3 Things to Watch For When SandRidge Energy Reports

Earnings season is in full gear, and thus far, earnings have been strong. However, this isn't the case for companies focused on natural gas. These companies have been struggling to bring in ever-increasing cash flow in the face of lowered revenue from their gas sales. Luckily, we're talking about SandRidge Energy (NYS: SD) , a company that has been boosting its oil production at a rapid clip.

The company's still spending heavily to ramp up production so that it can drill within cash flows, but it's still in the process of getting there. Here's what to watch for when SandRidge reports:

No. 1: The 3-year plan
SandRidge operates under the framework of a three-year plan that is aimed at tripling EBITDA, doubling oil production, and improving debt metrics, most notably debt-to-EBITDA. With its massive inventory of drilling locations in the Mississippi lime and the Permian Basin, the company seems to have its work cut out for it for the next several years. However, investors have been worried about the recent acquisition of Dynamic Offshore, which cost $680 million in cash and 74 million shares of common stock valued at $7.11 per share.

The company's existing drilling locations are indeed quite valuable, but management sees value in acquiring offshore production on the cheap. In fact, the company believes that the Dynamic transaction presents inexpensive oil production at an EBITDA multiple that improves the balance sheet. Remember, the goal is to increase EBITDA and oil production, as well as improve its debt metrics. Investors had long thought that would come by drilling its existing onshore inventory, but it appears that's not the only option on the table.

No. 2: Well costs
Year-over-year production growth is great, but what we want is profitable growth. One of the biggest problems with the Mississippian is that the play produces a ton of water. This has caused others to shy away from producing oil here in the past, but SandRidge has made a huge commitment to the play and is working on cost efficiencies in order to improve returns. Management would like to keep well costs at about $3 million per well, but would like to reduce this number in the future despite also trying to rapidly ramp up the rig count.

One such improvement is its saltwater disposal infrastructure, which is the largest in the play. Management estimates this infrastructure could save as much as $20 to $40 per barrel on lease operating expenses. By pursuing efficiencies such as these, the company hopes to keep well costs down and improve the rate of return earned.

No. 3: Watch the cash
Finally, investors should keep an eye on the cash balance. SandRidge's three-year plan is going quite well, but there's still a lot of time left. Along the way, more cash will have to be raised to meet the funding gaps that come with outspending operating cash flow on capital expenditures. Most recently, the company raised approximately $590 million by offering more Mississippian acreage to the public via its SandRidge Mississippian Trust II (NYS: SDR) .

Since drilling is not expected to be funded internally until the three-year plan is complete, there will be more cash needs in the future. We should expect more royalty trusts, joint ventures, or other forms of financing in the future that will help meet those needs.

Foolish bottom line
While natural gas is certainly the most interesting headline item, SandRidge is a company planted firmly on my radar due to its status as an oil-focused growth story. If the company continues to ramp up its drilling rig count while keeping costs down, it has a good shot at reaching its plan.

If you're looking for more ideas, The Motley Fool has created a new special report titled "The Only Energy Stock You'll Ever Need," which you can download today, absolutely free.

At the time this article was published Paul Chi is an analyst on the Fool's Alpha service. He owns no shares of any companies mentioned. You can follow him on Twitter to stay up to date on his latest market commentary. Paul and Matt Argersinger co-manage the Street Fighter portfolio, where they look for cheap, unloved stocks with home run potential.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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