One Promising Oil Stock to Watch

You've likely watched Chesapeake Energy (NYSE: CSK  ) and others develop an exciting bevy of shale plays. You should know, however, that Sandridge Energy (NYSE: SD  ) , in some ways a cousin of Chesapeake, has adopted an alternative approach to production -- one that provides a balance to the industry's expensive rush to the rocks.

In 2006, Oklahoma oilman Tom L. Ward joined Sandridge as CEO after leaving as president of Chesapeake, which he co-founded with its CEO, Aubrey McClendon, in 1989. Last year, Ward began a concerted movement toward higher-priced oil and away from gas. But unlike his former company, Sandridge has avoided the costly siren song of shale in favor of a tighter-fisted approach to finding and producing black gold.

As Ward said in his company's latest annual report, "Controlling costs is the key to success in our oil drilling program. By pursuing shallow, permeable carbonate reservoirs, we are able to drill wells quickly and at a low cost." His targets lie in the Permian Basin of West Texas and the horizontal Mississippian play of Oklahoma and Kansas.

Sandridge entered the long-producing Permian's Central Basin Platform through a 2009 acquisition from Forest Oil (NYSE: FST  ) , and later expanded its assets there by acquiring Arena Resources. The acquisitions cost the company a manageable total of $1.9 billion, a value that has since doubled. In the process, it added proved reserves of 149 million barrels of oil equivalent, or Boe, three-quarters of which was in oil.

With 800 wells expected to be drilled this year on the Permian acreage -- Sandridge managed 199 in the first quarter, despite uncooperative weather -- the play will receive the largest portion of the 2011 drilling budget. But as Ward points out, it only costs about $760,000 per copy to drill the 4,000- to 8,000-foot wells, which require just four to eight days, yield an average of 83,000 Boe, and achieve a 90% return.

The Mississippian play cost the company a paltry $200 per average lease, which Ward compares to acreage costs "10 to 100 times higher" for many of the "high-profile plays now prominent in our industry." He just may be referring to the $9,000 per Marcellus acre that Exco Resources (NYSE: XCO  ) coughed up not long ago, or to Marathon's (NYSE: MRO  ) recent $20,000 per-acre tab in the Eagle Ford.

The Mississippian wells go vertically for about 6,000 feet, and then turn horizontal for another 4,000. Each well, for which the company has 3,400 locations mapped out, costs about $2.7 million. All in all, the two oil plays enabled Sandridge to increase its production by 155% in 2010, with another 66% likely to be added this year.

Should gas prices get a sudden bump, Sandridge won't be caught flatfooted. It currently has 8,000 gas drilling targets in Oklahoma, Texas, and the Gulf of Mexico. Indeed, it's able to hasten drilling by using its own 31 rigs.

So while the shale plays provide intriguing upside, there's lots to be said for balancing your portfolio with a successful miser like Sandridge Energy. You can easily keep track of the company by adding its name to your version of my watchlist.

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Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days.

Fool contributor David Lee Smith doesn't have financial interests in any of the companies named in this article. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2011, at 3:00 PM, rjf53 wrote:

    David,

    You have your numbers wrong on the cost of a Missippian well they have gone up to 3 million.

    The other thing I would point out to any potential investors in SD is they have 80%ish of their oil hedged through 2013 between $87 & $93.

    B

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