SandRidge Energy (NYSE:SD) will move quickly in 2011 to develop its large property base in the Permian Basin in Texas as the industry trend towards the development of oil and liquid plays continues.

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Permian Basin
SandRidge Energy has 210,000 net acres under lease in the Permian Basin, and drilled 484 wells here in 2010. The company reported a huge increase in production, to 28,500 barrels of oil equivalent (BOE) per day in the fourth quarter of 2010, up from only 3,500 BOE per day a year earlier. This production growth wasn't totally organic and was helped by two acquisitions during the year.

In July 2010, SandRidge Energy closed on its acquisition of Arena Resources, an operator with extensive holdings in the Permian Basin. At the end of 2009, the company also picked up Permian properties from Forest Oil (NYSE:FST) for $800 million.

SandRidge Energy is operating 16 rigs in the Permian Basin, most of which are in the central portion of the basin drilling vertical wells into the San Andreas and Clear Fork formations. The company plans to expand the number of drilled Permian wells through 2011.

2011 Capital Expenditures
SandRidge Energy plans to spend $1.03 billion in 2011 to drill 950 wells across all its properties. The majority of this capital will be devoted to the company's properties in the Permian Basin. The company has nearly 8,000 drilling locations to choose from on its acreage in the Permian.

Rate of Return
SandRidge Energy estimates that its rate of return on wells here will be 88%. The company analysis assumes a total cost of $760,000 to drill and complete wells and an estimated ultimate recovery of 83,000 BOE per well. These are small wells with an average production rate over the first thirty days of only 65 BOE per day, but the low cost makes the returns competitive with many other basins.

The Permian Basin is one of the fastest growing areas for oil development in the United States, with many other operators increasing development here. Concho Resources (NYSE:CXO) is active in Texas and New Mexico and has 98% of it proved reserves from this basin. The company is currently operating 31 rigs on its properties and drilled 662 gross wells in 2010.

Devon Energy (NYSE:DVN) is also operating in the Permian Basin and has approximately one million acres under lease. The company reported average daily production of 45,000 BOE per day during the fourth quarter of 2010. Devon Energy plans to spend $650 million in capital here in 2011 and drill 300 wells.

The Bottom Line
SandRidge Energy will put the majority of its 2011 capital expenditures into the Permian Basin as the company focuses development almost exclusively in this area and one other oil play in the midcontinent area during the year. (Changes in the price of oil aren't arbitrary. Read on to find out what moves them and why. Check out What Determines Oil Prices?)

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