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DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. FOR OTHER IMPORTANT DISCLOSURES, visit www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683 US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
12 February 2013
Americas/United States
Equity Research
Oil & Gas Exploration & Production
SandRidge Energy, Inc. (SD) INITIATION
Taking a Swing at the 'Miss'; Initiate at Neutral
■ Initiating Coverage: We are initiating coverage of SandRidge with a Neutral rating and target price of $6.30, assuming 6.0 times 2013E EBIDA. SD is essentially a pure play on the Mississippian. We expect shares to be range bound in 2013, given continued outspend and significant levels of unproductive capex, which will likely mask value-creation potential from this intriguing play.
■ Perpetual Motion: Throughout its fledgling existence, SD has been in perpetual motion, shifting from a high-cost gas producer at its 2007 IPO to an oily producer. Following the gas price collapse and consistent outspend of its cash flows, SD’s financial position has been under duress, which led to dubious strategic moves such as the ill-fated purchase of GoM shelf properties through Dynamic Offshore.
■ Mississippian Has Value-Creation Potential: Despite its checkered past, management has made some good moves. SD got an early-mover advantage in the Mississippian, leasing 1.85 MM acres for only $200/acre. This play could drive long-term value creation, given attractive economics (IRR of 25%) and its vast running room. SD has signed two JVs at a valuation of $4,000/acre, which validates the potential of this burgeoning play. Lingering concerns include the lowering and adverse mix of its basin type curve (gas now 63% vs. 55% previously) and ‘statistical’ approach, which is light on modern 3-D seismic data.
■ Not the Right Type of Growth: Pro forma for the Permian sale, we expect 22% ’12-’14 oil production growth, which will still be in the top quartile of its peer group. However, we estimate that SD’s debt-adjusted cash flow growth from 2012 to 2014, which is a much more important value driver, will significantly lag its peers, given its significant outspend relative to forecast cash flows.
■ Significant Claims on Cash: Analysis of SD’s financial position suggests that there is more than $300 MM per annum in ‘unproductive’ capex related to royalty trusts, P&A obligations, and the under-delivery of CO2. While SD shares trade at a meaningful discount to NAV, we believe that this discount is warranted, given the significant claims on its cash flows. We believe that a more ‘live within your means’ approach is necessary before the shares can possibly rerate.
Share price performance
5
6
7
8
9
Feb-12 May-12 Aug-12 Nov-12
Daily Feb 13, 2012 - Feb 11, 2013, 2/13/12 = US$7.79
Price Indexed S&P 500 INDEX
On 02/11/13 the S&P 500 INDEX closed at 1517.01
Quarterly EPS Q1 Q2 Q3 Q4 2011A -0.02 -0.00 0.01 0.02 2012E 0.04 0.07 0.05 0.06 2013E 0.01 -0.09 -0.07 -0.07
Financial and valuation metrics
Year 12/11A 12/12E 12/13E 12/14E Revenue (US$ m) 1,400.4 1,977.5 1,992.4 2,245.8 EBIDAX (US$ m) 753.7 1,220.9 1,073.4 1,215.6 EPS (CS adj.) (US$) 0.00 0.22 -0.23 -0.20 Prev. EPS (US$) — — — — ROGIC (%) 7.99 8.28 4.12 4.61 P/E (x) 1,685.3 26.0 -25.3 -29.1 P/E rel. (%) 11,069.5 180.9 -191.7 -245.8 OCFPS (US$) 1.08 1.72 1.38 1.62 P/OCF (x) 7.6 3.3 4.2 3.5 Qtrly ent. val./tot. EBIDAX 8.0 5.3 5.5 4.9 Net debt (US$ m) 2,606 3,890 2,301 3,067
Dividend (current, US$) — Dividend yield (%) — Net debt current qtr (US$ m) 3,890.5 Net debt/tot cap (Next Qtr., %) 91.8 BV/share (Next Qtr., US$) 5.5 GIC (12/12E, US$) 8,130.0 EV qtr/GIC (x) 0.75 Current WACC — Free float (%) — Number of shares (m) 583.00
Source: Company data, Credit Suisse estimates.
Rating NEUTRAL* Price (11 Feb 13, US$) 5.73 Target price (US$) 6.30¹ 52-week price range 8.82 - 5.19 Market cap. (US$ m) 3,340.59 Enterprise value (US$ m) 7,231.08
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
[V] = Stock considered volatile (see Disclosure Appendix).
Research Analysts
Arun Jayaram, CFA
212 538 8428
arun.jayaram@credit-suisse.com
David Yedid
212 325 1831
david.yedid@credit-suisse.com
Helen Xu
212 325 4750
helen.xu@credit-suisse.com
12 February 2013
SandRidge Energy, Inc. (SD) 2
SandRidge (SD) Executive Summary and Investment Thesis
We initiate coverage of SandRidge Energy (SD) with a Neutral rating and a target price of
$6.30, which equates to approximately 70% of NAV and 6.0 times our 2013 EBIDA estimate.
Throughout its fledgling existence, SD has been in perpetual motion, shifting from a high-cost
gas producer at its 2007 IPO to an oily producer. While the company has made some good
strategic moves along the way, including the well timed purchase of Permian Basin properties
in 2009 and the acquisition of a vast acreage position in the Mississippian play at a bargain-
basement price of $200 per acre, the Achilles heel of the story has been excess spending in a
highly cyclical industry.
Given SD’s plans to monetize its Permian Basin properties for $2.6 billion, the key driver of the
company’s stock will be the company’s drilling results in its horizontal Mississippian play (~80%
of 2013 capex). As such, we concentrate our analysis on this play, which represents the lion’s
share of our asset value. (See Exhibit 1.)
What Is the Bottom Line from Our Analysis?
We believe that fair value for SD shares over the next 12 months is $6.30, which suggests a
balanced risk/reward profile in the stock relative to the peer group. We would recommend that
investors exit positions at share prices above $7 per share, with a recommended entry point of
$4-5, given asset valuation support.
Our preferred asset metric for evaluating E&P companies is net asset value (NAV), which
normalizes for variations in reserve life, future capital requirements, and near- and long-term
growth rates versus peers. The components of our $9.00 per share net asset value for SD are
highlighted in Exhibit 1.
Exhibit 1: SD Net Asset Value Components (per Share)
SD Net Asset Value
$7.40
$4.80 $0.60 $3.90
$9.00
$0
$2
$4
$6
$8
$10
$12
$14
$13 per share in assets
Source: Company data, Credit Suisse estimates.
What Is Our Investment Thesis for SD Shares?
We expect shares to be range bound in 2013, given continued outspend, which will likely mask
value-creation potential from this intriguing play. Analysis of SD’s financial position suggests
that there is more than $300 MM per annum in ‘unproductive’ capex related to royalty trusts,
P&A obligations, and the under-delivery of CO2 volumes to OXY. While SD shares trade at a
meaningful discount to NAV, we believe that this discount is warranted, given the significant
12 February 2013
SandRidge Energy, Inc. (SD) 3
claims on its cash flows. We believe a more ‘live within your means’ approach is necessary
before the shares can possibly rerate.
Investment Positives
■ Attractive Drilling Economics in the Company’s Mississippian Play: Sweet spots in
the Mississippian provide some of the most attractive economics in U.S. onshore E&P.
On average, the sweet spots of Mississippi lime provide IRR of 51%, compared to an
average of 41% for unconventional onshore oil plays and 16% for gas plays at the
current futures strip. However, we estimate that average after-tax IRRs for SD’s wells in
the Mississippian are approximately 25%, reflecting a higher gas mix and steeper
decline curve.
■ Attractive Entry Price for Its Mississippian Position: In 2009, SD began an
aggressive leasing campaign for the horizontal Mississippian play, citing the potential of
this play given significant vertical production history from over 17,000 wells. The
company was able to build a 1.85 MM net acreage position (2.3 MM acres gross) at a
lease cost of $200 per acre, or $400 MM in total. The lease acquisition cost looks
compelling relative to the implied purchase price in the company’s two joint venture
transactions with Atinum and Repsol.
■ Differentiated Onshore Oil Production Growth, Driven by the Mississippian:
Exhibit 12 illustrates our production growth estimates for SD relative to its peers.
Between 2012 and 2014, we estimate that SD will grow its oil production at a 22%
CAGR, which is attractive relative to the peer group.
■ Management and BoD Is Under Magnifying Glass: One of SD’s largest shareholders
has commenced a consent solicitation to amend the company’s bylaws to destagger the
BoD, provide for the removal of directors ‘with or without cause,’ and remove the
existing BoD with the shareholders’ nominees. While the process is a distraction to their
ongoing management of operations, there are clear benefits from having a motivated
BoD and management team in terms of maximizing shareholder value creation.
■ Benefits of Scale: One of the key challenges of the play is the significant amount of
water that is produced, requiring significant water disposal infrastructure. On average,
SWD wells cost approximately $2 to $3 MM per copy. SD’s peers are developing the
Mississippian under a ratio of six to eight wells per SWD well. However, SD anticipates
developing the play with a ratio of 10 to 12 wells per SWD well, which will translate into
a savings of $130,000 per well, thereby lowering invested capital per well.
■ Discounted Valuation Relative to Net Asset Value: Exhibit 14 illustrates our
comparative valuation table for Credit Suisse’s U.S. E&P coverage. SD shares are
trading at a discounted valuation relative to the peer group on net asset value (NAV).
The shares are valued at a 36% discount to our $9.00 per share NAV, while our E&P
coverage universe trades at a 12% discount to NAV.
■ Permanent Relief in Sight to Reduce Crude Oil Differentials: One of the key
headwinds for producers such as SD that market their crude at Cushing has been the
lack of takeaway capacity, which has pressured differentials. As a result of meaningful
midstream investment, there is 1.2 MMbbls per day of pipeline infrastructure that is set
for completion from the Permian Basin and Cushing to the Gulf Coast, which should
narrow Midland differentials (as well as WTI) over time relative to LLS.
■ Low Expectation Story: Currently, only 29% of E&P analysts have a Buy rating on SD
shares, while 63% have it rated Hold rating and 8% have a Sell rating. It is one of the
lowest expectation stories in the U.S. E&P sector.
Investment Concerns
■ Meaningful Downward Revision to Mississippian Type Curve: SD reported that
historical performance from its 500+ wells drilled thus far in the Mississippian play have
12 February 2013
SandRidge Energy, Inc. (SD) 4
exhibited a steeper oil decline and revised its average Mississippian well EUR to
155 MBbl of oil and 1.6 Bcf natural gas vs. its previous estimate of 204 MBbl of oil and
1.5 Bcf of natural gas. A steeper-than-expected decline in oil volumes relative to NGLs
and natural gas has also been noted by Range Resources (RRC), which estimates that
oil will comprise ~50% of total initial production rates but expects it to make up ~33% of
the expected EUR.
■ Cash Flow Growth on a Debt-Adjusted Basis Poised Meaningfully to Lag the Peer
Group, Based on Our Estimates: While SD’s oil production growth rate is attractive
relative to its peers, we expect the company to outspend its cash flows for the
foreseeable future. As such, we believe that it is important to translate oil production
growth into cash flow growth to adjust for differences in per barrel margins. In Exhibit 20
and Exhibit 21, we analyze how the increased oil production will translate into cash
flows. Between 2012 and 2014, capex-adjusted cash flow per share growth is in the
bottom quartile at -2%, trailing the peer group average of 17%.
■ SD’s Purchase of GoM Assets, Which Likely Compress Its Relative Multiple,
Given Increased Volatility of Production and Higher Reinvestment Risk: Exhibit 23
illustrates the pro forma historical production from the acquired assets on a gross basis.
Note the historic volatility in the production stream, which will likely lead to greater
swings in SD’s quarterly production over time. We believe that this increased volatility
as well has higher reinvestment risk relative to onshore will likely compress SD’s
relative multiple over time. Exhibit 24 illustrates the GoM comparables. Excluding MMR,
which is trading on anticipation of multi-Tcf discoveries on the ultra-deep shelf, the
GoM-focused E&Ps are trading at 3.2 times 2013E EBITDA. This compares to our
large-cap peer group at 6.2 times and E&P coverage group average of 5.7 times.
■ Significant Drains on Future Cash Flows That Do Not Benefit Existing
Shareholders: Analysis of SD’s financial position suggests that there is more than
$300 MM per annum in ‘unproductive’ capex related to royalty trusts, P&A obligations,
and the under-delivery of CO2. While SD shares trade at a meaningful discount to NAV,
we believe that this discount is warranted, given the significant claims on its cash flows.
We believe that a more ‘live within your means’ approach is necessary before the
shares can possibly rerate.
■ SD’s Business Model Has Meaningfully Outspent Its Cash Flow Every Year Since
Its IPO: Exhibit 25 illustrates SD’s five-year aggregate capex and acquisition program
and sources of funding for its investments in property and drilling. Over this time period,
SD has spent $9.3 billion in capex, including acquisitions. However, operating cash flow
and asset sales have only represented 40% of its spending program, which has
necessitated significant funding from equity (27%), debt instruments (26%), and royalty
trusts (7%). We expect this level of outspending to continue for the foreseeable future.
What Is Proprietary About Our Work?
We developed a predictive production model to forecast monthly production trends in the
Mississippian, which has historically been accurate. We have calculated type well economics
for SD’s Mississippian position in comparison to other U.S. onshore oil and gas plays and
relative to its peers.
Potential Risks to Our Thesis? Where Could We Go Wrong?
SD has a significant acreage position in the Mississippian, which generates robust
investment returns. If the company would reduce the significant outspend relative to its
cash flows and high-grade its drilling program, this could lead to a favorable rerating in the
shares by improving growth metrics on a debt-adjusted basis.
12 February 2013
SandRidge Energy, Inc. (SD) 5
Investment Positives Sweet Spots in the Mississippian Provide Strong Drilling Economics
SD entered the Mississippian play in 2009 and has since acquired 1,850,000 net acres at
an attractive purchase price of $400 million. The Mississippian play encompasses 20
counties in Northwest Oklahoma and Southern Kansas. In addition, SD has identified an
extension area in Kansas. The Oklahoma portion of the Mississippian spans 1,100,000 net
acres whereas the Kansas portion spans 750,000 net acres. SD and the industry are
developing the play horizontally. Horizontal wells drilled in the Mississippian are drilled
6,000 ft vertically and 4,000 ft laterally. Current drilling and completion costs are $3.2 MM,
including allocated costs for water disposal.
Exhibit 2: Mississippian Play Map—Historical Industry Activity
Source: SandRidge.
As shown in Exhibit 3, sweet spots in the Mississippian provide some of the most
attractive economics in U.S. onshore E&P. On average, the Mississippi lime provides rates
of return that are more than 10% higher than the average unconventional onshore oil play
and 35% higher than the average gas play at the current futures strip.
12 February 2013
SandRidge Energy, Inc. (SD) 6
Exhibit 3: U.S. Basin Internal Rates of Return (IRRs)
Source: Company data, Credit Suisse estimates. Strip prices as of 1/30/2013.
Rising Activity Levels Suggest Robust Operator Interest
Understanding of the Mississippian Lime continues to evolve, driven by a step-up in
activity by operator during 2012. SD is the primary operator in the eastern part of the
basin, while RRC and DVN are emerging as primary operators on the western part of the
basin.
Exhibit 4: Industry Mississippian Rigcount
1
Mississippian Rig Count
0
10
20
30
40
50
60
70
80
90
Ja
n-0
8
Ap
r-0
8
Ju
l-08
Oc
t-08
Ja
n-0
9
Ap
r-0
9
Ju
l-09
Oc
t-09
Ja
n-1
0
Ap
r-1
0
Ju
l-10
Oc
t-10
Ja
n-1
1
Ap
r-1
1
Ju
l-11
Oc
t-11
Ja
n-1
2
Ap
r-1
2
Ju
l-12
Oc
t-12
Ja
n-1
3
Source: Smith Bits, Credit Suisse estimates.
12 February 2013
SandRidge Energy, Inc. (SD) 7
Exhibit 5 illustrates the current operated rigcount in the play. SD is by far the largest
operator, with more than three times the activity level of the next most active player,
Chesapeake Energy (CHK).
Exhibit 5: Mississippian Play—Operated Rigcount
Operator Rigcount
SandRidge 31
Chesapeake Energy 8
Devon Energy 6
Range Prod Co 4
Highmount 3
Mid-States 3
Plymouth Res 3
ARP Oklahoma 2
Chaparral USA Energy 2
Red Fork Prod 2
Other 10
Total 74
Source: Smith Bits, Credit Suisse estimates
The basin now appears to be characterized by a higher-GOR region to the west and north
and an a more oil-rich region to the east straddling the Nemaha Ridge that cuts across
Kay, Garfield, Noble, Logan, and Kingfisher counties in Oklahoma and Cowley and
Sumner counties in Kansas.
Exhibit 6: Mississippian Formations
Source: Range Resources.
SD’s activity is concentrated in Alfalfa, Grant, Comanche, and Harper counties. (See
Exhibit 7.)
12 February 2013
SandRidge Energy, Inc. (SD) 8
Exhibit 7: SandRidge’s Mississippian Rigcount by County
County Rigcount
ALFALFA 12
GRANT 8
COMANCHE 3
HARPER 3
WOODS 2
BARBER 1
FINNEY 1
GRAY 1
FORD 0
GARFIELD 0
HODGEMAN 0
KAY 0
NESS 0
NOBLE 0
Total 31
Source: Smith Bits, Credit Suisse estimates.
SD is still accelerating its Mississippian program and expects to get to 41 rigs by mid-2013
and drill 580 horizontal Mississippian wells. The following is a snapshot of industry activity
by key operators in the play. (See Exhibit 8.)
Exhibit 8: Mississippian Lime—Current Activity
Source: Company data, Credit Suisse estimates.
As of year-end 2011, the company had booked 146 MMBoe in the Mid-Continent. In 2012,
SD ran ~30 rigs in the Mississippian, with an objective to drill 380 gross wells (330 wells in
the core part of the play and 50 wells in the extension) at $3.2 MM per well.
Attractive Purchase Price
In 2009, SD began an aggressive leasing campaign for the horizontal Mississippian play,
citing the potential of this play given significant vertical production history from over 17,000
12 February 2013
SandRidge Energy, Inc. (SD) 9
wells. The company was able to build a 1.85 MM net acreage position at a lease cost of
$200 per acre, or approximately $400 MM in total. The lease acquisition cost looks
compelling relative to the implied purchase price in the company’s two joint venture
transactions with Atinum and Repsol.
