January 7, 2014 / 1:35 PM / 4 years ago

UPDATE 3-SandRidge Energy to exit U.S. Gulf in $750 mln deal

* Sells assets to Fieldwood Energy, an affiliate of Riverstone

* Raises 2014 output growth forecast to 26 pct from 12 pct

* SandRidge shares down 1.5 pct

By Michael Erman and Garima Goel

Jan 7 (Reuters) - Oil and gas company SandRidge Energy Inc struck a deal Tuesday to sell its Gulf of Mexico assets to private equity-backed Fieldwood Energy for $750 million, ending a brief, much-criticized foray into offshore drilling.

The company bought the Gulf of Mexico assets from Dynamic Offshore Resources for about $1.2 billion in cash and stock in April 2012. Fieldwood, owned by private equity firm Riverstone Holdings LLC, is run by Dynamic’s former management team.

SandRidge CEO James Bennett said the company would use the proceeds from the sale to further develop its holdings in northern Oklahoma and western Kansas, where it is the biggest operator in the Mississippian oil and gas formation, as well as other holdings in the mid-continent region of the U.S.

“We cut back our capex on our offshore business, so that production and capex was declining,” he said on a conference call with investors. “One of the things (the deal) does is turn us into a higher-growth business. We are selling an asset that had declining production and declining cash flow.”

SandRidge fired Chief Executive Tom Ward last June after hedge funds TPG-Axon and Mount Kellett Capital Management agitated for change, accusing Ward of strategic missteps and self-dealing at the expense of shareholders.

Notably, TPG-Axon pointed to SandRidge’s 2012 acquisition of Dynamic Offshore as being “massively dilutive, and most importantly, strategically incoherent.”

That fund’s founder and CEO Dinakar Singh praised Tuesday’s sale, calling it a “perfect move” by SandRidge.

Still, the company’s shares fell 1.9 percent after the deal was announced. Mark Hanson, an oil and gas company analyst with Morningstar in Chicago, said investors were probably worried about leverage at the company, because the Gulf assets generated a fair amount of cash for SandRidge.

At the end of the third quarter, SandRidge had $3.2 billion in long-term debt.


SandRidge is the latest company to offload its Gulf of Mexico assets, following Apache Corp, Devon Energy Corp and Callon Petroleum Co.

Due to increasing regulation since BP Plc’s Gulf of Mexico oil well disaster in 2010, drilling in the region had become a costly and lengthy process for oil and gas companies.

But activity is now picking up and drilling in the shallower regions of the U.S. Gulf, where Fieldwood Energy operates, is generally easier, cheaper and less risky than deepwater drilling.

Fieldwood Energy bought Apache’s Gulf of Mexico shelf operations for $3.75 billion in July, and the deal cements its position as the owner of the largest asset base on the continental shelf portion of the Gulf of Mexico.

“We know these assets very well,” Matt McCarroll, CEO of Fieldwood said in an interview. “SandRidge is a great company and a great mid continent operator. I don’t think they really had the experience in the Gulf of Mexico that it takes.”

As part of the deal with SandRidge, Fieldwood will also assume well abandonment liabilities of $370 million.

SandRidge will retain a 2 percent overriding royalty interest in two exploration prospects in the Gulf assets.

Most U.S. oil and gas companies are increasing spending on their onshore fields as technological advancements open up vast shale reserves.

Morningstar’s Hanson said that the deal should help SandRidge because it makes sense for a company of its size to focus its money and personnel in one area.

“It also makes it easier to sell the company outright,” he said.

SandRidge’s capital redeployment is expected to push its production up by about 37 percent to 23.2 million barrels of oil equivalent (BOE) in the mid-continent region this year.

The company also raised its forecast for overall production growth in 2014 to 26 percent from 12 percent, after adjusting for the sale, which is expected to close in the first quarter of this year. The company expects to produce 28.3 million BOE in 2014, which does not include 1 million BOE it expects to produce from the Gulf of Mexico assets before the deal closes.

Daily output at the divested assets was about 23,500 BOE over the past month, of which nearly half was natural gas, SandRidge said.

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