The oil and gas industry, which has a far cheerier outlook this year, anticipates traveling on a revived growth path in 2017. Higher commodity prices are driving the land rig count upward and a more pro-oil and gas atmosphere in the federal government is in place. But for a half dozen or so E&Ps, this year is special for another reason: dramatic rebirth will unfold now that they have emerged from Chapter 11 bankruptcy with new management, new balance sheets and new assets.
Oil and Gas Investor visited with one such company, SandRidge Energy Inc., which emerged from a fast-track voluntary bankruptcy restructuring last fall. In January it started reaching out to investors again, presenting its new story at a Goldman Sachs conference.
“The elevator pitch is that we have no debt to service, and we’ve expanded beyond our former production base in the Mississippi Lime into both the northwest Stack area and the Niobrara Shale in the North Park Basin in Colorado. We have a lot more to do and are more diversified,” said Duane Grubert, executive vice president of strategy and investor relations.
This year’s budget is penciled in for now at no more than $200 million, meaning only a moderate outspend of projected cash flow at reasonable oil price assumptions. One rig is working in the northwest Stack, particularly in the expansion area in the Osage and Meramec formations in Oklahoma, and one will be chasing the Niobrara Shale in Colorado. A leader in horizontal drilling improvements in the Miss Lime, SandRidge intends to transfer its technical learnings and extended reach laterals (XRLs) to nearby Major, Garfield and Woodward counties; the so-called northwest Stack; and to its North Park oil resource, where it claims 1,300 proved and probable locations.
“We think that sets us up for a compelling, multiyear growth story,” Grubert told Investor.
The rosier picture derives from restructuring through one of the fastest bankruptcy processes in the industry, with SandRidge having filed in May 2016 and emerging in October. “We’re getting back on course,” said CFO Julian Bott, who detailed the bankruptcy process for the Houston Energy Finance Group last year.
The painful oil and gas downturn led to an “aha” moment for the company. “We were in a situation where the balance sheet required rapid growth, but once prices fell, that meant that the return on investment of our growth projects wouldn’t support that,” Grubert said. “It became clear we had to clean up the balance sheet or else diversify into assets that would support the balance sheet. So we cleaned up the balance sheet and diversified.”
SandRidge has changed, but even before the bust it was changing. CEO James Bennett, who joined in 2013, reduced the rig count by 60% and in 2014 sold the Gulf of Mexico assets the company had acquired in 2012, a temporary and ill-fated attempt to diversify out of the Midcontinent. That had added to the company debt load. Before the downturn began in November 2014, SandRidge at one time operated 35 rigs and had more than 2,000 employees.
The company acquired the Colorado Niobrara assets in late 2015 to augment its legacy position in the Miss Lime. Now under a new board, it is invested in more than one play in which to allocate capital and boasts a more competitive drilling inventory with higher returns. Post-bankruptcy, it has zero debt and $500 million of cash on hand—not to mention that it is supported by many drilling and completion efficiency gains it’s made in the past two or three years.
However, the “new” company’s current position didn’t come without some travail, months of poring over detailed paperwork and late nights. The journey started with a plunging stock price of less than $1 per share, high debt and the hiring of advisory and legal counsel. SandRidge reduced its workforce by 55% since the beginning of 2016. It ended with a quick trip through bankruptcy court in a pre-packaged agreement.
“I learned there’s a whole lot of players involved in this process, and it was really one strategic decision after another. Our advisors kept telling us it was OK; this is all fairly standard procedure,” said Bott. “But it was quite stressful and it came down to every little decision, even regarding cash management and the use of our liquidity. After all the head-banging, we were able to take it to the judge.”
The timeline was fast and the hurdles high: The company restructured $4.7 billion of debt and simplified a complex, six-layered capital structure in less than 120 days. “It involved a lot of detailed work. Bankruptcy is a whole world unto itself, so having specialized consultants help you is really key,” Grubert said.
