03
Dec

SandRidge 3Q07 Pre Call Notes

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(SD) $31.20

SandRidge Reports Solid 3Q But There's No Coverage Yet. Can't compare it to published estimates as there aren't any yet. This was brought to market by a power house investment banking syndicate led by Goldman, Lehman, and Banc of America and I see no reason for them to come with anything but glowing BUY recommendations beginning December 5 (they are permitted to begin coverage 30 days after the IPO).

Background: This is a gassy (80% of 3Q production was gas) mid-cap E&P ($4.2 B market cap; $5.6 B TEV) focused on developing a large play in the West Texas Overthrust (stacked targets: at least 2 sands and 2 cherts (quartz)). Click here for a quick background look at SandRidge I did back in July.

As for the quarter:

Guidance: None Given in the PR. They'll probably hint at some round production growth percentage targets as well as providing a little color on forward costs. Looking at their metrics I would estimate they can generate between $500 and $600 million of EBITDA next year. Costs are under control and will likely tread water or even decline slightly on a $/Mcfe basis as we move into next year.

Valuation: Not cheap but give it time, we're not talking about options here. My ballpark EBITDA would yield a 10x multiple which is a little pricey for the group but we are in the early stages here, and they will continue to grow production and reserves low double digits for quite some time (near 5,000 drilling locations at present). Also, with a reserve life approaching 20 years, SD should be compared with the longer reserve members of the group like KWK or SWN (which trade at much higher EBITDA multiples)...if they establish growth targets in the teens I would call the current multiple fair.

Reserves: up 8% from 2Q levels to 1.174 Tcfe. I'm glad to see Tom Ward following his old partner Aubrey McLendon's practice of putting forth quarterly reserve estimates. Finding and development costs were respectable: all-in came in at $2.86/Mcfe while drilling only F&D were $2.27. Year to date all-in costs are running $2.24 which is very respectable.

Costs Towing The Line: LOE was $1.79 per Mcfe for the 3Q; clean of tertiary (CO2 flood) oil recover costs and their small but costly GOMex operations, LOE was $1.55 / Mcfe.  That's very good and should stay under control as they, more than most, control their costs via their own fleet of rigs.

Largely Hedged in 2008. They've pretty much locked in the first 9 months of 2008's gas production at average prices in excess of $8 per Mcf. Notably, gas volumes hedged for the first half of 2008 are higher than 3Q gas production levels. Crude collars are unlikely to have a positive impact on production ($50 floors so if that gets used we'll all be having a bad day and mid $80 ceilings which may hurt a little) but either way the hedge volumes are small. I'm surprised that with their high cost tertiary oil recovery they don't hedge up production a little more and for some better prices than they have at present.

Conference Call: Tuesday, December 4th, 9 est, www.sandridgeenergy.com 

2 Responses to “SandRidge 3Q07 Pre Call Notes”

  1. 1
    TTupp Says:

    looks to me that the majority of the money is being made with spot VLCC’s. anyone know of a nice mid-cap name here? FRO & TK are nice but are mostly suez’s

  2. 2
    TTupp Says:

    also, it looks to me like FRO might have added the VLCC’s to the fleet recently since they saw little price appreciation during previous day-rate spikes…

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