Our company is focused on one specific geographic location in the Southwestern United States, the West Texas Overthrust (WTO), which will consume the majority of our capital expenditures in the coming years. The WTO is a unique geological setting created by the collision of the ancestral North and South American continents. The collision caused both source rock and reservoir rock - including potential hydrocarbon traps - to thrust upon one another in multiple layers (imbricate stacking) along the leading edge of the major thrust faults. In the process, the reservoir rock became highly fractured, increasing the likelihood of natural gas and oil accumulations and providing for multi-pay exploration and development opportunities.
Even with its enormous potential, the WTO has historically been largely under-explored due to its remoteness and the lack of infrastructure in the area, as well as past limitations on conventional subsurface geological and geophysical methods. The difficulty in finding natural gas within the WTO combined with the even greater difficulty of getting it to market and the potential for high amounts of carbon dioxide gas in certain reservoirs have, until recently, been a triple threat to finding economic production in the area.
That is not to say the field has been completely ignored. When we assembled our team in June 2006, our company produced just over 20 million cubic feet of net natural gas equivalent per day (MMcfe/d). We owned a sizable leasehold position and were the operator of the quickly growing Pinon natural gas field in the WTO. The Pinon Field, discovered 20 years earlier, had grown its proved reserves to 300 billion cubic feet of natural gas equivalent (Bcfe) by the end of 2005. SandRidge, however, owned less than a majority of the field; so our first order of business was to buy and control our largest asset. We spent the remainder of 2006 acquiring leasehold in the Pinon Field and grew our working interest (WI) from less than 30 percent to more than 80 percent by the end of that year. Our largest acquisition was NEG Oil & Gas LLC (NEG), the largest WI owner in Pinon, for $1.5 billion in November 2006. Upon completion of the acquisition, our total net production increased to 135 MMcfe/d.
During the last six months of 2006, we raised more than $1.6 billion of capital to finance the NEG acquisition, in the form of an $850 million bridge loan, $450 million of preferred stock and $332 million of common equity. In addition, we were preparing for our initial public offering (IPO), which we planned to launch in the first half of 2007.
We did not slow down in 2007. In March, we placed $1.0 billion in term loans to repay our bridge loan and refinance our revolver. We also needed to fund our drilling ramp-up in the Pinon Field, so we added $320 million of equity through a private placement from entities affiliated with Ares Management LLC, as well as participation from our preferred share investors and management. This equity raise permitted us to delay our IPO and demonstrate to investors that the Pinon Field could be expanded. We completed our IPO in November 2007, issuing 32.4 million shares at $26 per share and raising $842 million. Proceeds from the IPO were used to repay the revolver and finance a portion of our 2007 and 2008 drilling program.
We have continued to add to our WI in the Pinon Field through various acquisitions, so that we now have an average WI of 93 percent across the field. Importantly, we initiated our large 3-D seismic plan in May of 2007. We are now executing what we believe is the largest contiguous proprietary onshore 3-D seismic shoot in U.S. history. We have also aggressively added acreage within the WTO. We now own over 500,000 net acres and plan to complete our 1,400 square mile 3-D seismic project by the end of 2009.
We finished 2007 producing 235 MMcfe/d, a 72 percent year-over-year production growth, and plan to grow our production by approximately 50 percent in 2008. SandRidge is currently the sixth most active driller of new wells in the U.S.(1), and we continue to have a very aggressive drilling schedule. We now employ more than 2,300 people and have purchased a new office building in downtown Oklahoma City where we continue to prepare for the ongoing growth of the company.
In 2006, we had a year of consolidation in the Pinon Field. 2007 was a year of expansion of the Pinon Field and 2008 will be a year of exploration across the WTO. Our team is very excited about the opportunities for exploration and is looking forward to growing our WTO assets during 2008.
For the year, we recorded net income available to common stockholders of $10.3 million ($0.09 per share), operating cash flow(2) of $295.6 million, an increase of 255 percent over the prior year, and earnings before interest, taxes, depreciation, amortization and other non-cash items (Adjusted EBITDA)(3) of $394.9 million, 273 percent higher than 2006.
From an operational standpoint, our success was evident as well. Our production of 64.2 Bcfe was 320 percent higher than the previous year, while our proved reserve base ended the year at 1.516 trillion cubic feet of natural gas equivalent (Tcfe), a 51 percent improvement over year-end 2006.