In December 2015 the company retained Houlihan Lokey in an advisory role. In January 2016 its stock was delisted from the NYSE. All the while, management had been working through the restructuring process for several months. It filed its voluntary petition on May 16 using its longtime legal counsel, Kirkland & Ellis. This was less than a week after it had executed a restructuring support agreement, or RSA, with the lien holders and unsecured note holders. The RSA outlines “who gets what” and how each class of creditors will be treated. Alas, the previous common equity holders were wiped out, with new common issued to new holders.
The court confirmed its plan of reorganization on Sept. 16 and it emerged from bankruptcy—and was relisted on the NYSE—on Oct. 4.
Moving forward
As industry conditions deteriorated through 2015, SandRidge was scrambling like so many other E&P firms, laying off employees and laying down rigs. A transformation occurred late in 2015, before it retained Houlihan Lokey, when it acquired the Colorado asset in order to diversify, for $190 million. Previously it had all its eggs in one basket: the Miss Lime in northern Oklahoma and southern Kansas.
“Today we have activity in two areas of Oklahoma and one in Colorado, vs. before when we could only ramp up or ramp down in one play. It’s brand new for us to have a true capital allocation set up in a portfolio of three plays [Miss Lime, northwest Stack and Niobrara], instead of one,” Grubert said.
Under founder and former CEO Tom L. Ward, SandRidge grew rapidly into the Mississippi Lime play and took public three royalty trusts associated with it. Joint ventures with Spain’s Repsol and Korea’s Atinum Partners funded some of the enhanced drilling pace. Before the downturn began in November 2014, SandRidge at one time operated 35 rigs and had more than 2,000 employees.
This year the product mix doesn’t change that much but activity does, which will be reflected in 2018 results—the company has shifted to the so-called northwest Stack in Major, Garfield and Woodward counties, Oklahoma (the Osage and Meramec plays) and the Niobrara Shale in the North Park Basin.
The Colorado acreage is held by production, which gives the company the leeway it needs to focus on Oklahoma. “We may be biased to incremental drilling on the northwest Stack acreage to hold it, depending on drilling results,” Grubert said. Drilling is at a slow pace, but will last for years. In Colorado, meanwhile, it drilled 11 horizontals last year, starting on an inventory of 108 PUD locations and 2P inventory of 1,300. “This project is very material to us,” Grubert said, “and it’s new for us to be able to have true capital allocation in an expanded portfolio, each with competitive returns. We have a portfolio of projects rather than one area.”
Lessons learned
What was the biggest lesson learned from the whole restructuring process? Grubert said the core management team came out stronger and learned to better align the value of SandRidge’s portfolio with a level of discipline about spending capital.
“Effectively we’re harvesting in the Miss Lime in Oklahoma and using that cash flow to diversify into the other two plays [the Osage/Meramec in the northwest Stack and Niobrara].” The company has 60 drilling permits approved in the latter.
“We’re certainly out of the woods and moving forward,” Grubert said. “We have no debt to service, no covenants to worry about and we don’t need to grow just to service interest expense. We have a $425 million undrawn revolver that we could draw immediately, but we choose not to do that. It depends on market conditions and if we have great well results in the northwest Stack, if it makes sense to ramp up activity, we will—but we intend to have very little outspend.”
The company has publicly vowed to keep leverage at no more than 2.5x EBITDA going forward, although it is far from that now, being debt-free.
The liquidity SandRidge has today allows it the leeway to consider small bolt-on acquisitions, and an internal group is always looking at those opportunities, but Grubert assures that SandRidge intends to stick close to its knitting. The main strategy is to maintain a heightened focus on disciplined capital allocation across the three assets.
Arm-chair quarterbacking is inevitable when a company has soared to 2,200 employees only to end up in bankruptcy court, emerging as a much smaller and more focused enterprise. Many lessons are learned. Grubert said management understood much more about the underlying value of its business while in court through the process of negotiating with the other parties involved.
“If we had the benefit of hindsight, I’d say we would have accelerated our focus on the northwest Stack earlier,” Grubert said. “We always had a dominant legacy position in the Miss Lime, but we could have looked further south of that to the Osage and Meramec plays. Now with the smaller scale of the enterprise, the Stack area has become even more material to us.”
For this year, the focus is on showing investors that these lessons have been heeded and that management will bring forward the value inherent in the diverse assets while protecting the balance sheet.
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