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.
