A Smart Way to Hedge Against Energy Volatility
cris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
SandRidge Energy (NYSE: SD) is an oil and natural gas exploration company. The company has been public since November 2007. SandRidge is currently trading at about $6.20, and does not show any signs of slowing down any time soon. For comparison, competitor Kodiak Oil & Gas (KOG) is trading around $8.58, and competitor Devon Energy (NYSE: DVN) is trading around $54. SandRidge has been hovering a bit below average while the company has had copious amounts of positive media coverage pertaining to its low prices and moves forward. Overall, SandRidge has seen a 28% increase in revenue from $267 million in the first quarter of 2011 to $341 million in the first quarter of 2012.
Some investors are wary to place too much into SandRidge due to its high forward price to earnings ratio and debt to equity ratio, but analysts are not so sure about that anymore. SandRidge has tons of potential and it seems to be capitalizing on it, so this is definitely a stock to watch. Lately natural gas prices have been low, although very recently they have started to increase once more. This increase seems to be prompting forward and positive decisions for corporate at SandRidge, as it is demonstrating all the characteristics of a company about to make a big move.
First off, SandRidge is really pressuring Kansas for continued exploration into their untapped oil resources. The company, which already holds the most horizontal drilling permits in Kansas, estimates that there are about 15 billion barrels of recoverable oil in Harper County, Kansas. It is SandRidge's plan to build 130 wells, up 10 from the previous year - and its drills are hitting oil 100% of the time. The company also plans to continue drilling and hiring for the next ten years out in Kansas. SandRidge's prospects are looking good out in the Midwest, and with its other drilling locations in the mid-continent, Permian Basin, West Texas, the Gulf Coast, and the Gulf of Mexico, the company has plenty of opportunities for advancement and growth.
Hydraulic fracturing, or "fracking" out in the Mississippi Lime (the region of North Oklahoma and Southern Kansas) is looking extremely promising as more and more energy companies are trying to head out there. It is predicted that the region has a 55/45 mix of oil to natural gas, making it an ideal spot for all of these energy corporations. SandRidge was the first company to capitalize on the resources in the Mississippi Lime, and since the company has sold 537,000 acres for $2.48 billion. The Kansas Geological Survey is supportive of the hydraulic fracturing efforts, and the state itself is welcome to the idea of the increased chances of economic opportunity.
In terms of natural gas production, SandRidge still primarily relies on dry natural gas, which currently makes up over half of its total production. Despite this, SandRidge currently has no rigs working this year on natural gas. Any natural gas revenue will come from the natural gas that SandRidge has in storage - this is a great move for the company since it is demonstrating that it is one of the few energy corporations out there actually doing something to combat the current natural gas oversupply that was contributing to the price depression. Hopefully this has been part of the cause for the reason in the recent increase in natural gas prices. Furthermore, as far as companies go, SandRidge is demonstrating that it is one with quality corporate responsibility.
Second, SandRidge's royalty trust, the SandRidge Premium Trust (NYSE: PER), has high yields at over 11%. The Premium Trust consists of oil and gas wells and has hedges in place to protect investors in these volatile economic times with fluctuating oil prices. For instance, the SandRidge Premium Trust has about 85% of its oil production hedged at $102 per barrel. This is a very attractive and lucrative trust that is expected to keep paying high yields in the future.
SandRidge will be doing lots of competing with fellow energy corporation Devon Energy in the coming weeks. Devon holds 23,000 acres in North Oklahoma that includes part of the previously discussed Mississippi Lime. Devon Energy is looking to hold onto its land as well as push for an increase in acreage.
Some analysts have referred to Devon Energy as the perfect energy stock. Like SandRidge, Devon Energy is involved with the exploration and production of oil, natural gas, and natural gas liquids. Devon has a 52-week range of $50.74 and $84.52. The company has proven agility and adaptability to ever-changing markets and has diversified holdings across North America. Basically, Devon Energy is well equipped to profit despite a market that is in transition and flux. It will be interesting to watch and see how Devon and SandRidge deal with and work around each other with the Mississippi Lime region and how they navigate through the changing energy market.
So, what to do in regards to the SandRidge Energy? The stock is doing well, and, as previously mentioned, the stock (and the company) will likely see solid gains in the coming quarters. The company had significant increases in revenue, and its forthcoming projects in Kansas at the Mississippi Lime will bode well for the future successes of the company. SandRidge Energy is definitely one company to keep your eye on. With its strategy, success in drilling, and emphasis on corporate responsibility to adhere to changing market conditions, SandRidge is definitely on a positive track.
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool owns shares of Devon 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.
