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Why SandRidge’s CEO says “I consider us to now be funded”

Ingrid Pan, CFA

Why did SandRidge sell assets it just bought a few years ago? (Part 3 of 4)

(Continued from Part 2)

Outspending cash flow in 2014

SandRidge’s asset sale helps fund its 2014 spending plans. The company notes that for this year, it plans total capex of $1,475 million. Meanwhile, consensus EBITDA for SandRidge for 2014 is around $900 million (taking into account the company’s updated guidance given the Gulf of Mexico divestiture). Plus, the company has cash interest expense of approximately $250 million a year, and with this back-of-the-envelope calculation, after-interest cash flow is approximately $650 million (not including effect of preferred dividends and other items). This means that the company would be outspending cash flow by ~$800 million (which would vary given where the commodity price environment goes). The divestiture of the Gulf of Mexico assets gives SandRidge most of the cash it needed to fund its cash flow gap for 2014.

Cash from the offshore asset sale allows the acceleration of onshore development

With this additional cash in hand, SandRidge can accelerate growth in its Mid-Continent properties. The company noted that for 2014, given that it needs to spend less cash on its Gulf of Mexico properties, it would spend an additional $75 million on these properties and put on an additional three rigs, resulting in the drilling of an incremental 30 gross wells.

Solid liquidity position and ability to fund future development

After this sale, SandRidge will have cash of $1.6 billion and an undrawn $775 million credit facility (which acts like a credit card for a company), for a total of $2.4 billion in liquidity. The company also stated that pro forma for the asset sale, its net leverage (debt less cash divided by EBITDA) is 2.7x, slightly higher than its 3Q13 levels of 2.4x, as it’s losing some cash flow from its Gulf of Mexico properties. Management stated that the current level of liquidity is enough to fund development plans for several years, and the growth in cash flow and reserves from the greater production should support its senior secured borrowing capacity. Note that the amount of borrowing capacity upstream energy companies have (similar to a credit card balance) is generally a function of the value of their oil and gas reserves. As SandRidge develops its Mid-Con properties, it should see its reserve base and borrowing capacity grow.

Management further stated that other than borrowings under its credit facility, the company will not require external capital or additional asset sales to execute growth plans. “I consider us to now be funded,” asserted SandRidge CEO James Bennett.

Continue on to the next section to see how SandRidge has changed guidance for 2014 given its asset sale.

Continue to Part 4

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