We invested $808.7 million in our drilling program in 2007, drilled 316 wells and achieved an overall completion success rate of 98 percent. We added 503 Bcfe and replaced 784 percent of our production, while another 75 Bcfe were added through acquisitions. Our overall finding costs for the year were $1.99 per thousand cubic feet of natural gas equivalent (Mcfe) and the drilling finding costs were $1.61 per Mcfe.
In 2008, we plan to spend $1.1 billion for exploration and production, with approximately 70 percent of that planned for drilling, land and seismic expenditures in the WTO. We expect to keep an average of 32 rigs operating throughout the year in the WTO. We plan to start exploring five distinct project areas outside of the Pinon Field, but within the WTO in 2008. This exploration activity will be focused on the locations defined by the 3-D seismic data we obtained during 2007 and are obtaining in 2008.
In 2008, we also plan to spend approximately 30 percent of our exploration and production budget drilling for reserves away from the WTO. Our next largest asset is in east Texas where we expect to keep five rigs developing the Cotton Valley Sandstone. We have over 500 locations remaining to drill on this asset, which we acquired in our November 2006 NEG transaction.
In addition to the enormous sweet gas potential of the West Texas Overthrust, the area is rich with high-volume CO2 gas. CO2 injection has proven to be ideal in tertiary, or enhanced oil recovery (EOR), in fields where traditional water flooding has already been utilized. Our goal is to capture an additional 1.1 Tcf of methane gas that would not be produced without an outlet for CO2. We continue to work toward a joint venture that will allow SandRidge to produce methane gas, while a joint venture partner finances the installation of our new "Century Plant" for access to our CO2 reserves. The WTO’s close proximity to the Permian Basin and the high amount of methane in the natural gas stream allows us to be very competitive in delivering CO2 gas to our counterparties in the Permian Basin. It is also our belief that throughout our holdings in the WTO, we have additional formations with high amounts of CO2 intermixed with methane. Our vast potential of high CO2 gas puts SandRidge in an exceptional position to capitalize on increased demand for CO2 as the EOR market expands beyond the Permian Basin.
Our primary objective at SandRidge is to achieve long-term growth while maximizing shareholder value. We have adopted five specific strategies we believe will enable us to successfully pursue our goals:
- Focus on developing long-life natural gas reserves through drilling
- SandRidge is the sixth most active driller in the U.S. with 41 rigs in operation(1)
- Continue to expand multi-pay "sweet" natural gas reservoirs in Pinon Field
- Approximately 2,000 locations identified with 29 rigs currently running(4)
- Ramp up development of prolific high CO2 reservoirs in Pinon Field
- Approximately 600 locations identified with one rig currently running(4)
- Focus on exploring the WTO acreage with large scale 3-D seismic shoot and exploration wells
- Shot 389 square miles in 2007; plan includes an additional 560 square miles in 2008
- We plan to start exploring five distinct project areas outside of the Pinon Field, but within the WTO in 2008
- Expand our high CO2 business by developing deeper targets in the WTO
- Use our additional high CO2 reservoirs to attract a joint venture partner in order to deliver CO2 to the Permian Basin or other areas of the U.S.
- Develop the methane captured through our venture that cannot otherwise be produced today.
SandRidge expanded its management team significantly in 2006 and 2007, assembling an exceptional team of professionals in exploration, operations, land, accounting and finance, each with significant experience in public oil and natural gas companies. I am continually impressed by their abilities to provide the leadership and strategic thinking needed to direct the company along the path of positive growth.
I hope that as you read this annual report, you gain a sense of the enthusiasm the employees at SandRidge share as we look forward to the future of our company. I firmly believe the opportunities and potential for significant growth that lie before us are unique within our industry and I am very excited to share our vision for the future.
I would also like to thank our employees for their hard work and dedication, our directors for their leadership and expertise, and finally each of our shareholders for offering the ultimate vote of support through the purchase of our stock.
Tom L. Ward
Chairman and Chief Executive Officer
1. As of March 3, 2008. Source: Smith Bits.
2. “Operating Cash Flow” is a Non-GAAP calculation reconciled on page 31 of the SandRidge Energy Inc. 2007 annual report.
3. “Adjusted EBITDA” is a Non-GAAP calculation reconciled on page 31 of the SandRidge Energy Inc. 2007 annual report.
