In the midst of debt struggles, SandRidge Energy Inc. (NYSE: SD) is choosing to diversify its portfolio with oily assets in the Niobrara Shale.
The Oklahoma City company said it has agreed to acquire assets from EE3 LLC, a company backed by private equity firm Yorktown Partners LLC, in $190 million cash transaction. The deal includes 136,000 largely contiguous net acres in the North Park Basin in Colorado.
SandRidge’s portfolio also gains 1,000 barrels of oil equivalent per day (boe/d) and a second core area to the company’s portfolio. SandRidge also operates Midcontinent assets in northern Oklahoma and southern Kansas.
Despite a minor bump in its stock price, SandRidge has yet to rebound above $0.50 and last traded at $1 on June 25.
SandRidge purchased Piñon Gathering Co. LLC, a gathering system, in October and in the third quarter of 2015 lowered its lease operating expense (LOE) and made a dent in its debt.
But Raymond James analysts said it was hard to get a read on the company, which may see initial upside in the stock as it diversifies to the oily Niobrara.
Analysts are still trying to get a “look behind the curtain, as it is not clear what the strategy is given one week it is acquiring assets—Piñon gathering asset, Niobrara—and the next it is struggling to preserve liquidity—suspension of preferred dividend, debt restructuring.”
SandRidge aims to get drilling right away in the Niobrara, with plans to spud its first well in January. The company plans to drill continuously in 2016, adding a second rig mid-year with the target of about 25 wells.
Thirteen drilling permits have already been approved. In total, the company has identified more than 1,300 gross drilling locations.
The company’s position in the Niobrara has the potential to add 50% or more to the company’s current reserves base. It also has more oil content compared to its Midcontinent assets in the Mississippian Play, said James D. Bennett, president and CEO, on SandRidge’s third-quarter earnings call on Nov. 5.
The Niobrara assets are expected to generate “higher returns as oil prices recover,” Bennett added.
However, the company hasn’t soured on its Midcontinent assets. Production in the region is up 13% from 2014, even while dramatically scaling back rigs there.
SandRidge achieved its 2015 goal of $2.3 million per Mississippian lateral a quarter early. In response, the company has raised production guidance to 29.5-30.5 million barrels of oil equivalent (MMboe) from 29-30.5 MMboe.
The company’s purchase of Piñon gathering lines will support natural gas and CO2 production from its Piñon Field in West Texas. The $126 million acquisition is expected to increase EBITDA by about $40 million through annual expense reductions beginning in November.
The company paid for the Piñon deal with $48 million cash and $78 million of its senior secured notes due 2020.
The Niobrara acquisition is expected to close in the fourth quarter of 2015.
Debt Woes
In July, SandRidge received a de-listing noticed from the New York Stock Exchange because it had fallen below continued listing requirement of $1 per share. The company has six months to return to compliance. As of open on Nov. 6, SandRidge’s stock was trading at $0.47 per share.
By September, SandRidge decided to suspend its $3.50 per share semi-annual dividend on its preferred stock. The company made the decision to avoid “significant dilution” to the its equity holders, Bennett said in a Sept. 28 release.
During the third quarter, the company also made several bond repurchases and exchanges. In total, the company addressed $925 million of debt, retiring $350 million and exchanging $575 million into debt, convertible into equity.
The company’s $500 million borrowing base was affirmed during its fall redetermination, which allowed for an increase in cash available for the repurchases of notes.
In addition, the company incurred a non-cash impairment charge of about $1.1 billion during the quarter primarily due to lower oil prices, the company said.
The company has also been making progress on selling noncore assets and year-to-date have closed more than $50 million of divestitures, said Julian Mark Bott, executive vice president and CFO, during SandRidge’s third-quarter earnings call.
The assets consisted of noncore real estate and oil field service equipment.
Sandridge said it ended the third quarter with $1.3 billion in liquidity, including $790 million in cash.
Perfect Fit
Even though SandRidge remains focused on liability management and debt reduction, it’s critical for the company to create value through oil production, Bennett said.
The Niobrara acquisition “represents judicious use of our liquidity,” he said in a statement.
The Niobrara acreage is located in rural north-central Colorado and is ideally suited for pad drilling, Bennett said. It is about 50% HBP and by two federal units.
Sixteen horizontal wells have already been drilled, derisking most of the acreage. Current production is about 1,000 boe/d, mainly from the Niobrara D, which is the company’s initial target.
SandRidge will share the expertise it has already gained in the Midcontinent, where it owns about 1.85 million acres, of using multilateral, extended lateral designs and improved completion designs.
The company plans to develop both of the areas "at a pace that optimizes learnings and allows for high grading," Bennett said.
"We anticipate improved corporate capital efficiency by concurrently developing our strong Midcontinent and newly acquired Niobrara resource base,” he added.
Contact the author, Emily Moser, at emoser@hartenergy.com.