In August 2011, SD announced a $500 MM joint venture agreement with Atinum (private
equity fund). As part of the joint venture transaction, SD conveyed a 13.2% working
interest in 860,000 acres or 113,000 acres net to Atinum. This equates to an undiscounted
transaction value of $4,400 per acre, as Atinum will fund 13.2% of SD’s working interest
expenses under a drilling carry or $3,836 on an adjusted basis.
In December 2011, SD announced a second JV transaction in the Mississippian, with a
$1.0 billion agreement with Repsol. Under this transaction, SD conveyed 16% of its net
acreage position in the original Mississippian play (113,636 net acres) and 25% of its
acreage in the extensional part of the play. Total consideration included an upfront cash
payment of $250 MM and a $750 MM drilling carry. (Repsol is on the hook for 200% of its
working interest in wells to fund SD’s cost of development.) This equated to an
undiscounted transaction value of $2,750 per acre.
As illustrated in Exhibit 9, the average adjusted acreage transaction for recent deals (21
transactions in all) has been $2,294 per acre.
Exhibit 9: Recent Mississippian Acreage Transactions
Announce Date Buyers Sellers Deal Value ($MM) Net Undev Acres $/Acre
12/22/2011 Repsol SandRidge Energy $1,000 363,636 $2,750
8/11/2012 Midstates Petroleum Company Eagle Energy Production LLC $650 90,200 $2,328
8/4/2011 Atinum (South Korea) SandRidge Energy $500 113,000 $3,836
12/22/2011 Halcon Resources LLC Ram Energy Resources Inc $428 44,157 $981
9/24/2012 Atlas Resource Partners LP Equal Energy $40 8,550 $2,500
Various Other Other $163 222,731 $1,368
Total $2,780 842,274 $2,294 Source: PLS, Credit Suisse estimates.
Benefits of Motivated BoD and Management
One of SD’s largest shareholders has commenced a consent solicitation to amend the
company’s bylaws to destagger the BoD, provide for the removal of directors ‘with or
without cause,’ and remove the existing BoD with the shareholders’ nominees. It is unclear
how this process will play out. While the solicitation process is likely a bit of a distraction
for the management team, there are clear benefits from having a motivated BoD and
management team in terms of maximizing shareholder value creation.
Mississippian Provides Optionality to Higher Production Growth
Based on our production model, which incorporates our estimated type curve, we believe
that the company’s Mississippian program is poised to drive strong oil production growth
relative to its peers. Exhibit 10 illustrates the recent trend in the company’s operated
rigcount in the Mississippian. In 2012, the company averaged 30 rigs. We are modeling a
rigcount of 37 and 38 rigs, respectively, in 2013 and 2014.
12 February 2013
SandRidge Energy, Inc. (SD) 10
Exhibit 10: SD Operated Mississippian Rigcount
SANDRIDGE Mississippian Rigcount
0
5
10
15
20
25
30
35
Jan-1
1
Feb
-11
Mar-
11
Apr-
11
May-
11
Jun-1
1
Jul-11
Aug-1
1
Sep-1
1
Oct-11
Nov-
11
Dec-
11
Jan-1
2
Feb
-12
Mar-
12
Apr-
12
May-
12
May-
12
Jun-1
2
Jul-12
Aug-1
2
Sep-1
2
Oct-12
Nov-
12
Dec-
12
Source: Smith Bits Rigcount.
Exhibit 11 shows our production forecasts for SD in the Mississippian play. Note the
significant production growth we anticipate from the Mississippian.
Exhibit 11: SD Net Mississippian Production
SD Mississippian Production
0
20
40
60
80
100
120
Jan
-10
Apr-
10
Jul-
10
Oct-
10
Jan
-11
Apr-
11
Jul-
11
Oct-
11
Jan
-12
Apr-
12
Jul-
12
Oct-
12
Jan
-13
Apr-
13
Jul-
13
Oct-
13
Jan
-14
Apr-
14
Jul-
14
Oct-
14
Jan
-15
Apr-
15
Jul-
15
Oct-
15
MB
oe/d
Source: HPDI, Smith Bits, Credit Suisse estimates.
Attractive Oil Production Growth
Exhibit 12 and Exhibit 13 illustrate our production growth estimates for SD relative to its
peers. Between 2012 and 2014, we estimate that SD will grow its oil production at a 22%
CAGR, which is in the top quartile of the peer group.
12 February 2013
SandRidge Energy, Inc. (SD) 11
Exhibit 12: Estimated Oil Production Growth (‘12 – ‘14E)
Oil Production Growth (2012 to 2014E)
50%
25%22% 22%
18% 17%14% 14% 13% 12% 10%
8% 10%7%
2%
-3%
-10%
-25%
-15%
-5%
5%
15%
25%
35%
45%
55%
PX
P
PX
D
SD
EO
G
NB
L
CH
K
AP
C
DV
N
CX
O
WL
L
CO
P
AP
A
MR
O
OX
Y
DN
R
HE
S
SW
N
Source: Company data, Credit Suisse estimates.
We see similar production strength extended into 2015, with SD’s production poised to rise
21% per year. Again, SD should have one of the strongest oil production growth rates in
our coverage group.
Exhibit 13: Estimated Oil Production Growth (‘12 – ‘15E)
Oil Production Growth (2012 to 2015E)
35%
24%21%
16% 15% 15%13% 13%
11%9% 8% 7% 6%
4%1%
-11%
-25%
-15%
-5%
5%
15%
25%
35%
45%
PX
P
PX
D
SD
EO
G
DV
N
CH
K
NB
L
CX
O
AP
C
CO
P
OX
Y
AP
A
MR
O
DN
R
HE
S
SW
N
Source: Company data, Credit Suisse estimates.
Benefits of Scale
One of the key challenges of the play is the significant amount of water that is produced.
Typical Mississippian wells produce between 1,000 and 5,000 Bbls of water per day. As a
result, the development of the play requires significant water disposal infrastructure
through salt water disposal (SWD) wells. On average, SWD wells cost approximately
$2.0 to $3.0 MM per copy. SD’s peers are developing the Mississippian under a ratio of six
12 February 2013
SandRidge Energy, Inc. (SD) 12
to eight wells per SWD well. However, SD anticipates developing the play with a ratio of
10 to 12 wells per SWD well, which will translate into a savings of $130,000 per well,
thereby reducing invested capital per well.
Discounted Valuation Relative to Net Asset Value
Exhibit 14 illustrates our comparative valuation table for Credit Suisse’s U.S. E&P
coverage. SD shares are trading at a discounted valuation relative to the peer group on
net asset value (NAV). The shares are valued at a 36% discount to our $9.00 per share
NAV, while our E&P coverage universe trades at a 12% discount to NAV.
Exhibit 14: E&P Coverage – Comparative Valuation Table
Large Cap($M, except per share) Market Data Net EV/
Current 52-Wk YTD Fully dil. Debt/ NAV EBIDA EBIDA
Price Low High (%) EV* Cap $/sh P/NAV 2012E 2013E '12E '13E
APA $83.81 $75 $112 3.8% $43,498 25% $109 77% $9,030 $12,633 4.8x 3.4x
APC $83.47 $56 $89 9.7% $52,379 34% $108 77% $8,229 $9,742 6.4x 5.4x
CHK $20.05 $13 $26 20.8% $27,102 44% $23 87% $1,194 $5,196 22.7x 5.2x
CXO (PF) $96.52 $76 $117 17.8% $13,176 52% $94 103% $1,454 $1,812 9.1x 7.0x
DVN $59.70 $51 $76 13.8% $28,812 17% $75 80% $4,873 $5,885 5.9x 4.9x
EOG $133.34 $82 $138 7.8% $41,672 29% $118 113% $6,165 $7,049 6.8x 5.9x
NBL $112.75 $77 $116 9.2% $22,754 23% $140 81% $3,027 $4,063 7.5x 5.6x
PXD $128.55 $77 $134 17.1% $19,097 37% $150 86% $2,036 $2,750 9.4x 6.9x
RRC $70.68 $53 $74 13.9% $14,223 56% $82 86% $707 $1,081 20.1x 13.2x
SWN $33.59 $26 $37 0.7% $13,434 34% $30 112% $1,625 $1,857 8.3x 7.2x
MEAN: 11.5% 35.1% 90.1% 10.1x 6.5x
MEDIAN: 11.8% 34.0% 85.9% 7.9x 5.8x
Mid Cap($M, except per share) Market Data Net EV/
Current 52-Wk YTD Fully dil. Debt/ NAV EBIDA EBIDA
Price Low High (%) EV* Cap $/sh P/NAV 2012E 2013E '12E '13E
DNR $18.75 $13 $21 13.6% $9,354 28% $24 78% $1,475 $1,594 6.3x 5.9x
EXXI $32.41 $26 $40 -1.8% $3,744 37% $42 77% $812 $728 4.6x 5.1x
ROSE $50.48 $32 $55 8.5% $3,035 33% $69 73% $337 $548 9.0x 5.5x
SD (PF) $5.73 $5 $9 -11.6% $6,996 58% $9 64% $1,116 $1,000 6.3x 4.4x
WLL $49.01 $36 $64 8.9% $7,555 34% $52 94% $1,221 $1,556 6.2x 4.9x
MEAN: 3.5% 38.0% 77.3% 6.5x 5.2x
MEDIAN: 8.5% 34.0% 77.2% 6.3x 5.1x
Small Cap($M, except per share) Market Data Net EV/
Current 52-Wk YTD Fully dil. Debt/ NAV EBIDA EBIDA
Price Low High (%) EV* Cap $/sh P/NAV 2012E 2013E '12E '13E
BCEI $34.04 $15 $35 18.7% $1,493 20% $37 92% $111 $226 13.5x 6.6x
BRY $38.74 $30 $57 11.0% $3,794 63% $32 121% $490 $579 7.7x 6.6x
CRK $14.19 $13 $21 -7.3% $1,972 55% $15 95% $384 $445 5.1x 4.4x
CRZO $22.35 $19 $32 5.9% $1,881 63% $20 112% $273 $328 6.9x 5.7x
FANG $21.56 $16 $23 12.1% $966 57% $26 83% $44 $137 22.0x 7.0x
FST $7.03 $6 $15 1.7% $2,644 88% $6 117% $312 $424 8.5x 6.2x
GPOR $38.68 $16 $43 -3.4% $2,427 17% $57 68% $81 $114 30.1x 21.2x
KOG $9.19 $7 $11 -1.5% $3,427 49% $10 92% $282 $557 12.1x 6.2x
MHR $3.92 $3 $8 -5.5% $1,400 46% $6 65% $105 $268 13.3x 5.2x
PDCE $43.86 $19 $44 27.5% $1,902 45% $57 77% $183 $222 10.4x 8.6x
PVA $4.94 $4 $8 8.8% $726 38% $6 82% $262 $280 2.8x 2.6x
REXX $13.32 $9 $15 0.0% $893 32% $13 102% $45 $113 20.0x 7.9x
SFY $15.45 $14 $36 -0.9% $1,546 46% $23 67% $323 $442 4.8x 3.5x
MEAN: 5.2% 47.6% 90.3% 12.1x 7.1x
MEDIAN: 1.7% 46.0% 91.9% 10.4x 6.2x
Universe MEAN: 7.1% 41.4% 87.9% 10.4x 6.5x
MEDIAN: 8.6% 37.5% 84.3% 8.0x 5.8x Source: Company data, Credit Suisse estimates.
12 February 2013
SandRidge Energy, Inc. (SD) 13
Permanent Relief in Sight to Reduce Crude Oil Differentials
One of the key headwinds for producers such as SD that market their crude at Cushing
has been the lack of takeaway capacity, which has pressured differentials. As a result of
meaningful midstream investment, there is 1.2 MMbbls per day of pipeline infrastructure
that is set for completion from the Permian Basin and Cushing to the Gulf Coast, which
should narrow Midland differentials (as well as WTI) over time relative to LLS.
Exhibit 15: Key Canadian and U.S. Oil Pipelines
Source: CAPP.
The key infrastructure projects include the Seaway Reversal and Permian Express and
Longhorn Reversal projects, which will enable the transport of Permian Basin volumes to
the Gulf Coast.
12 February 2013
SandRidge Energy, Inc. (SD) 14
Exhibit 16: Incremental Takeaway Capacity from the Permian and Cushing
0
200
400
600
800
1,000
1,200
1,400
Dec-12E Feb-13E Apr-13E Jun-13E Aug-13E Oct-13E Dec-13E
WTG Seaway Keystone XL Permian Express Longhorn Reversal
Source: Company data, Credit Suisse estimates.
Exhibit 17 illustrates Credit Suisse’s Permian Basin supply/demand model developed by
our integrated oils team. Following incremental midstream additions, we forecast that there
is ample takeaway capacity beginning in 2013 to handle rising Permian volumes. As such,
we expect Cushing as well as Permian Basin crudes to trade at tighter differentials relative
to LLS.
Exhibit 17: Permian Supply/Demand Model
0
250
500
750
1000
1250
1500
1750
2000
2250
2500
2750
3000
2010 2011 2012 2013 2014 2015 2016 2017
KB
D
Refinery Pipelines
Rail/Other (net flows) Permian - Supply
Source: Company data, Credit Suisse estimates.
12 February 2013
SandRidge Energy, Inc. (SD) 15
Investment Negatives Statistical Play
SD is developing the Mississippian play using a statistical approach that is not based on
the use of modern 3-D seismic data. Management believes that its approach is sound,
citing data from 17,000 vertical well penetrations across the play as well as the cost of
seismic, which would burden returns and cash flows. While this approach does reduce the
overall development costs of the play, this development approach could lead to more
variability in well results, given the vast acreage position of the play.
The play is in the early stages of horizontal development, with limited production history.
As illustrated in Exhibit 18, there is meaningful variability between well results, given the
heterogeneous nature of this conventional reservoir.
Exhibit 18: Mississippian Play—30-Day Avg. Peak Rate (Boe/d)
Source: Company data, Credit Suisse estimates.
Both RRC and SD noted steeper-than-expected oil declines relative to NGLs and natural
gas. RRC stated that it estimates that oil will comprise ~50% of total initial production rates
but expects it to make up ~33% of the expected EUR. SD also reported that historical
performance from its 400 wells has exhibited a steeper oil decline and revised its average
Mississippian well EUR to 155 MBbl of oil and 1.6 Bcf natural gas vs. its previous estimate
of 204 MBbl of oil and 1.5 Bcf of natural gas. We are using a prospective well cost of $3.0
MM going forward, assuming some benefit from efficiencies and a higher density of wells
per SWD well.
12 February 2013
SandRidge Energy, Inc. (SD) 16
Exhibit 19: SandRidge Well Economics in the Mississippian
Well Productivity
30 day rate (MBoe/d) 0.267
Gross EUR (MMBoe) 0.436
Net EUR (MMBoe) 0.358
1st year decline -70%
B-factor (Oil) 1.75
B-factor (Gas) 3.00
Cost Assumptions
Completed well cost $3.00
LOE & Gathering 8.00
Production taxes 4.0%
Tax rate % 36.0%
Royalty 18.0%
Discount rate 10.0%
Well economics
F&D cost $8.39
IRR (after-tax) 24.9%
NPV per well ( MM) $2.1
NPV/I 0.7x
PV-10 (MM) $5.1
PV/I (x) 1.7x
Disc. payback period (yrs) 3.25
Undisc. payback period (yrs) 2.58
SD Mississippian Program
0.0
0.1
0.1
0.2
0.2
0.3
0.3
0.4
0.4
0.5
0.5
0.0
0.0
0.0
0.1
0.1
0.1
0.1
0.1
0.2
0.2
20
12
20
14
20
16
20
18
20
20
20
22
20
24
20
26
20
28
20
30
20
32
20
34
20
36
20
38
20
40
20
42
20
44
20
46
20
48
20
50
Cu
mu
lati
ve
Pro
du
cti
on
(B
cfe
)
Da
ily G
as
Pro
du
cti
on
(M
Mcf/
d)
Source: Company data, Credit Suisse estimates.
Debt-Adjusted Cash Flow Growth
While SD’s oil production growth rate is attractive, as shown in Exhibit 12 and Exhibit 13,
we expect the company to outspend its cash flows for the foreseeable future. As such, we
believe that it is important to translate oil production growth into cash flow growth to adjust
for differences in per barrel margins. In Exhibit 20 and Exhibit 21, we analyze how the
increased oil production will translate into cash flows. Between 2012 and 2014, capex-
adjusted cash flow per share growth is in the bottom quartile at -2%, trailing the peer group
average of 17%. Between 2012 and 2015, capex-adjusted cash flow per share growth for
SD is -5% compared to the peer group average of 12%.
Exhibit 22 rolls forward the cash flow multiples adjusting the balance sheet for anticipated
cash inflows or outflows between 2012 and 2013.
Exhibit 20: Debt Adjusted Cash Flow Growth ’12-‘14 Exhibit 21: Debt Adjusted Cash Flow Growth ’12-‘15
Capex Adjusted Cash Flow per Share Growth (2012E to 2014E)
Average: 17%
-10%
0%
10%
20%
30%
40%
50%
60%
CR
K
RR
C
MR
O
EN
I
NB
L
CX
O
PX
D
EO
G
AP
C
CH
K
AP
A
CO
P
OX
Y
SW
N
DV
N
RD
S.A
DN
R
HE
S
XO
M
TO
T
CV
X
SD
CR
ZO
Capex Adjusted Cash Flow per Share Growth (2012E to 2015E)
Average: 12%
-10%
0%
10%
20%
30%
40%
50%
60%
CR
K
RR
C
EN
I
MR
O
CX
O
SW
N
NB
L
DV
N
PX
D
AP
C
EO
G
RD
S.A
AP
A
CH
K
OX
Y
TO
T
CO
P
XO
M
DN
R
CV
X
HE
S
SD
CR
ZO
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
12 February 2013
SandRidge Energy, Inc. (SD) 17
Exhibit 22: SD 2013 Forward EV/CF Multiple vs. Peer Group
2013 Forward EV/CF
Average: 6.3x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0xA
PA
EN
I
CR
K
TO
T
MR
O
RD
S.A
CV
X
OX
Y
HE
S
CO
P
NB
L
AP
C
EO
G
DV
N
CR
ZO
XO
M
CH
K
DN
R
SWN SD
PX
D
CX
O
RR
C
Mo
reE
xp
en
siv
eL
ess E
xp
en
siv
e
Source: Company data, Credit Suisse estimates
Increase in Offshore Production Base May Compress SD’s Relative Multiple
Exhibit 23 illustrates the pro forma historical production from the acquired assets on a
gross basis. Note the historic volatility in the production stream, which will likely lead to
greater swings in SD’s quarterly production over time. We believe that this increased
volatility as well has higher reinvestment risk relative to onshore will likely compress SD’s
relative multiple over time.
