) after previously maintaining a large cash position and only making minor acquisitions. SandRidge is acquiring producing assets and leasehold interests in the Western Anadarko Basin for $144 million in cash from Upland Exploration/Upland Operating.
These assets are currently producing approximately 6,000 BOEPD (approximately 40% oil, 30% NGLs, and 30% natural gas) from 42 producing wells. There are also 4 DUCs that could be completed during 2024, as well as an inventory of up to 22 2-mile laterals in the Cherokee play. The lifetime oil cut of the Cherokee wells may be closer to 30% based on three-stream reporting.
SandRidge mentioned that the annualized EBITDA from the acquired assets (based on production through May 2024) was over $50 million. This appears to imply that production averaged closer to 4,500 BOEPD during that time period.
As SandRidge noted on its Q2 2024 earnings call, the producing wells are relatively new, with all the wells coming online within the last few years. The apparent increase in production (with current production around 33% more than estimated production through May 2024) suggests that some wells have come online recently. The near-term decline rate from the acquired assets is likely to be high.
It is challenging to determine whether SandRidge got a good deal with this acquisition due to the limited information released so far. However, a major acquisition makes sense from a strategic point of view since cash G&A could otherwise reach 20+% of production margins by 2026 due to SandRidge’s declining production.
SandRidge also made a minor $2 million acquisition of producing assets adjacent to its Alfalfa, Grant, and Woods County assets.
Q2 2024 Results
SandRidge’s Q2 2024 results point to significant continued oil production declines with its legacy assets. The oil production declines combined with weak realized ($0.66 per Mcf) natural gas prices resulted in SandRidge only generating $9 million in free cash flow during the quarter.
SandRidge’s total production declined by only 1% from Q1 2024 to Q2 2024, although this was aided by its largest natural gas purchasers switching from ethane rejection to ethane recovery for two months during the quarter.
Ethane recovery results in a bit over two barrels of ethane in exchange for one BOE of natural gas, so that boosts total production a bit. If SandRidge’s largest natural gas purchasers had remained in ethane rejection for Q2 2024, I estimate that its total production would have declined by approximately 4% from Q1 2024.
SandRidge’s oil production is declining at a much faster rate than total production, as its oil production declined by approximately 36% from Q2 2023 to Q2 2024 and 11% from Q1 2024 to Q2 2024.
Cash Position
SandRidge had $211 million in cash at the end of Q2 2024. Pro forma for its acquisitions it would have $65 million in remaining cash, without any purchase price adjustments.
With the expected interest rate cuts though, having a large cash balance wouldn’t have generated as much interest income. SandRidge can probably generate around $2 million to $3 million per year in interest income with its remaining cash.
Legacy Assets
If SandRidge hadn’t made its recent acquisitions, I believe that it would have generated approximately $50 million EBITDA in 2025 and $40 million EBITDA in 2026 (at current strip prices). This assumes minimal capex, with free cash flow being fairly similar to EBITDA.
SandRidge would benefit from improved natural gas prices, with the Henry Hub strip near $3.25 for 2025 and near $3.50 for 2026. However, the declining oil production would result in diminishing EBITDA in future years.
The acquired assets should roughly double SandRidge’s EBITDA in 2025 if it aims for around 4,500 BOEPD production from them.
Notes On Valuation
I am continuing to value SandRidge based on cash on hand plus a range of 0.7x to 0.9x PDP PV-10 (based on my long-term commodity price estimates of $75 WTI oil and $3.75 Henry Hub natural gas).
I’ve reduced my estimate of SandRidge’s value slightly to a new range of $13 to $15 per share to reflect continued high oil production declines at SandRidge’s legacy assets. The decline rate is resulting in some negative revisions to my estimates of SandRidge’s PDP oil reserves.
Due to the limited information, I am currently neutral on SandRidge’s Western Anadarko Basin acquisition from a valuation standpoint. However, I view the acquisition positively from a strategic standpoint and believe that SandRidge has the potential to increase its dividend after the deal closes.
I have assumed that SandRidge paid in that (0.7x to 0.9x PDP PV-10) range for the assets it is acquiring. I will revise my valuation estimate accordingly if new information comes out that indicates that it paid outside that range for those assets.
Conclusion
SandRidge’s oil production has been declining quickly, with Q2 2024 oil production down 36% compared to Q2 2023. Continued oil production declines would reduce SandRidge’s projected EBITDA in future years, while interest rate cuts would also reduce the interest income it could generate from its cash on hand.
In that context, the $144 million Western Anadarko Basin acquisition makes strategic sense for SandRidge. The acquisition has the potential to double SandRidge’s 2025 EBITDA (compared to without the acquisition), while free cash flow should also be meaningfully improved.
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