It’s been said that one man’s trash is another man’s treasure. In the case of the oil and gas exploration business, one company’s core operations is another company’s non-core asset that’s ripe to be sold to the highest bidder. That’s why investors shouldn’t initially get so worked up about asset sales because they’re never as cut and dry as they would appear.
As an investor, it’s tough to know who to believe. You’re talking about some of the smartest people in the energy industry with two very different opinions on the same energy play. Let’s take a close look at the play and see what all the fuss is about.
Source: SandRidge Investor Presentation
To SandRidge Energy Inc. (NYSE:SD) the Mississippian Lime is not just a treasure, but a gold mine. The company is basically building its business around this one asset. That’s why it seized the opportunity to sell its high-demand and attractively priced Permian Basin operations for $2.6 billion. The company’s plan is to invest all that cash to fund the development of its 1.85 million net acres in the Mississippian for the next two years.
This would appear to be in stark contrast to peers Chesapeake Energy Corporation (NYSE:CHK) and Devon Energy Corp (NYSE:DVN) which have both sold partial stakes in their Mississippian Lime acres in the past year. Devon Energy Corp (NYSE:DVN) has about 600,000 net acres in the play, but it sold a 33% joint venture interest to Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI) in a package with four other emerging plays for $2.5 billion last year. The deal covered 1.5 million net acres and a rough estimate puts the value of these acres at slightly less than $1,700 per acre. However, Devon Energy Corp (NYSE:DVN)’s sale was more about de-risking its emerging plays than anything against the Mississippian. In fact, the company currently has 15 rigs in the play and could increase that to 20 by the end of the year. It plans to drill about 400 wells and its early results are in line with expectations.
Chesapeake Energy Corporation (NYSE:CHK)’s recent Mississippian asset sale is of a bit more concern to investors for a number of reasons. First, it appears to be offered at a fire-sale price given that the company had boasted much higher values for the assets. In fact, at a price per acre of less than $2,400, it’s less than a third of what the company claimed the land was worth at an investor presentation last summer. The question here is whether Chesapeake Energy Corporation (NYSE:CHK) was just so desperate for cash that it simply took whatever it could get, or whether the Mississippian is turning out not to be as great as it once thought.
This is a play that Chesapeake discovered in 2007 and it’s the largest leaseholder at about 2 million net acres. It has 273 wells in the play and is currently operating eight rigs. Further, for a company trumpeting its liquids growth, this is a play that produced 45% oil, 9% natural gas liquids, and 46% gas. That’s what makes its sale of a 50% undivided interest in 850,000 acres interesting.
It would appear that Chesapeake Energy Corporation (NYSE:CHK) sees better value elsewhere in its vast portfolio, namely its Eagle Ford Shale acreage; it’s the second-largest leasehold owner in there. That play produced much better results at 66% oil, 15% natural gas liquids, and 19% gas. That’s likely why Chesapeake is devoting more than a third of its capital budget to the play this year, and its currently operating 17 rigs there. Chesapeake has simply found better gold in the Eagle Ford.
Does that mean SandRidge Energy Inc. (NYSE:SD) investors are in trouble? No. In fact, its production coming out of the play is about to become a whole lot more valuable. Earlier this year SandRidge entered into an agreement with Atlas Pipeline Partners (NYSE:APL) on a new percentage-of-proceeds contract for its natural gas liquids. As with most new oil and gas plays, producer profits can sometimes be stifled by lack of pipeline capacity to get its products to the most lucrative markets. This new agreement gives SandRidge Energy Inc. (NYSE:SD) a greater share of the processing value and lowers its fees so that it can capture natural gas liquid volumes and enhance its economics.
This will add some incremental improvement to its well economics. The production mix, which is currently 45% oil and natural gas liquids and 55% natural gas, will shift further toward the more profitable oil and liquids mix. This shift together with an overall improvement in its drilling plan should help make this a more profitable play.
When you add it all up, the Mississippian is showing very positive signs. Because of its focus there, SandRidge Energy Inc. (NYSE:SD) will be among the most profitable operators in the play. So, while it would appear that the Mississippian isn’t as oily as the Bakken or Eagle Ford, it’s still an exciting field and one that could make SandRidge Energy Inc. (NYSE:SD) investors a lot of money as it develops its acreage over the next two decades.
The article Is SandRidge Wrong About the Mississippian Lime? originally appeared on Fool.com.
Fool contributor Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of Devon Energy and has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy.
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