Exhibit 23: GoM Acquisition—Historical Production
GoM Production from Dynamic
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
Jul-
58
Jun
-60
May
-62
Ap
r-64
Mar
-66
Feb
-68
Jan-
70
Dec
-71
No
v-73
Oct
-75
Sep
-77
Au
g-79
Jul-
81
Jun
-83
May
-85
Ap
r-87
Mar
-89
Feb
-91
Jan-
93
Dec
-94
No
v-96
Oct
-98
Sep
-00
Au
g-02
Jul-
04
Jun
-06
May
-08
Ap
r-10
Mar
-12
Bo
e/d
Source: Company data, Credit Suisse estimates.
12 February 2013
SandRidge Energy, Inc. (SD) 18
Exhibit 24 illustrates the GoM comparables. Excluding MMR, which is trading on
anticipation of multi-Tcf discoveries on the ultra-deep shelf, the GoM-focused E&Ps are
trading at 3.2 times 2013E EBITDA. This compares to our large-cap peer group at 6.2
times and E&P coverage group average of 5.7 times.
Exhibit 24: GoM Company Comparables
EV/Proved EV/Current
EV/EBITDA Reserves Production Reserves
Ticker EV ($MM) 2012E 2013E 2014E EV/PV-10 ($/Boe) ($/MBoepd) %Oil %PD
ATPG $2,709 5.8x 4.1x 64.0% 22.83 $108.5 66% 23%
CPE $273 3.0x 3.4x 2.9x 158.0% 17.13 $54.1 63%
EPL $709 3.1x 1.5x 1.4x 64.8% 19.14 $64.0 74% 91%
EXXI $3,652 4.1x 3.0x 2.6x 85.1% 30.5 $82.8 71% 68%
MMR $3,038 75.0x 10.0x 342.3% 71.25 $133.0 37% 85%
SGY $1,849 3.0x 3.1x 2.8x 119.8% 18.43 $51.3 46% 60%
WTI $2,283 3.5x 3.9x 3.6x 73.7% 19.58 $49.2 44% 65%
Median $2,496 3.8x 3.2x 2.7x 102.5% 21.205 $73.4 65% 65% Source: Company data, FactSet, Bloomberg.
SD’s Business Model Has Meaningfully Outspent Its Cash Flows Every Year since
Its IPO
Exhibit 25 illustrates SD’s five-year aggregate capex and acquisition program and sources
of funding for its investments in property and drilling. Over this time period, SD has spent
$9.3 billion in capex, including acquisitions. However, operating cash flow and asset sales
have represented only 40% of its spending program, which has necessitated significant
funding from equity (27%), debt instruments (26%), and royalty trusts (7%).
Exhibit 25: 2007 to 2011—Funding Sources for Capex
2007 - 2011
Capex $9,288
Operating cash $2,267
Asset Sales $1,515
Borrowings, net $2,517
Equity $2,637
Royalty Trusts $671
Total Funding $9,607
SD Capex & Funding 5-Year Aggregate
24%
16%26%
27%
7%
Operating cash Asset Sales
Borrowings, net Equity
Royalty Trusts
Source: Company data, Credit Suisse estimates.
Exhibit 26 through Exhibit 31 illustrate the capex and acquisition program relative to
funding on a per annum basis since 2007. Since going public in 2007, the company’s
operating cash flow has yet to fund the company’s spending program, requiring excess
funding. In fact, operating cash flows have never funded even half of the company’s
spending program, with the highest percentage coming in 2010, when internally generated
cash flows represented only 37% of overall spending.
12 February 2013
SandRidge Energy, Inc. (SD) 19
Exhibit 26: 2007—Funding Sources for Capex Exhibit 27: 2008—Funding Sources for Capex
2007
Capex $1,397
Operating cash $296
Asset Sales $9
Borrowings, net $0
Equity $1,080
Royalty Trusts $0
Total Funding $1,384
SD 2007 Capex & Funding
21%1%
78%
Operating cash Asset Sales Equity
2008
Capex $2,058
Operating cash $540
Asset Sales $159
Borrowings, net $1,290
Equity $0
Royalty Trusts $0
Total Funding $1,989
SD 2008 Capex & Funding
27%
8%
65%
Operating cash Asset Sales Borrowings, net
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Exhibit 28: 2009—Funding Sources for Capex Exhibit 29: 2010—Funding Sources for Capex
2009
Capex $1,510
Operating cash $309
Asset Sales $263
Borrowings, net $184
Equity $762
Royalty Trusts $0
Total Funding $1,519
SD 2009 Capex & Funding
21%
17%
12%
50%
0%
Operating cash Asset Sales
Borrowings, net Equity
2010
Capex $1,183
Operating cash $452
Asset Sales $205
Borrowings, net $315
Equity $255
Royalty Trusts $0
Total Funding $1,228
SD 2010 Capex & Funding
37%
16%26%
21%
0%
Operating cash Asset Sales
Borrowings, net Equity
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Exhibit 30: 2011—Funding Sources for Capex Exhibit 31: 2012—Funding Sources for Capex
2011
Capex $1,778
Operating cash $587
Asset Sales $859
Borrowings, net $0
Equity $0
Royalty Trusts $671
Total Funding $2,117
SD 2011 Capex & Funding
28%
40%
32%
Operating cash Asset Sales Royalty Trusts
2012
Capex $3,061
Operating cash $1,148
Asset Sales $422
Borrowings, net $1,484
Equity $0
Royalty Trusts $0
Total Funding $3,054
SD 2012 Capex & Funding
37%
14%
49% 0%
Operating cash Asset Sales Borrowings, net
Source: Company data, Credit Suisse estimates. Source: Company data, Credit Suisse estimates.
Exhibit 32 shows the relationship between capex and operating cash flow in 2013. Based
on our forecasts, we expect this level of meaningful outspend to continue consistent with
the company’s historical patterns. In fact, the company is outspending its cash flow by the
most in the peer group.
12 February 2013
SandRidge Energy, Inc. (SD) 20
Exhibit 32: 2013 Capex Relative to Discretionary Cash Flows
Capex to Operating Cash Flow 2013
0%
50%
100%
150%
200%
250%
300%
DNR APC APA NBL EOG CXO SWN PXD DVN CHK SD
Series1 Series2 Series3
average capex/CF under CS price deck: 114%
Source: Company data, Credit Suisse estimates.
Stretched Balance Sheet
Following the gas price collapse and consistent outspend of its cash flows, SD’s financial
position has been under duress. The company’s balance sheet metrics appear below
average. Even after factoring in the impact from the anticipated sale of its Permian assets,
SD’s net 2013 debt-to-EBITDA multiple of 2.1 times is meaningfully above the peer group
multiple of 1.4. In addition, SD has one of the lowest interest coverage ratios of its peers,
with an EBITDA/interest expense ratio of 4.1, compared to the group median of 16.0.
Exhibit 33: E&P Debt Ratio Analysis
2013
EBITDA
Interest
expense
2013 Net
Debt
EBITDA to Interest
Expense
Debt /
Ebitda
APA $13,637 $160 $9,173 85.2x 0.7x
NBL $4,340 $126 $3,335 34.4x 0.8x
EOG $7,537 $258 $5,925 29.2x 0.8x
APC $10,500 $656 $9,272 16.0x 0.9x
SWN $1,880 $114 $1,873 16.5x 1.0x
PXD $2,801 $272 $3,965 10.3x 1.4x
DVN $6,019 $519 $9,179 11.6x 1.5x
CXO $1,778 $205 $3,069 8.7x 1.7x
DNR $1,650 $191 $3,155 8.6x 1.9x
CHK $5,240 $100 $10,879 52.6x 2.1x
SD $1,073 $265 $2,301 4.1x 2.1x
Avg. 25.2x 1.4x Source: Credit Suisse Estimates, company data.
In August 2012, Moody’s upgraded SD’s debt rating to B-1 from B-2, citing the size of its
reserve base and increasing growth in oil production, which Moody’s expects would
maintain leverage near existing levels, given cash flow growth. That said, S&P placed
SD’s senior unsecured debt on credit watch on January 22, with a negative bias. S&P
viewed the reduction in the company’s asset base following the planned sale of its
Permian Basin assets as outweighing the anticipated deleveraging after the transaction.
12 February 2013
SandRidge Energy, Inc. (SD) 21
Claims on Cash
Analysis of SD’s financial position suggests that there is more than $300 MM per annum in
‘unproductive’ capex related to royalty trusts, P&A obligations, and the under-delivery of CO2.
■ While the key rationale of the Dynamic Offshore transaction was to help improve the
company’s balance sheet and cash flow profile, there are meaningful P&A obligations
associated with the properties. In 2012, SD spent approximately $70 MM for P&A, and
the company expects its P&A costs to increase to $120 MM in 2013.
■ SandRidge estimates that ~$500 million is required to fulfill its drilling obligations for
the three royalty trusts. Capex spent on the underlying properties in the royalty trusts
is included in the company’s reported E&P capex and guidance.
■ In order to facilitate expansion of CO2 treating capacity in the WTO, SD constructed a
CO2 treatment plant in Pecos County, Texas, and associated compression and
pipeline facilities pursuant to an agreement with Occidental Petroleum Corporation
(OXY). Under the terms of the agreement, OXY paid SD a minimum of 100% of the
contract price, or $800 MM, plus any subsequently agreed-upon revisions, through
periodic cost reimbursements based upon the percentage of the project completed by
the company. Pursuant to a 30-year treating agreement executed simultaneously with
the construction agreement to build the Century Plant, OXY was expected to separate
CO2 from SD’s delivered natural gas production volumes. Under this agreement, SD
is required to deliver certain CO2 volumes annually to OXY and is on the hook for
under-delivery of volumes, which is now the case, as SD is no longer committing
capital to the WTO. In 2012, SD accrued an approximate $20 MM liability related to its
shortfall in meeting its delivery obligations. Going forward, this obligation is expected
to increase to $30 to $40 MM per annum.
12 February 2013
SandRidge Energy, Inc. (SD) 22
Company Description and Strategy SandRidge Energy, Inc. (SD) traces its roots to the state of Texas, where it was originally
organized as Riata Energy in 1984. In 2006, the company completed a corporate
reorganization and was renamed SandRidge Energy. Tom Ward, who cofounded
Chesapeake Energy Corporation (CHK) in 1989 and served as its president and COO until
February 2006, joined SD as the company’s chairman and CEO in June 2006. The
company completed its IPO in November 2007, raising $795 MM. The company began
trading on the New York Stock Exchange under the symbol “SD.” The key elements of the
company’s business model are:
■ Concentrate in Core Operating Areas: SD’s primary areas of operation are West
Texas and the Mid-Continent area of Oklahoma and Kansas, which includes the
Mississippian formation. Concentrating on these core areas allows the company to
build and utilize its technical expertise to interpret specific geological and
operational trends. Furthermore, the company is able to achieve economies of
scale and breadth of operations, both of which help it to control its costs.
■ Focus on Conventional Reservoirs: SD focuses its development efforts primarily
in areas with conventional, shallow, low-cost, permeable carbonate reservoirs with
decades of production history. The nature of these reservoirs allows it to execute
low-risk, repeatable drilling programs with predictable production profiles and a
higher certainty of economic returns. Furthermore, due to these low-pressure and
shallow characteristics, the company is able to mitigate rising service costs.
■ Maintain Flexibility: SD has multiyear drilling inventories of both oil and natural
gas drilling locations within its core operating areas. Additionally, it maintains its
own fleet of drilling rigs through its Lariat Services subsidiary (31 rigs). The
company believes that its undrilled inventory and vertical integration allow it
efficiently to direct capital toward projects with the most attractive returns.
■ Mitigate Commodity Price Risk: SD enters into hedging contracts in order to
mitigate commodity price volatility. By increasing the predictability of cash inflows
for a portion of its future production, the company is better able to ensure funding
for longer-term development plans and rates of return associated with those plans.
■ Monetize Noncore Assets: SD periodically evaluates its properties to identify
opportunities to monetize noncore assets in order to fund or accelerate
development within its areas of focus or, alternatively, pay down amounts
outstanding under its revolving credit facility.
Historical Transactions
Exhibit 34 shows the key asset transactions that SD has completed since 2006.
Exhibit 34: SD Historical Asset Acquisitions
SandRidge Historical Asset Acquisitions
Announce Date Target Name Deal Value (MM)
Sep-06 NEG Oil & Gas LLC $1,518
Nov-09 Assets in the Permian from Forest Oil & Gas $800
Apr-10 Arena Resources Inc $1,564
Feb-12 Dynamic Offshore Resources LLC $1,287 Source: Company data.
Acquisition of NEG Oil & Gas LLC—November 2006
Tom Ward spearheaded the acquisition of NEG Oil & Gas in November 2006 for net
consideration of $1.5 billion, as part of SD’s strategy to expand its core asset base of the
West Texas Overthrust and focus on natural gas. The acquisition increased SD’s net
acreage in the WTO from approximately 167K acres to over 260K acres, added ~500 Bcfe
12 February 2013
SandRidge Energy, Inc. (SD) 23
of proven reserves to its predeal inventory of 272 Bcfe. The company’s production
quadrupled followed the transaction. SD subsequently became the largest operator and
producer with the largest acreage positions in the WTO and owned 83% working interest
in the Piñon Field, which had been the company’s single most prolific field within the WTO,
accounting for 70% of the company’s proven reserves in the area before the transaction.
In addition, the transaction added assets in the Texas Gulf Coast, Gulf of Mexico, and
eastern Texas to SD’s portfolio.
Asset Purchase from Forest Oil (FST)—December 2009
In the wake of falling gas prices, SD initiated a strategic shift to pursuing more oil
production and reserves in 2009. In December 2009, the company completed an
$800 million asset purchase in the Central Basin Platform of the Permian Basin from
Forest Oil, which meaningfully increased the percentage share of oil in SD’s product mix.
The assets primarily consisted of six operated areas in the Central Basin Platform and
greater Permian Basin area of western Texas and eastern New Mexico. These properties
were characterized by multiple producing horizons, including the Spraberry, Wolfcamp,
Grayburg, San Andres, and Wichita-Albany formations. The acquired areas of 90,000 net
acres target the Clear Fork formation at about 7,000 feet in the Central Basin Platform.
The transaction made the Permian a new focus area for the company, paralleling the WTO.
The acquired properties included 80 MMBoe of proven reserves (52% oil, 65% liquids,
44% PDP) and 90 MMBoe of probable and possible reserves. As a result of the acquisition
and a significant write-down of gas reserves in the WTO due to low gas prices, the
pro forma total proven reserve base of the company was 219 MMBoe, consisting of 48%
oil vs. 12% previously.
Acquisition of Arena Resources—April 2010
Four months following the close of the Permian asset purchase in December 2009, SD
announced its intention to merge with Arena Resources (ARD), whose key assets lied in
the San Andres formation and Fuhrman-Mascho field in the Central Basin Platform. These
assets were in close proximity to the assets acquired from Forest. SD offered $1.6 billion
for Arena, representing a 17% premium to ARD shares. The deal was financed through a
combination of common stock (94%) and cash (6%). SD offered $2.50 in cash and 4.771
SD shares for each ARD share.
The acquisition was another step by SD to increase its oil mix, with a meaningful footprint
in the Permian Basin. Arena had 67,600 net acres, 69.3 MMBoe of proven reserves (37%
PD), and 8.5 MBoe/d of production (86% oil). The proven reserves were valued at
$1,121 million using the SEC 12-month average case ($3.87/Mcf and $57.65/Bbl) and
$1,820 million at strip prices ($5.79/Mcf and $79.34/Bbl). Through the acquisition, SD
increased its liquids production mix to 36% from 28% and oil reserve concentration to 57%
from 48%. Another key benefit of the transaction was an improved balance sheet, with the
company’s pro forma leverage ratio declining to 66% from 108% prior to the transaction.
Acquisition of Dynamic Offshore Resources LLC—February 2012
In February 2012, SD acquired Dynamic Offshore, LLC for $1,275 million, financed by
$680 million of cash and the issuance of 74 million shares. Dynamic Offshore primarily
operated in water depths of less than 300 feet and was producing ~25 MBoed of oil and
gas as of year-end 2011. The acquisition added 62.5 MMBoe proved reserves (~50% oil,
81% developed) to SD’s portfolio.
Dynamic was an oil-focused E&P operating in shallow water development in the Gulf of
Mexico (GoM) Shelf. Prior to the acquisition, Dynamic had 490,000 net acres in the GoM,
with interests in over 270 producing wells and 250 offshore leases.
While the transaction appeared to be a divergence from the company’s focus on its core
assets in the Mississippian and Permian, management argued that the move was
consistent with its strategy to purchase undervalued oil assets from mature fields. The
12 February 2013
SandRidge Energy, Inc. (SD) 24
acquisition also served as a funding mechanism that would help SD meet its three-year
plan to double production, triple EBITDA, and reduce leverage. Following the transaction,
SD’s year-end 2011 net debt-to-EBITDA ratio decreased from 4.0 to 3.3, while its
net debt-to-capital remained at ~50%.
Asset Sales
Exhibit 35 shows a summary of SD’s historical asset sale transactions. In contrast to the
bulk of its peers, the company jettisoned the bulk of its unconventional oil and gas assets
to focus on its conventional assets in the Permian and Mississippian. In July 2010, the
company sold its assets in the Cana-Woodford play in Oklahoma for $140 MM. It also sold
40K net acres in the Avalon shale and Bone Spring reservoirs of the Permian Basin for
$110 MM in December 2010. SD sold its Wolfberry assets in the Permian basin in January
2011 for $155 MM. It also divested 23K net acres in the Wolfcamp shale play in Eddy and
Lea counties of New Mexico for $200 MM. In September 2011, SD divested ~25K net
acres of natural gas properties in East Texas for $231 MM.
