Shrunken SandRidge Energy searches for answers to oil woes

It’s too bad that zombies are on the wane these days because SandRidge Energy could star in its own movie.

Despite plenty of hard work to improve the company, it’s barely staggering into the new year. Last week it was delisted by the New York Stock Exchange because its stock traded below $1 a share for months.

This week it’s battling Oklahoma state regulators over whether it must stop injecting the saltwater that is believed to cause earthquakes.

The Oklahoma City oil and gas producer entered Kansas in 2010 like the second coming of Big Oil, driving a speculative land boom never seen in Kansas. But it has withered under the pressure of heavy debt and very low oil and gas prices.

SandRidge has confounded its biggest doubters by surviving this long, but how much longer is a big question.

Investors measure the size of the company’s cash pile vs. the speed at which it’s burning through it vs. how big its debt payments are vs. how soon oil and gas prices will rebound. Most figure the company is toast.

Company executives, however, have spun a tale of optimism, of rising production, falling costs and paying off debt. They’ve even uncorked a few surprises on analysts in recent quarters by using their precious cash to make major purchases that look to be long-term plays.

Last week, its spokesmen reiterated that the company had sufficient liquidity — cash and credit — to survive until … well, they never say how long.

“We can’t address non-specific hypotheticals when considering the many variables that can be so dynamic,” spokesman Justin Lewellen wrote in an e-mail last week.

“What we do know,” he wrote, “is that despite depressed prices, we have significant liquidity and have made material strides at right-sizing our balance sheet all while drilling attractive productive Miss Lime wells at record low drilling and completion costs.”

Deep financial problems

The company on Wednesday announced layoffs of 226 of the 260 employees at its Lariat Services subsidiary based in Alva and Cherokee, Okla., just over the border from Kiowa, to save money and because of the general slowdown in drilling.

The company still has $1.2 billion in cash and credit it can draw on, but it has lost about $3 billion in the first three quarters of 2015 — fourth-quarter figures are not yet available — and even bottom-feeding speculators have lost hope.

The stock was trading at 15 cents a share last week before being delisted by the NYSE. The company took the opportunity a few days later to suspend the dividend payouts on its preferred stock to conserve cash.

The stock still trades over the counter. It was listed at 7 cents a share on Wednesday.

The company has $3.3 billion in debt, but its creditors aren’t any more optimistic about its long-term chances than its stock investors.

Moody’s and Standard & Poor’s, the biggest bond rating companies, in August dropped SandRidge’s corporate rating after the company bought back $250 million in company debt from anxious bondholders for $94.5 million.

S&P viewed the transaction as distressed and set the company’s corporate credit rating at “selective default.”

Moody’s downgrade of SandRidge corporate family debt to Caa2 reflects the company’s “weak cash flow metrics and potentially unsustainable capital structure,” a Moody’s analyst said in an Aug. 19 company news release.

“With weak commodity prices exacerbating the impact of its relatively high interest expense and operating cost structure on cash flow, the risk of further debt restructuring has increased,” wrote Amol Joshi, Moody’s vice president.

In Kansas

SandRidge entered Kansas in 2010, quietly buying up oil leases. But it wasn’t long before founder and then-CEO Tom Ward was trumpeting the potential of the Mississippian Lime formation under northern Oklahoma and southern Kansas.

He wound up securing more than 2 million acres of land leases and set off a bidding war for land leases with other large out-of-state oil companies, including Shell Oil. He wound up selling some of the land as two investment trusts and pumped his stock and compensation way up.

In a 2012 interview in Oklahoma City, Ward speculated that if the play worked out, it would dramatically reconfigure the economy of Kansas and Wichita.

“It will make the loss of Boeing seem paltry,” he said at the time.

But investors kept pushing for all that upfront spending to translate into big profits. In 2013 investors forced Ward out and the board installed James Bennett, who sold off oil assets away from the Mississippian Lime and focused on making those wells less expensive and more productive. The wells now cost $2.3 million per lateral to drill, Bennett said in November.

Today, the company has more than 500 wells in Harper County and nearby Kansas counties. In 2014, it was the state’s largest producer of oil and gas, with about 8 million barrels of oil or the equivalent energy in natural gas or gas liquids, according to the Kansas Geological Survey.

The company stopped drilling in Kansas in the second half of the year to cut costs, so it likely won’t match 2014 production in 2015. The company said it produced close to 4 million barrels of oil or the equivalent amount of gas and gas liquids through the first three quarters.

Earthquakes

The company has developed a serious legal and environmental challenge to its core business practices. Its horizontal wells produce massive amounts of saltwater — 10 times the hydrocarbons they produce — that must be pumped back into the ground for disposal.

SandRidge is the largest such user in Kansas or Oklahoma of water injection wells, which have been blamed for a massive uptick in earthquakes.

For most of 2015, SandRidge abided by orders of the Oklahoma Corporation Commission to shut down or decrease the water injected into wells within 3 to 15 miles of the epicenter of earthquakes 4.0 or greater. But in December the company declined to comply with the OCC’s two most recent orders, which cover Medford and Cherokee.

The OCC is considering legal action against the company, but they are now in negotiations. The company did not comment on its conflict with the OCC for this story.

Kansas also has five areas in Sumner and Harper counties where water injections have been restricted, but there have been no conflicts with SandRidge.

Rex Buchanan, interim director of the Kansas Geological Survey, said it’s pretty clear the water injection wells cause earthquakes, but they can’t say which water wells are causing which earthquakes. And, as the restrictions have taken effect, the power of the earthquakes originating in Kansas has diminished.

Bennett and the company’s executives surprised observers in November by using $190 million of their cash pile to buy acreage in the Niobrara Shale formation in the North Park Basin of north central Colorado. Bennett told analysts he sees it as a chance to diversify the company’s assets.

Some analysts commented afterward that it was the company’s acknowledgment that the Mississippian Lime formation, a layer of rock thousands of feet deep in Kansas and Oklahoma, has just never panned out economically as well as Ward projected, although the company has never said that.

It may also have geology different enough to be free of water injection well restrictions.

But the company said it’s not abandoning Kansas and Oklahoma.

“The Miss Lime remains a solid resource to produce from and with the addition of our newly acquired Colorado assets, we will now have two class A opportunity sets to invest into,” said Lewellen, the company spokesman.

This story was originally published January 13, 2016 at 5:03 PM with the headline "Shrunken SandRidge Energy searches for answers to oil woes."