A Close Look at SandRidge’s Results in the Mississippian

When Sandridge (SD) talks about its Mississippian acreage, it makes it sounds like there’s no “sweet spot” in the formation which implies that each of its counties are as good as the next.  There’s an advantage for SD to speak of its acreage like that, because with 1.85 million acres scattered across the Mississippian, the company is banking its future on the play (assuming it follows through with its plan to sell its Permian Basin assets).  Based on 160-acre spacing, SD estimates it has 11,000 net well locations of which it will have drilled a program total of 589 wells by year-end with 581 planned for 2013.  As shown by the graph below, the company’s early results in the Mississippian have me skeptical that all of its 11,000 well locations will be prospective for drilling at current commodity price levels.

SandRidge’s 30-Day Oil Production Rates in the Mississippian by County
Source: Oklahoma Corporation Commission / Kansas Geological Survey; The Energy Harbinger.
1The Oklahoma Corporation Commission (OCC) doesn’t provide natural gas production for wells designated as “oil wells”.  Oil cut based on initial production rates provided by the company in completion reports.
Note: 30-day production rates may differ from reported figures as the state doesn’t report the amount of days a well produced in a month.  For this reason, production may be understated.
Sample size: Alfalfa (46), Harper (13), Grant (43), Barber (7), Woods (13), Comanche (16), Total (138).

In Oklahoma, Alfalfa and Grant are its top producing counties although it has drilled a couple dozen wells in Eastern Woods County.  While production from Alfalfa looks to be much stronger than Grant, I don’t see much difference between these counties and expect them to perform similarly moving forward.  Alfalfa’s advantage over Grant can be attributed to two monster wells drilled by SD in the county, Puffinbarger 1-28H and 2-28H, both of which achieved 30-day production rates of more than 1,800 barrels of oil per day (BOPD).  The Woods County wells are gassier and less impressive overall, so I wouldn’t expect the company to do much there other than drill to hold.

In Kansas, results have been strong in Harper and Barber which are located across the border from the aforementioned Alfalfa and Grant Counties.  Production from Comanche, which is North of Woods, has been similar to Woods, thus less impressive than Harper and Barber.  All of this evidence leads me to believe that Woods and Comanche will be less economic than the counties to the east.  To that end, expect SandRidge to delineate its acreage in Sumner and Cowley (North of Grant and Kay Counties, Oklahoma) over the near-term.

A lot of people are wondering why SD’s impressive production numbers aren’t translating into bigger production “beats” with coinciding stock price appreciation.  One answer is steeper than expected declines in the Mississippian:

SandRidge Declines by Well
Source: Oklahoma Corporation Commission / Kansas Geological Survey; The Energy Harbinger.

The above wells are average to above average performing wells across SD’s acreage.  The company has to be disappointed by its Puffinbarger 1-28H well which has declined at a high rate since its impressive 120-day run when it produced at an average of 1,110 BOPD.  Despite recovering more than 150 MBO during its first six-months, the well has since fallen off the map and produced at a rate below 100 BOPD during September, 2012.  This is a disappointing result and one that undoubtedly contributed to the company’s decision to lower estimated ultimate recoveries (EUR) of oil to 155 MBO per Miss well.

Of the rest of these “average to above average performers”, 5 of 11 are producing at a rate below 100 BOPD as of August, 2012.  Does this mean SD was wrong when it claimed a 119% rate-of-return (ROR) for its Mississippian program earlier this year?  Yes it does and I would argue this has as much to do with its recent stock price struggles as anything else.  The company’s expectations came back down to earth in its Q3 2012 conference call when it adjusted its ROR target to 50% (still robust) on its Miss drilling program.

