As SandRidge Value Builds, It’s Time to Buy
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It seems as though everyone wants to join little SandRidge Energy (NYSE: SD) in the Mississippian Lime play this summer, with players large and small disclosing positions and plans for the future. American Petro-Hunter, Inc. is one of the newest entrants and is reporting excellent results from its South Oklahoma Project based on its first horizontal well, and plans to expand quickly with a new $10 million credit facility.
Even international players are jumping in, with British Magnolia Petroleum PLC receiving an operator’s license that frees it from dependence on former interest partners like Chesapeake Energy (NYSE: CHK). This is bad news for Chesapeake, which is depending on partners to supplement its lack of development cash, but good news for the play at large since it indicates plenty of room (and revenue) for players to grow. Magnolia is now operating two of its own wells and has a 100% working interest in two areas where it can now operate more wells on its own. Australian ventures Red Fork Energy Limited and World Oil Resources Ltd are also looking to get in on the Mississippian, an exchange on the oil heavy play while U.S. producers are drilling for Australia’s natural gas.
SandRidge a First Mover
As Tulsa World noted earlier this month, SandRidge focused attention on the Mississippian with its joint venture with Repsol YPF, a $1 billion deal announced in the last half of 2011 that others were sure to notice. The Mississippian play is far from new; when producers began re-entering the play the acreage bore remnants of vertical drilling abandoned decades ago as the wells ran dry. Only with the advent of efficient horizontal drilling did the Mississippian appear profitable again, and early movers included SandRidge and competitor Eagle Energy LLC. SandRidge is now the play’s biggest acreage holder with 1.7 million acres encompassing 8,000 possible drilling locations.
Oklahoma is bucking the national trend of declining retail sales and other poor economic results, and is crediting oil activity on the Mississippian as part of the reason why. According to SandRidge CEO Tom Ward, up to 100,000 new jobs will be coming to Oklahoma because of oil activity, with jobs peaking in 2014 to 2015 and remaining steady until 2020. Ward believes that SandRidge alone will create 25,000 of those jobs through its plans to drill 2,500 wells in northwest Oklahoma and western Kansas in the next three years. This optimistic growth track shows how SandRidge will continue to make the most of its opportunities now that it commands a decisive interest in one of the best U.S. onshore plays.
Outlook
Natural gas storage levels continue to increase in the U.S. despite cutbacks from many of the top producers. Recent news that Cheniere Energy (LNG) received approval from the U.S. Department of Energy for a plan to export liquid natural gas (LNG) from U.S. shores gave prices fresh support, which was badly needed. However, there are still hurdles for others with similar plans, since the Energy Information Administration’s analysis indicates that U.S. exports of natural gas would cause consumer prices to rise between 1% and 3%, and industrial prices to rise between 9% and 28%.
It is unclear why Cheniere received approval for its trains while others did not, but it could be that Cheniere’s plan for 1.1 bcfpd for exports would reduce the amount of natural gas in storage that is currently depressing prices but would be unlikely to cause the feared meteoric rise in natural gas prices on its own. SandRidge is now heavily oil weighted, but it has natural gas reserves that could be sent through Cheniere’s LNG facility, so it stands to benefit from the plan.
SandRidge’s high debt load is pushing its enterprise value far above its equity value, at $7.2 billion vs. $3.1 billion. At first glance this might make SandRidge less appealing, but it has acquired immense value by leveraging that debt. It has 15.7 years of reserves at current production and a net asset value of $38.8 billion as of the end of 2011, net of its various joint ventures and royalty trusts. Its highly centralized holdings also add to SandRidge’s attractiveness, since its operations are concentrated in Texas, Oklahoma and Kansas.
SandRidge’s Mississippian play represents the largest of its plays by far, even after a series of monetizations through spin-offs of the Mississippian Trusts I and II and joint ventures with Atinum Partners Co., Ltd and Repsol. In total these moves raised $2.4 billion for SandRidge, a portion of which was derived solely from the increased value of the acreage SandRidge holds. As it built its position on the Mississippian, SandRidge was paying approximately $215 per acre, the value of which is now estimated at $4,600 an acre; this jumps to $14,600 with the resource implied values included. SandRidge is considering future sales of up to 250,000 net acres, which could help it meet short term funding needs should it find itself in a debt situation approaching that of Chesapeake, which is unlikely but possible.
SandRidge is currently trading around $7, with a price to book of 2.3 and a forward price to earnings of 14.3. This compares favorably to its similarly focused peer, Kodiak Oil & Gas (NYSE: KOG), which operates in the Williston Basin. Kodiak is trading around $9 a share, with a price to book of 2.8 and a forward price to earnings of 9.3. Competitor Apache (NYSE: APA) is making moves to edge in on SandRidge and Kodiak’s territories. Apache is doing better, trading around $86 with a price to book of 1.2 and a forward price to earnings of 6.8.
At current prices I think that SandRidge is a reasonable buy, since it stands to grow exponentially in the next few quarters based on oil alone. Its second quarter earnings should give a better view of where the company is headed for this year compared to its estimates, and will be watched closely. SandRidge will release its second quarter results on August 2.
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