Hedge Fund Mount Kellett Boosts its Stake in This Energy Stock

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At the beginning of January, SandRidge Energy (NYSE: SD), a $2.6 billion market cap exploration and production company which primarily produces natural gas, was one of the largest holdings by market value in Mount Kellett Capital Management’s portfolio. An activist battle has been brewing at SandRidge.

On the one hand, investors such as Mount Kellett and TPG-Axon Capital Management have been trying to remove unpopular CEO Tom Ward; the CEO of peer Chesapeake Energy (NYSE: CHK) was recently forced out following questionable business practices and a history of overexpansion, which may have emboldened the activists. On the other hand, some investors, including Prem Watsa’s Fairfax Financial Holdings, are standing by management.

Now Mount Kellett, which is managed by Mark McGoldrick and Jason Maynard, has filed with the SEC to disclose that it has purchased an additional 3 million shares of SandRidge Energy. This brings the fund’s total ownership above 25 million shares and to 5.1% of the total shares outstanding. Recently, both the activists and the company came to an arrangement under which it is essentially TPG-Axon’s decision to either replace Ward or gain majority control over the Board of Directors. Shortly afterward, Ward sold a significant percentage of his stock holdings.

TPG-Axon, Mount Kellett, and Fairfax were three of the largest holders of SandRidge stock out of the hedge funds and other notable investors we track in our database of 13F filings. They were joined by billionaire Leon Cooperman’s Omega Advisors, which initiated a position of over 24 million shares between October and December 2012; in an interview earlier this year, Cooperman claimed that his team had not made up their minds regarding the struggle over the company.

SandRidge’s stock price has fallen 33% in the last year, and 14% of the outstanding shares are held short. Wall Street analysts expect the company to be unprofitable both this year and next year, at the same time that they are expecting Chesapeake to at least achieve positive earnings. We’d also note that SandRidge Energy's beta is 3.0, reflecting that the stock is very responsive to changes in broader market indices.

We can compare SandRidge not only to Chesapeake (which, as we’ve noted, has been suffering from similar management and industry problems but is at least expected to turn a profit in 2014) but also to oil and gas producers Apache (NYSE: APA), Devon Energy (NYSE: DVN), and EOG Resources (NYSE: EOG). EOG has been in the best shape of these three companies, and its stock has actually risen in line with market indices over the last year, while Apache and Devon are down 20% or more. EOG also experienced a 16% increase in revenue last quarter compared to the fourth quarter of 2011, while Devon’s sales slipped and Apache’s were about flat.

Market valuations are accounting for this to some degree: EOG trades at 16 times forward earnings estimates, and even that figure assumes a significant improvement in net income over the next two years. Meanwhile, Apache had seen a sharp decline in earnings to go with its flat top line; it carries trailing and forward P/Es of 15 and 7, respectively, so analysts are expecting a recovery there. Expectations for Devon imply a forward earnings multiple of 11 for that company.

Mount Kellett’s additional purchases of a stock that was already one of the fund’s largest holdings demonstrate that the investment team believes that the situation with SandRidge will be resolved in a manner beneficial for the stock price. Still, we don’t like the company’s current financial situation and would think that even if investors were interested in committing capital to a recovery in natural gas prices they might be better served by looking at peers such as Chesapeake and Apache.


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in CHK. The Motley Fool owns shares of Apache and 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. 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!

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