Exhibit 35: SD Historical Asset Sales
SandRidge Historical Asset Sales
Announce Date Target Name Deal Value (MM)
May-08 Piceance Basin Assets/CO $285
Jun-09 Midstream Assets $200
Jul-09 Pinon Gathering Co LLC $200
Jul-10 Assets in the Cana Woodford $140
Dec-10 Assets in the Bone Spring $110
Jan-11 Wolfberry Assets $155
Mar-11 23K Net Acres in the Wolfcamp $200
Aug-11 Mississipian Play $250
Sep-11 Natural Gas Assets in East Texas $231
Dec-11 Extension Mississippian Play $250
Jun-12 SandRidge Tertiary LLC $130
Source: Company data.
12 February 2013
SandRidge Energy, Inc. (SD) 25
Asset Overview As of December 31, 2011, SD’s proven reserve base was at 470.6 MMBoe (52% oil and
48% natural gas). The company has a relatively high proportion of proved undeveloped
reserves at 51%, reflecting strong reserve bookings in the Mid-Continent basin (including
the Mississippian play) and acquisitions in the West Texas Overthrust (WTO) region. The
reserve base does not include the impact of the February 2012 acquisition of Dynamic
Offshore, which added an incremental 62.5 MMBoe of proven reserves.
Exhibit 36: Proven Reserves (12/31/11) Exhibit 37: Composition of Proven Reserves
Mid-Continent
31%
Permian Basin
40%
Other
5%
Gulf Coast
1%
WTO
22%
Gulf of
Mexico
1%
Oil
52%
Natural Gas
48%
Source: Company data. Source: Company data.
Exhibit 38 displays SD’s historical production growth on a quarterly basis since 2007:
Exhibit 38: Quarterly Production 2007 – 2012
SD Quarterly Production 2007 - 2012
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
Q1
-200
7
Q2
-200
7
Q3
-200
7
Q4
-200
7
Q1
-200
8
Q2
-200
8
Q3
-200
8
Q4
-200
8
Q1
-200
9
Q2
-200
9
Q3
-200
9
Q4
-200
9
Q1
-201
0
Q2
-201
0
Q3
-201
0
Q4
-201
0
Q1
-201
1
Q2
-201
1
Q3
-201
1
Q4
-201
1
Q1
-201
2
Q2
-201
2
Q3
-201
2
Qu
art
erl
y P
rod
uct
ion
(MM
Bo
e)
Source: Company data.
SD operates in three business segments: (1) Exploration and Production (E&P),
(2) Drilling and Oil Field Services, and (3) Midstream Gas Services. The company’s E&P
assets are primarily located in the Mid-Continent and Permian Basin. In addition, it also
operates leasehold positions in the West Texas Overthrust (WTO), Gulf Coast, and Gulf of
Mexico. In December 2012, SD announced an agreement to sell its Permian assets to
Sheridan Production for $2.6 billion. Exhibit 39 displays SD’s historical reserve growth
since 2007.
12 February 2013
SandRidge Energy, Inc. (SD) 26
Exhibit 39: SD’s Historical Reserve Growth
Historical Reserve Growth (MMBoe)
100
200
300
400
500
600
2007 2008 2009 2010 2011
MM
bo
e
Oil Gas
Source: Company data.
Exploration & Production (E&P)
SD’s principal areas of operations are in the Mid-Continent and Permian basin. It also
operates in the West Texas Overthrust (WTO), Gulf Coast, and the Gulf of Mexico. (See
Exhibit 40.)
12 February 2013
SandRidge Energy, Inc. (SD) 27
Exhibit 40: SD’s Operations Overview
Source: Company data.
Mid-Continent
SD holds interests in ~1,698K gross (1,332K net) leasehold and option acres in Oklahoma
and Kansas as of December 31, 2011. Proved reserves as of December 31, 2011, totaled
145.5 MMBoe, 41% of which were proved developed reserves.
■ Mississippian Formation: SD’s primary focus within the Mid-Continent area is the
Mississippian formation, which is an expansive carbonate hydrocarbon system located
on the Anadarko Shelf in northern Oklahoma and Kansas. The top of this formation is
encountered between approximately 4,000 and 7,000 feet and lies stratigraphically
between the Pennsylvanian-aged Morrow formation and the Devonian-aged Woodford
Shale formation. The Mississippian formation can reach 1,000 feet in gross thickness,
and the targeted porosity zone is between 50 and 100 feet in thickness. The
formation's geology is well understood as a result of the thousands of vertical wells
drilled and produced since the 1940s. SD currently has 2,300,000 gross (1,850,000
net) acres under lease, of which 49,600 gross (42,000 net) acres are included in the
Mississippian Trust I's area of mutual interest (AMI) and 81,200 gross (53,000 net)
acres are included in the Mississippian Trust ǁ’s AMI.
The Mississippian play demonstrated significant potential beginning in 2007 through
the application of horizontal drilled and multistage hydraulic fracturing treatments
Since the beginning of 2009, there have been over 1,140 horizontal wells drilled in the
Mississippian formation in northern Oklahoma and Kansas, including 507 drilled by SD
as of Q3 2012. As of September 30, 2012, SD was running 30 horizontal rigs in the
Mississippian. The company plans to drill 388 gross (265 net) horizontal wells in the
Mississippian formation during 2012.
Mississippian Trust I
As a result of its significant acreage position in the Mississippian and need for additional
funding to finance its capex program, SD created a royalty in the Mississippian. In April
2011, SandRidge IPO’ed 17,250,000 common units of its Mississippian Trust I for net cash
12 February 2013
SandRidge Energy, Inc. (SD) 28
proceeds of $336.9 million. Under the Trust agreement, unit holders have royalty interests
in 37 producing wells and 123 horizontal development wells to be drilled in an AMI
spanning 42,000 net acres in the Mississippian in Alfalfa, Garfield, Grant, Major, and
Woods counties in Oklahoma. (See Exhibit 41.)
The Trust is entitled to receive 90% of the sales (after deducting postproduction costs and
production taxes) from the PD wells and 50% from the PUD wells. SD will have until
December 31, 2014 (or December 31, 2015, in the event of delays), to complete its drilling
obligations, and the company is liable for all the capex and production costs associated
with these development wells. Until it fulfills its drilling obligations, SD may not sell the
properties subject to the royalty interests in the trust development wells.
There is no minimum distribution amount, and quarterly distributions could vary with
factors including the timing of the development wells, commodity prices, volume of oil and
gas sold, etc. However, SD will receive certain incentive rewards if income from the Trust’s
properties exceeds a certain threshold.
As of September 2012, the company owned 29.3% of the Mississippian Trust 1 and had
drilled 94 development wells, with 29 wells (~24%) remaining under its obligations. On
February 27, 2012, the company sold an additional 1,583,937 common units of its
Mississippian Trust I common units for proceeds of $52.3 million. On October 2, 2012, the
company sold approximately 688,000 of its Mississippian Trust I common units in a
transaction exempt from registration under Rule 144 under the Securities Act for proceeds
of approximately $15.8 million. As a result of these sales, the company’s beneficial interest
in the Mississippian Trust I decreased to 26.9%.
A wholly owned subsidiary of SandRidge set up a lien to the Trust to secure the estimated
amount of drilling costs for the development wells. The lien amount decreases as SD
fulfills its drilling obligations over time. As of September 2012, the maximum recoverable
amount under the lien was ~$38.8 million.
Exhibit 41: SandRidge Mississippian Trust I (SDT)—Area of Mutual Interest
Source: Company data, Credit Suisse estimates.
12 February 2013
SandRidge Energy, Inc. (SD) 29
Mississippian Trust II
In April 2012, SD sold 29,900,000 common units of its Mississippian Trust II, generating
net cash proceeds of ~$587.1 million. SD retained approximately 7.4 million common units
and 12.4 million subordinated units.
The Mississippian Trust II is similar to the structure of the Mississippian Trust I. The Trust
will have royalty interests in 67 producing wells and 206 horizontal development wells to
be drilled by December 31, 2016. The royalty interests entitle the Trust to receive 80% of
the proceeds (after deducting postproduction costs and production taxes) from the
producing wells and 70% from the development wells. The Area of Mutual Interest (AMI)
extends across 53 K net acres in the Mississippian formation in northern Oklahoma and
southern Kansas. (See Exhibit 42.)
As of September 2012, SD owned 39.9% of the Mississippian Trust 2 and had drilled 77
development wells, with 129 wells (~63%) remaining under its obligations. The maximum
recoverable amount under the lien for the Mississippian Trust II was $269.1 million.
Exhibit 42: SandRidge Mississippian Trust II (SDR)—Area of Mutual Interest
Source: Company data, Credit Suisse estimates.
Permian Basin
As of December 31, 2011, SD held interests in ~319K gross (225K net) leasehold acres in
the Permian Basin, of which ~17.5K gross (16K net) acres were included in the Permian
Trust’s area of mutual interest. Associated proved reserves as of December 31, 2011,
were 187.0 MMBoe, 58% of which were proved developed reserves. The company’s
interests in the Permian Basin as of December 31, 2011, included 3,125 gross (2,976 net)
producing wells with an average working interest of 96.2%.
■ Central Basin Platform: SD significantly expanded its holdings in the Permian
Basin, specifically the Central Basin Platform (CBP), through the Forest acquisition
in December 2009 and the Arena merger in July 2010. These acquisitions added
significant Permian Basin production from the Midland and Delaware Basins in
Texas as well as the Northwest Shelf in New Mexico. Reserves and associated
production in this area are predominantly oil. The primary reservoirs in the CBP are
12 February 2013
SandRidge Energy, Inc. (SD) 30
the dolomites and limestones of the Grayburg-San Andres and Clear Fork
formations. To date, the San Andres and Clear Fork zones have produced more
than 4.0 and 1.8 billion barrels of oil, respectively, with well depths typically ranging
from 4,500 to 7,500 feet. The company's properties in the CBP are positioned for
infill and step-out drilling to target these reservoirs in several of the major CBP
fields, such as the Fuhrman-Mascho, Goldsmith, Fullerton, Tex-Mex, Brooklaw,
and Robertson fields.
Exhibit 43: SD—Permian Basin Operations Details (Central
Basin Platform)
Source: Company data, Credit Suisse estimates.
Permian Trust
In August 2011, SD sold 34.5 million common units of the Permian Trust to the public for
net proceeds of ~$580.6 million and retained 4.875 million common units and
13.125 million subordinated units.
The Trust will have royalty interests in 517 PD wells and 888 development wells to be
drilled by December 31, 2016. The royalty interests entitle the Trust to receive 80% of the
proceeds (after deducting postproduction costs and production taxes) from the producing
wells and 70% from the development wells. The Area of Mutual Interest (AMI) extends
across 15.9K net acres of the Grayburg/San Andres formation in the Permian basin in
Andrews county. (See Exhibit 44.)
As of September 2012, SD owned 30.5% of the Permian Trust and had drilled 415
development wells, with 473 wells (~53%) remaining under its obligations. The maximum
recoverable amount under the lien for the Permian Trust was $156.9 million.
In 2013, SD expects to spend ~$140 million on drilling 220 Permian wells associated with
the Trust. The company aims to finish the drilling obligation in two years.
12 February 2013
SandRidge Energy, Inc. (SD) 31
SandRidge estimates that ~$500 million is required to fulfill its drilling obligations for the
three royalty trusts. Capex spent on the underlying properties in the royalty trusts is
included in the company’s reported E&P capex and guidance.
Exhibit 44: SD Permian Trust (PER)—Area of Mutual
Interest
Source: Company data, Credit Suisse estimates.
Sale of Permian Acreage
On December 19, 2012, Sandridge announced to sell all of its Permian acreage, except
for the area subject to the Permian Trust, to Sheridan Production for cash proceeds of
$2.6 billion. The proceeds will be used to pay down debt and fund investments in the
Mississippian. The transaction is expected to close in the first quarter of 2013. The
properties produced 24.5 MBoe/d, with 67% oil, 15% NGLs, and 18% natural gas. The
transaction implies a valuation of $106K per flowing barrel. After the sale, SD is still
obligated to fulfill its drilling commitment under the Permian Trust, which we estimate to be
approximately $300 million.
West Texas Overthrust
SD holds interests in ~544K gross (419K net) leasehold acres in the West Texas
Overthrust (WTO) as of December 31, 2011. Associated proved reserves as of
December 31, 2011 were 102.5 MMBoe, 45% of which were proved developed reserves.
The company's interests in the WTO as of December 31, 2011, included 880 gross
(745.4 net) producing wells with an average working interest of 95.3%.
SD has drilled and developed natural gas in the WTO since 1986. This area is located in
Pecos and Terrell counties in west Texas and is associated with the Marathon-Ouachita
fold and thrust belt that extends east-northeast across the United States into the
Appalachian Mountain Region. The primary reservoir rocks in the WTO range in depth
12 February 2013
SandRidge Energy, Inc. (SD) 32
from 2,000 to 17,000 feet and range in geologic age from the Permian to the Devonian.
The imbricate stacking of these conventional gas-prone reservoirs provides for multipay
exploration and development opportunities. Despite these opportunities, the WTO has
historically been under-explored. The high CO2 content of the natural gas, lack of
infrastructure in the region, and historical limitations of conventional subsurface geological
and geophysical methods have combined to discourage exploration of the area.
In order to facilitate expansion of CO2 treating capacity in the WTO, SD constructed a
CO2 treatment plant in Pecos County, Texas, and associated compression and pipeline
facilities pursuant to an agreement with Occidental Petroleum Corporation (OXY). Under
the terms of the agreement, OXY paid SD a minimum of 100% of the contract price, or
$800 MM, plus any subsequently agreed-upon revisions, through periodic cost
reimbursements based upon the percentage of the project completed by the company.
Pursuant to a 30-year treating agreement executed simultaneously with the construction
agreement to build the Century Plant, OXY was expected to separate CO2 from SD’s
delivered natural gas production volumes. Under this agreement, SD is required to deliver
certain CO2 volumes annually to OXY and is on the hook for under-delivery of volumes,
which is now the case, as SD is no longer committing capital to the WTO. In 2012, SD
accrued an approximate $20 MM liability related to its shortfall in meeting its delivery
obligations. Going forward, this obligation is expected to increase to $30 to $40 MM per
annum.
Gulf of Mexico/Gulf Coast
As of December 31, 2011, SD owned 57K gross (28 K net) acres in state and federal
waters off the coasts of Texas and Louisiana. As of December 31, 2011, the company’s
estimated net proved reserves in the Gulf of Mexico were 6.1 MMBoe.
As of December 31, 2011, SD had ~66K gross (34 K net) acres in the Gulf Coast area. As
of December 31, 2011, the Company's estimated net proved reserves in the Gulf Coast
area were 5.8 MMBoe.
SD acquired Dynamic Offshore Resources, LLC (Dynamic) for aggregate consideration of
approximately $680 MM in cash and ~74 million shares of SD common stock in April 2012.
Dynamic had 62.5 MMBoe of proven reserves, 80% of which were proved developed
reserves. Approximately 50% of Dynamic’s current production and proved reserves
consists of oil.
Drilling and Oilfield Services (OFS)
The drilling and related oil field services that the company provides to its exploration and
production business and to third parties are consolidated under its drilling and oilfield
services subsidiary, Lariat Services. As of September 30, 2012, Lariat owned 31 drilling
rigs. Exhibit 45 presents a summary of the company’s rigs as of September 30, 2012, and
2011.
Exhibit 45: SD: Lariat Services, Inc. Drilling Fleet
Rigs 9/30/2012 9/30/2011
Working for SD 21 20
Working for 3rd Parties 9 11
Total Operational 30 31
Non-operational 1 0
Total Rigs 31 31
Source: Company data, Credit Suisse estimates.
SD’s oil field services business conducts operations that, together with its drilling services,
complement its exploration and production business. Oil field services include providing
12 February 2013
SandRidge Energy, Inc. (SD) 33
pulling units, trucking, rental tools, location and road construction, and roustabout services
to the company as well as to third parties.
Midstream Gas Services
SD provides gathering, compression, and treating services of natural gas in west Texas.
The company’s midstream operations and assets serve its exploration and production
business as well as other oil and natural gas companies. Exhibit 46 and Exhibit 47 set
forth information regarding primary midstream assets as of December 31, 2011:
Exhibit 46: SD, Midstream—Gas Treating Plants
Gas Treating Plants Plant Capacity (MMcf/d) Avg. Utilization 3rd Part Usage
Pike's Peak 85 25% <1%
Grey Ranch 220 26% 6% Source: Company data, Credit Suisse estimates.
Exhibit 47: SD, Midstream—CO2 Compression Facilities
SD CO2 Compression Facilities CO2 Compression Capacity (MMcf/d) Avg. Utilization
Pike's Peak 36.0 29%
Mitchell 26.5 28%
Grey Ranch 64.0 20%
Terrell 28.0 73% Source: Company data, Credit Suisse estimates.
West Texas
SD owns and operates the Pike’s Peak gas treating plant in Pecos county, Texas, which
has the capacity to treat 85 MMcf/d of natural gas for the removal of CO2 from production
in the Piñon Field and nearby areas. The company also owns the Grey Ranch gas treating
plant located in Pecos county and has a 50% interest in the partnership that leases the
plant from it under a lease expiring in 2020. The treating capacity for both the Pike’s Peak
and Grey Ranch plants is dependent upon the quality of natural gas being treated.
SD’s two west Texas gas treating plants remove CO2 from natural gas production and
deliver residue gas into the Atmos Lone Star and Enterprise Energy Services pipelines.
These pipelines are operated on fixed fees based upon throughput of natural gas. In
addition, the company has access of up to 30 MMcf per day of treating capacity at Hoover
Energy Partners’ Mitchell Plant under a long-term fixed fee arrangement.
SD also owns or operates over 1,700 miles of gas gathering pipelines and numerous
dehydration units. Within the Piñon Field, the company operates separate gathering
systems for sweet natural gas and produced natural gas containing high percentages of
CO2. In addition to servicing its own exploration and production business, these assets
also service other oil and natural gas companies.
