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Will There Ever Be a Bottom for Sandridge Energy ?

August 11, 2010 | About:
Canadian Value

CanadianValue

210 followers


I’ve been sniffing around Sandridge Energy for a while now. The company carries a lot of debt but has effectively deleveraged by making a couple of expensive acquisitions of oil producing companies through the issuance of stock.

This has done two things for Sandridge:

1) Better matched cash flow with debt

2) Moved them away from a complete dependence on natural gas to being a company that has a nice balance between gas and oil



Of course the cost has been heavy dilution for existing shareholders.

The risk in this investment has gone down in a large way thanks to these transactions. But I have stayed away thus far mainly due to two things:

1) I expected shareholders of the recent Arena acquisition who received shares of Sandridge to start dumping them once they realized what had happened (this includes institutions for which SD is a small position)

2) I expected continued selling by SD shareholders who did not buy SD stock for exposure to oil and who are likely to be quite put out by the dilution.

So far my decision to stay away has been a good one. From a high of $60 in 2008 the shares now trade for $4.60 as they have been cut in half again in 2010.



There are several things to like about the company going forward:

1) There will be rapid growth in oil production as SD puts rigs to work on the acquired properties

2) Tom Ward CEO has a lot of skin in the game

3) They are very well hedged on the oil side which will provide predictable cash flow (they just lifted their gas hedges)

4) They are selling non-producing, non-core properties which will help the balance sheet by up to $300mil in the next year

5) They have some large exploration targets that they are drilling into currently

6) They are a low cost conventional natural gas producer

7) You get a fairly low risk flyer (post acquisitions) on a return to higher natural gas prices



I’ve started nibbling today. But as my Aunt Alice and Uncle Hector always used to say “It pays to be patient”. So I will build my position slowly.



About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 4.5/5 (13 votes)

Comments

swissprivatebanker
Swissprivatebanker - 3 years ago
The obwervation made in the seven points make sense and I basically agree.

Having said that I have a serious problem with the CEO - Tom Ward. SD being an E&P company is supposed to be run in a lean and mean manner as one would expect from a chap of the frugal sort like Tom presented himself in the media downtown Oklahoma City.

I followed the company closely since Malone Mitchell III handed over his reins to Tom some 4 years ago. And what I have seen so far does not make pleasent reading for an investor. The balance sheet is way over-leveraged, the overhead costs are out of bounds, and the share price has pretty much lost 90+ percent from its peak in mid 2008.

What is going on?? I tell you: Tom Ward has taken his eyes off the ball. I always thought that E&P companies of the size of SD should have a corporate head office that is mean, shabby, even dirty from oily boots but efficient as Swiss Clock work. But what I see happenin down-town Oklahoma City is what proves my point. Tom Ward has embarked on a Real Estate venture that that has taken his eyes off the ball. I put this down to vanity in support of Tom's larger than life Ego.

Tom, get back to your real job, focus on creating proper shareholder value. Your "proud" postulating the 50% return on wells must now have a direct positive bearing on the share price. Only if you turn back to your roots as an E&P CEO and drop the ego trip into Real Estate, then I am sure we as shareholders will see some proper upturn of the value of our shares.

Your predecessor's company has four-folded his share price over the last 18 months or so whilst yours have gone to the proverbial "hell". Shareholders expect better than that I say.

Yours Truly

Swissprivatebanker
CanadianValue
CanadianValue - 3 years ago


Swissprivatebanker,

Great comments. Couldn't agree more.

What they do have though are assets that have a value. And sooner or later the price has to be attractive enough.

Thanks for sharing.
jim.falbe
Jim.falbe - 3 years ago


The company is on the verge of bankruptcy. And there is no equity left for shareholders. There is no way that this company is a value play, there is just too much debt. The real question is how much the bonds are trading for.
jrhubbard
Jrhubbard - 3 years ago
While you can make a business case for diversification, keep in mind that they chose a time to diversify away from natural gas when the ratio of natural gas to oil prices is significantly outlying, historically. There could be a secular, fundamental shift that has taken place that will keep the ratio skewed, but how confident is anyone that this shift has taken place? I would suggest that if Sandridge "knows" something, there are plenty of smart CEO's in the energy industry whose actions show ignorance. I am not convinced and in fact am quite skeptical.

In essence, it seems quite possible that Sandridge just gave away a huge part of their business (complete with its temporarily depressed revenue and thus profit and valuation) to purchase a business with temporarily inflated revenue and thus profit and valuation.

Gangstarr
Gangstarr - 3 years ago


More insider buying of SD at today's prices. SD's Directors don't seem to think the company is going bankrupt.
superguru
Superguru - 3 years ago
Wally Weitz also bought SD. Also Insider buys are quite significant in size.
aliceconnector
Aliceconnector - 3 years ago
I like the humor and the fact you now have a 2nd position.