So what changed? The 30-day average IP of 181 BOPD that I computed (see graph above) on the 138 wells I looked at implies a rate of 324 BOEPD (56% oil/see footnote below).  This is very similar to the company’s reported program production rate.  Instead, steeper than expected declines in oil production combined with the realization that their acreage produces a lot of gas has caused the company to modify its expectations.  SD now expects its oil EURs to be 40% of total production (down from 45%) which is more in-line with what Range (RRC) has predicted.  Economically, I expect these wells to pay for themselves in approximately 2.5 years, longer than what you’ll find in the Bakken or Eagle Ford but still plenty economic.

I don’t see SandRidge having trouble achieving its (new) target Miss EUR of 155 MBO and 1.6 Bcf  (422 BOE) per well in its core acreage, but I’m skeptical of its assumption that economics will be similar in the extension.  Investor skepticism over this claim is probably another reason for recent stock price struggles.  To that end, the company would be wise to hang on to the Permian until it proves its theory on the extension Miss.

Note: The Oklahoma Corporation Commission (OCC) doesn’t provide natural gas production for wells designated as “oil wells”, so I inferred the total production rate based on initial production rates provided by the company in the completion report.

10 thoughts on “A Close Look at SandRidge’s Results in the Mississippian

  1. Dave

    I think this report details the side of shale oil (and gas, at current prices) that is not being discussed by the investment community. There are many wells being drilled that will never make money when to look at recovery over time. Money is going into the ground and will never be recovered.

    SandRidge may be an extreme example, and the market sees a problem here.

    There are many companies that are borrow money, seemingly, to keep the oil flowing. It is impossible to dissect without information like this and the information is pains-taking to gather. A poor well can eliminated any profit from a strong well, and the market is not differentiating among the players.

    My sense is that a company must show most development well results over a long period of time or an average of ALL production wells over a period of time (enough time to level out production, at least one year) to determine if acreage in a play will be profitable. There appears to be a large stretch of the EF and various section of the Bakken that are money makers for oil, Wattenberg, Woodford/Hogshooter, Unita appear to be able to prove themselves.

    Other than that, I am not convinced anyone is making money, and that includes all shale gas at $3.50

  2. bradenholt Post author

    Particularly in the Mississippian, companies like SandRidge need to get better at figuring out where to drill. To your point, these guys are drilling a lot of uneconomic wells which is hurting their returns quite a bit. The Northern DJ-Niobrara is another formation that has been difficult for the industry to figure out, but results are improving. I’m not really clear on SD’s strategy in the Mississippian, but their accuracy needs to improve.

  3. Ron

    Why do you think you understand these properties better than Boone Pickens and Prem Watsa, two billionaires with significant investments in SD?

    1. bradenholt Post author

      I never said I did. I researched well results in Kansas and Oklahoma and reported what I found. I didn’t “cherry pick” results as evidenced by the 100+ wells I studied in my analysis. I like the Mississippian and that’s why I’m long SD, but their management was very wrong on the predicted IRRs of their acreage and I felt like that should be highlighted. It’s not as good as the Bakken, it’s not as good as the Eagle Ford, but it’s still a good play and I predicted a 2.5 year payback period. If you’re the type of investor that believes everything they read in a presentation, then don’t read my blog.

    2. Dave

      I think Boone sold out of SD. Remember Boone invested big in wind and lost a fortune. He recently bought Cheaspeake, then sold it out. He was in EXCO, lost his shirt, as Wilbur Ross bought in and he too lost big. (Wilbur Ross’s record is even better than Boone, and he is sticking with EXCO, so far).

      By the way, if Boone were to sell any stock, you would never know it. While you are asking “why is this stock going down?”, he is long gone.

      If you are going to follow the billion’s move, you better follow him exactly and you better have the money to take losses. It is part of the game.

  4. Dave

    T. Boone Pickens Buys Devon Shares – “T. Boone Pickens’ BP Capital sold all of its shares in Oklahoma City-based Chesapeake Energy Corp. and most of its holdings in SandRidge Energy Inc. while investing in other energy companies, including Oklahoma City-based Devon Energy Corp., according to regulatory filings.” NewsOK.com

  5. Pingback: An Early Look at Range’s Mississippian Results in Kay County | theenergyharbinger

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