Other Areas
As of December 31, 2011, SD owned ~50 miles of pipeline in the Mid-Continent area, and
the company owned ~54 miles of pipeline gathering systems and operated over 2,500
horsepower of gas compression in the Gulf Coast area.
Other Services
SD’s CO2 capturing operations are conducted through SandRidge CO2. As of December
31, 2011, SandRidge CO2 owned 240 miles of CO2 pipelines in west Texas, with ~56,000
horsepower of owned and leased CO2 compression available and currently operational.
The captured CO2 is primarily used for tertiary oil recovery operations.
12 February 2013
SandRidge Energy, Inc. (SD) 34
Management Team Executive Compensation
SD believes that a strong, experienced senior management team is necessary to execute
the company’s business plan. Accordingly, compensation philosophy reflects the
company’s need to attract, retain, and motivate top talent executives.
Exhibit 48: SD’s Compensation Overview
Compensation Element Description and Purpose Market Guidelines
Base Salary Provides a minimum fixed level of cash compensation for
performing day-to-day responsibilities
Competitive with peers
Rewards near-term operational and financial performance
Aligns executive and stockholder interests
Encourages retention
Rewards long-term operational and financial performance
Health, welfare and retirement program and perquisites
Maintains a competitive position in terms of attracting and
retaining executives
Other Benefits and Perquisites Competitive with peers
Competitive with peers
Competitive with peers
Cash Bonus Awards
Long-Term Incentives
Source: Company data.
SD utilizes the following peers as a basis for its executive compensation: ATP Oil & Gas
(ATP), Anadarko Petroleum (APC), Apache (APA), Chesapeake (CHK), Denbury
Resources (DNR), EOG Resources (EOG), Forest Oil (FST), Devon (DVN), Newfield
Exploration (NFX), Noble Energy (NBL), Pioneer (PXD), Plains Exploration & Production
(PXP), Range Resources (RRC), Southwestern (SWN), and Ultra Petroleum (UPL).
Exhibit 49: SD’s Executive and Director Ownership Detail CXO Ownership of Directors and Executive Officers
Name
Shares
Owned
Market
Value ($M)
% of
Total S.O.
Management Team
Tom L. Ward, Chairman & CEO 19,611,344 $119.1 4.72%
Matthew K. Grubb, President & COO 272,514 $1.7 0.07%
James D. Bennett, EVP & CFO 113,923 $0.7 0.03%
Todd N. Tipton, EVP - Exploration 59,342 $0.4 0.01%
Rodney E. Johnson, EVP - Reservoir Engineering 34,591 $0.2 0.01%
Total Management Team 20,091,714 $122.1 4.84%
Directors
Jim J. Brewer 10,373 $0.1 0.00%
Everett R. Dobson 44,662 $0.3 0.01%
William A. Gilliland 1,652,253 $10.0 0.40%
Daniel W. Jordan 1,546,046 $9.4 0.37%
Roy T. Oliver Jr. 1,323,764 $8.0 0.32%
Jeffrey S. Serota - $0.0 0.00%
Total Directors 4,577,098 $27.7 1.10%
Total Executive and Director Shares Owned 24,668,812 $149.8 5.94% Source: Company data.
12 February 2013
SandRidge Energy, Inc. (SD) 35
Management Team
Tom L. Ward, Chairman and Chief Executive Officer
Professional Background
Tom L. Ward has been SD’s chairman and CEO since June 2006. Between December
2006 and January 2011, Mr. Ward also served as the company’s president. Before joining
SD, Mr. Ward cofounded Chesapeake Energy (CHK), where he served as president and
COO between 1989 until 2006.
Education
Mr. Ward graduated from the University of Oklahoma with a bachelor of business
administration in petroleum land management. Mr. Ward is a member of the board of
trustees of Anderson University in Anderson, Indiana, and of the economic advisory
council of the Federal Reserve Bank of Kansas City.
Matthew K. Grubb, President and Chief Operating Officer
Professional Background
Matthew Grubb was elected as SD’s president in January 2011 and has served as the
company’s COO since June 2007. Mr. Grubb’s previous position in the company was
executive vice president—operations, which he held from August 2006. Between 1995 and
2006, Mr. Grubb was employed by Samson Resources.
Education
Mr. Grubb is a graduate from the Texas A&M University, where he received both his
bachelor of science degree in petroleum engineering in 1986 and his master of science
degree in mechanical engineering in 1988.
James D. Bennett, Executive Vice President and Chief Financial Officer
Professional Background
James D. Bennett joined SD in January 2011 as executive vice president and CFO. Before
joining SD, Mr. Bennett was employed by White Deer Energy, where he was a managing
director. Between 2006 and 2009, he served as managing director at GSO Capital
Partners L.P. Mr. Bennett also served on the board of directors of the GP of Cheniere
Energy Partners L.P. and PostRock Energy Corporation.
Education
Mr. Bennett graduated from the Texas Tech University, where he earned his bachelor of
business administration in finance.
Todd N. Tipton, Executive Vice President—Exploration
Professional Background
Todd N. Tipton joined SandRidge in September 2006 as has held the position of executive
vice president—exploration since then. Prior to joining the company, Mr. Tipton was
employed by Devon, where he served as exploration manager of the western division
between 2001 and 2006. Mr. Tipton is also a member of the Rocky Mountain Association
of Geologists and a member of the Independent Petroleum Association of Mountain States.
Education
Mr. Tipton graduated from the State University of New York at Buffalo, where he got his
bachelor degree in geology in 1977. He also completed an executive development
program at The Johnson Graduate School of Management at Cornell University.
12 February 2013
SandRidge Energy, Inc. (SD) 36
Rodney E. Johnson, Executive Vice President—Reservoir Engineering
Professional Background
Rodney E. Johnson currently holds the position of executive vice president—reservoir
engineering. Mr. Johnson joined the company in January 2007 as president of reservoir
engineering. Between October 2003 and December 2006, Mr. Johnson was employed by
Chesapeake, where he served as manager of reservoir engineering.
Education
Mr. Johnson earned his bachelor of science degree in mechanical engineering from the
Wichita State University in 1980.
Exhibit 50: SD Management Compensation Table
Executive Compensation 2009 2010 2011
Salary $1,212,894 $1,500,000 $1,502,596
Bonus 1,350,000 1,500,000 1,523,000
Stock Awards 9,406,250 17,284,585 20,771,971
All Other Compensation 1,772,829 1,471,672 1,463,935
Total Compensation $13,741,973 $21,756,257 $25,261,502
Salary $588,904 $755,770 $900,519
Bonus 675,000 855,000 914,000
Stock Awards 1,671,200 2,127,335 4,672,500
All Other Compensation 170,068 224,454 338,626
Total Compensation $3,105,172 $3,962,829 $6,825,645
Salary NA NA $670,789
Bonus NA NA 710,500
Stock Awards NA NA 6,153,250
All Other Compensation NA NA 204,913
Total Compensation NA NA $7,739,452
Salary $372,443 $401,692 $424,884
Bonus 289,000 304,500 447,500
Stock Awards 448,740 585,015 1,168,125
All Other Compensation $96,972 $105,221 119,904
Total Compensation $1,207,155 $1,396,428 $2,160,413
Salary $351,544 $376,924 $421,039
Bonus 325,000 355,500 447,000
Stock Awards 332,400 425,465 1,168,125
All Other Compensation $96,929 $108,994 123,060
Total Compensation $1,105,873 $1,266,883 $2,159,224
Rodney E. Johnson - EVP of Reservoir Engineering
Tom L. Ward - Chairman, Chief Executive Officer
Matthew K. Grubb - President, Chief Operating Officer
James D. Bennett - EVP, Chief Financial Officer
Todd N. Tripton - EVP of Exploration
Source: FactSet, Company reports.
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Financial Overview Exhibit 51: Financial Summary of SandRidge Energy (SD)
SandRidge Energy (SD)
($ millions, except per share) 2012E 2013E 2014E 2015E
EPS $0.22 -$0.23 -$0.20 -$0.44
CFPS $1.72 $1.38 $1.62 $1.64
Net income $66 -$188 -$171 -$315
Interest expense $299 $265 $263 $305
Effective tax rate -3% 0% 0% 0%
Average fully diluted shares 553 588 588 588
EBITDA $1,118 $1,073 $1,216 $1,269
Depreciation $633 $735 $857 $1,006
EBIT $455 $302 $317 $215
Cash flow from operations $840 $809 $953 $964
Capex* $2,128 $1,750 $1,650 $1,650
Free cash flow from operations ($1,288) ($941) ($697) ($686)
Year-end cash balance $410 $900 $633 $479
Year-end debt $4,300 $3,200 $3,700 $4,300
Year-end net debt $3,890 $2,301 $3,067 $3,822
Net Debt/EBITDA 3.5x 2.1x 2.5x 3.0x
Net Debt/Cap 59% 46% 54% 61%
Production
Oil (MMBbls) 18.0 16.5 17.4 19.4
% growth 52% -8% 5% 12%
% of total 54% 46% 42% 41%
Average realized price $84.77 $93.76 $92.71 $83.74
Natural Gas (Bcf) 93.3 118.3 142.8 166.8
% growth 35% 27% 21% 17%
% of total 46% 54% 58% 59%
Average realized price $2.43 $3.27 $3.74 $3.92
Total (MMBoe) 33.5 36.2 41.2 47.2
% growth 43% 8% 14% 15%
Credit Suisse Commodity Price Outlook
WTI Crude Oil ($ per barrel) $94.14 $102.75 $102.00 $92.00
Brent Crude ($ per barrel) $111.96 $115.00 $110.00 $100.00
US Natural Gas ($ per mcf) $2.80 $3.70 $4.30 $4.50 Source: Company data, Credit Suisse estimates
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Exhibit 52: SD Income Statement Annuals
2012 2013 2014 2015 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
INCOME STATEMENT
REVENUE
Oil and natural gas $1,801.7 $1,814.4 $2,053.2 $2,238.2 $192.5 $584.5 $490.2 $534.5 $1,801.7 $543.0 $394.7 $427.5 $449.3 $1,814.4 $480.4 $501.5 $526.7 $544.6 $2,053.2 $529.4 $550.5 $571.6 $586.6 $2,238.2
Drilling, Midstream & Other 175.8 177.9 192.6 208.4 40.3 48.7 44.5 42.3 175.8 43.2 44.0 44.9 45.8 177.9 46.7 47.7 48.6 49.6 192.6 50.6 51.6 52.6 53.7 208.4
Total Revenue $1,977.5 $1,992.4 $2,245.8 $2,446.7 $232.8 $633.1 $534.7 $576.8 $1,977.5 $586.1 $438.7 $472.4 $495.1 $1,992.4 $527.1 $549.2 $575.3 $594.2 $2,245.8 $580.0 $602.1 $624.2 $640.3 $2,446.7
OPERATING EXPENSES
Lease operating costs $482.1 $561.5 $618.2 $708.7 $83.3 $122.5 $137.0 $139.3 $482.1 $153.1 $128.2 $136.6 $143.6 $561.5 $142.9 $151.1 $159.1 $165.1 $618.2 $166.9 $174.1 $181.2 $186.4 $708.7
Production taxes 54.4 50.8 57.5 62.7 12.3 11.0 13.0 18.2 54.4 15.2 11.1 12.0 12.6 50.8 13.5 14.0 14.7 15.2 57.5 14.8 15.4 16.0 16.4 62.7
Drilling and services 74.0 72.5 82.4 94.5 17.6 19.2 15.7 21.6 74.0 19.8 16.5 17.6 18.5 72.5 19.1 20.1 21.2 22.0 82.4 22.3 23.2 24.2 24.9 94.5
Midstream and marketing 38.5 39.8 45.3 52.0 8.0 8.6 10.7 11.3 38.5 10.9 9.1 9.7 10.2 39.8 10.5 11.1 11.7 12.1 45.3 12.2 12.8 13.3 13.7 52.0
Depreciation, depletion, and amortization 568.8 670.2 783.1 921.3 87.1 139.3 166.1 176.4 568.8 182.8 153.0 163.0 171.4 670.2 181.0 191.4 201.6 209.1 783.1 217.0 226.4 235.6 242.3 921.3
Depreciation, depletion, and amortization (non-E&P) 64.5 65.2 74.2 85.0 14.5 15.3 16.5 18.1 64.5 17.8 14.9 15.9 16.7 65.2 17.1 18.1 19.1 19.8 74.2 20.0 20.9 21.7 22.4 85.0
Asset retirement accretion / asset impairment 29.6 36.2 41.2 47.2 2.6 8.0 9.1 10.0 29.6 9.9 8.3 8.8 9.3 36.2 9.5 10.1 10.6 11.0 41.2 11.1 11.6 12.1 12.4 47.2
General and administrative 207.2 194.3 226.7 259.9 50.3 61.7 46.8 48.4 207.2 49.4 45.5 48.5 51.0 194.3 52.4 55.4 58.3 60.5 226.7 61.2 63.9 66.5 68.3 259.9
Other Operating Expenses / (Income) 3.8 0.0 0.0 0.0 3.1 0.3 0.4 0.0 3.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
TOTAL EXPENSES $1,522.9 $1,690.5 $1,928.7 $2,231.3 $278.6 $385.9 $415.2 $443.2 $1,522.9 $458.7 $386.5 $412.1 $433.2 $1,690.5 $445.9 $471.4 $496.4 $515.0 $1,928.7 $525.7 $548.3 $570.6 $586.8 $2,231.3
OPERATING INCOME $454.6 $301.8 $317.1 $215.3 -$45.8 $247.3 $119.6 $133.6 $454.6 $127.4 $52.2 $60.3 $61.9 $301.8 $81.2 $77.7 $79.0 $79.2 $317.1 $54.3 $53.8 $53.7 $53.5 $215.3
Interest Expense 299.3 264.7 262.8 304.7 67.0 68.6 81.9 81.9 299.3 81.9 60.9 60.9 60.9 264.7 60.9 60.9 70.5 70.5 262.8 70.5 74.3 78.1 81.9 304.7
Loss/(gain) on derivatives contracts and other income, net -338.9 0.0 0.0 0.0 103.3 -639.5 197.2 0.0 -338.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Pretax Earnings $494.2 $37.1 $54.3 -$89.4 -$216.2 $818.2 -$159.6 $51.7 $494.2 $45.5 -$8.7 -$0.6 $0.9 $37.1 $20.2 $16.8 $8.5 $8.8 $54.3 -$16.1 -$20.4 -$24.4 -$28.4 -$89.4
Income Tax Expense (Benefit) -103.4 0.0 0.0 0.0 0.1 -103.7 0.2 0.0 -103.4 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Note, Effective Tax Rate -3% 0% 0% 0% 0% -13% 0% 0% -3% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%
Production taxes 4% 3% 3% 3% 6% 2% 3% 3% 4% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3% 3%
Net Income $597.6 $37.1 $54.3 -$89.4 -$216.2 $921.9 -$159.8 $51.7 $597.6 $45.5 -$8.7 -$0.6 $0.9 $37.1 $20.2 $16.8 $8.5 $8.8 $54.3 -$16.1 -$20.4 -$24.4 -$28.4 -$89.4
Less: Net income from noncontrolling interests 129.0 170.0 170.0 170.0 2.0 99.0 10.7 17.4 129.0 42.5 42.5 42.5 42.5 170.0 42.5 42.5 42.5 42.5 170.0 42.5 42.5 42.5 42.5 170.0
Less: Preferred stock dividends 55.5 55.5 55.5 55.5 13.9 13.9 13.9 13.9 55.5 13.9 13.9 13.9 13.9 55.5 13.9 13.9 13.9 13.9 55.5 13.9 13.9 13.9 13.9 55.5
Net Income To Common $413.1 -$188.4 -$171.2 -$314.9 -$232.1 $809.0 -$184.3 $20.4 $413.1 -$10.9 -$65.1 -$57.0 -$55.5 -$188.4 -$36.1 -$39.6 -$47.9 -$47.6 -$171.2 -$72.5 -$76.8 -$80.8 -$84.8 -$314.9
Special Items/Adjustments 346.6 0.0 0.0 0.0 -239.4 786.0 -200.0 0.0 346.6 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Adjusted Net Income To Common $66.5 -$188.4 -$171.2 -$314.9 $7.4 $23.0 $15.7 $20.4 $66.5 -$10.9 -$65.1 -$57.0 -$55.5 -$188.4 -$36.1 -$39.6 -$47.9 -$47.6 -$171.2 -$72.5 -$76.8 -$80.8 -$84.8 -$314.9
Reported Earnings Per Share (Basic) $0.90 ($0.38) ($0.34) ($0.63) ($0.58) $1.75 ($0.39) $0.04 $0.90 ($0.02) ($0.13) ($0.11) ($0.11) ($0.38) ($0.07) ($0.08) ($0.10) ($0.10) ($0.34) ($0.15) ($0.15) ($0.16) ($0.17) ($0.63)
Reported Earnings Per Share (Diluted) $0.85 ($0.23) ($0.20) ($0.44) ($0.58) $1.47 ($0.39) $0.06 $0.85 $0.01 ($0.09) ($0.07) ($0.07) ($0.23) ($0.04) ($0.04) ($0.06) ($0.06) ($0.20) ($0.10) ($0.11) ($0.11) ($0.12) ($0.44)
Adjusted Earnings Per Share (Basic) $0.15 ($0.38) ($0.34) ($0.63) $0.02 $0.05 $0.03 $0.04 $0.15 ($0.02) ($0.13) ($0.11) ($0.11) ($0.38) ($0.07) ($0.08) ($0.10) ($0.10) ($0.34) ($0.15) ($0.15) ($0.16) ($0.17) ($0.63)
