SandRidge Sees Downgrade, May Now Be a Value Play
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SandRidge Energy (NYSE: SD) recently saw Citigroup downgrade the stock from a buy to neutral due to declining cash flows and the flood of oil to market. SandRidge is an oil and natural gas company focused on the development and production of assets in the Mid-Continent area of Oklahoma and Kansas, and in western Texas. One positive is that the estimated proven reserves are around 50/50 oil and gas, which gives the energy company a solid mix. SandRidge has the likes of billionaire investors Ken Griffin, Steven Cohen and Jim Simons owning shares of the stock. T. Boone Pickens is also one SandRidge's top investors with 5% of his 13F invested in the energy company (check out T. Boone Pickens' top picks).
TPG-Axon Capital, which owns 6.5% of SandRidge, has expressed notable interest in breaking up the energy company and restructuring its board. TPG has watched SandRidge for a long time, and the firm is transitioning its strategy toward an activist role. TPG utilizes a selective activist strategy where the firm will put up a fight assuming it has the possibility to double its money. TPG sees great value in the company, assuming it restructures or pursues a sale.
TPG loves the SandRidge asset base, but the fundamental issue is that management is zigzagging too much. Without action, TPG believes that in a couple years those assets might not be useful. The majority of the stock's recent downward pressure, down 20% year to date, is likely due to the fact that investors have a complete lack of confidence in its CEO. The other big underlying issues for SandRidge have been large overhead costs and high cost of capital.
TPG believes that what might be best is for an organization with a lower cost of capital to initiate a takeover of the asset base. TPG described SandRidge’s 3Q earnings as essentially “pulling rabbits out of a hat” to appease shareholders, i.e. the company continues to sell assets to pay for other assets.
Based on earnings uncertainty, SandRidge trades at incalculable trailing and forward P/E ratios, but only a 1.6x P/S ratio – a 50% discount to its peer average P/S ratio. Assuming SandRidge can restructure its management and asset utilization, it could easily trade at only a 25% discount (2.5x). Putting a 2.5x P/S on next year's sales estimates shows potential upside of over 100%.
Continue reading to see how SandRidge can make you more than its competitors...
Occidental Petroleum Corporation (NYSE: OXY) is the largest integrated oil and gas company, listed at a $60 billion market value. On a valuation basis, Occidental is very attractive, trading at a cheap P/E of 11x. Although Occidental might be too large to boast some of the higher growth opportunities provided by small-cap explorers, it does have the lowest debt ratio of the five stocks listed at 11%.
Energen (NYSE: EGN), meanwhile, is a solid small-cap oil/gas explorer that also pays a 1.2% dividend yield. The stock trades at only 11x forward earnings, compared to 16x on a trailing basis, but it also trades the cheapest (besides SandRidge) on a P/S basis (2.2x).
Laredo Petroleum Holdings (NYSE: LPI) is the most expensive oil/gas stock listed on a P/E basis at 45x trailing earnings and 21x forward earnings. With this high valuation does come high growth - 25% expected earnings growth over the next five years (annually). We still remain cautious given the energy company has an elevated debt ratio of 45%, the highest of our players listed here. Billionaire Ken Griffin, founder of Citadel Investment Group, dumped all of his shares last quarter (check out Ken Griffin's newest picks).
Concho Resources (NYSE: CXO) operates in Texas and Mexico and promises investors solid growth with 14% 5-year expected earnings CAGR. The oil/gas company is down over 15% year to date after having missed earnings estimates each of the last four quarters. Even after the pressure, Concho still trades richly at 30x earnings and 4.4x sales. Concho saw billionaire George Soros dumping its entire stake last quarter (check out George Soros' top picks).
In short, we believe that SandRidge is an interesting turnaround story that may remain weak in the near-term, but enough pressure from activist investors should unlock shareholder value in the interim.
This article is written by Marshall Hargrave and edited by Jake Mann. They don't own shares in any of the stocks mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!