SandRidge Energy: Steep Production Declines In 2020 As It Attempts To Manage Its Debt

Summary

• SandRidge is at risk of seeing its production shrink considerably during 2020.
• It is shutting in wells (some permanently) as well as spending minimal capex during 2020.
• This (combined with the sale of its headquarters) should allow the company to avoid a borrowing base deficiency despite its 67% borrowing base reduction.
• SandRidge needs $55+ WTI oil for the best of its assets to have decent economics.
• At lower prices, it will need to deal with more declines in production.

SandRidge Energy (SD) is at risk of continuing to shrink as its assets require much higher oil prices to deliver decent economics. The company has reduced its 2020 capex to minimum levels and also reached an agreement to sell its headquarters building. This should allow it to keep its credit facility borrowings below its greatly reduced borrowing base.

SandRidge may have some upside with $50s oil, but otherwise it will continue to see its production decline and have its cash flow go towards paying off its credit facility debt.

Updated 2020 Outlook

SandRidge has reduced its 2020 capex budget to minimal levels and has also shut in wells (both temporarily and permanently) due to low commodity prices.

At current strip of roughly $35 WTI oil and $2.05 NYMEX natural gas, SandRidge is now projected to end up with $103 million in revenues after hedges. There may be some upside from NGL prices, as some components (propane, butane, ethane) have improved significantly in recent weeks, although the natural gasoline component remains pretty weak.

SandRidge's 2020 capital expenditure budget may end up at around only $7 million as it is only planning on spending on projects required to maintain safety or mechanical integrity, or on minor workovers.

The company has also worked to cut costs, reducing both its G&A and its lease operating expenses by around 30% compared to its previous guidance. The shut-in of unprofitable wells is contributing to the reduced costs. Thus, it may end up with $80 million in cash expenditures in 2020.

SandRidge would then have $23 million in positive cash flow in 2020 before working capital changes. This does not include plugging and abandonment costs though.

Projected Debt

SandRidge had $57.5 million in credit facility debt at the end of 2019. It also had a nearly $50 million working capital deficit at that time. This working capital deficit included $22.1 million in asset retirement obligations, although when the company filed its annual report in February 2020, it anticipated only incurring $4.5 million in actual plugging and abandonment costs in 2020.

I am now assuming that the company will incur $22.1 million in plugging and abandonment costs in 2020 as it shuts in a large number of wells due to the commodity price outlook.

The $23 million in positive cash flow and $35.5 million sale of its corporate headquarters may reduce its credit facility debt to around $49 million at the end of 2020, with no working capital deficit remaining.

SandRidge's credit facility borrowing base was reduced to $75 million (down from $225 million) and its credit facility matures in April 2021. The sale of its corporate headquarters should reduce its debt enough to keep its debt under its borrowing base limit. However, there is a risk that the borrowing base gets reduced further as SandRidge's PDP reserves diminish.

Beyond 2020

SandRidge's production is declining rapidly in 2020 due to its minimal capex spend plus shut-in wells (some of which are permanently shut in). This may result in its total production ending up at around 18,250 BOEPD (23% oil) exiting 2020.

At that level of production, the company would generate roughly $100 million in revenue at current 2021 strip prices (such as $37 to $38 WTI oil and $2.70 NYMEX natural gas).

I estimate that SandRidge could maintain its (value-weighted) production with around $75 million in capital expenditures. This would result in the company burning $40 million in cash in 2021 at current strip if it wanted to maintain production.

SandRidge appears to need upper-$50s WTI oil to be able to maintain production without cash burn. It is hampered by lacking top-tier assets. The company's Mississippian Lime and NW Stack assets could not compete for capital at mid-$50s WTI oil. Its North Park Basin XRL type curves showed decent returns at $55 WTI oil, but there were questions about how oil production from those wells held up over time.

Conclusion

While SandRidge Energy doesn't have that much debt, at below $55 WTI oil it appears likely to end up with continued declines in production. Its assets struggle to generate decent returns at below $55 WTI oil, and its credit facility borrowing base has been reduced by 67%.

SandRidge's credit facility matures in April 2021, although given the company's lack of other debt, it may be able to get that extended. Its credit facility lenders will likely want the company to keep its borrowings low though. For SandRidge to have significant upside probably requires a fairly quick return to $50s oil.

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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.