Adjusted Earnings Per Share (Diluted) $0.22 ($0.23) ($0.20) ($0.44) $0.04 $0.07 $0.05 $0.06 $0.22 $0.01 ($0.09) ($0.07) ($0.07) ($0.23) ($0.04) ($0.04) ($0.06) ($0.06) ($0.20) ($0.10) ($0.11) ($0.11) ($0.12) ($0.44)
EBITDA $1,118 $1,073 $1,216 $1,269 $185 $410 $311 $338 $1,118 $338 $228 $248 $259 $1,073 $289 $297 $310 $319 $1,216 $303 $313 $323 $331 $1,269
Cash Taxes $2 $1 $1 $1 $2.03 $1.34 $1.37 $1.85 $1.65 $1.54 $1.34 $1.36 $1.36 $1.40 $1.41 $1.39 $1.39 $1.39 $1.40 $1.33 $1.33 $1.32 $1.32 $1.33
EBIDA $1,116 $1,072 $1,214 $1,268 $183 $409 $310 $336 $1,116 $336 $227 $247 $258 $1,072 $287 $296 $309 $318 $1,214 $301 $311 $322 $329 $1,268
Cash Flow Per Share (Basic) $2.07 $1.62 $1.91 $1.94 $0.38 $0.58 $0.59 $0.52 $2.07 $0.51 $0.34 $0.38 $0.40 $1.62 $0.46 $0.47 $0.48 $0.50 $1.91 $0.47 $0.48 $0.49 $0.50 $1.94
Cash Flow Per Share (Diluted) $1.72 $1.38 $1.62 $1.64 $0.31 $0.47 $0.50 $0.44 $1.72 $0.44 $0.28 $0.32 $0.34 $1.38 $0.39 $0.40 $0.41 $0.42 $1.62 $0.39 $0.41 $0.42 $0.42 $1.64
Basic shares 457.7 498.0 498.0 498.0 400.6 461.0 476.0 493.0 457.7 498.0 498.0 498.0 498.0 498.0 498.0 498.0 498.0 498.0 498.0 498.0 498.0 498.0 498.0 498.0
Diluted shares 552.6 588.0 588.0 588.0 500.1 560.6 566.6 583.0 552.6 588.0 588.0 588.0 588.0 588.0 588.0 588.0 588.0 588.0 588.0 588.0 588.0 588.0 588.0 588.0
2013E 2014E 2015ESandRidge Energy (SD)
2012E
Source: Company data, Credit Suisse estimates
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Exhibit 53: SD Cash Flow Statement Annuals
2012 2013 2014 2015 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
Discretionary Cash Flow Reconciliation ($MM)
CASH FLOWS FROM OPERATING ACTIVITIES
NET INCOME $597.6 $37.1 $54.3 ($89.4) ($216.2) $921.9 ($159.8) $51.7 $597.6 $45.5 ($8.7) ($0.6) $0.9 $37.1 $20.2 $16.8 $8.5 $8.8 $54.3 ($16.1) ($20.4) ($24.4) ($28.4) ($89.4)
Depreciation, depletion, and amortization 633.3 735.4 857.3 1,006.4 101.6 154.6 182.6 194.5 633.3 200.5 167.9 178.9 188.1 735.4 198.1 209.6 220.7 228.9 857.3 237.1 247.3 257.3 264.7 1,006.4
Debt issuance costs amortization 11.3 0.0 0.0 0.0 3.2 3.5 4.7 0.0 11.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Unrealized loss on derivative contracts (234.7) 0.0 0.0 0.0 127.8 (583.0) 220.4 0.0 (234.7) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Realized loss on derivative contracts 99.3 0.0 0.0 0.0 120.1 (24.1) 3.3 0.0 99.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Loss (gain) on sale of assets 3.8 0.0 0.0 0.0 3.1 0.3 0.4 0.0 3.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Deferred income taxes (103.3) 0.0 0.0 0.0 0.0 (103.3) 0.0 0.0 (103.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Investment income (0.8) 0.0 0.0 0.0 (0.6) 0.5 (0.7) 0.0 (0.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Stock Based Compensation / ARO Accretion 43.1 36.2 41.2 47.2 14.0 19.9 (0.7) 10.0 43.1 9.9 8.3 8.8 9.3 36.2 9.5 10.1 10.6 11.0 41.2 11.1 11.6 12.1 12.4 47.2
Other (100.3) 0.0 0.0 0.0 0.0 (124.4) 24.1 0.0 (100.3) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Discretionary Cash Flow $949.3 $808.7 $952.8 $964.2 $152.9 $265.8 $274.4 $256.2 $949.3 $255.9 $167.4 $187.1 $198.3 $808.7 $227.9 $236.4 $239.8 $248.7 $952.8 $232.1 $238.4 $245.0 $248.7 $964.2
Changes in working capital ($108.9) $0.0 $0.0 $0.0 $78.0 ($79.0) (107.9) 0.0 ($108.9) $0.0 $0.0 $0.0 $0.0 0.0 $0.0 $0.0 $0.0 $0.0 0.0 $0.0 $0.0 $0.0 $0.0 0.0
Net Cash Provided by Operating Activities $840.5 $808.7 $952.8 $964.2 $230.9 $186.8 $166.5 $256.2 $840.5 255.9 167.4 187.1 198.3 808.7 $227.9 $236.4 $239.8 $248.7 $952.8 $232.1 $238.4 $245.0 $248.7 $964.2
($88.5)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment ($2,128.4) ($1,750.0) ($1,650.0) ($1,650.0) ($601.8) ($521.2) ($502.7) ($502.7) ($2,128.4) ($437.5) ($437.5) ($437.5) ($437.5) ($1,750.0) ($412.5) ($412.5) ($412.5) ($412.5) (1,650.0) ($412.5) ($412.5) ($412.5) ($412.5) (1,650.0)
Acquisition of assets (837.0) 0.0 0.0 0.0 (10.5) (751.1) (75.4) 0.0 (837.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Proceeds from asset sales 422.2 2,600.0 0.0 0.0 269.0 151.9 1.3 0.0 422.2 0.0 2,600.0 0.0 0.0 2,600.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Cash Provided by Investing Activities ($2,543.3) $850.0 ($1,650.0) ($1,650.0) ($343.3) ($1,120.4) ($576.8) ($502.7) ($2,543.3) ($437.5) $2,162.5 ($437.5) ($437.5) $850.0 ($412.5) ($412.5) ($412.5) ($412.5) ($1,650.0) ($412.5) ($412.5) ($412.5) ($412.5) ($1,650.0)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings $1,850.3 $0.0 $500.0 $600.0 $0.0 750.0 1,100.3 0.0 $1,850.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 500.0 0.0 500.0 0.0 200.0 200.0 200.0 600.0
Repayments of borrowings (366.0) (1,100.0) 0.0 0.0 (0.3) (15.8) (350.0) 0.0 (366.0) 0.0 (1,100.0) 0.0 0.0 (1,100.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Premium on debt redemption (0.8) 0.0 0.0 0.0 0.0 0.0 (0.8) 0.0 (0.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Debt issuance costs (48.2) 0.0 0.0 0.0 (7.2) (20.1) (20.9) 0.0 (48.2) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Dividends paid - preferred (62.3) (69.0) (69.0) (69.0) (17.3) (10.5) (17.3) (17.3) (62.3) (17.3) (17.3) (17.3) (17.3) (69.0) (17.3) (17.3) (17.3) (17.3) (69.0) (17.3) (17.3) (17.3) (17.3) (69.0)
Purchase of treasury stock (12.8) 0.0 0.0 0.0 (7.1) (0.8) (4.8) 0.0 (12.8) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other 544.9 0.0 0.0 0.0 64.5 524.0 (43.6) 0.0 544.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Cash Provided by Financing Activities $1,905.1 ($1,169.0) $431.0 $531.0 $32.6 $1,226.8 $662.9 ($17.3) $1,905.1 ($17.3) ($1,117.3) ($17.3) ($17.3) ($1,169.0) ($17.3) ($17.3) $482.7 ($17.3) $431.0 ($17.3) $182.7 $182.7 $182.7 $531.0
Net (decrease) Increase in Cash and Cash Equivalents $202.3 $489.7 ($266.2) ($154.8) ($79.8) $293.2 $252.6 ($263.7) $202.3 ($198.9) $1,212.6 ($267.6) ($256.5) $489.7 ($201.9) ($193.3) $310.0 ($181.0) ($266.2) ($197.7) $8.7 $15.2 $19.0 ($154.8)
Cash and equivalents, beginning of period $207.7 $409.9 $899.6 $633.3 $207.7 $127.8 $421.1 $673.7 $207.7 $409.9 $211.1 $1,423.7 $1,156.1 $409.9 $899.6 $697.7 $504.4 $814.4 $899.6 $633.3 $435.6 $444.3 $459.6 $633.3
Cash and equivalents, end of period $409.9 $899.6 $633.3 $478.5 $127.8 $421.1 $673.7 $409.9 $409.9 $211.1 $1,423.7 $1,156.1 $899.6 $899.6 $697.7 $504.4 $814.4 $633.3 $633.3 $435.6 $444.3 $459.6 $478.5 $478.5
2013E 2014E 2015ESandRidge Energy (SD)
2012E
Source: Company data, Credit Suisse estimates
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Exhibit 54: SD Production Forecast Annuals
2012 2013 2014 2015 Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year Q1 Q2 Q3 Q4 Year
Production Volumes - Daily
Oil (Mbbl/d)
United States 49.1 45.3 47.7 53.2 37.7 50.1 53.7 54.8 49.1 56.8 39.4 41.4 43.4 45.3 45.2 46.9 48.5 50.0 47.7 51.4 52.6 53.9 55.1 53.2
Total Oil (Mbbl/d) 49.1 45.3 47.7 53.2 37.7 50.1 53.7 54.8 49.1 56.8 39.4 41.4 43.4 45.3 45.2 46.9 48.5 50.0 47.7 51.4 52.6 53.9 55.1 53.2
Natural Gas (MMcf/d)
United States 254.9 324.2 391.3 457.0 173.0 240.7 295.5 310.3 254.9 317.8 308.8 326.3 343.8 324.2 363.8 382.8 400.8 417.8 391.3 433.8 449.8 464.8 479.8 457.0
Total Natural Gas (MMcf/d) 254.9 324.2 391.3 457.0 173.0 240.7 295.5 310.3 254.9 317.8 308.8 326.3 343.8 324.2 363.8 382.8 400.8 417.8 391.3 433.8 449.8 464.8 479.8 457.0
34% 27% 21% 17%
Total Production (Mboe/d) 91.5 99.3 112.9 129.4 66.5 90.2 103.0 106.5 91.5 109.8 90.9 95.8 100.7 99.3 105.8 110.7 115.3 119.6 112.9 123.7 127.6 131.3 135.1 129.4
Production Volumes - Summary
Oil (MMbbls)
United States 18.0 16.5 17.4 19.4 3.4 4.6 4.9 5.0 18.0 5.1 3.6 3.8 4.0 16.5 4.1 4.3 4.5 4.6 17.4 4.6 4.8 5.0 5.1 19.4
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Oil (MMbbls) 18.0 16.5 17.4 19.4 3.4 4.6 4.9 5.0 18.0 5.1 3.6 3.8 4.0 16.5 4.1 4.3 4.5 4.6 17.4 4.6 4.8 5.0 5.1 19.4
Natural Gas Liquids (Mbbl/d)
United States 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Natural Gas Liquids (MMbbls) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Natural Gas (Bcf)
United States 93.3 118.3 142.8 166.8 15.7 21.9 27.2 28.5 93.3 28.6 28.1 30.0 31.6 118.3 32.7 34.8 36.9 38.4 142.8 39.0 40.9 42.8 44.1 166.8
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Natural Gas (Bcf) 93.3 118.3 142.8 166.8 15.7 21.9 27.2 28.5 93.3 28.6 28.1 30.0 31.6 118.3 32.7 34.8 36.9 38.4 142.8 39.0 40.9 42.8 44.1 166.8
Total Production (MMboe)
United States 33.5 36.2 41.2 47.2 6.1 8.2 9.5 9.8 33.5 9.9 8.3 8.8 9.3 36.2 9.5 10.1 10.6 11.0 41.2 11.1 11.6 12.1 12.4 47.2
Other 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Total Production (MMboe) 33.5 36.2 41.2 47.2 6.1 8.2 9.5 9.8 33.5 9.9 8.3 8.8 9.3 36.2 9.5 10.1 10.6 11.0 41.2 11.1 11.6 12.1 12.4 47.2
2013E 2014E 2015ESandRidge Energy (SD)
2012E
Source: Company data, Credit Suisse estimates
12 F
eb
ruary
201
3
San
dR
idg
e E
nerg
y, In
c. (S
D)
41
Exhibit 55: SD Balance Sheet
3/31/2012 6/30/2012 9/30/2012 12/31/2012 3/31/2013 6/30/2013 9/30/2013 12/31/2013 3/31/2014 6/30/2014 9/30/2014 12/31/2014 3/31/2015 6/30/2015 9/30/2015 12/31/2015
ASSETS
Cash and short term investments $127.8 $421.1 $673.7 $409.9 $211.1 $1,423.7 $1,156.1 $899.6 $697.7 $504.4 $814.4 $633.3 $435.6 $444.3 $459.6 $478.5
Accounts receivable, net 240.6 288.3 382.1 382.1 382.1 382.1 382.1 382.1 382.1 382.1 382.1 382.1 382.1 382.1 382.1 382.1
Other current assets 51.0 271.4 173.4 163.4 153.5 145.3 136.5 127.2 117.7 107.6 97.0 86.0 74.8 63.2 51.1 38.7
Total Current Assets $419.4 $980.8 $1,229.2 $955.5 $746.7 $1,951.1 $1,674.6 $1,408.9 $1,197.5 $994.1 $1,293.5 $1,101.4 $892.6 $889.7 $892.8 $899.4
Property, plant & equipment, net 5,034.1 7,133.8 8,194.0 8,502.1 8,739.1 6,408.7 6,667.3 6,916.7 7,131.1 7,334.1 7,525.9 7,709.5 7,884.9 8,050.1 8,205.3 8,353.1
Goodwill and intangibles 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4 235.4
Other non-current assets 689.1 828.6 185.7 185.7 185.7 185.7 185.7 185.7 185.7 185.7 185.7 185.7 185.7 185.7 185.7 185.7
Total Assets $6,378.1 $9,178.5 $9,844.2 $9,878.7 $9,906.9 $8,780.9 $8,763.1 $8,746.7 $8,749.7 $8,749.2 $9,240.5 $9,232.0 $9,198.6 $9,360.9 $9,519.2 $9,673.5
LIABILITIES
Accounts payable $601.8 $669.4 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2 $779.2
Current portion of long-term debt 1.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Other current liabilities 164.7 154.1 135.5 135.5 135.5 135.5 135.5 135.5 135.5 135.5 135.5 135.5 135.5 135.5 135.5 135.5
Total Current Liabilities $767.5 $823.4 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7 $914.7
Long-term debt 2,813.5 3,549.4 4,300.4 4,300.4 4,300.4 3,200.4 3,200.4 3,200.4 3,200.4 3,200.4 3,700.4 3,700.4 3,700.4 3,900.4 4,100.4 4,300.4
Other non-current liabilities 406.0 383.6 424.0 424.0 424.0 424.0 424.0 424.0 424.0 424.0 424.0 424.0 424.0 424.0 424.0 424.0
Total Liabilities $3,987.0 $4,756.5 $5,639.2 $5,639.2 $5,639.2 $4,539.2 $4,539.2 $4,539.2 $4,539.2 $4,539.2 $5,039.2 $5,039.2 $5,039.2 $5,239.2 $5,439.2 $5,639.2
Working capital ($348.1) $157.4 $314.4 $40.7 ($168.0) $1,036.3 $759.9 $494.1 $282.7 $79.3 $378.7 $186.7 ($22.2) ($25.1) ($21.9) ($15.4)
SHAREHOLDERS' EQUITY
Common stock and paid-in capital $4,626.3 $5,195.7 $5,202.5 $5,185.2 $5,168.0 $5,150.7 $5,133.4 $5,116.2 $5,098.9 $5,081.6 $5,064.4 $5,047.1 $5,029.9 $5,012.6 $4,995.3 $4,978.1
Retained earnings, net (3,169.2) (2,360.2) (2,544.5) (2,492.8) (2,447.3) (2,456.0) (2,456.6) (2,455.7) (2,435.5) (2,418.7) (2,410.2) (2,401.4) (2,417.5) (2,438.0) (2,462.4) (2,490.8)
Total Stockholders' Equity $1,457.2 $2,835.5 $2,658.0 $2,692.5 $2,720.7 $2,694.7 $2,676.8 $2,660.5 $2,663.4 $2,663.0 $2,654.2 $2,645.7 $2,612.3 $2,574.6 $2,532.9 $2,487.3
Non-controlling interests 933.9 1,586.6 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0 1,547.0
Total Equity $2,391.1 $4,422.1 $4,205.0 $4,239.5 $4,267.7 $4,241.7 $4,223.8 $4,207.5 $4,210.5 $4,210.0 $4,201.2 $4,192.7 $4,159.4 $4,121.6 $4,080.0 $4,034.3
Total Liabilities and Equity $6,378.1 $9,178.5 $9,844.2 $9,878.7 $9,906.9 $8,780.9 $8,763.1 $8,746.7 $8,749.7 $8,749.2 $9,240.5 $9,232.0 $9,198.6 $9,360.9 $9,519.2 $9,673.5
SandRidge Energy (SD)
Source: Company data, Credit Suisse estimates
12 February 2013
SandRidge Energy, Inc. (SD) 42
Valuation and Historical Performance We value SandRidge Energy (SD) using a number of metrics that we believe reflect the
underlying potential of the shares over the coming 12 to 18 months. Our valuation
methodology includes the following:
■ Based on sector outlook, determine whether industry conditions will support trough,
average, or peak multiples for SD.
■ Assess how the company is valued on net asset value (NAV), the primary valuation
tool for the group, and relative to peers under our value-added returns framework.
■ Employ traditional multiple analyses on EPS, cash flow, and EBITDA to compare
the current valuation to history and relative valuation based on earnings, cash flow,
and EBIDA (EBITDA less cash taxes).
■ Review and assess SD’s historical performance relative to the peer group.
■ Supplement our traditional valuation methods with Credit Suisse’s HOLT® cash
flow return on investment (CFROI®) framework.
From our analysis, we believe that a Neutral rating on SD is justified, given limited upside
potential to valuation and its stretched balance sheet. Our target price of $6.30 assumes
that the stock trades at 70% of our NAV estimate of $9 per share and 6.0 times our 2013E
EBIDA estimate.
Because E&P stocks are universally affected by the oil and gas cycle, they tend to exhibit
similar trading patterns, and regardless of sector growth opportunities, it is difficult to move
against the tide. As shown in Exhibit 56, SD performed in-line with the EPX index from its
IPO until mid-2008, but it has significantly underperformed the EPX thereafter, following
the gas price collapse and continued outspending of its cash flows.
