This Company Could Jump On Oil Market Stabilization
Jordo 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 already the leading oil driller in the state of Kansas and will continue to be so deep into the future as the company announced at the Kansas Independent Oil & Gas Association convention earlier this year that the company will drill 200 wells in the state in 2013. Its average production per well across Kansas and Oklahoma is 325 barrels of oil equivalent per day, with some of its wells producing more than 1,000 barrels of oil equivalent.
The company has been very aggressive in buying leaseholds in Kansas and Oklahoma, currently holding over 2 million acres of leaseholds in those two states.
There was widespread concern a few years ago that SandRidge was headed towards bankruptcy. But since that time the company has done a very good job of it putting its balance sheet in good shape. While aggressively expanding its drilling operations the company is fully funded. Some investors will look at how the company is funding itself, for example a complicated royalty trust IPO, and be turned off of the company. But this is a mistake. While any time a company takes on a high debt load it should raise some degree of concern, but a small company like SandRidge must take on debt to expand, and the company is expanding in a smart and efficient way. The debt issue is not a sign of problems; it is an example of low risk high reward.
Chesapeake Energy (NYSE: CHK) provides a clear example of what I am talking about. Chesapeake shouldered a great deal of debt in the previous years while aggressively expanding its natural gas production capabilities. What has hurt firms like Chesapeake, however, is that the natural gas market is in the middle of an historic low price period. Right as Chesapeake's financing bills began to become due, the natural gas market was in terrible shape. Furthermore, just as SandRidge was focusing on putting its balance sheet in order, Chesapeake began a strategy of spending more capital than it had cash flow, the total opposite of the SandRidge strategy. Now Chesapeake is taking on a strategy of rapidly selling assets in order to generate cash flow - such a result will not happen at SandRidge due to the focus on the balance sheet currently. It's a good strategy, and investors should realize the difference in approach by comparing Sand Ridge to Chesapeake.
Perhaps what is most important to investors looking at SandRidge is the fact that the company is producing solid growth with the debt they have taken on, and in the process has reduced its debt ratio. In the second quarter of 2010 the company carried debt that was equivalent to 104% of its market cap, reducing that to less than 40% of its market cap this year. The company did this primarily through growth as opposed to drastically paying down its debt - its market cap nearly doubling during that time. Investors should not view this as a negative. When a company takes on debt it is doing so in an effort to grow. SandRidge has been very successful in this, nearly doubling its market cap in less than 3 years. This is a very successful company and provides a great opportunity for huge growth.
SandRidge made another very smart decision when it decided to focus on liquids a few years ago. Many companies like Chesapeake and Encana (NYSE: ECA) did not do this and maintained tremendous effort on gas. Encana has a similar debt to equity ratio, currently at 1.4, but its utter failure to move towards liquids until recently resulted in net losses of $1.5 billion in just the second quarter of 2012, and $3 billion year to date. Continental Resources (NYSE: CLR) is also carrying significant debt, with a debt to equity of 0.8. However, the firm's apparent track, which positions to beat its previous five year growth plan to triple production by 18 months, is helping offset concerns, as are its plans to become a "super independent," which among other things involves Continental maintaining its current debt picture while building cash flow through its current inventory. Pioneer Natural Resources (NYSE: PXD) is carrying a debt to equity ratio of 0.6. This is right below the industry average, though it is on the upswing after reductions throughout 2011. Although the majority of Pioneer's 2012 budget expenditures are funded through operating cash flow, it is now carrying $3 billion in net debt.
Compared to these competitors, SandRidge has a less attractive debt position than its optimistic reports tend to suggest and unfortunately, SandRidge's credit metrics are not improving quickly enough to impress investors. But the bottom line is the company is growing and growing fast. As it continues to grow its debt load becomes less and less and of a problem.
SandRidge has the potential for the most growth than any of these companies discussed above. The strategy of aggressive growth is already paying off, and the company will continue to see this going into 2013 and beyond. It is well positioned as liquids producer and has largely avoided problems that have plagued domestic gas producers. The company will see its stock increase a minimum of 150% in 2013. If the oil market stabilizes at prices slightly higher than the current $85 level, then the company could easily see a per share price of $15. This is a great stock for investors who want to see fast growth.
jordobivona has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, short JAN 2014 $15.00 puts 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.