I have been following SD for a long time now. The July 2012 snapshot: SD has quietly broken into one of the most prolific, repeatable oil plays in the lower 48. It is called the Mississippian Formation in Oklahoma and Kansas. They currently own 1,700,000 acres across the play and paid an average of $215/acre. That kind of entry cost is phenomenal given the size of the position.

At this point in time, I believe this play has proven that its economics will be better than both the Bakken and the Eagleford. An average well will produce 456 million barrels of oil equivalents. It has a very high oil cut which provides a ROR of 80-100%. This is insanely robust economics! I'm in the business and everyone i speak with talks about the play being a true game changer.

To mitigate risk of a fall in oil prices, SD has hedged production well into the future to lock in these economics by hedging at $90 per barrel 2-3 years into the future. So they can continue to drill and produce these wells and lock in those high RORs. This makes for a very low risk profile for an E&P company.

The problem that has plagued SD over the past 3 years as they have been making this transformation is the debt load. However at this point the tangible assets of the company are beginning to de-leverage the company to a safer level.

Funding is in place to continue to ramp up this drilling program and i believe it could change SD into a big time oil company. The current price is $6 a share. The stock was at $12 last year at this time, when the world economic outlook was rosier(relatively speaking). So another full year under its belt of growth. Earnings will drive its growth from now on.

I encourage everyone to take a look at this stock and see what you think. If you look at the math I can't see how this company will not surpass most other oil companies in the next couple years.

Thanks for the quality post. I'm going to look in to them. I held them for a little while a few years back after being impressed with their leadership. Looks like they are coming around again.

Been a bit of a ride the past year, hopefully this train will turn around.

An average well will not produce 456mm BOE. Maybe 456k BOE. What is the average GOR on these wells? Average completed cost? Average first year production?

I've never liked SD because of the management. You really can't trust any of these newer, resource play, public companies' reserve estimates. Also, every new resource play in the last 5 years has been hugely overestimated as far as reserve potential.

If you can find the cost of these wells, and their first year production, and truly determine that the wells are paying out in less than one year, and confirm that SD is deleveraging, I think it's a buy. I'd still like to see a regime change though.

I think JP has been pumping SD several times on here before.

Have any data to back up these claims? I haven't found it. Sounds like something CHK said about Utica - next EF/Bakken/etc... And wasn't SD CEO part of CHK. Stinks too much for me. Not saying it won't work but I feel better about other companies. Not to mention SD is all over the map.. We have 2 million wonderful acres BUT we are buying a bunch of shallow offshore production. I question whether they will be able to handle what they've got. Will keep an eye on it though - crazier things have happened. Just feels very CHK to me. And if your a CHK lover, you could be right on that too - just not something I feel good about.

You have to understand that the company IPO'd with a terrible asset base (high cost CO2 gas field / Piñon) when nat gas prices were > 7/mcf.... Was forced to do some oily acquisitions to save the company from Forest and Arena...so there debt load is still quite a burden and there funding problems are only cured for 2012... 2013-2015 will still need considerable financing from outside sources.

Their CEO was a cofounder of CHK, and has very similar attributes to Aubrey...ie never being able to stop acquiring land. The CEO says his NAV is over $60 but is not afraid to issue equity at $6.

The Miss Llime is 50% gas and has a 95% water cut... So there Are significant water disposal and handling costs... Not to mention well results are highly variable... You might drill a 900 mmboe well then a 90 mboe well...

Dont get me wrong, there is a lot of inherent asset value in the company....but this stock is no slam dunk. Stock is a high short interest for a reason.... Adults only in the pool on this stock.

The data is out there. And yes that was a typeO- its 456mboe or 456,000 barrels equivalent per well (204,000 barrels of 100% crude). That is from a 3rd party engineering firm, Netherland Sewell. So it is not SD management estimating that number. Completed well cost is $3.2 million and that includes all infrastructure for water disposal. So the average well will pay out in about 1 year or less.

I believe the statistical sample is now big enough to start buying in. SD has drilled over 350 horizontal wells now. avg 30 day rate is 325 BOE/D. The sample is from multiple counties in the play as well.