Exhibit 56: SD’s Historical Price Performance vs. Peers
Source: Bloomberg.
12 February 2013
SandRidge Energy, Inc. (SD) 43
Group multiples have considerably fluctuated at different stages, primarily as a result of
commodity price expectations of producers that cannot change production volumes
materially over the near term. Valuations have historically peaked and troughed coincident
with this price cycle. Exhibit 57 displays SD’s historical EV/BOE trading ranges versus
commodity price (weighted average price of oil, gas, and NGLs) per BOE in 2008-2011.
Exhibit 57: SD’s Historical EV/BOE Trading Ranges vs. Commodity Prices/BOE
SD Historical EV/BOE Trading Range (incl. future development costs)
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$70.00
$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
20
08
20
09
20
10
20
11
20
12
Co
mm
od
ity P
ric
es
pe
r B
OE
EV
/Bo
e
Current EV/BOE
Source: Company reserve and Bloomberg pricing data.
Exhibit 58 illustrates Credit Suisse’s oil and gas price forecasts. While we acknowledge
the potential for commodity price volatility, we believe that customer cash flows are poised
to move higher in 2013 and 2014, driven by tightening WTI spreads relative to Brent and a
modest improvement in natural gas price fundamentals.
Exhibit 58: Credit Suisse Commodity Oil and Gas Price Outlook
2012 2013E 2014E 2015E 2016E LT
WTI Crude ($/Bbl) $94.14 $102.75 $102.00 $92.00 $82.00 $82.00
Brent ($/Bbl) $111.96 $115.00 $110.00 $100.00 $90.00 $90.00
US Natural Gas ($/MMBtu) $2.80 $3.70 $4.30 $4.50 $4.50 $4.50 Source: Credit Suisse estimates.
Valuation
One of the shortcomings of traditional multiple analyses on earnings or cash flow-based
measures for the E&P industry is the potential distortion of trading ranges at cyclical
extremes. At the peaks, analysis can be biased by the it’s different this time syndrome,
while at the troughs, most E&P companies fail to generate meaningful (if any) earnings or
cash flow, making historical or cross-company comparisons difficult. In addition, EPS can
be skewed by noncash ceiling test write-downs associated with oil and gas prices that
perversely tend to inflate earnings by understating DD&A. Finally, the analysis does not
account for noncash producing assets, such as undeveloped or probable proved reserves.
We employ an asset-based valuation approach to this capital-intensive sector to determine
current market sentiment of a company. Asset-based valuation tends to be more reliable
at extremes, providing a gauge for determining if you are buying assets cheap or if
valuations are stretched. Our preferred asset metric for evaluating E&P companies is net
asset value (NAV), which normalizes for variations in reserve life, future capital
12 February 2013
SandRidge Energy, Inc. (SD) 44
requirements, and near- and long-term growth rates versus peers. Our NAV methodology
is based on the following:
■ We first estimate the value of a company’s proved developed (PD) reserves using
the audited reserve figures provided in its 10-K. The cash inflows from these
reserves are driven by our decline curve and commodity price estimates. From
these estimated proved developed revenues (estimated future production per our
decline curve times our commodity price forecast), we back out estimated
production costs (lease operating, gathering, and production taxes) as well as cash
income taxes. We apply a 10% discount rate to our estimated cash flow stream to
arrive at a present value for proved reserves.
■ Outside of proved developed reserves, value to unbooked reserves is
conservatively awarded based on the quantity of unbooked reserves and proved
undeveloped reserves (PUDs) a company can convert to proved developed over a
five-year period. We consider the funding and infrastructure requirements
necessary to execute this drilling plan, including an assessment of what the
company can reasonably achieve over this time frame, given balance sheet quality,
as well as anticipated cash flows based on our commodity price/production
forecasts.
■ Our calculated onshore and offshore field NAVs are then compared against recent
valuation markers, such as acreage deals or valuations of public companies, which
serve as reasonableness checks.
■ We give fair market value for non-E&P and midstream assets and back out balance
sheet liabilities to arrive at our NAV estimate. We generally do not give value for
exploration potential above the value of acquired leasehold.
Using our methodology, as highlighted, we calculate a net asset value of $9.00 per share
for SandRidge Energy.
Exhibit 59: NAV Component Breakdown (per Share)
SD Net Asset Value
$7.40
$4.80 $0.60 $3.90
$9.00
$0
$2
$4
$6
$8
$10
$12
$14
$13 per share in assets
Source: Company data, Credit Suisse estimates.
E&P stocks exhibit similar trading patterns in the cycle, but there are opportunities to
exploit relative valuation gaps and differential performance at various stages. One of our
most effective tools is our returns-based framework, which suggests that value is not
arbitrarily assigned, with differential returns driving differential valuation.
12 February 2013
SandRidge Energy, Inc. (SD) 45
While investment success in any industry should eventually be demonstrated by tangible
returns or earnings, E&P stocks have traded more consistently on cash flow than
earnings. This is a function of the cyclical and capital-intensive nature of the business.
Earnings can be influenced by accounting choices, acquisition activity (i.e., purchase
versus pooling accounting), and asset write-offs, which have been commonplace owing to
extreme fluctuations of asset values in the oil and gas cycle. We have found that cash flow
measures tend to be better indicators for potential share price valuation.
Exhibit 60 highlights SD’s historical trading range on one-year price to cash flow per share
(CFPS). On average, the stock has traded at around 6.0 times cash flow, with multiples
ranging from a peak of around 15 times in mid-2008 to below 3.0 times in late 2008 during
the global financial crisis. Since increasing from the trough in 2009, SD has generally
traded at below average multiples (except for a brief period in 2011) until recently.
Currently, the shares are trading at approximately 6 times the consensus cash flow
multiple.
Exhibit 60: SD Historical Price-to-Cash Flow Ratio
SD Price-to-Cash Flow Ratio (1YR FWD)
0.0x
4.0x
8.0x
12.0x
16.0x
20.0x
Jan
-08
Ap
r-08
Ju
l-08
Oct-
08
Jan
-09
Ap
r-09
Ju
l-09
Oct-
09
Jan
-10
Ap
r-10
Ju
l-10
Oct-
10
Jan
-11
Ap
r-11
Ju
l-11
Oct-
11
Jan
-12
Ap
r-12
Ju
l-12
Oct-
12
Jan
-13
5 Yr Average Standard Deviation
Source: Bloomberg and FactSet consensus.
Exhibit 61 and Exhibit 62 illustrate SD’s trading range of enterprise value-to-EBITDA on a
one- and two-year basis. On a one-year basis, the stock has traded around an average
EV/EBITDA multiple of 7.0 times, with multiples ranging from a peak of 12.5 times in early
2008 to less than 4.6 times in early 2010. Since increasing from the trough in the second
half of 2010, SD has traded mostly within the 5.0 to 8.5 EV/EBITDA multiple band, and it
now trades above 8.0 times the current consensus 2013 EBITDA estimate. On a two-year
basis, the stock is trading one standard deviation above average at 8.0 times 2014
EBITDA estimates.
12 February 2013
SandRidge Energy, Inc. (SD) 46
Exhibit 61: SD Historical EV-to-(One-Year-Forward)
EBITDA Multiples
Exhibit 62: SD Historical EV-to-(Two-Year-Forward)
EBITDA Ratios
SD EV-to-EBITDA (1YR FWD)
0.0x
4.0x
8.0x
12.0x
16.0x
Jan
-08
Ju
l-08
Jan
-09
Ju
l-09
Jan
-10
Ju
l-10
Jan
-11
Ju
l-11
Jan
-12
Ju
l-12
Jan
-13
5 Yr Average Standard Deviation
SD EV-to-EBITDA (2YR FWD)
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
Jan
-08
Ju
n-0
8
No
v-0
8
Ap
r-09
Sep
-09
Feb
-10
Ju
l-10
Dec-1
0
May-1
1
Oct-
11
Mar-
12
Au
g-1
2
Jan
-13
5 Yr Average Standard Deviation
Source: Bloomberg. Source: Bloomberg.
Exhibit 63 displays trading metrics for SD using traditional multiple analysis, including
price-to-earnings, price-to-cash flow, and enterprise value-to-EBITDA, on a one-year
forward basis using consensus forecasts. The stock has historically traded within a broad
range between 9.4 and 46.2 times earnings, 7.0 and 15.1 times cash flow, and 4.6 and
12.5 times EBITDA. SD is currently trading above its five-year range of EV/EBITDA
multiple at 8.0 times.
Exhibit 63: SD Current vs. Historical Trading Multiples vs. Peers
High Low Average
P/E NA 46.2x 9.4x 22.6x
Peers 20.3x 30.9x 10.7x 19.0x
P/CF 6.3x 15.1x 7.0x 12.3x
Peers 5.4x 9.4x 4.2x 6.8x
EV/EBITDA 8.0x 12.5x 4.6x 6.8x
Peers 6.9x 9.0x 4.0x 6.1x
CurrentPrior-Cycle
Multiple
Source: Company data, Credit Suisse estimates.
Historical Performance
We have historically viewed investing in E&P stocks as a group call using the expected
changes in the spending cycle as a guide for investment decisions. Within each cycle,
there is room for differentiated performance; however, we maintain that getting the cycle
right is the key to investing in E&Ps. E&P stocks typically move in anticipation of improving
or declining fundamentals, so investment decisions should be made in advance of
changes in commodity price or net asset value expectations in order to maximize gains or
minimize losses.
Exhibit 64 shows the relative performance of E&P stocks versus the XNG on a quarterly
basis since 1997.
12 February 2013
SandRidge Energy, Inc. (SD) 47
Exhibit 64: XNG Index Relative Performance 1997 – 2012
Q1 Q2 Q3 Q4 Year
1997 (14.19) (12.07) 7.66 (11.40) (34.66)
1998 (11.03) (12.21) (12.16) (32.33) (62.85)
1999 2.81 17.98 2.82 (25.25) (4.35)
2000 28.17 19.86 15.87 25.86 115.61
2001 1.64 (15.88) (0.33) (7.08) (16.81)
2002 4.50 (3.67) (3.15) 7.14 1.99
2003 19.19 1.25 (3.43) 1.56 23.74
2004 0.96 7.73 11.98 (0.43) 23.42
2005 15.13 6.84 19.33 (9.29) 34.08
2006 (3.57) 7.06 (6.97) 1.32 (2.45)
2007 6.78 0.93 1.34 14.11 26.03
2008 15.39 27.14 (23.72) (3.13) 3.95
2009 3.68 4.50 5.69 2.64 20.27
2010 (5.09) 1.40 (0.84) 4.10 (0.58)
2011 8.65 (1.87) (3.76) 3.90 5.07
2012 (9.89) (0.52) 1.44 (1.93) (11.21)
Outperformed 11 10 8 8 9
Underperformed 5 6 8 8 7
XNG Relative Performance by Quarter
Source: Bloomberg.
Exhibit 65 shows SD’s performance relative to the market since 2008.
Exhibit 65: SD’s Relative Performance 2008 – 2012
Q1 Q2 Q3 Q4 Year
2008 19.09 68.18 (60.77) (46.06) (44.36)
2009 18.82 14.07 37.13 (32.73) 29.88
2010 (23.22) (12.42) (13.29) 18.67 (35.16)
2011 69.44 (16.33) (33.51) 35.61 11.48
2012 (16.04) (11.27) (1.50) (7.96) (35.59)
Outperformed 3 2 1 2 2
Underperformed 2 3 4 3 3
SD Relative Performance by Quarter
Source: Bloomberg.
12 February 2013
SandRidge Energy, Inc. (SD) 48
HOLT® Framework
We have included in our analysis of SandRidge Energy an assessment of the company
using Credit Suisse HOLT®. This tool, which is premised on the belief that a firm’s market
value is determined by its creation or destruction of economic wealth, is a type of
discounted cash flow analysis that uses cash flow returns on investment (CFROI®) as its
primary gauge of corporate performance. While the commodity cycle and capital intensity
of this sector make this form of valuation somewhat problematic, we believe that a
DCF-type analysis can help gauge embedded expectations and is a useful supplement to
traditional valuation metrics.
In Exhibit 66, we present embedded expectations for SD through Credit Suisse’s HOLT
relative wealth chart. The intention of this analysis is to highlight changes in two drivers of
economic value: economic returns (cash flow returns on investments, or CFROIs) and
reinvestments rates, to better understand stock price movements throughout history. We
conclude the following from SD’s HOLT relative wealth chart:
■ SD’s market-implied CFROI has historically fluctuated between 6% and slightly
less than 0%. Since 2008, SD has generated lower cash flow returns than its cost
of capital and will continue the trend until 2015, assuming the same cost of capital
as the current level going forward. (See chart at the top left of Exhibit 66.)
■ SD has demonstrated strong asset growth in the past, reflecting the significant
number of acquisitions since the company’s 2007 IPO. (See second chart on the
left of Exhibit 66.)
■ SD’s asset turns, calculated by dividing sales with assets, have generally trended
within the range of 10% to 20%. (See chart at the bottom right of Exhibit 66.)
Exhibit 66: SD Relative Wealth Chart
Source: Company data, Credit Suisse HOLT.
Exhibit 67 illustrates SD’s warranted value in HOLT® through time. The green line on the
chart represents HOLT warranted values, the bars show price ranges, and the circle
shows the closing price for a given year. The chart indicates that the HOLT® model
generally trends with actual prices but historically has been more pessimistic when
12 February 2013
SandRidge Energy, Inc. (SD) 49
estimating the intrinsic value relative to the subsequent actual price. Currently, the model
suggests significant downside from the current valuation range.
Exhibit 67: HOLT Warranted Price vs. Historical Price Range
Source: Company data, Credit Suisse estimates.
Exhibit 68 shows SD’s consensus CFROI levels (pink bars) that are based on sell-side
analysts’ estimates in comparison to market-implied CFROI levels (green dots). Since
2011, market-implied expectations for the company’s CFROIs have been significantly
higher than forecast expectations for SD. Current consensus CFROI level stands at below
1% versus a market-implied level of 6.5%.
Exhibit 68: SD’s Consensus CFROI vs. Market-Implied CFROI
Source: Company data, Credit Suisse estimates.
Exhibit 69 shows that SD’s market implied returns have been 6-8% lower than consensus
throughout a large part of its trading history.
12 February 2013
SandRidge Energy, Inc. (SD) 50
Exhibit 69: Spread between SD’s Market-Implied CFROI and Consensus CFROI
Source: Company data, Credit Suisse estimates.
Exhibit 70 and Exhibit 71 show the results of our sensitivity analysis, broken down in a
valuation matrix, which estimates the HOLT warranted value and its premium/discount to
current stock price at various combinations of CFROI and asset growth rates.
Exhibit 70: SD Value Matrix Exhibit 71: Sensitivity Analysis on SD’s Warranted Price
2% 3% 4% 5% 6% 7% 8% 9% 10%
2% -0.00 0.93 2.64 4.38 6.16 7.98 9.83 11.72 13.64
4% -0.00 0.74 2.64 4.58 6.57 8.59 10.64 12.74 14.87
6% -0.00 0.57 2.68 4.85 7.06 9.31 11.60 13.94 16.31
8% -0.00 0.40 2.77 5.19 7.65 10.17 12.73 15.33 17.98
10% -0.00 0.26 2.91 5.62 8.38 11.19 14.06 16.97 19.94
12% -0.00 0.14 3.12 6.16 9.25 12.41 15.62 18.89 22.22
14% -0.00 0.07 3.42 6.83 10.31 13.86 17.47 21.15 24.88
SD
2016 A
sset G
row
th
2016 CFROI
2% 3% 4% 5% 6% 7% 8% 9% 10%
2% -100% -87% -63% -38% -13% 13% 39% 66% 93%
4% -100% -90% -63% -35% -7% 21% 50% 80% 110%
6% -100% -92% -62% -31% 0% 32% 64% 97% 131%
8% -100% -94% -61% -27% 8% 44% 80% 117% 154%
10% -100% -96% -59% -21% 19% 58% 99% 140% 182%
12% -100% -98% -56% -13% 31% 76% 121% 167% 214%
14% -100% -99% -52% -3% 46% 96% 147% 199% 252%
2016 CFROISD
2016 A
sset
Grow
th
Source: Credit Suisse HOLT. Source: Credit Suisse HOLT.
For more information on the HOLT framework, please see the appendix on page 53.
12 February 2013
SandRidge Energy, Inc. (SD) 51
Risk Factors Oil and Natural Gas Price Volatility
Oil and natural gas prices historically have been volatile and may continue to be volatile in
the future. Cash flow from operations is highly dependent on the prices that the company
receives for oil and gas. This price volatility also affects the amount of cash flow available
for capital expenditures and the ability to borrow money or raise additional capital. The
prices of oil and gas depend on a variety of factors:
■ Worldwide demand and supply for oil and gas;
■ Ability of the OPEC to agree and maintain oil price and production control;
■ Availability of alternative fuel sources;
■ Worldwide economic and political conditions;
■ Government regulations and taxes; and
■ Weather conditions.
Operational Risks
Drilling may involve unprofitable efforts, not only by dry wells, but from wells that are
productive but do not generate a profit when drilling and other costs are deducted.
Geographic Concentration
A substantial portion of the company’s reserves are located in northwest Oklahoma,
Kansas, and Texas. Any regional events may have a more significant impact on
operations than if the reserves were more diversified geographically.
Risks Associated with Oil Reserves
■ Estimated reserves are based in assumptions that may turn out to be inaccurate
and may affect the value of the company’s assets.
■ Oil and gas reserves will decline unless replaced, and the company may not be
able to develop, find, or acquire additional reserves to replace its current and future
production at acceptable costs
Acquisition of Dynamic Offshore Resources, LLC
If the company completes the pending acquisition of Dynamic, its business and prospects
will be subject to additional risks relating to Dynamic’s offshore operations in the Gulf of
Mexico, and risks relating to offshore operations in general may become more significant.
Stretched Balance Sheet
Following the gas price collapse and consistent outspend of its cash flows, SD’s financial
position has been under duress. The company’s balance sheet metrics appear below
average. Even after factoring in the impact from the anticipated sale of its Permian assets,
SD’s 2013 net-debt-to-EBITDA multiple of 2.1 is meaningfully above the peer group
multiple of 1.4. In addition, SD has one of the lowest interest coverage ratios of its peers,
with an EBITDA/interest expense ratio of 4.1, compared to the group median of 16.0.
