Betting Against Shale In the Oil Patch

SandRidge is bucking the industry by sticking with traditional fields | “Tom is one of those CEOs [who is] going to do what he wants to do”

David Wethe

Tom Ward has always considered himself a contrarian. In his senior year of high school in Seiling, Okla. (pop. 1,000), Ward rejected the advice of his principal, who thought the football jock was best suited for a small college, and enrolled in the University of Oklahoma. Later, as co-founder of Chesapeake Energy, he spent some $14 billion on gas assets from 1998 to 2006 — when most of the industry was focused on oil — and built the country’s No. 2 gas producer. “Chesapeake grew from a $1 stock to a $30 stock in that time frame,” Ward says with pride.

Today, Ward is at it again, as chief executive officer of SandRidge Energy. Instead of chasing rivals into shale oil fields, he has spent $3.7 billion in the past two years on older reserves, aiming to keep them productive as crude prices rise. The Oklahoma City company on Feb. 1 said it would pay $1.3 billion for Dynamic Offshore Resources, its third major buy of traditional crude reserves since 2009. “I want to go to the place that no one else likes ... and stay away from competition,” Ward says.

Investors sold off more than 8 percent of the company’s market value on Feb. 2 after Ward announced the deal with Dynamic, which owns wells in shallower parts of the Gulf of Mexico. Although the stock has since recovered, some shareholders say Sand Ridge has too much debt — $2.8 billion. Others question whether SandRidge, which controls mostly onshore wells, can manage offshore operations. BNP Paribas analyst Anne Cameron worries that SandRidge’s largest asset, the Mississippian field in Oklahoma and Kansas, may not produce as much as the company predicts. Logan Moncrief, a principal at Houston private equity fund Moncrief Willingham Energy Advisers, says he’s sometimes confused by Ward’s game plan. “Every time you think you have it figured out, they do something to make you question it again,” says Moncrief, who owns Sand Ridge shares but declines to say how many. “Tom is one of those CEOs [who is] going to do what he wants to do.”

Ward says he “didn’t expect anyone to understand our strategy until we prove it out.” He aims to double oil output in the next three years by adding more than 20 new rigs in the Mississippian. Ward says that would triple profits and cut debt to about double operating earnings, roughly half of today’s level. Dynamic’s wells produce 25,000 barrels a day, he says, which will help pay for expansion in the Mississippian. “This is the first time in my career that [the shallow part of] the Gulf of Mexico is a place that nobody wants to be,” Ward says. “You just can’t buy oil this cheap anywhere.”

Since 2009 the company has become the top producer in the Mississippian, pumping the equivalent of 21,000 barrels per day. Last year oil represented more than half SandRidge’s total output, up from 13 percent in 2008. That shift to oil likely saved the company because plunging natural gas prices would have sapped profits, says Stuart Miller, senior analyst at Moody’s in New York. But it also means added financial risk, given that the new wells were paid for mostly with debt. “They’re definitely playing a contrarian game,” Miller says, “which sometimes you win big, and sometimes you lose big.”

The bottom line Even as the rest of the industry bets big on shale, SandRidge Energy has paid $3.7 billion for traditional wells over the past two years.


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