Investment Thesis
SandRidge Energy Inc. (NYSE: SD) has reported a notable $15 million in free cash flow for Q1 2024, despite some disruptions due to cold weather. This performance aligns with expectations, although a faster-than-anticipated decline in oil production has led to a slight reduction in the projected value of its shares. T
his article delves into SandRidge’s Q1 2024 results, updated outlook for the year, and revised valuation.
Q1 2024 Results
SandRidge’s Q1 2024 production and cost results were impacted by cold weather, which caused additional downtime and higher workover costs. The company produced approximately 15,100 BOEPD (15% oil) in Q1 2024, exceeding its full-year guidance average of 14,500 BOEPD. However, production is expected to decline throughout the year due to a lack of new development.
The cold weather also led to higher lease operating expenses, which rose to $10.9 million in Q1 2024, up from $9.9 million in Q4 2023. Despite these challenges, SandRidge generated approximately $15 million in free cash flow during the quarter, with minimal capex of around $1 million.
Oil Production Decline
SandRidge’s oil production has been declining more rapidly than anticipated. The company reported a 28% decline in daily oil production from Q2 2023 to Q1 2024, even after acquiring additional working interests in NW Stack wells. Without this acquisition, the decline would have been over 30%.
The cold weather likely contributed to a small part of this decline, but the trend suggests that oil production from SandRidge’s 2023 NW Stack wells is decreasing faster than initially modeled.
Updated 2024 Outlook
For 2024, SandRidge’s oil production is now projected at 775,000 barrels, slightly below the midpoint of its guidance range of 700,000 to 900,000 barrels. This adjustment reflects the faster decline in oil production mentioned earlier.
NGL production is expected to increase due to a major natural gas producer switching to ethane recovery, which should boost NGL volumes and total production, albeit at a lower average price per barrel.
Based on current commodity prices ($79 WTI oil and $2.60 NYMEX gas), SandRidge is projected to generate $132 million in revenues, including interest income. Assuming a lease operating expense of $40 million (slightly above the guidance midpoint), the company is expected to produce $66 million in free cash flow for 2024.
Valuation Adjustments
Previously, SandRidge’s value was estimated at $13.55 to $15.50 per share, based on long-term prices of $75 WTI oil and $3.75 Henry Hub gas. This estimate has been reduced by $0.30 to a new range of $13.25 to $15.20 per share, reflecting the lower projected free cash flow and potentially higher oil decline rates.
Despite these adjustments, SandRidge’s current trading price remains slightly below this revised valuation range, indicating that it is not significantly undervalued to warrant a buy rating.
Conclusion
SandRidge Energy’s Q1 2024 results were in line with expectations, considering the impact of cold weather on production and costs. The company’s oil production is declining faster than expected, leading to a revised value estimate of $13.25 to $15.20 per share.
With a projected $66 million in free cash flow for 2024, SandRidge remains a stable investment, though not significantly undervalued at its current trading price. Investors should monitor the company’s production trends and cost management closely to assess future performance.
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Joel Gbolade is a seasoned financial writer with over seven years of experience in freelance content creation. Specializing in the financial niche and stock market, he has crafted engaging content for numerous websites. His background in technology extends to data processing and computer proficiency, enriching his comprehensive skill set in the financial realm.