The SD management has done an amazing job since the nat gas market fell out. They spent $470 million acquiring these leases in 2009-2010. Today the implied value of these leases is $7.8 billion! This is based on the acreage value as implied by recent industry transactions ($4600/acre).

Chesapeake is run totally different than SD.
Just look at the current assets SD has. Very concentrated, focused and growing. Chesapeake leased most of north america and is now paying for it.

way to spread the company propaganda!

Yeah - send me a link to the data. Seen the press release from SD. Seen the same ones for CHK.

I want a couple wells with 6 months data, not an A&M football team before the season. No offense, I just see this kind of promoting all the time. It may turn out to be great, but I've searched for data and they are keeping it close to the vest. If you've got most of the acreage and they are barn burners you don't keep it this quiet IMO - especially when your in trouble financially. Just feels identical to what CHK has done with the Utica - don't see Utica panning out BUT it always could.

CHK promoted the Utica after results from a couple of wells! To assume SD is doing the same after 350+ wells,in addition to the rest of the industry activity which has been positive, is silly.

You need to understand that this isn't company generated EUR estimates. SD has to be audited just like any other company each year. The 3rd party that audits them has assigned an EUR for each well and the average of every well to date is 456 mboe.

You need to understand how engineering audits work. Company XYZ can't go out and fudge numbers to sell to investors. The SEC will put you out of business

Again Aggie028, we're talking about 350+ wells drilled by SD alone. Thats not an insignificant sample. The rest of the industry has drilled hundreds of wells to further support the data. There is a big difference between what these companies are doing and what CHK has done in other plays.

Will look again. Couldn't find those but I'm not saying your wrong. Not sure about reporting requirements in those states. Not the highly touted play your making it out to be I don't think.,,

"Expected program outcome range 300-500 MBoe/well"

Wouldn't count on this - not booked reserves - likely what we call possible

Looked at SD presentation and saw CHK has second highest rig count. If you need an example of a company that will drill 300 garbage wells and promote the heck out of th, look no further.

Let's come back to this in a year. It wi be interesting to see how SD turns out.

I'm at NAPE twice a year and i can tell you from talking with dozens of geologists and engineers that the Mississippian is a big time play. Its most likely going to shrink in size to some core areas, but even then those areas will be very large. Of the 1 million plus acres SD owns, they will likely delineate down to only 100-200,000 acres, those being the highest economic areas but still with 10-20 years of drilling locations available on them.

Check the SD investor presentations on their website and check out the information there.

Anybody who was associated with CHK sometime in the past is forever tainted and only promotes ponzi schemes? to do what? eventually tank the stock?

Oil and gas execs know full well how important credibility with analysts is (Aubrey being an exception). I don't know how presenting 3rd party decline curves to the investor community that clearly show highly economic wells is "hyping". What would you like them to tell the auditors? to downsize the EURs so they can sandbag?

As far as 300-500 mboe range, its very reasonable given the 1-2 years of production history on these wells already. these wells will not randomly shut down after 5 years of production. The shape of decline in this formation is known from thousands of vertical wells that have produced back in the 1960's-1980's. So alot is known about the rock properties. When Netherland Sewell is assigning EURs they have access to all this plus the pressure data. The wells drilled to date are going to produce within a range 300-500mboe, 456mboe being the average.

I will contact Oklahoma Oil and Gas commission and see if I can get the monthly production data for each SD operated well.

jp you sound a lot like a producer. we always take what the producer tells us a well is going to make cut it in half and then divide it by 2.

Very interesting - I will keep an eye on this play moving forward. Personally, I do not like the limited availability of data out there for a play that has 300+ wells drilled primarily by CHK and SD. Obviously we have to assume they are doing ok or hopefully their activity level would have declined by now - although CHK has certainly proved they will drill when it makes no sense at all. SD management is still suspect to me so I will likely go for someone else with acreage but if your going to take a gamble, I see your logic.

Comparing the play to the Bakken or Eagle Ford at this point seems a bit premature to me.

