SandRidge Energy will Soar on New Acquisitions, Reserves
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
SandRidge Energy is a mid-size oil and gas company with a market cap of $3 billion, based in Oklahoma, and involved in exploration, production and supply. I want to take a look at current events effecting the oil sector , examine SandRidge Energy (NYSE: SD) and compare them to some competitors in the energy sector, and then explain where SandRidge will be the future.
SandRidge stock has traded in a range of $5 to $13 a share over the past year. The 52 week high was last summer and corresponds to seasonal cycles and the run up of oil in the spring and summer when people in the United States drive more. Oil has steadily climbed to over $105 a barrel so now is the time to get more oil to market. SandRidge is using the higher prices to acquire more reserves and leverage funding for the company. SandRidge has increased the borrowing base of the company by a $750 million offering of senior notes. According to the company, these funds will go to pay for the acquisition of Dynamic Offshore Resources which will give SandRidge more proven reserves and open up more shallow (less than 300 feet) depth oil leases and wells in the Gulf of Mexico.
ConocoPhillips (NYSE: COP) recently used higher oil prices just like SandRidge to leverage more oil reserves and sell some big assets. For example, Conoco is spinning off Phillips and its retail outlets while SandRidge sold part of its reserves in Western Kansas for $1billion. It's easier to make such large moves when cash flow is good and oil markets are up. ConocoPhillips, like SandRidge, added energy reserves at a joint venture in Australia. Both stock prices for ConocoPhillips and SandRidge tend to correlate with West Texas crude oil prices. Both companies could see a modest boost to their bottom lines based on seasonally strong crude prices over the summer. In particular, warmer markets and especially countries dependent on oil for heating and cooling (like Japan post-Fukushima) see a spike in demand. With relatively stable worldwide crude production, prices tend to increase when demand rises.
Although higher oil prices have helped oil companies, higher prices have also made oil companies an easy target for politicians because their constituents are angry over high prices at the gas pump. The Obama administration definitely has exploited the profits being made by oil companies from these higher prices. In fact, Obama tried to convince Congress to repeal the tax breaks for oil companies. Obama cited in a speech that Exxon Mobil (NYSE: XOM) made $4.7 million per hour in profits and the three biggest oil companies made a combined $80 billion last year. The president does not think the oil companies need exploration tax breaks.
The problem is, according to the Congressional Research Service, you could see higher gas pump prices and more foreign oil imports from the tax break being repealed. The tax breaks help with exploration costs; therefore, companies might cut back exploration which would keep oil from getting to market and raise prices. A large company like Exxon -Mobil, with a market cap of $399 billion, could absorb the lost tax breaks; but smaller companies like SandRidge, with a market cap of $3billion, could be hurt. Three billion dollars may sound like a lot, but drilling rigs, test wells, and other equipment are not cheap. SandRidge has to pay the same prices for oil testing equipment as Exxon Mobil. These facts seem to be lost on some members of Congress and the President.
Another competitor of SandRidge Energy in the oil and gas sector is Devon Energy (NYSE: DVN). In fact, Devon drills in the same West Texas, Oklahoma, and the Gulf Coast areas that SandRidge drills. Devon Energy's stock rebounded from its October lows and recently settled at 71.00. The Devon Energy stock chart is seasonal and corresponds with the United States annual transportation and driving periods. Devon, like SandRidge, went on a selling spree as oil prices rose. They got rid of $9 billion in the Gulf of Mexico holdings and sold assets in Brazil in 2011 totaling over $3 billion.
Devon has a lot of cash reserves, but unlike SandRidge, has not been involved in any mergers or acquisitions recently. Devon is a more cautious company compared to SandRidge and moves much slower in acquiring companies. This sometimes causes investors to overlook Devon or even rate the stock lower than a company like SandRidge. Devon Energy's CEO, John Richels, said just last week Devon would not be buying any companies and would be putting more of its money into exploration. I like the extra cash, and I can live with slow and cautious. Devon Energy, in my opinion, is not reacting to the investment crowd or bowing to pressure. SandRidge is still a good stock, but I like Devon more.
Chesapeake (NYSE: CHK) is not as versatile as SandRidge, which explores for both oil and gas. Currently, Chesapeake is having a tough time with depressed natural gas prices which SandRidge has not had to deal with as much. SandRidge has concentrated on oil production until natural gas returns to more normal levels. Chesapeake has been using new technology, such as the fracking method, to reach undrillable areas and remove the gas. However, some scientists have questioned the ecological cost of fracking and are doing studies to see if there's damage to the water supply.
Chesapeake and SandRidge both may have to rethink using this method of drilling. This depends on what the science determines and what our government decides to do. There may be problems with litigation later if the fracking is outlawed, and SandRidge and Chesapeake could have similar liabilities. SandRidge is in a better situation than Chesapeake because it has income from oil. Chesapeake's stock will stay under pressure until the gas market goes back up. SandRidge is my stock choice rather than Chesapeake for these reasons.
So, where does SandRidge go from here? SandRidge will continue to pick up small companies that add value and make operational sense. They will continue to add oil and gas reserves, especially offshore in the Gulf of Mexico. Their current reserves and land leases as well as their sturdy balance sheet makes them an attractive merger target. SandRidge may be a candidate for a take over in the future even if they don't want to merge because of the small market cap. The chance of takeover by a larger company goes down the bigger their market cap gets. Therefore, growth in all aspects of the company will be something that the company will aspire to in the next decade.
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