SandRidge’s Proved Reserves in 1Q15: More Than Meets the Eye



SandRidge reports 1Q15 loss

SandRidge Energy (SD) reported revenues of $215 billion in 1Q15, significantly down from $443 billion in 1Q14. This translated to a loss per share of $2.19 in 1Q15 compared to a loss per share of $0.31 in 1Q14.

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Proved reserves valuation, more than you think

Cash flows for oil and gas companies are based on proved reserves. SandRidge uses the SEC (Securities and Exchange Commission) PV-10 calculation to value its proved reserves. The 12-month average of commodity prices is used to value the proved reserves, which are discounted at an annual rate of 10%.

According to SandRidge’s investor presentation, its proved resources for 2014 rose 37% to 516 MMBOE (million barrels of oil equivalent). They were estimated to be $5.5 billion using the SEC PV-10 method. However, the average prices for gas and oil used as part of this calculation were $91.48 and $4.35, respectively.

The disproportionate fall in commodity prices in the latter half of 2014 could have massively impacted the present value of these reserves. Sustained low prices of commodities could also bring down the borrowing base that pertains to the company’s senior credit facility, which is based on the natural gas and oil reserves the company holds.

SandRidge stock tanks following announcement to raise $1 billion in additional debt

SandRidge announced on May 28, 2015, that it intends to raise new debt to the tune of $1 billion. It will use the proceeds to pay down the company’s credit facility and enhance its cash balance. Although the new debt boosts SandRidge’s liquidity, it also puts the company in greater debt. In the trading hours after SandRidge announced its additional debt, shares plunged nearly 11%.

Consol Energy (CNX), ExxonMobile (XOM), and Chevron Corporation (CVX) are part of the Energy Select Sector SPDR Fund (XLE) with weights of 0.69%, 15.79%, and 13.21%, respectively. The companies have price-to-earnings ratios of 40.4x, 12.9x, and 24.5x, respectively.

In the next part of this series, we’ll analyze the fundamentals of Vaalco Energy (EGY).


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