SandRidge Energy Gives Up on the Gulf of Mexico

Photo credit: SandRidge Energy,

Well, that didn't take long. Less than two years after buying Dynamic Offshore to build its Gulf of Mexico business, SandRidge Energy is giving up on the Gulf. The move comes as no surprise, as activist investors who have been working to shake up the company wanted SandRidge Energy to exit the region.

Dynamic blunder?
SandRidge Energy purchased Dynamic Offshore in February of 2012 in a cash-and-stock deal valued at $1.28 billion. Today's exit sees the oil and natural gas company selling that business to Fieldwood Energy for a grand total of $750 million in cash and the buyer's assumption of $370 million in abandonment liabilities. But SandRidge is retaining a 2% overriding royalty interest in two very promising exploration projects in the Gulf.

On the surface it would appear that SandRidge Energy made a massive blunder buying Dynamic, which at the time SandRidge's since-ousted CEO Tom Ward called a "bargain." That was due to the fact that BP's Deepwater Horizon disaster was still depressing prices for Gulf of Mexico properties. Because of this Ward said he saw the Gulf as being a "very large opportunity to be contrarian but also for value."

While the company's quick exit doesn't suggest it got much when it purchased Dynamic, SandRidge was actually able to extract a fair amount of value from its purchase. It cut back investment in the properties, allowing production to naturally decline, and instead used the offshore oil properties as a cash cow to fund some of its Mississippian drilling.

However, there was always a large cost associated with abandonment of wells that no longer produced.These properties were originally sold by Royal Dutch Shell to Superior Energy Services as part of a major decommissioning deal signed in 2010. Superior Energy Services then flipped a 49% interest to Dynamic Offshore to operate the field as operations slowly wound down. SandRidge was then responsible for Dynamic's portion of those costs, which is why investors shouldn't overlook the $370 million in future abandonment liabilities SandRidge is also exiting along with the Gulf.

What's next?
New CEO James Bennett said in a press release today that SandRidge Energy is now a "high growth, Mid-Continent focused company." Oddly enough, just last month I wrote that investors should expect to see the company really focus its attention on becoming a miccontinent-focused driller in 2014. While I thought the company would hold on to the Gulf of Mexico properties and simply find a partner for the exploration prospects, it's clear that SandRidge Energy wants to put its past behind it and focus on growing returns.

To do that the company will add three more midcontinent drilling rigs to its 2014 drilling program. That should enable it to drill another 30 wells on the year. It sees this reallocation of capital fueling 26% year-over-year organic production growth. That's more than double the previously guided rate of 12% production growth.

Investor takeaway
SandRidge Energy is focusing all of its attention at what it does best, which is drill in America's midcontinent region. That focus, along with shedding the image of underperformance under its former CEO, should fuel returns for investors in 2014 and beyond. A new era has clearly begun at SandRidge Energy.

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Fool contributor Matt DiLallo owns shares of SandRidge Energy and is Short Jan 2014 $6 puts on SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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