4. As of December 31, 2007.
Our company is focused on one specific geographic location in the Southwestern United States, the West Texas Overthrust (WTO), which will consume the majority of our capital expenditures in the coming years. The WTO is a unique geological setting created by the collision of the ancestral North and South American continents. The collision caused both source rock and reservoir rock - including potential hydrocarbon traps - to thrust upon one another in multiple layers (imbricate stacking) along the leading edge of the major thrust faults. In the process, the reservoir rock became highly fractured, increasing the likelihood of natural gas and oil accumulations and providing for multi-pay exploration and development opportunities.
Even with its enormous potential, the WTO has historically been largely under-explored due to its remoteness and the lack of infrastructure in the area, as well as past limitations on conventional subsurface geological and geophysical methods. The difficulty in finding natural gas within the WTO combined with the even greater difficulty of getting it to market and the potential for high amounts of carbon dioxide gas in certain reservoirs have, until recently, been a triple threat to finding economic production in the area.
That is not to say the field has been completely ignored. When we assembled our team in June 2006, our company produced just over 20 million cubic feet of net natural gas equivalent per day (MMcfe/d). We owned a sizable leasehold position and were the operator of the quickly growing Pinon natural gas field in the WTO. The Pinon Field, discovered 20 years earlier, had grown its proved reserves to 300 billion cubic feet of natural gas equivalent (Bcfe) by the end of 2005. SandRidge, however, owned less than a majority of the field; so our first order of business was to buy and control our largest asset. We spent the remainder of 2006 acquiring leasehold in the Pinon Field and grew our working interest (WI) from less than 30 percent to more than 80 percent by the end of that year. Our largest acquisition was NEG Oil & Gas LLC (NEG), the largest WI owner in Pinon, for $1.5 billion in November 2006. Upon completion of the acquisition, our total net production increased to 135 MMcfe/d.
During the last six months of 2006, we raised more than $1.6 billion of capital to finance the NEG acquisition, in the form of an $850 million bridge loan, $450 million of preferred stock and $332 million of common equity. In addition, we were preparing for our initial public offering (IPO), which we planned to launch in the first half of 2007.
We did not slow down in 2007. In March, we placed $1.0 billion in term loans to repay our bridge loan and refinance our revolver. We also needed to fund our drilling ramp-up in the Pinon Field, so we added $320 million of equity through a private placement from entities affiliated with Ares Management LLC, as well as participation from our preferred share investors and management. This equity raise permitted us to delay our IPO and demonstrate to investors that the Pinon Field could be expanded. We completed our IPO in November 2007, issuing 32.4 million shares at $26 per share and raising $842 million. Proceeds from the IPO were used to repay the revolver and finance a portion of our 2007 and 2008 drilling program.
We have continued to add to our WI in the Pinon Field through various acquisitions, so that we now have an average WI of 93 percent across the field. Importantly, we initiated our large 3-D seismic plan in May of 2007. We are now executing what we believe is the largest contiguous proprietary onshore 3-D seismic shoot in U.S. history. We have also aggressively added acreage within the WTO. We now own over 500,000 net acres and plan to complete our 1,400 square mile 3-D seismic project by the end of 2009.
We finished 2007 producing 235 MMcfe/d, a 72 percent year-over-year production growth, and plan to grow our production by approximately 50 percent in 2008. SandRidge is currently the sixth most active driller of new wells in the U.S.(1), and we continue to have a very aggressive drilling schedule. We now employ more than 2,300 people and have purchased a new office building in downtown Oklahoma City where we continue to prepare for the ongoing growth of the company.
In 2006, we had a year of consolidation in the Pinon Field. 2007 was a year of expansion of the Pinon Field and 2008 will be a year of exploration across the WTO. Our team is very excited about the opportunities for exploration and is looking forward to growing our WTO assets during 2008.
For the year, we recorded net income available to common stockholders of $10.3 million ($0.09 per share), operating cash flow(2) of $295.6 million, an increase of 255 percent over the prior year, and earnings before interest, taxes, depreciation, amortization and other non-cash items (Adjusted EBITDA)(3) of $394.9 million, 273 percent higher than 2006.
From an operational standpoint, our success was evident as well. Our production of 64.2 Bcfe was 320 percent higher than the previous year, while our proved reserve base ended the year at 1.516 trillion cubic feet of natural gas equivalent (Tcfe), a 51 percent improvement over year-end 2006.
