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Prem Watsa Reduces Holdings in SandRidge Energy

July 21, 2011 | About:
Prem Watsa holds the honor of being branded the "Canadian Warren Buffet," and a simple glance at his performance over the past quarter century explains why. As the founder, chairman, and chief executive of Fairfax Financial Holdings Limited, Watsa has earned a 25-year cumulative return of over 24,000%, with his company book value per share compounding by almost 25% per year. In the past 10 years, his cumulative return of 154.6% easily outperformed the 16.4% of the S&P 500. Watsa has maintained a strategy of purchasing positions in strong companies with superb long-term track records and holding them for the long term. In 2007 and 2008, Fairfax delivered strong results due to large gains in equity hedges and credit default swaps that were based on Watsa's correct appraisal of the economy before the Great Recession. Recently, he reduced his holdings in SandRidge Energy (SD) by 62.75%.

Holding History

Watsa first bought into SandRidge Energy when the stock was in the midst of a plunge from its peak price of $65. He first bought 280,000 shares at an average price of $38.42 in the third quarter of 2008 and then added another 601,600 shares at an average price of $9.17 in the next quarter. In the second quarter of 2009, he bought 359,300 shares at an average price of $9.35 that he sold the next quarter for an average gain of $1.66 per share, a return of 18%.

In the fourth quarter of 2009, he added 5,645,000 shares at an average price of $10.37, drastically increasing his holdings in the company. He would sell 2.6 million of those shares at a price of $6.83, a loss of 34%. As prices continued to decline, Watsa then added another whopping 17,381,000 shares for an average price of $5.84, making a sizeable impact to his portfolio. His most recent move was to reduce his holdings by 62.75% at a price of $11.24, leaving him now with 7,937,600 shares. His sale nets him 92.5% return on his previous 17 million share purchase.

SandRidge Energy (SD)

SandRidge Energy Inc. is an oil and natural gas company headquartered in Oklahoma City with a principal focus on exploration and production. SandRidge also owns and operates drilling rigs and a related oil field services business operating under the Lariat Services Inc. brand name; gas gathering, marketing and processing facilities; and, through its subsidiary, PetroSource Energy Company CO2 treating and transportation facilities and tertiary oil recovery operations. SandRidge focuses its exploration and production activities in West Texas, the Cotton Valley Trend in East Texas and the Gulf Coast. SandRidge also owns oil and gas properties in the Piceance Basin of Colorado, the Gulf of Mexico and the Anadarko and Arkoma Basins.

According to their quarterly statements for the three months ended March 31, revenues increased by 48% year-over-year to $312.8 million, driven largely by a $100 million increase in oil and natural gas revenues. However, expenses increased 327%, from $121.8 million last year to $520.6 million this quarter, mainly as a result of losses on derivative contracts. Net income was a $302 loss, worse than last year's $28.4 million gain and last quarter's $185 million loss. Free cash flow was a loss of $192 million, worse than last year's loss of $37.4 million. Free cash flow has been negative for each of the past five quarters as well as every fiscal year since the company began trading publicly.

The stock is currently trading with a P/S ratio of 4.9, near its historical high, though quarterly sales per share have declined since the company first went public to $0.76. It also trades with a P/B ratio of 3.7, lower than its recent average, and book value per share is positive at $3.02 for the third straight quarter after six quarters of negative book value per share.

According to Tom L. Ward, chairman and CEO: "We continue to execute our oil-directed plan by focusing efforts in two core areas of development where we are able to realize wellhead rates of return exceeding 100%. We are the most active driller in the Central Basin Platform and the Mississippian horizontal play, capitalizing on our expertise in shallow, conventional carbonate reservoirs to execute our development plan and strategically add to our leasehold positions in these areas. Production growth is matching our expectations in spite of weather-related interruptions. Finally, with the success of our asset monetizations to date, we are now focused on funding our 2012 capital spending program."

The company upsized and closed the initial public offering of SandRidge Mississippian Trust I at the top of their expected price range, earning approximately $334 million on April 12, 2011. They also closed sale of non-core assets in New Mexico, earning approximately $199 million on April 1, 2011.

Recent Headlines

On 5/25/2011, SandRidge announced the filing of a Registration statement with the Securities and Exchange Commission relating to the initial public offering of approximately $600 million for SandRidge Permian Trust, a newly formed Delaware Trust.

On 6/10/2011, SandRidge announced the appointment of David C. Lawler to the position of executive vice president of operations. He previously served as CEO and president of PostRock Energy Corporation.

This is part of GuruFocus Real Time Picks report, which reports the stock trades of Gurus within the last few days. For more information, go to Real Time Picks.

Rating: 3.0/5 (15 votes)


Superguru - 6 years ago    Report SPAM
I somehow remember Prem owns convertible, preferred and/or debt in SD too.
Superguru - 6 years ago    Report SPAM
SD up 7.5% on news of Prem Watsa selling !!!!

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GuruFocus has detected 3 Warning Signs with SandRidge Energy Inc $SD.
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