BOE always bugs me. I realize most everyone use this measure in press releases but why?!?!?! IMO lately it has been used to hide how gassy something actually is. If I have 90 bars of silver and 10 bars of gold and I tell you I have 100 bars of Gold Equivalent, what does it tell you about the value of the 100 bars?! I know they use an energy basis... but that does not clearly translate to dollars without knowing the percentage of each.

the problem is that "BOE" is historically 6-1 as a basis of energy equivalents.

however, the basis based on price is closer to 30-1 right now.

I'd rather have a well making 9 bopd and 6 mcfd (10 boepd) vs. a well making 1 bopd and 54 mcfd (10 boepd). With oil at $85 and gas at $2.80, the first well has $782/day in 8/8ths revenue vs $236/day in 8/8ths revenue for the 2nd well. They are both "10 boepd" wells but one has revenue 3.3x the other


so, right now, using BOE makes things look "better" because of the 6-1 ratio instead of the 30-1 ratio

[This message has been edited by Blue-eyes (edited 7/7/2012 5:19p).]

Sloan- I know what you mean. I am a geologist but I have an engineers skepticism when it comes to EUR's and wild claims. But the repeatability of this play is starting to get interesting. And I agree its one thing for the producers to tell you what a well will make when it first comes on line, but its another to tell you after 2-3 years of production after the rate has steadied.

As for everything being reported in BOE I understand the frustration. But remember SD has disclosed what the oil cut is and its about 200,000 Barrels of Crude Oil EUR per well. Count the ngl content of the gas for some of the EUR's also and those get roughly $50/barrel. But ROR is what you want to look for. The ROR is calculated at NYMEX Strip, and as recent as June prices. So even with the low nat gas price factored in there, the ROR is still 80%. (also remember SD has hedged oil at over $90 for the next couple years)

So the ROR is what to look at here, and you don't see that high of ROR in most other plays. I'm not aware of many plays outside of EOG EagleFord position where it is better and repeatable. Many shale plays panned out worse than we thought because the play either lacked repeatability or high economics (especially gas plays). But the Miss is limestone so it has better perm and porosity by orders of magnitude.

Also Ag028- I'm not sure how you are used to getting data for production. In Texas its Railroad Commission and it takes forever to get. What are you using to search?

IHS or DI.

What do you predict the average ROR will be?

jp,

i put in a call to a trusted source. i'm not hearing anything like you are reporting. lots of gas and very little oil. the oil they are getting is not great. this thing is a long, long way away from proving fruitful.

Ask yourself why would Repsol ink a $1 billion joint venture with SD in this play back in January? U think they didn't do any due diligence before they inked a $1 billion deal like that?

Ask yourself why would Atinum Ltd. ink a $500 million joint venture with SD to get a piece of the action in this play in late 2011?

Anytime a company works on a major deal like this, ALL well data is examined with the finest detail. They are given access to all levels of data.

Also why would Apache and Devon have just entered the play, given all the data they have access to?

Here is Tom Ward discussing recently on the recent 2012 Q1 results conference call:

" One well we recently completed in Alfalfa County, Oklahoma averaged more than 2,200 barrels of oil equivalent per day at 92% oil and is calculated to be the third highest 30-day rate oil well drilled in the United States in the last 3 years. Another well is even better and appears to be on track to be the highest 30-day rate oil well drilled in the U.S. in the last 3 years. This well has averaged over 3,750 barrels of oil a day and 1.5 million cubic feet of gas a day or 4,000 barrels of oil equivalent per day and paid the $3 million well back during the initial flow-back period of 10 days. However, we have chosen to not only discuss our best wells, but the nearly 300 wells we've built across more than 150 miles from Comanche County, Kansas to Noble County, Oklahoma. A well that averages only 244 barrels of oil equivalent per day, which is what our type curve was at the end of 2010, would have a rate of return more than 80%. And a well that averages 310 barrels of oil equivalent per day during the 30-day peak rate will have a rate of return of over 125%."

some of those companies including shell were way too late the Eagle Ford and Bakken plays, so it would not surprise me to see them take a bit of a flyer on a new play.

do you want to go ahead and admit what your stake is in SD? you are posting way too much on this to be just a regular investor.

quote:

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Ask yourself why would Repsol ink a $1 billion joint venture with SD in this play back in January? U think they didn't do any due diligence before they inked a $1 billion deal like that?