We invested $808.7 million in our drilling program in 2007, drilled 316 wells and achieved an overall completion success rate of 98 percent. We added 503 Bcfe and replaced 784 percent of our production, while another 75 Bcfe were added through acquisitions. Our overall finding costs for the year were $1.99 per thousand cubic feet of natural gas equivalent (Mcfe) and the drilling finding costs were $1.61 per Mcfe.
In 2008, we plan to spend $1.1 billion for exploration and production, with approximately 70 percent of that planned for drilling, land and seismic expenditures in the WTO. We expect to keep an average of 32 rigs operating throughout the year in the WTO. We plan to start exploring five distinct project areas outside of the Pinon Field, but within the WTO in 2008. This exploration activity will be focused on the locations defined by the 3-D seismic data we obtained during 2007 and are obtaining in 2008.
In 2008, we also plan to spend approximately 30 percent of our exploration and production budget drilling for reserves away from the WTO. Our next largest asset is in east Texas where we expect to keep five rigs developing the Cotton Valley Sandstone. We have over 500 locations remaining to drill on this asset, which we acquired in our November 2006 NEG transaction.
In addition to the enormous sweet gas potential of the West Texas Overthrust, the area is rich with high-volume CO2 gas. CO2 injection has proven to be ideal in tertiary, or enhanced oil recovery (EOR), in fields where traditional water flooding has already been utilized. Our goal is to capture an additional 1.1 Tcf of methane gas that would not be produced without an outlet for CO2. We continue to work toward a joint venture that will allow SandRidge to produce methane gas, while a joint venture partner finances the installation of our new "Century Plant" for access to our CO2 reserves. The WTO’s close proximity to the Permian Basin and the high amount of methane in the natural gas stream allows us to be very competitive in delivering CO2 gas to our counterparties in the Permian Basin. It is also our belief that throughout our holdings in the WTO, we have additional formations with high amounts of CO2 intermixed with methane. Our vast potential of high CO2 gas puts SandRidge in an exceptional position to capitalize on increased demand for CO2 as the EOR market expands beyond the Permian Basin.
Our primary objective at SandRidge is to achieve long-term growth while maximizing shareholder value. We have adopted five specific strategies we believe will enable us to successfully pursue our goals:
- Focus on developing long-life natural gas reserves through drilling
- SandRidge is the sixth most active driller in the U.S. with 41 rigs in operation(1)
- Continue to expand multi-pay "sweet" natural gas reservoirs in Pinon Field
- Approximately 2,000 locations identified with 29 rigs currently running(4)
- Ramp up development of prolific high CO2 reservoirs in Pinon Field
- Approximately 600 locations identified with one rig currently running(4)
- Focus on exploring the WTO acreage with large scale 3-D seismic shoot and exploration wells
- Shot 389 square miles in 2007; plan includes an additional 560 square miles in 2008
- We plan to start exploring five distinct project areas outside of the Pinon Field, but within the WTO in 2008
- Expand our high CO2 business by developing deeper targets in the WTO
- Use our additional high CO2 reservoirs to attract a joint venture partner in order to deliver CO2 to the Permian Basin or other areas of the U.S.
- Develop the methane captured through our venture that cannot otherwise be produced today.
SandRidge expanded its management team significantly in 2006 and 2007, assembling an exceptional team of professionals in exploration, operations, land, accounting and finance, each with significant experience in public oil and natural gas companies. I am continually impressed by their abilities to provide the leadership and strategic thinking needed to direct the company along the path of positive growth.
I hope that as you read this annual report, you gain a sense of the enthusiasm the employees at SandRidge share as we look forward to the future of our company. I firmly believe the opportunities and potential for significant growth that lie before us are unique within our industry and I am very excited to share our vision for the future.
I would also like to thank our employees for their hard work and dedication, our directors for their leadership and expertise, and finally each of our shareholders for offering the ultimate vote of support through the purchase of our stock.
Tom L. Ward
Chairman and Chief Executive Officer
1. As of March 3, 2008. Source: Smith Bits.
2. “Operating Cash Flow” is a Non-GAAP calculation reconciled on page 31 of the SandRidge Energy Inc. 2007 annual report.
3. “Adjusted EBITDA” is a Non-GAAP calculation reconciled on page 31 of the SandRidge Energy Inc. 2007 annual report.
4. As of December 31, 2007.