The Power of Us was singing a little Jose Feliciano in Oklahoma City on the eve of the 2011 holiday break. It is not often that you hear Feliz Navidad echoing through the headquarters of SandRidge Energy, Inc., but then not every holiday season features a $1-billion joint venture with Repsol YPF, the Madrid, Spain-based integrated European Major.

Up for dibs is 363,636 net acres of liquids-rich Mississippi Lime acreage, which could net Repsol 90,000 Boepd by 2019.

For SandRidge, the Repsol joint venture was no lump of coal. Besides the $250-million immediate cash contribution to seal the deal, Repsol will finance $750 million in drilling carries over three years, which will help the Oklahoma City independent accelerate the development phase of the carbonate play without additional cash hemorrhage. The joint venture starts with 200 horizontal wells in 2012 with plans to drill more than 1,000 wells by 2014.

The other big news, of course, is announcement of a western Kansas extension to the Mississippi Lime, which heretofore had straddled the Oklahoma/Kansas border.

The Mississippi Lime is a sort of hybrid play like the Granite Wash. While it doesn’t match the definition of unconventional oil and gas (the Mississippi is a high-permeability carbonate rather than a low-permeability shale, for example), the application of unconventional methodologies including horizontal drilling and multi-stage fracturing have provided the keys to unlock up to 500,000 Boe per well in EURs.

Rig count has picked up in the Mississippi Lime over the last 90 days—and particularly the month of December. There are now more than 20 operators active in the lime, including some big name players like Royal Dutch Shell.

‘Tis the Season

Repsol has been an aggressive shopper this holiday season. The company just inked a $1.5-billion contract to develop Perla natural gas field offshore Venezuela and signed a separate $850-million joint venture with Alliance Oil Co. Ltd to prospect for oil and gas in Russia. Furthermore, Repsol’s interest in land resources in the U.S. is a fascinating coda to the Loma la Lata shale discovery in Argentina last July, which contains an estimated 927 MMboe in reserves. But it takes two to tango in Latin America and Repsol YPF is patiently awaiting a beneficial long-term outcome to the convoluted political and economic environments that comprise modern-day Argentina and Bolivia.

In fact those high-risk foreign adventures suggest Repsol has been an economic thrill seeker, especially when considering that the Spanish IOC takes a role as a minority player. So jumping into an early-cycle Mississippi Lime play headfirst with a cash-strapped U.S. independent has to be the closest thing to a sure bet this time of year outside the Dallas Cowboys’ annual holiday season collapse.

Repsol carries its own cache as a partner-oriented European IOC. The company has experienced recent success with Petrobras in Brazil. And, like Statoil, another partner-oriented European IOC, the Repsol got its feet wet in North American operations in the deepwater Gulf of Mexico where the Spanish IOC is a 28% partner in the Shenzi project. The Mississippi Lime joint venture also fits easily within Repsol’s broader five-year plan to re-invigorate its upstream efforts in part by focusing on OECD upstream assets.

The deal is the second announced Mississippi Lime JV since August and boosts the running total of U.S.-joint ventures to nearly $37 billion with another half dozen in the wings (including at least two more in the Mississippi Lime). The U.S. joint venture movement should pass the $40-billion threshold before the Mayan long-count calendar expires this time next year (and that will keep a lot of land rigs busy over the next half decade, assuming Hollywood got the doomsday expectations all wrong).

For its part, SandRidge has inaugurated the two Mississippi Lime JVs for a combined $1.5 billion, including $1 billion in drilling carries. Previously, SandRidge signed South Korea’s Atinum Partners to a $500-billion Mississippi Lime JV split evenly between cash and drilling carry. (The company’s Mississippian Drilling Trust I has raised another $334 million. for drilling lime wells). Additionally, SandRidge may put another 500,000 Mississippi Lime acres up for a possible $1.83-billion joint venture in the wake of the Repsol deal.

The fact of the matter is that SandRidge became a serial dealmaker the old-fashioned way: it had to. Credit the company with being among the first independents to pivot towards liquids in the wake of the 2008 commodity price collapse. Only SandRidge made the transition via the transactions market after falling natural gas prices rendered the company’s West Texas Overthrust play uneconomic. To add insult to injury, low natural gas prices also scuttled a $230-million attempt to buy Crusader Energy’s Midcontinent gas properties in 2009. Remarkably, SandRidge responded with a quick pivot, spending a combined $2.3 billion for Forest Oil’s conventional oil properties in the Permian Basin in late 2009 followed by the acquisition of Arena Resources Inc. and its San Andres Permian Basin reserves in April 2010.

The pivot to oil was the first challenge. Today, SandRidge finds itself in the company of Whiting (Bakken), and Concho Resources (Permian Basin) as the only large public companies who have 100% of their rigs drilling for oil.

But paying for the transition has been the second challenge. SandRidge has sold Permian Wolfberry, worked through several corporate financings to raise $3.5 billion in capital and quietly added 2 million acres in the Mississippi Lime (1.5 million net) to its lease portfolio. SandRige currently has $2.8 billion in senior notes outstanding and faces $1.8- to $2.1 billion in annual expenditures to develop its shallow conventional oil holdings through 2014, at which time the company should be able to live within cash flow.

Meanwhile SandRidge finds itself in the company of players like EOG Resources, Chesapeake Energy Corp., and former peers like PetroHawk Corp. and Brigham Exploration whose sizeable bites of the unconventional holiday dinner was more than cash flow could chew.

For SandRidge, the short-term scramble for capital has led the company to pioneer a pair of innovative drilling trusts in the Mississippi Lime and the Permian Basin and those trust units, frankly, have outperformed the company’s battered stock in the latter half of 2011.

Of course the long-term picture is whether those deals will create enough financial intricacy (a la Chesapeake) to discourage potential suitors. In other words, will SandRidge (and similar public independents with big acreage positions and a tendency to outspend cash flow) survive the expected domestic resource play roll up by well-capitalized—and reserve growth hungry—Major IOCs?

May HK and BEXP R.I.P.

Down in Mississippi

As for the Mississippi Lime, the big picture takeaway is that operators now believe they have cracked the geologic and engineering codes for the original Mississippi Lime and are ready to move into the harvest phase. SandRidge, for example, has completed nearly 200 wells in the Mississippi Lime. That knowledge may shorten the cycle on developing the western Kansas Mississippi Lime extension.

Make no mistake: further development is coming to the lime. Chesapeake Energy Corp. is talking up its own Mississippi Lime joint venture. And if there are any remaining doubts about the viability of the lime, consider that Floyd Wilson—late of Petrohawk—is back in the game with the $550-million purchase of Ram Energy Resources, Inc., whose primary holdings lie in the burgeoning play.

Adding those events to the $1-billion Repsol JV illustrates the industry is overcoming the biggest hurdle in the carbonate play, which is generating the capital necessary to convert a potential per well 300,000 to 500,000 barrel EUR resource into $100 per barrel oil production.