SandRidge Ready for Strong Long-Term Performance
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SandRidge Energy (NYSE: SD) has become a solid oil and gas company that I believe should be part of every investor's energy sector of their portfolio. The company has been aggressively exploring as well as investing which keeps this jewel in a fine position for strong future growth.
SandRidge may not be as broad as the likes of Exxon Mobil (XOM),Chevron (CVX), Shell (RDS.A), BP (BP), or Total (TOT), but it is an up-and-comer. The company's primary focus is on exploration and production of natural gas and oil, but the company knows when to make necessary changes as needed. With natural gas prices at an all-time low, the company's change of focus is beginning to pay off. Just a few years ago, in 2008, the company's revenues were 90% derived from natural gas, but for 2012, the company predicts 85% of revenue will now come from oil.
Though the company stacked up debt in the process, its earning power has allowed SandRidge to pay off much of it and actually begin building a cash reserve. The company reported record oil production in the first quarter 2012 of 3.4 million barrels, and that number is rising. In addition to reserves of natural gas and record oil production, the company and its subsidiaries also own and operate gas gathering and processing facilities and CO2 treating and transportation facilities. Without even considering the future of rising natural gas prices, I believe this company to be a winner and a buy for long term holding.
SandRidge has been selling off assets, building up cash for future oil plays. It recently sold off subsidiary SandRidge Tertiary LLC to Trinity CO2 Investments for $130 million, getting out of the enhanced oil recovery business. SandRidge Tertiary has proved reserves of 24 million barrels of oil equivalent in enhanced oil recovery projects in the west Texas' Permian Basin. Those projects currently produce roughly 1,100 barrels of oil per day.
The company also recently announced that MRC Global Inc has signed an agreement to acquire the majority of the operating assets of a wholly owned subsidiary of SandRidge, Cherokee, Oklahoma based Chaparral Supply, LLC, which is a provider of oil field supplies including pipe, valve and fitting (PVF) products. As part of the agreement, MRC will serve as the primary pipe, valve and fitting (PVF) product and oilfield supply distributor to SandRidge's operations in Oklahoma and Kansas. This divestment strategy is part of the company's overall strategy created at the end of 2011.
With acquired cash from the selling of assets, SandRidge can expand its oil holdings even greater through wiser exploration and production investments. Of course, the company isn't just relying on organic cash growth for better plays. It had secured about $750 million committed financing for its acquisition of Dynamic Offshore Resources, LLC, but has yet to touch much of its $790 million borrowing base.
But it is not just oil and natural gas that this little gem is using to become even more profitable. The company owns Lariat Services, Inc., a drilling company that drills wells for SandRidge as well as for other natural gas and oil companies, primarily in West Texas. The subsidiary of SandRidge has a fleet of 31 rigs that have an average horsepower rating in excess of 800 and an average depth capacity greater than 10,500 feet. Lariat also provides trucking, pulling units, location and road construction, air drilling packages, roustabout services and rental tools.
In the search for oil, SandRidge is being aggressive and it is paying off in productivity. In Kansas, where it is estimated the state could be holding 15 billion barrels of oil. SandRidge has estimated that in the first quarter of 2012, its Kansas production has increased by 23%. The company has the largest stake in Kansas with an estimated two million net acres. Not far behind are some of the big dogs like Chesapeake (NYSE: CHK) with over one million net acres, Range Resources (NYSE: RRC) with forty five thousand net acres and Circle Star Energy with one hundred seventy five thousand acres. Chesapeake, Range Resources, and SandRidge have all benefited from Kansas' recent 2.5% rise in oil production in 2011, marking a dollar increase of $3.5 billion. SandRidge still believes in its Mississippian oil play to provide the majority of growth for the company over the next three years. The company has over 550,000 net acres through two joint ventures and the creation of two royalty trusts that it is banking on.
Though costly, with the average Mississippian well costing upwards of $3.2 million, the wells will yield an estimated ultimate recovery (EUR) of 456,000 BOE per well. At the current price of oil, the internal rate of return on Mississippian wells could be as high as 200%. SandRidge plans to drill 380 wells during the year, 330 in the original Mississippian play and 50 wells in an extension area in northwestern Kansas, while operating an average of 26 rigs in the Mississippian play. The company has budgeted $900 million to cover drilling and a saltwater disposal system in 2012.
SandRidge reported first quarter 2012 earnings of 0.04 per share, under-performing last year's first quarter results by 0.06. The company had first quarter 2012 revenues of $381.64 million, 2.09% above the prior year's first quarter results, and had revenues for the full year 2011 of $1.42 billion, 51.89% above the prior year's results. Sand Ridge's Board of Directors announced that it has declared a $3.50 per share semi-annual dividend on its shares of 7.0% Convertible Perpetual Preferred Stock and it also declared a $4.25 per share semi-annual dividend on its shares of 8.5% Convertible Perpetual Preferred Stock that will be paid in cash on August 15, 2012 to holders of record on August 1, 2012.
SandRidge is no slouch in the world of oil exploration. The company's plan to expand more into oil sets the company up for future growth, especially with its great Permian Basin plays and its foothold in Kansas. This affordable oil and gas stock is well worth a buy and will treat investors with good returns in the long run.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool 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. Motley Fool newsletter services recommend Range Resources. 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.