Sandridge Energy (NYSE:SD) continues its shift towards more oil production and reserves in its asset base, highlighted at its recent analyst meeting. The shift is a result of Sandridge Energy's bearish outlook on natural gas through 2012.
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Management believes that 900 rigs are needed to keep production flat in North America. The rig count is currently at that level, and since most exploration and production companies are planning to increase drilling in 2010 over 2009, management fears an oversupply situation depressing prices.
Sandridge Energy is pursuing this conversion towards oil through both exploration and development, and the company has 50% of its 2.6 Tcfe of proved reserves composed of oil at end of 2009.
Permian Basin
Sandridge Energy has a large position in the Permian Basin, located in Texas and New Mexico. This is one of the largest and oldest producing areas in the United States, and is considered a mature area by almost every measure.
Sandridge Energy has 150,000 net acres here, and is producing about 12,000 barrels per day from its properties.
This represents 23% of the company's production, which was enhanced considerably in late 2009 when it purchased producing properties from Forest Oil (NYSE:FST) for $800 million.
Sandridge Energy believes that it has nearly 2,700 drilling locations to develop on its acreage, representing a resource potential of 156 million barrels oil equivalent (BOE). These wells are inexpensive relative to shale wells, and only cost between $.7-1.2 million per well.
Most of its wells will target the San Andreas/Clean Fork formation in the Central Basin and the Spraberry, found in the eastern part of the Permian. The company hopes to increase production here to over 26,000 BOE per day by 2012.
Another exploration and production company with assets in the Spraberry is Pioneer Natural Resources (NYSE:PXD), which has interests in 5,600 wells and 50% of its proved reserves there.
Exploration Side
Sandridge Energy is exploring the West Texas Overthrust belt to try to find future opportunities. The company has 550,000 net acres to explore and has allocated $20-25 million in capital here in 2010.
Despite the focus on oil, Sandridge Energy is involved with a large natural gas project at the Pinon Development. The natural gas being developed at the field has a high carbon dioxide content, so it signed an agreement with Occidental Petroleum (NYSE:OXY) to sell the excess carbon dioxide for use in Occidental Petroleum's enhanced oil recovery (EOR) projects nearby.
Sandridge Energy will spend $430 million and operate 18 rigs here in 2010. Sandridge Energy is building Phase I of the Century Plant to process this carbon dioxide, and will have it in service by the summer of 2010.
Occidental Petroleum is reimbursing Sandridge Energy for the $800 million cost of the plant, and Occidental Petroleum signed an agreement to accept 3.5 Tcf of carbon dioxide over 30 years. Sandridge Energy also gets a 53 cents per Mcf tax credit from the government for his project because of the recapture of the carbon dioxide.
The Bottom Line
Sandridge Energy is putting its money down on oil and shifting the company toward that hydrocarbon and away from natural gas. If the company's bearish view on natural gas is prescient, then the company will be well positioned for that environment. (Learn about factors that affect oil prices in our article, What Determines Oil Prices?)
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