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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at SandRidge Energy (NYSE: SD ) today and see why you might want to buy, sell, or hold it.
The company, which is involved in the exploration, development, and production of oil and gas properties, sports a market capitalization of about $2.8 billion. It was brought public in 2006 by CEO Tom Ward, who had been the COO of Chesapeake Energy.
Agility and management smarts are some of SandRidge's strengths. It began by focusing on natural gas, for example, but as the price of gas tumbled, management shifted its focus toward oil and hedging prices for its natural gas production. Had the company not done so, it would have struggled mightily, as many natural-gas-focused companies have. In that arena, Ultra Petroleum (NYSE: UPL ) has managed to profit mainly because of its low-cost production, but even it has seen its shares take a big hit, down 48% over the past year, and it has cut back on investments and production. SandRidge's shift was a smart one.
SandRidge's business strategy is another big plus, as it aims to buy strong assets at very low prices. It paid only about $200 per acre for two million acres in the Mississippian Lime oil field, for example. It was an early entrant there and stands to benefit from more traditional and less risky oil extraction there than competitors such as Kodiak Oil & Gas (NYSE: KOG ) , which are involved in fracking in locations such as the Bakken fields. Kodiak has been making a lot of capital expenditures lately, investing in its future. But it faces headwinds, such as slowing economic growth in key markets such as Europe and Asia.
How SandRidge does business is also impressive. After spending $400 million for 2 million acres in the Mississippian, for example, it collected the huge sum of $2.3 billion via joint ventures and royalty trusts relating to just 550,000 acres of the land. The royalty trusts include the SandRidge Mississippian Trust I (NYSE: SDT ) and the SandRidge Mississippian Trust II (NYSE: SDR ) .
Then there are the company's big goals, such as doubling its oil production and tripling its earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of 2014. Shareholders could benefit considerably, if the goals are met.
Some see the stock today as representing a good value. Its recent price-to-earnings (P/E) ratio was 21, compared to its five-year average of 31. Its P/E to growth ratio (PEG) was recently an appealing 0.3.
The SandRidge story isn't all unicorns and rainbows, though. For one thing, it carries a lot of debt, with its free cash flow negative and growing in the wrong direction. Management is aiming to take a big bite out of its debt problem over the coming few years.
While revenue has been growing, albeit in a lumpy fashion, earnings have been a bit scattered between gains and loses.
Dilution is another concern. As fiscal 2007, concluded, SandRidge sported about 110 million shares. That has risen to about 407 million lately. Issuing more shares can help fuel purchases and pay down debt, but it also shrinks the value of existing shares.
If you're interested in collecting income from your investments, that's another reason to scratch SandRidge off your list -- it pays no dividend.
Finally, remember that its founder and CEO hails from Chesapeake Energy, which has become the poster child of abysmal corporate governance. It might be taken as a good sign that Tom Ward jumped ship, but one might also wonder whether any bad habits from Chesapeake have traveled to SandRidge. Countering that, to some degree, is the fact that more than 12% of the company's shares outstanding are held by insiders. That's generally a very good thing, as their interests are thus aligned with those of shareholders. (Chesapeake has substantial insider ownership, as well.)
Given the reasons to buy or sell SandRidge, it's not unreasonable to decide to just hold off, at least for a while. You might wait for it to make a significant dent in paying down its debt. You might wait for higher oil and/or gas prices, too, or for earnings to be growing more reliably at a brisk clip. More evidence of successful cost-cutting and more money coming in than going out would also be welcome.
I think I'll be holding off on SandRidge, at least for now. It may well perform spectacularly in the coming years, but there are plenty of compelling stocks out there with more certain futures. Still, everyone's investment calculations are different; do your own digging and see what you think.
While SandRidge's fortunes are closely tied to oil prices, there are energy stocks out there that are much more resilient to changes in the price of oil. Learn about one such contender that seems ready to soar in The Motley Fool's special free report: "The Only Energy Stock You'll Ever Need."