Ask yourself why would Atinum Ltd. ink a $500 million joint venture with SD to get a piece of the action in this play in late 2011?

---

ask yourself why companies were paying up to $30,000/acre for Haynesville acreage...

Blueyes- the Haynesville was different in some key ways.
It was a true shale play with very little historical production to support the idea that long term production was viable. The rock perm and porosity are horrendously bad, but the very early IP rates on a small sample of wells set off a land rush. I'm not an expert in the Haynesville, so correct me if I'm wrong, but I believe the decline rates in the majority of wells turned out to be catastrophic. In the 90-95% range over the first year. The Haynesville is also dry gas, so the macro economics of Nat Gas made it uneconomic once gas prices got down below the limit ($6/mcf ?)


The Horizontal Miss in Oklahoma has substantial production history to it by all the vertical wells that were drilled there historically. So the rock was known to not only have large quantities of hydrocarbon in place, but also suitable for oil & gas recovery. Those are two huge distinguishing factors for this play. So in the Miss operators are actually redeveloping an old known reservoir, if you will.

Given the amount of data available in the Miss, risk can be substantially reduced in the three big areas: reservoir, oil&gas in place, trapping. The question is one of statistics at this point. What will the average well do over 20-30 years. Right now, if SD is correct, the average well is very economic. So in a statistical play that is what you want to keep an eye on.

Sloan- I am buying SD whenever I can at these prices. I post here because I want to discuss it with anyone who is interested.

alright then. good luck to you. i actually hope the miss formation works out.

After everything i've studied, I think the stock allows for "data-driven" optimism. The macro risks are always there of course, but those factor in to all stocks at this point.

Personally, I'm not big on joint ventures. You don't see companies joint venture wells that are paying out in under a month. The majority can't be close to that... so we are talking about a couple of wells and letting those feelings extrapolate to an entire play. Your a geologist - is all Eagle Ford created equal?

I've seen foreign companies bail out CHK several times - it wasn't because they thought it was a great deal... unless they are dumb. More likely is the fact that gas is $12+ over seas and they want to learn how to do what we are doing - some of their competitors have done it and now is their time to do it. Don't see XOM or CVX getting in on it....

Btw - Niobrara had similar sentiment. So far that one looks average as well.

SD had to do JV's to raise dollars to devote to capex. They took on a heavy debt burdens to turn the company into an oil producer in 2 years time. So they need to do special financing to keep growing. They also leased enough acreage to allow for that, while keeping a massive share for themselves to drill alone.

I don't think the Niobrara ever had the number of wells online that the Miss does now. Shale plays are often hyped based on geochemical data and the idea that the shales have huge geographic extent. You can't map petrophysics with well logs in shale plays. porosity and perm can only be had by taking core. So those plays always wind up way more complicated.

The obvious problem with SD is the share price has not reflected the underlying value of their growing assets. In this global economic environment, the balance sheet is going to keep the pps down for as long as recession looks near (probably in the 6-8 dollar range). I think management is probably looking at how to pay down a bunch of the debt in the next year or 2.
But if the economy shows signs of life and/or the company pays down some debt, the stock will move up in a big way.

Right now the risk on the operations side for SD is the statistical picture of the Miss. To me a 350 well sample is getting close to being a big enough sample. SD has drilled 350 wells to date, and the average well has excellent economics. After they have drilled 1000 wells, the average will likely go up as completions are perfected.



[This message has been edited by JP_Losman (edited 7/10/2012 1:36p).]

Let's see. That's about all I can say.

Had a conversation with a guy from small company tonight that went in and evaluated their stuff and some acreage he was looking to buy. His analysis was pretty bleak. Also pointed out that he sees some similarities to CHK in how they are handling it. Very interesting topic. Hope SD proves its gold.

JP is sipping the purple drank

A JV with Atinum is nothing to brag about, at all. That is funny money from South Korea.