Energy Market Uncertainties Taint SandRidge Stock
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SandRidge Energy (NYSE: SD) has reported an adjusted EBITDA of $185 million for the first quarter of 2012 against a figure of $149 million for the same quarter of the previous year. Operating cash flow was $153 million as against $102 million on a year by year basis. Adjusted net income was $21.2 million (EPS of $.04 per share) compared to a net loss of $7.7 million or $.02 per share in the first quarter of 2011. The other highlights of the quarter were a 23% growth rate in daily average production from Mississippi, record oil production of 3.4 MMBbls for the quarter and a current Mississippi oil acreage of approximately 1.7 million net acres. The IPO of SandRidge Mississippian Trust II in April 2012 raised $590 million and the company hass approximately $1.6 billion of liquidity presently with cash balances of around $600 million and no borrowing under the senior credit facility.
SandRidge Energy is an independent oil and natural gas producer that is headquartered in Oklahoma City and focuses its activity on the mid-continent areas of Oklahoma, Kansas and West Texas. Its primary area of operation is the Mississippian formation, a shallow hydrocarbon system in northern Oklahoma and Kansas, where it had approximately 1,329,000 net acres under lease as of December 31, 2011. It also has approximately 225,000 net acres under lease agreements in the Permian Basin of West Texas. Equity analysts at RBC Capital started their coverage of SandRidge Energy by assigning an "outperform" rating. The company also appears to be carrying out a restructuring which may or may not be necessary. This should be viewed as a positive move and the stock should be watched for further developments.
SandRidge has recently announced a deal with MRC Global, in which MRC will acquire most of the operating assets of SandRidge's subsidiary, Chaparral Supply, LLC. Chaparral produces pipes, valves, fittings and supplies primarily for SandRidge. Under the terms of the deal, MRC Global will become the major supplier for SandRidge. The financial impact of the deal on SandRidge is not known. In addition, SandRidge has also announced a small deal in which it will sell its subsidiary that specializes in enhanced recovery to Trinity CO2 Investments for $130 million. The deal will take some oil production and reserves out of SandRidge's balance sheet.
This string of asset sales is noteworthy, because SandRidge competitor Chesapeake (NYSE: CHK) has not been successful in putting its assets on the block. We must also account for the past relationship between SandRidge CEO Tom Ward and Chesapeake CEO Aubrey McClendon. McClendon learned many of his most complex financial tricks from Ward, including the practice of sheltering non-core operations under subsidiaries and complex trusts. When you consider the problems that Chesapeake faces, these strategic moves make SandRidge look good. These are small deals but, in my opinion, Ward had spotted the trouble that Chesapeake is having with asset sales and probably realizes that complex trust arrangements and complex ownership strategies do not necessarily lend themselves to easy and transparent asset sales.
SandRidge is bullish on Kansas in particular and estimates that recoverable reserves in the state could be as much as 15 billion barrels of oil. SandRidge already has the maximum number of drilling permits and plans to continue drilling for some years to come. As you know, fracking requires enormous quantities of water (up to 2 million gallons per well) and oil and gas producers are looking for innovative deals. Chesapeake recently concluded a deal with the city of Louisville, Ohio to purchase both potable and treated sewage water for activities on the Utica Shale. SandRidge is using small water sources such as creeks and ponds but, as fracking activity increases, there is concern over the diversion of fresh water in agriculture and animal husbandry. It is clear that small and mid-sized fracking companies have to think of innovating alternatives and one company that is likely to take the lead is EOG Resources (EOG).
SandRidge is currently trading for around $6 a share, which is well below the peak three years ago of $60 a share. The current market capitalization is in excess of $2.5 billion but only represents about half of the enterprise value. The projected PEG ratio over a five-year period is below 10 while the price to book ratio is about one and these numbers indicate that there is still scope for the shares to appreciate in price. From the recent sale of assets, I would expect to see a reduction in the debt to equity ratio to more satisfactory levels. For instance. Kodiak Oil & Gas (NYSE: KOG) is currently trading around $8 with a price to book of 2.3, a forward price to earnings of 7.9, and a debt to equity ratio of 0.7. Another competitor Devon Energy (NYSE: DVN) is trading around $58, with a price to book of 1.1, a forward price to earnings of 8.5, and a superior debt to equity of 0.3.
All the recent asset divestitures lead me to believe that SandRidge is preparing a platform on which it will grow much more rapidly than in the past. These developments make it an interesting stock to watch but not necessarily a highly recommended buy at this point in time. There are still too many uncertainties in the oil and gas business such as crude oil prices, record low prices of gas in the United States and the shrinkage in crude oil demand resulting from weak global economic conditions. There is always time to reconsider SandRidge when these factors become a little stronger. By all means continue to watch and hold on to any existing investment, but do not buy until you see more positive developments.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon Energy and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls 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.If you have questions about this post or the Fool’s blog network, click here for information.
