March 21, 2014

SandRidge to let its oil leases expire on much of its acreage in Kansas

A lot of land will hit the oil-lease market this year.

A lot of land will hit the oil-lease market this year.

SandRidge Energy has said it will allow leases on about 700,000 gross acres of land in Kansas and Oklahoma to expire this year, and hundreds of thousands of acres more in 2015, 2016 and 2017.

It said in a filing with the U.S. Securities and Exchange Commission last month that it has 1,026,000 gross acres set to expire this year in northern Oklahoma and southern and western Kansas. The company said it expects to hold on to about 30 percent of that by either paying to exercise the options or by holding them by producing oil and gas.

SandRidge, based in Oklahoma City and Kansas’ largest oil driller, has made clear in the last year that it is interested only in Sumner, Harper, Barber and Comanche counties in Kansas, and Woods, Alfalfa and Grant counties in Oklahoma.

Company officials added Sumner County to their focus area last month, accumulating 117,000 acres of leases in the county. The company now has about 650,000 acres of leases in the seven counties.

That means the company appears ready to surrender its acreage in Clark, Cowley, Edwards, Finney, Ford, Gove, Gray, Hodgeman, Kingman, Kiowa, Ness, Scott and Wichita counties, among others.

“So the message is that while we will renew some acreage, we will let other acreage expire and, most importantly, we will add new acreage in better areas where we have experienced better well performance,” Lance Galvin, SandRidge’s senior vice president for Corporate Reserves, told analysts at a conference earlier this month.

The company declined to comment for this story.

And while SandRidge is only interested in the four southern counties, Kansas’ existing oil industry, composed almost entirely of vertical drillers, thrives across dozens of counties. Ellis County, home to Hays, was the state’s highest producing county in 2012, the most recent year for which annual production figures are available.

Views vary on what kind of impact SandRidge’s decision will have.

Cecil O’Brate of American Warrior, one of the state’s largest exploration companies, which drills extensively in western Kansas, said he didn’t expect the new acreage to have much effect.

“They leased acreage that others didn’t want, that’s why they got the dry holes,” he said. “There won’t be much demand for this acreage.”

The new land will accelerate the steep decline in prices paid for leases across Kansas, said longtime Wichita-based landman Fred Hambright. That decline will help make those acres affordable again for the native Kansas oil industry, he said.

“It will be back to normal prices,” Hambright said. “They will go back down to where they fit the economics.”

SandRidge, which originally purchased more than 2 million acres of leases in 2010 and 2011 under then-CEO and founder Tom Ward, has been on a huge efficiency kick under its new CEO James Bennett as it attempts to boost returns to investors. The company has tweaked its drilling operations to lower costs and raise production, reaped the benefits of its heavy investment in infrastructure and plans to drill into more oil- and gas-producing layers under existing land leases.

Land lease prices jumped in 2010 and 2011 from the $15 to $75 per acre range to $250 to $1,500 per acre, depending on location, when SandRidge, Shell Oil and other large out-of-state oil exploration companies rushed to accumulate large leaseholds. But the geology of the Mississippian layer proved more complex and less consistently profitable than expected. The mixed results led most of them to leave.

SandRidge investors deposed company founder Tom Ward in 2013 because of low profits and low stock prices.

Ward has since returned to Kansas with a new company, Tapstone Energy, which purchased Shell’s approximately 600,000-acre stake in southern Kansas.

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