Is SandRidge Imploding After Earnings?

After the markets closed Wednesday, SandRidge reported its first-quarter earnings. The company had a net adjusted loss of less than $0.01 per share on revenue of $215.3 billion.

SandRidge produced 7.9 million barrels of oil equivalent (MMBoe) in the first quarter of 2015, 50% of which was crude oil and natural gas liquids. First-quarter production averaged 87.7 thousand barrels of oil equivalents per day (MBoep/d). This represents a 1% decrease in average daily production from the full fourth quarter of 2014.

Credit Suisse’s analysts Arun Jayaram and Bryan Baritot had an Underperform rating for SandRidge and a price target of $0.80, implying downside of just over 50% from current prices.

The highlight of this quarter was the significant cash burn, with SandRidge’s net debt balance increasing by an incredible $345 million sequentially in a period when the company benefited from $137 million in cash hedging gains. As a result of the significant cash burn, management signaled that it was “evaluating alternatives to bring our cash generation and debt levels in line.” Credit Suisse suggests that SandRidge might be considering some sort of equity raise or other type of financing near term.

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SandRidge is currently running seven rigs, its expected run-rate for the remainder of the year, down from the last quarter’s exit rate of 35. Notably, the company ended the quarter with $11.8 million in cash, down from $181 million at year-end 2014, despite cash flow being augmented by $137 million in cash hedging gains and the addition of a $175 million senior credit facility. As a result, the company’s liquidity position went from $1.1 billion at year-end 2014 to $725 million in the first quarter, with $378 million left in its 2015 capex budget.

Credit Suisse detailed in its report:

SandRidge reported first quarter production of 87.7 MBoe/d, 4.5% above our 83.9 MBoe/d forecast and just above the Street estimate of 87.4 MBoe/d. The company also reiterated their full-year production outlook of 28.0-30.5 MMBoe, which is in line with our 29.1 MMBoe forecast. Further, despite spending nearly half of their annual budget in the first quarter of 2015 ($322 million in first quarter capex), management still expects to spend $700 million. The only change to guidance was a 7% reduction in per unit.

James Bennett, CEO and president of SandRidge, commented on earnings:

We continue to reduce activity as we wind down from a rig count of 35 at the close of 2014 to an average of seven rigs in the back half of 2015. While we had capital expenditures of $322 million in the first quarter, we are reducing spending sharply in the second half of this year in line with our guidance of $700 million. This fiscal discipline coupled with operational efficiency gains provide options to improve our balance sheet as we actively evaluate alternatives to bring our cash generation and debt levels in line.

Shares of SandRidge were down 6.2% at $1.66 Thursday afternoon, in a 52-week trading range of $1.13 to $7.43. The stock has a consensus analyst price target of $1.36.

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