SandRidge Energy Inc. Better Watch Out

Photo credit: SandRidge Energy.

Chesapeake Energy recently held its annual analyst day. One topic that stood out to me was how good the company is getting at drilling the Mississippian Lime. Chesapeake Energy is getting so good that SandRidge Energy might need to worry about losing its spot as top dog in that play.

Stronger core?
Chesapeake Energy built a massive legacy position in the Mid-Continent region encompassing more than 1.9 million net acres. However, its core position in the Mississippian Lime consists of about 160,000 net acres. That's relatively small compared to SandRidge Energy's 670,000 core position in the play, as shown on the following slide, but it still packs quite a punch.

Source: SandRidge Energy Investor Presentation (Link opens a PDF).

Like Chesapeake Energy, SandRidge has whittled its massive acreage position in the Mid-Continent down to what it views as the most promising acres. Some acres have better long-term well results than others, but it's still a moving target as SandRidge Energy has added to its core over time. The bulk of its core, though, is still concentrated right around the Kansas-Oklahoma border.

The next slide shows that the bulk of Chesapeake Energy's core position in the Mississippian is concentrated in northern Oklahoma, in what appears to be the strongest oil-producing zones of the play.

Source: Chesapeake Energy Investor Presentation (Link opens a PDF).

Because of that Chesapeake Energy is generating high rates of return each time it drills, while also enjoying consistent results. That means the Mississippian is a draw for Chesapeake capital, and that the company is likely to direct more capital from its large drilling budget to the play if the current trends persist.

Getting better
Chesapeake Energy is focusing on drilling its Mississippian wells more efficiently (meaning faster), which is cutting costs. The company's average well cost this year should be roughly $2.9 million, which is roughly what it costs SandRidge Energy to drill a well. This means Chesapeake Energy can add 100 additional economic wells to its future drilling inventory for every 10% it shaves off its well costs.

That also boosts the rate of return the company sees on its drilling capital. Just two quarters ago, Chesapeake Energy's rate of return for wells drilled in the Mississippian was 31%. That's now up to 50% as the company's improvements are having a noticeable effect on its bottom line. While that's still below the 64% internal rate of return that SandRidge Energy sees on its wells, Chesapeake Energy is catching up.

Investor takeaway
For a long time SandRidge Energy has held a distinct competitive advantage in the play because it could drill wells a lot cheaper than any competitor. Chesapeake Energy, however, appears to be narrowing that gap -- its well costs aren't that much higher. That means SandRidge Energy better watch out and continue to move forward; otherwise it could lose its place as the best operator in its core play. 

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Matt DiLallo owns shares of 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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