Let me comment on the comments first.

Swissprivatebanker is right on the mark.

Let me tell you what i think happened, he expanded into ng properties like crazy at the height of the market. Then ng prices plumented form 14 to 2 recovering recently to 4. There is no end in site to the oversupply.

Sandridge has amassed 3.0 b in debt and no equity due to one time write offs of property and crazy sec rules that made them use 3.79 for ng prices for valuation. Well we are close to 3.79 now and sd has no ng hedges for 2011. So how can sandridge service its debt and maximize return for every cap ex dollar..answer sell oil instead. They bought oily ard for stock and ard holders have sold their sd stock.

yes , sd will have 70 % revenue coming from oil but they are currently spending more on cap ex than they are bring in. So its imperative ward gets as frugal as possible, ie

You dont pizz away 100 m on a fancy building when you are on the ropes

the 2nd issue i have with ward is , he has to sell off assets that he cant get too or find a partner to develop the west texas gas assets. He has a million acres lets say valued at 5 k per acre 5 billion in property collecting dust. He cant bring himself to monetizing some of the assets. The author of this article knows something about monetization

3. Jim no they are not at the verge of bankrupcy. Their bonds are trading at par. But they are overlevered and should pay down debt by 1.0 b. The market would applaud, the stock would double,

Companies that are overlevered become vulnerable to any bad news. My Aunt Alice would say the stock could be cut in half with bad news

In a low commodity marked , the lowest cost producers will be the winners.

As an aside, OXy likes to partner with sd. They, OXY, have put up 1.0 b dollars to build the century Plant to process CO2 rich ng that must be treated before sale (sour gas). SD provides the untreated gas and they get the methane, oxy gets the c02 for injection into their oil fields. SD short term plans is redirecting exploration capital to oil. That leaves the plant unfilled and OXY wanting more

OXY is a logical partner for SD. Ward should be having meetings with them to share the assets oil and ng for mutual interest.

Oxy could buy the thing for 6 b, 3 b for debt 3 b for equity. Sd thros of 700 to 800 m a year thats not a bad return for oxy plus they would get their hands on a millin acres of oily and ng assets

So i agree with the author, good value, if ward gets smart and gets frugal and makes some jv's. I wish i could run this company and turn it around
swissprivatebanker
Swissprivatebanker - 3 years ago
Tom Ward is clearly out of step with reality. His balance sheet is lobsided. And he is seriously exposed.

I have known his predecessor since the early 90ies and I admired him for being the most efficient low-cost producer in the business. No fancy office real estate but rather cosy shak North of the I-40 in Amarillo followed by a cheap, ready to be knocked down office block down-town. Overheads were as low as they could be but the output was admirable.

Here we have a man at the helm who thinks that "Size matters".

Message to Tom:

No, Tom what matters is Shareholder Value and you have destroyed a few billions of it. The balance sheet is out of kilter in a big way and that is directly reflected in the share price. Your flexibility to make enterpreneurial decisions have been castrated.

What is needed is a re-sizing of the company. Get rid of a large junk of WT and reduce the debt by 50% I say. And then get rid of your idea of Down-Town Real Estate palace building. Remember what happened to the French Royalty and many others. Take action so as the people, your bosses in the persons and institutions being the shareholders do not have to resort to such drastic action.

It is in your hands to rectify mistakes of the past three years - inaction will be brutally dealt with. That is the way Capital works.

Yours Truly

Your SD shareholder

LwC
LwC - 3 years ago
aliceconnector@yahoo.com wrote in a message posted at 7:39PM on the 12th:

"3. Jim no they are not at the verge of bankrupcy. Their bonds are trading at par. But they are overlevered and should pay down debt by 1.0 b. The market would applaud, the stock would double,

Companies that are overlevered become vulnerable to any bad news. My Aunt Alice would say the stock could be cut in half with bad news"

Hmm…is that the same "Aunt Alice" that CanadianValue, the author of the above "article", claimed he received advice from in the message that began this thread?

CanadianValue wrote above at 2:53PM on the 11th: [i]"I’ve started nibbling today. But as my Aunt Alice and Uncle Hector always used to say “It pays to be patient”. So I will build my position slowly."
Adib Motiwala
Adib Motiwala - 3 years ago
Way too levered for this to be a value play. Much better risk reward companies out there.
CMW
CMW - 3 years ago
"flyer" - the only word in this thesis which makes any sense. Not a bad one as flyers go, but that's what it is.
superguru
Superguru - 3 years ago
Now Prem Watsa is reducing SD.
superguru
Superguru - 3 years ago
Question to ask will be for SD - is there a possibility that some one may buy them out? Are they attractive enough at these prices and debt.

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