-- U.S. oil and gas exploration and production company SandRidge Energy
Inc. announced plans to sell its primarily oil producing properties in the
Permian Basin in Texas.
-- The $2.6 billion sale proceeds will be used to repay SandRidge's debt
and to fund development of the company's Mississippian play formations in
Kansas and Oklahoma.
-- We are affirming our 'B' corporate credit rating on SandRidge. We are
placing our 'B' issue rating on the company's $4.3 billion of senior unsecured
notes on CreditWatch with negative implications.
-- The stable outlook reflects our expectation that SandRidge will
continue to aggressively grow its asset base while not materially increasing
leverage beyond current levels.
On Dec. 21, 2012, Standard & Poor's Ratings Services affirmed its 'B'
long-term corporate credit rating on Oklahoma City-based SandRidge Energy Inc.
At the same time, we placed our 'B' issue rating on the company's $4.3 billion
of senior unsecured notes on CreditWatch with negative implications. Upon
completion of the transaction (which we expect in February 2013), we expect to
lower the recovery rating on the notes to '5', resulting in the lowering of
the issue rating to 'B-'. A '5' recovery rating indicates our expectation of
modest (10% to 30%) recovery for lenders in the event of a default.
The rating action follows the announcement that SandRidge plans to sell
Permian Basin properties for approximately $2.6 billion. The transaction
materially reduces the company's reserves and production but increases its
geographic concentration in the Mid-Continent Mississippian play and Gulf of
Mexico shelf. Sale proceeds, which we view as reflecting a relatively high
valuation, also provide substantial cash that we expect the company to use to
reduce outstanding debt and fund development of its very sizable Mississippian
acreage position. The company's interest in the Permian Basin Royalty Trust is
unchanged following the sale.
The ratings on SandRidge reflect Standard & Poor's assessment of the company's
"weak" business risk profile and "highly leveraged" financial risk profile. We
base this assessment on what we deem to be an aggressive growth strategy and
financial policies--with capital spending well in excess of internally
generated cash flow. Somewhat offsetting this, the ratings also reflect the
company's focus on increasing production of oil versus natural gas, reflecting
the weak near-term natural gas prices.
Pro forma the transaction, SandRidge will have approximately 388 million
barrels of oil equivalent (mmboe) of proved reserves in 2011 and production of
approximately 78,500 barrels of oil equivalent a day (boe/d) in the third
quarter of 2012, of which we estimate 43% were oil and natural gas liquids
(NGLs). We view the reserve size as large for the rating, and the meaningful
component of oil and NGLs is a favorable factor. Through sizable acquisitions
and internal investments, the company has established reserve positions more
balanced between natural gas and liquids, with reserves in the Mississippian
formation in the Mid-Continent and in the West Texas Overthrust (WTO), Earlier
this year, the company acquired Dynamic Offshore Resources for $1.2 billion,
adding primarily offshore Gulf of Mexico reserves and production that is
approximately 50% oil.
The company's direct costs of developing and producing natural gas and oil are
competitive. Its per-unit cash costs are relatively low for an oil producer,
with lifting costs (including production taxes) of about $16 per boe and cash
general and administrative expenses of about $6 per boe. We expect operating
cost to change little following the Permian sale. Three-year average finding
and development costs were about $18 per boe, excluding price-related
revisions. As a result, SandRidge requires wellhead prices of about $40 per
boe to achieve break-even EBIT profitability (before consideration of any
hedges, interest expense, or income taxes). SandRidge has a substantial amount
of oil production hedged at favorable prices through 2015 supporting cash flow
We view SandRidge's high leverage and aggressive financial policies as
constraining the rating. Incorporating the Permian sale and subsequent debt
repayment, we expect the company's ratio of debt to EBITDA in 2013, to be an
aggressive 5.2x (including our standard adjustments)-approaching the upper
limit for the rating. Our forecast assumes that SandRidge generates EBITDA of
more than $800 million over the next 12 months under our current 2013 pricing
assumptions ($85 per boe for oil and $3 per million cubic feet for natural
gas). In 2013, we assume production of approximately 93,000 boe/d, capital
expenditures of $1.75 billion, and that the company will outspend cash flow by
$1.1 billion--primarily to develop its Mississippian acreage--using proceeds
from the sale and cash on hand to fund the shortfall. SandRidge's employs
means to finance operations including a combination of royalty trusts, joint
ventures, and asset sales as sources of funding, some of which we adjust as
debt like obligations.
TPG-Axon, a shareholder in SandRidge, is currently pursuing a consent
solicitation in order to remove the company's board of directors and replace
management. Our ratings on SandRidge do not currently incorporate a view on
the likely outcome the vote, which we expect to occur by the end of the first
In our view, SandRidge's liquidity is "adequate". Our assessment incorporates
the following expectations and assumptions:
-- Pro forma for the Permian sale, we estimate that the company will have
$2.9 billion of cash and cash equivalents.
-- SandRidge had no borrowings on its revolving credit facility as of
Sept. 30, 2012. The borrowing base is $775 million. We anticipate no change to
borrowing base following the Permian sale.
-- The company does not have any significant debt maturities until 2016.
-- At our current price deck, we project that the company's capital
spending will exceed internally generated cash flows by approximately $1
billion in 2013 after capital spending of $1.75 billion.
-- We expect SandRidge to fund the deficit with cash on hand.
The CreditWatch listing with negative implications on SandRidge's senior
unsecured debt reflects the reduction in asset value available to noteholders
in a default scenario following the Permian sale. For the complete recovery
analysis, please see our recovery report on SandRidge to be published on
RatingsDirect following the release of this report.
The stable outlook reflects our expectation that SandRidge will continue to
aggressively grow its asset base while not materially increasing leverage
beyond current levels. We would consider lowering the rating if the company
becomes more aggressive in financing its growth with debt, such that debt to
EBITDA increases to more than 5.5x, without a clear view to deleveraging. We
would consider raising the rating if the company is able to reduce and
maintain adjusted total debt to EBITDA to the low-4x area.
Related Criteria And Research
-- Standard & Poor's Raises Its U.S. Natural Gas Price Assumptions; Oil
Price Assumptions Are Unchanged, July 24, 2012
-- Key Credit Factors: Global Criteria For Rating The Oil And Gas
Exploration And Production Industry, Jan. 20, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global
Corporate Issuers, Sept. 28, 2011
-- 2008 Corporate Criteria: Our Rating Process, April 15, 2008
SandRidge Energy Inc.
Corporate Credit Rating B/Stable/--
Preferred Stock CCC
Ratings On CreditWatch
SandRidge Energy Inc.
Senior Unsecured B/Watch Neg B
Recovery Rating 4 4