SandRidge Energy, which has become one of the biggest oil prospectors and producers in Kansas in the last two years, has traded some of its production in exchange for $1 billion in financing to develop its extensive land holdings in northern Oklahoma and southern Kansas, an area called the Mississippian Limestone play.
By creating a joint venture, Oklahoma City-based SandRidge is selling its interest in 363,636 net acres in northern Oklahoma and western Kansas to Repsol YPF S.A., a large energy company based in Spain, for $250 million in cash at closing and $750 million toward SandRidge’s cost of development. SandRidge anticipates spending the $750 million within three years.
SandRidge had earlier sold a portion of its holdings to Atinum Partners, a Korean investment company, for $500 million. It has also packaged some production rights into a trust and sold them for $334 million.
SandRidge will be the operating partner and pay its partners a percentage of the production. The transaction is expected to close in the first quarter and is subject to certain closing conditions.
SandRidge bet early and bet big that horizontal drilling and hydraulic fracking would turn the aging oil fields of the Mississipian Limestone formation into a strong producer for decades.
SandRidge Chairman and CEO Tom Ward said the company acquired mineral rights on about 2 million acres in counties along the Kansas-Oklahoma border. It initially bought hundreds of thousands of acres in south-central Kansas, including western Sedgwick County. It then bought a second million acres in western Kansas stretching northwest almost to the Colorado border. Those acres do not include the Hugoton gas field in far southwest Kansas.
SandRidge remains the largest leaseholder in the Mississippian field, Ward said, with 1.5 million acres. He said they expect to spin off more acres in 2012.
The company bought those rights for an average of $175 per acre; its investors are paying more than $3,600 an acre, he said.
But it’s worth it for the investors, Ward said. The Mississippian Limestone is considerably less expensive to drill than the better-known shale oil plays such as the Bakken field in North Dakota and the Utica field in Ohio and Pennsylvania.
A completed horizontal well in the Mississippian costs $3 million to complete, compared to $9 million to $11 million for shale wells. Ward said his investors are seeing a return of $1.90 for every $1 they invest.
With the price of oil so high, it has prompted tremendous investment in oil prospecting using new technology. Some experts say unconventional plays have the potential to again make the United States the world’s largest oil producer.
Ward said the Mississippian has proven itself and will produce large amounts of oil for at least 30 years.
“We think it is comparable to the Bakken,” he said. “It’s the same size and scale.”
With the newfound cash from his investors, SandRidge expects by 2013 to have 45 rigs drilling 700 horizontal wells a year. The investors will allow the company to double production and triple the earnings with less debt.
Each $1 million spent will produce 1.2 direct jobs, such as roughnecks and oil field workers, and 4.9 indirect jobs, such as waitresses and car salesmen, Ward said.
“We believe that through 2015, the top five drillers in this play will create 25,000 direct jobs and 100,000 indirect jobs in Oklahoma and southern Kansas,” he said. “This is a major breakthrough for Kansas.”