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Last week, oil dropped below $90 per barrel, causing prices to drop across the board in the energy sector. This drop in oil, along with an earnings miss, drove SandRidge Energy (NYSE: SD ) 30% lower over the course of two days, from $11.17 on Aug. 3 to $7.79 on Aug. 5. Shares could certainly continue to plummet, given the market's uncertainty these days, but the company's big drop still made me want to take a closer look.
As of Friday's close, SandRidge had a diluted market cap of $3.9 billion. In addition, the company also has net debt of $2.9 billion and preferred stock outstanding of $765 million. Its PV-10, or net present value of proved reserves, was $4.5 billion as of the end of 2010. That's more than SandRidge's market cap, although it does not factor in this company's big debt.
Taking a deeper look
SandRidge's main assets are 900,000 net acres in the Mississippian and more than 200,000 net acres in the Central Basin Platform of the Permian Basin. Currently, SandRidge has 16 rigs operating in the Permian and 14 rigs operating in the Mississippian. With 100% of its rigs dedicated to drilling for oil, SandRidge is in rare company along with Concho Resources (NYSE: CXO ) , Hess Corporation (NYSE: HES ) , and Whiting Petroleum (NYSE: WLL ) .
By the end of 2014, management's goals are to achieve EBITDA of $2 billion, to raise production annually by double digits, to fund capital expenditures with its cash flow, and to achieve debt-to-EBITDA of better than 2:1. These are all ambitious goals. For perspective, SandRidge's EBITDA in 2010 was $357 million, which is a far cry from its 2014 goal of $2 billion.
Looking at its cash flow statement, it's quite clear that SandRidge plans to meet these goals by ramping up drilling and production. Capital expenditures have outstripped operating cash flow by a very large margin in recent years and this trend looks to continue unabated.
I'm quite fond of SandRidge's shift to oil production. In fact, this is one of the main reasons I own Chesapeake Energy (NYSE: CHK ) , which has itself announced its plans to ramp up production out of its liquids-rich acreage. The big difference here is that Chesapeake is already solidly profitable, while SandRidge is still in the process of getting there. As such, investors might enjoy greater upside by betting on SandRidge's still-unknown potential.
One big question mark
The company has already announced plans for $1.8 billion in capital spending for 2011 and 2012. This compares to trailing cash from operations of only $393 million. Recent years' aggressive drilling program should lead to increased production and operating cash flow, but it's hard to imagine that cash will accumulate quickly enough to meet SandRidge's spending plans.
Thus, the company will likely issue more debt and common stock to make up the difference. While SandRidge's ramp-up has been quite impressive, it's uncertain how much dilution awaits investors in the company's future. Investors looking for more visibility ahead might consider more established onshore exploration and production outfits like Devon Energy (NYSE: DVN ) or EOG Resources (NYSE: EOG ) .
Foolish bottom line
The recent hit to SandRidge shares has put it solidly on my radar. SandRidge is making bold moves to become a major producer of onshore oil and analysts are expecting the company to be profitable this year and next. Since this company is on the high-risk end of the spectrum, it will likely offer a wild ride to investors who decide to buy in. I've yet to take the plunge, but I'll become more interested if the stock continues its recent slide.
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