Sandridge Energy: - Analysis of Q2 Results

[Petroleum economist]

Summary
Sandridge Energy Q2 production met expectations. Profit was lower than expected, due to lower gas prices. Production will jump in Q4 2024 after inclusion of the West Anadarko acquisition. Thereafter production then should restart the steady decline. The balance sheet is extremely sound and loaded with cash. Profitability is high due to low unit costs and no income taxes. Shareholder returns are generous.

Production
• Sandridge did not provide a Q2 production outlook.
• Q2 production (19.0 K BoE/d) was 1% down from Q1 (15,1 K BoE/d) and was identical to my expectation.
• Sandridge did not provide a Q3 outlook or an udated2024 prediction.
• For Q3 I expects decline to continue with a production of 14.4-14.5 K BoE/d.
• In Q4 the West Anadarko acquisition with 6.0 K BoE/d will be included.
• Therefore, I expect a Q4 production of 19.8-20.2 K BoE/d.
• In 2025 the decline should resume, although as yet is unclear what is the potential of the West Anadarko assets is.
• I expect a 2025 production of 19.3-19.5 K BoE/d
• In 2028 production may have declined to 18 K BoE/d

Balance sheet
• The SD balance sheet is very strong,
• Q2 solvency (80.2%) declined -1.3% versus late 2023 (81.5%) but still is very high.
• SD has $ 209.9 M cash on the balance sheet. Part of this will be utilized for the $ 144 M west Anadarko acquisition announced last week.
• The balance sheet allows shareholder returns.

Profitability
• Thanks to minimal staffing, unit costs are the lowest in industry at $ 16.70/BoE.
• SD has $ 1.6 B NOL’s and will pay only minimal income taxes for the next 10-15 years.
• Realized natural gas prices in Q2 ($ 0.66/MM Btu) were well below Q1 ($ 1.24/MM Btu) and also below expectations.
• Q2 net profit was $ 8.8 M (eps $ 0.24).
• For 2024, with WTI= $ 70-75/bbl, I expect a net profit (excluding non-cash hedging) of $ 45-48 M (eps $ 1.22-1.30, PE=9.7-10.3).
• From 2025 onward, with higher gas process the eps can increase to $ 2.04-2.35 (PE=5.3-6.1)
• SD Energy is very profitable.

Shareholder returns
• SD does no buyback shares.
• SD pays a regular quarterly dividend of $ 0.11
• SD paid in February a special dividend of $ 1.50
• Total yield in 2024 will be a very high 15.3%.
• In 2025 and subsequent years, the special dividend may be lowered to $1.00-1.20, equivalent to a still high return of 11.4-13.8%.

Conclusions
Production met expectations, but profit was lower than expected, due to low gas prices. Production will jump in Q4 with the West Anadarko acquisition. Thereafter production then should restart the steady decline. The balance sheet is extremely sound and loaded with cash. Profitability is high due to low unit costs and no income taxes. Shareholder returns are generous.

SD ranks a high 11th (out of 80). The high returns are very attractive, and with higher gas prices and the new production from West Anadarko can be maintained for an extended period.