Exhibit 25 illustrates SD’s five-year aggregate capex and acquisition program and sources
of funding for its investments in property and drilling. Over this time period, SD has spent
$9.3 billion in capex, including acquisitions. However, operating cash flow and asset sales
have only represented 40% of its spending program, which has necessitated significant
funding from equity (27%), debt instruments (26%), and royalty trusts (7%).
12 February 2013
SandRidge Energy, Inc. (SD) 52
Based on our forecasts, we expect this level of meaningful outspend to continue
consistent with the company’s historical patterns. In fact, the company is outspending its
cash flow by the most in the peer group.
12 February 2013
SandRidge Energy, Inc. (SD) 53
Appendix: Credit Suisse HOLT®
Framework The Credit Suisse HOLT
® valuation framework is based on two fundamental principles:
■ The market pays for economic (cash) performance and not accounting performance.
■ The value of a company is determined by its discounted future cash flows over its life
cycle.
The Credit Suisse HOLT methodology uses a proprietary performance measure known as
cash flow return on investment (CFROI®).
The Credit Suisse HOLT valuation framework uses CFROI to estimate future cash flows
and applies a unique notion of life cycle fade to reflect the position of any individual
company on its industrial life cycle.
Exhibit 72: Credit Suisse HOLT Framework
Income Statement
Balance Sheet
EPS, ROE, ROCE
Accounting
Cash Flow Return
on Investment
(CFROI®)
Economic
Performance
Cash
CFROI®
Asset Growth
Life Cycle Fade
Discount Rate
Value
Income Statement
Balance Sheet
EPS, ROE, ROCE
Accounting
Cash Flow Return
on Investment
(CFROI®)
Economic
Performance
Cash
CFROI®
Asset Growth
Life Cycle Fade
Discount Rate
Value
Source: Company data, Credit Suisse estimates.
Why use CFROI? Accounting statements often present a distorted view of underlying
economic performance. In order better to define a cash measure, Credit Suisse HOLT’s
economic CFROI corrects for the distortions found in traditional accounting-based
measures of performance by adjusting for inflation, off-balance sheet assets (e.g., leased
property), depreciation, LIFO and FIFO accounting, asset mix, asset holding gains or
losses, asset life, acquisition accounting, deferred taxes, pensions, investments,
revaluations, special reserves, research and development, and others.
As a result, CFROI provides comparability over time, among companies and across
industries and national borders. This proprietary measure focuses on the cash economics
of businesses. Once the economics of the company are understood, we can more
accurately determine value by taking into account expected future cash flows, asset
growth rates, discount rates, and life cycles.
12 February 2013
SandRidge Energy, Inc. (SD) 54
Exhibit 73: From Accounting to CFROI
Source: Company data, Credit Suisse estimates.
Credit Suisse HOLT’s CFROI is calculated in two steps. First, it compares the
inflation-adjusted (current dollar) cash flows available to all capital owners in the company
to the inflation-adjusted (current dollar) gross investment made by those capital owners.
Next, it translates the ratio of gross cash flow to gross investment to an internal rate of
return (IRR) by recognizing the finite economic life of depreciating assets and the residual
value of nondepreciating assets such as land and working capital. The process is identical
to calculating the yield to maturity for a bond. As a percent per year IRR, CFROI is directly
comparable to the return investors expect to receive (i.e., the cost of capital or discount
rate).
Companies can create wealth for shareholders by making the right decisions with respect
to CFROI and asset growth.
As seen in Exhibit 74, wealth is created when companies:
■ Improve CFROI; and
■ Grow assets when CFROI is above the discount rate (positive spread).
12 February 2013
SandRidge Energy, Inc. (SD) 55
Exhibit 74: Managing for Shareholder Value
Positive
Spread
Neutral
Negative
Spread
1. Increase or
hold CFROI
2. Grow Assets
1. Increase
CFROI
2. Then Grow
1. Increase
CFROI
2. Contract Assets
Cash Flow
Return (%)
(CFROI)
Strategic
Options
Discount Rate
(Cost of Capital)
Source: Company data, Credit Suisse estimates.
The Credit Suisse HOLT valuation model, at its foundation, is a type of DCF (discounted
cash flow) model. Among our model’s distinguishing features, along with the CFROI metric,
is the way by which the forecast stream of net cash receipts (NCRs) is generated and the
method by which the firm’s discount rate (DR) is estimated.
From a beginning asset base, key variables that drive the forecast NCR stream are
variables that actually generate cash flows, namely, economic returns (CFROIs),
reinvestment rates (growth), and their expected patterns of change over time owing to
competition (fade). The competitive life cycle is covered on the following page.
The discount rate (DR) is the rate of return investors demand for making their funds
available to the firm. DRs used in our model are real rates, not nominal rates, so they’re
consistent with CFROIs. The DRs are also consistent with other aspects of our model,
since base DRs are mathematically derived from known market values and from NCR
streams consistent within our model. Adjustments (positive or negative) to the base rate
are made for company-specific financial and liquidity risk characteristics.
The result of discounting the NCRs at the market-derived DR is what is referred to as a
warranted value or warranted price. This essentially is the valuation that results (or is
warranted), given the default (or users’ own) assumptions built into the forecast and the
resulting present value of the NCRs plus the value of any nonoperating investments.
12 February 2013
SandRidge Energy, Inc. (SD) 56
Exhibit 75: Major Components of the Credit Suisse HOLT Valuation Model
Warranted
Price
Net Cash
Receipts
(1+Disc. Rate)t
Growth
CFROI
Fade
Revenue
Growth
Operating
Margins
Asset
Turns
Asset
Base
createsn
=t=1
Country
Base Rate
Size
Differential
Leverage
Differential
Industrial Life Cycle
NPV of Existing Assets
+ NPV of Future Invests
NPV of Net Cash Receipts
+ MV of Non-Op. Assets
Total Enterprise Value
– MV of Debt
Total Equity Value
– Minority Interest
Common Equity Value
÷ Adjusted Shares
Com Equity / Share
Warranted
Price
Net Cash
Receipts
(1+Disc. Rate)t
Growth
CFROI
Fade
Revenue
Growth
Operating
Margins
Asset
Turns
Asset
Base
createsn
=t=1
Country
Base Rate
Size
Differential
Leverage
Differential
Industrial Life Cycle
NPV of Existing Assets
+ NPV of Future Invests
NPV of Net Cash Receipts
+ MV of Non-Op. Assets
Total Enterprise Value
– MV of Debt
Total Equity Value
– Minority Interest
Common Equity Value
÷ Adjusted Shares
Com Equity / Share
Source: Company data, Credit Suisse estimates.
In evaluating CFROI and asset growth rates, Credit Suisse HOLT found that, over long
periods of time, companies tend to follow an industrial life cycle. Competition tends to
force firms’ real economic returns toward the corporate sector’s average CFROI.
Exhibit 76: A Company’s Typical Industry Life Cycle
High Premium Premium DiscountPar
Increasing CFROIs &
High Reinvestment
Above-Average
but Fading CFROIs
Below-Average
CFROIs
Average
CFROIs
Growth Fading Mature Sick
CFROI
Discount Rate
(Investor’s Required
Rate of Return)
Value/Cost =
This Research Allows Us to Accurately Analyze the Expected Pattern of Growth and Fade Built into a Company’s Share Price
This Research Allows Us to Accurately Analyze the Expected Pattern of Growth and Fade Built into a Company’s Share Price
Source: Company data, Credit Suisse estimates.
Credit Suisse HOLT empirical research has found that, in the United States and other
industrialized economies, these aggregate CFROIs have been averaging about 6%. Thus,
a warranted price or market price can be viewed as implying a firm’s potential future life
cycle of CFROIs and growth rates that will eventually regress to the average aggregate
economic level.
12 February 2013
SandRidge Energy, Inc. (SD) 57
Exhibit 77: Current Prices Recognize that Performance Fades Under Competitive
Pressures
CFROI Competitive Fade
Toward Corporate Average
Growth Competitive Fade
Toward Corporate Average
2.5%
High Growth Firm
Low Growth Firm
6.0%
High CFROI Firm
Low CFROI Firm
Conclusion:• Competition causes CFROIs and real asset growth rates to regress to the mean (Benchmarks:
CFROIs = 6.0% and Asset Growth = 2.5%)
• Positive and negative surprises vs fade expectations cause significant changes in stock prices
Source: Company data, Credit Suisse estimates.
The benefits of using the Credit Suisse HOLT’s framework can be summarized as follows:
■ The framework eliminates accounting distortions, allowing investors to understand
levels and changes in stock prices worldwide.
■ The framework provides comparability over time, among companies, and across
international borders.
Credit Suisse HOLT users benefit from a common language for measuring track records,
making forecasts, and calibrating market expectations.
Companies Mentioned (Price as of 11-Feb-2013)
Apache Corp. (APA.N, $83.81) Anadarko Petroleum Corp. (APC.N, $83.47) Atlas Resources (ARII.JK, Rp1,300) ATP Oil & Gas Corp. (ATPG.OQ^H12, $0.31) Bonanza Creek Energy Inc. (BCEI.N, $34.04) Berry Petroleum Co. (BRY.N, $38.74) Chesapeake Energy Corp. (CHK.N, $20.05) ConocoPhillips (COP.N, $57.59) Comstock Resources, Inc. (CRK.N, $14.19) Carrizo Oil & Gas Inc. (CRZO.OQ, $22.35) Chevron Corp. (CVX.N, $115.64) CONCHO RESOURCES, INC. (CXO.N, $96.52) Denbury Resources (DNR.N, $18.75) Dynamic Offshore (DOR.N, $18.75) Devon Energy Corp (DVN.N, $59.7) Encana Corp. (ECA.N, $19.38) Eagle Energy Tr (EGL_u.TO, C$7.69) ENI (ENI.MI, €17.31) EOG Resources (EOG.N, $133.34) Energy XXI (EXXI.OQ, $32.41) Diamondback Energy, Inc. (FANG.OQ, $21.56) Forest Oil (FST.N, $7.03) Great Portland Estates (GPOR.L, 475.9p) Hess Corporation (HES.N, $66.74) Halcon Resources (HK.N, $7.56) Kodiak Oil & Gas Corp (KOG.N, $9.19) Magnum Hunter Resources Corp. (MHR.N, $3.92)
12 February 2013
SandRidge Energy, Inc. (SD) 58
Mid States (MIDS.L, 1.625p) Midstates (MPO.N, $8.13) Marathon Oil Corp (MRO.N, $34.31) Noble Energy (NBL.N, $112.75) Occidental Petroleum (OXY.N, $87.21) PDC Energy (PDCE.OQ, $43.86) Plymouth (PLH.AX, A$0.09) PetroQuest (PQ.N, $4.42) Penn Virginia Corp (PVA.N, $4.94) Pioneer Natural Resources (PXD.N, $128.55) Redstone Resourc (RDS.AX, A$0.12) Repsol (REP.MC, €15.72) Rex Energy Corp. (REXX.OQ, $13.32) Red Fork Energy (RFE.AX, A$0.715) Rosetta Resources Inc. (ROSE.OQ, $50.48) Range Resources (RRC.N, $70.68) SandRidge Energy, Inc. (SD.N, $5.73, NEUTRAL[V], TP $6.3) Swift Energy Co. (SFY.N, $15.45) Southwestern Energy Co. (SWN.N, $33.59) Total (TOT.N, $51.23) Whiting Petroleum Corp. (WLL.N, $49.01) ExxonMobil Corporation (XOM.N, $88.28)
Disclosure Appendix
Important Global Disclosures
I, Arun Jayaram, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Price and Rating History for SandRidge Energy, Inc. (SD.N)
SD.N Closing Price Target Price
Date (US$) (US$) Rating
19-Apr-10 6.98 9.00 N
16-May-10 6.88 8.00
10-Aug-10 4.88 7.00
17-Sep-10 4.71 6.00
07-Nov-10 5.16 5.50
15-Dec-10 6.56 6.10
28-Feb-11 10.81 10.00
28-Mar-11 11.82 14.00
04-Oct-11 5.42 NR
* Asterisk signifies initiation or assumption of coverage.
N EU T RA L
N O T RA T ED
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non -Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional be nchmark; Australia, New Zealand are, and prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional benchmark.
12 February 2013
SandRidge Energy, Inc. (SD) 59
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 42% (53% banking clients)
Neutral/Hold* 38% (47% banking clients)
Underperform/Sell* 16% (40% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection with Investment Research: http://www.csfb.com/research and analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for SandRidge Energy, Inc. (SD.N)
Method: Our TP of $6.30 is based on a 6 times 2013 EBIDAX multiple and 70% of NAV.
Risk: In Q3 2012, SD revised down its EUR in the Mississippian, lowered its expected oil yield and increased decline rate of the curve. The further deterioration of their well curves would put downward pressure on our $6.30 target price.
Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (SD.N, APC.N, ATPG.OQ^H12, BCEI.N, BRY.N, CHK.N, COP.N, FST.N, MRO.N, CRK.N, CRZO.OQ, CVX.N, CXO.N, DNR.N, DOR.N, DVN.N, FANG.OQ, OXY.N, ECA.N, ENI.MI, GPOR.L, EOG.N, EXXI.OQ, HES.N, KOG.N, MHR.N, NBL.N, PVA.N, PXD.N, REP.MC, REXX.OQ, ROSE.OQ, RRC.N, SFY.N, TOT.N, XOM.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (SD.N, APC.N, ATPG.OQ^H12, BCEI.N, BRY.N, CHK.N, COP.N, FST.N, CRZO.OQ, CVX.N, CXO.N, DNR.N, DOR.N, DVN.N, FANG.OQ, OXY.N, ECA.N, ENI.MI, GPOR.L, EOG.N, EXXI.OQ, KOG.N, MHR.N, NBL.N, PVA.N, PXD.N, REXX.OQ, RRC.N, SFY.N, TOT.N, XOM.N) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (SD.N, APC.N, BRY.N, CHK.N, COP.N, FST.N, MRO.N, CRZO.OQ, CXO.N, DNR.N, DOR.N, DVN.N, ECA.N, ENI.MI, EOG.N, EXXI.OQ, KOG.N, MHR.N, NBL.N, PXD.N, REP.MC, RRC.N, XOM.N) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (SD.N, BCEI.N, BRY.N, CHK.N, COP.N, FST.N, CRZO.OQ, DNR.N, DOR.N, DVN.N, FANG.OQ, ECA.N, ENI.MI, GPOR.L, EOG.N, KOG.N, MHR.N, PVA.N, PXD.N, RRC.N, TOT.N) within the past 12 months.
12 February 2013
SandRidge Energy, Inc. (SD) 60
Credit Suisse has received investment banking related compensation from the subject company (SD.N, APC.N, ATPG.OQ^H12, BCEI.N, BRY.N, CHK.N, COP.N, FST.N, CRZO.OQ, CVX.N, CXO.N, DNR.N, DOR.N, DVN.N, FANG.OQ, OXY.N, ECA.N, ENI.MI, GPOR.L, EOG.N, EXXI.OQ, KOG.N, MHR.N, NBL.N, PVA.N, PXD.N, REXX.OQ, RRC.N, SFY.N, TOT.N, XOM.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (SD.N, APA.N, APC.N, ATPG.OQ^H12, BCEI.N, BRY.N, CHK.N, COP.N, FST.N, MRO.N, CRK.N, CRZO.OQ, CVX.N, CXO.N, DNR.N, DOR.N, DVN.N, FANG.OQ, OXY.N, ECA.N, ENI.MI, GPOR.L, EOG.N, EXXI.OQ, HES.N, KOG.N, MHR.N, NBL.N, PVA.N, PXD.N, REXX.OQ, ROSE.OQ, RRC.N, SFY.N, TOT.N, WLL.N, XOM.N) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (SD.N, APC.N, BRY.N, CHK.N, COP.N, FST.N, MRO.N, CRZO.OQ, CXO.N, DNR.N, DOR.N, DVN.N, ECA.N, ENI.MI, EOG.N, EXXI.OQ, KOG.N, MHR.N, NBL.N, PXD.N, REP.MC, RRC.N, XOM.N) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (SD.N, APA.N, APC.N, ATPG.OQ^H12, BCEI.N, BRY.N, CHK.N, COP.N, FST.N, MRO.N, CRK.N, CRZO.OQ, CVX.N, CXO.N, DNR.N, DVN.N, FANG.OQ, OXY.N, ECA.N, EOG.N, EXXI.OQ, HES.N, KOG.N, MHR.N, NBL.N, PVA.N, PXD.N, REXX.OQ, PDCE.OQ, ROSE.OQ, RRC.N, SFY.N, SWN.N, TOT.N, WLL.N, XOM.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (CHK.N).
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (SD.N, APA.N, APC.N, ATPG.OQ^H12, BCEI.N, BRY.N, CHK.N, COP.N, FST.N, MRO.N, CRK.N, CRZO.OQ, CVX.N, DNR.N, DVN.N, FANG.OQ, OXY.N, ECA.N, ENI.MI, GPOR.L, EOG.N, EXXI.OQ, HES.N, KOG.N, MHR.N, NBL.N, PVA.N, PXD.N, REP.MC, REXX.OQ, PDCE.OQ, ROSE.OQ, RRC.N, SFY.N, SWN.N, TOT.N, WLL.N, XOM.N) within the past 12 months
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The following disclosed European company/ies have estimates that comply with IFRS: (ENI.MI, GPOR.L, REP.MC, XOM.N).
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
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CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating.
The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same security). The CS Model Portfolio and important disclosures about it are available at www.credit-suisse.com/ti.
Important Credit Suisse HOLT Disclosures
With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report
The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-part data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.
Additional information about the Credit Suisse HOLT methodology is available on request.
12 February 2013
SandRidge Energy, Inc. (SD) 61
The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur.
CFROI®, HOLT, HOLTfolio, ValueSearch, AggreGator, Signal Flag and “Powered by HOLT” are trademarks or service marks or registered trademarks or registered service marks of Credit Suisse or its affiliates in the United States and other countries. HOLT is a corporate performance and valuation advisory service of Credit Suisse.
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.credit-suisse.com/researchdisclosures or call +1 (877) 291-2683.
12 February 2013
SandRidge Energy, Inc. (SD) 62
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SD Initiation Report--edited.doc
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