Is SandRidge Energy Great?

For every stock out there screaming "buy me," others simply give us a nudge and a nod. While all the attention might be focused on their five-star peers, we can sift through Motley Fool CAPS to find four-star stocks giving us the "high sign" that they're on the path to greatness. 

These opportunities -- including familiar names and beaten-down companies -- rank higher than most of the other 5,400 starred companies, and it pays to investigate their potential. This time out we'll take a look at oil and gas driller SandRidge Energy (NYSE: SD), perhaps a less obvious source for tomorrow's great buys.

SandRidge Energy snapshot

Source: FinViz.com. N/A = not applicable; SandRidge Energy doesn't pay a dividend. TTM = trailing 12 months.

Of course, just because the 180,000-member CAPS community has chosen this stock as one being on the road to greatness doesn't mean you should buy in, too. Due diligence is still required, but let's see why they think it might merit your attention.

In the sight of greatness
The movement away from dry natural gas and toward liquids and oil started as a trickle but quickly became a torrent. SandRidge was one of the early movers, seeing the coming shift as early as 2008 and hedging all of its natural gas production for two years as it set the stage for the switch to oil. It subsequently acquired oil-focused Arena Resources, but was soon joined by EOG Resources (EOG 0.59%), which sold off non-core natural gas assets, and Chesapeake Energy (CHKA.Q) in turning its attention to the more profitable liquids market.

While natural gas is off the record lows it hit earlier this year, the current $3.26 per million British thermal units it fetches is still represents the above-average inventories facing the industry. But cooler weather may have some players rethinking that strategy, as Baker Hughes (NYSE: BHI) reports that the natural gas rig count rose to 427 at the end of last week compared with 422 the week before, though that's still 53% below where it was a year ago. 

SandRidge isn't one company ready to go back. It reported record oil production in the second quarter and increased guidance for the full year, indicating production would be 54% higher than in 2011. Importantly for its results in the second half of this year, 81% of its oil is hedged above $100 a barrel; it currently trades below $90. 

Linn Energy (LINEQ) is directing more than half of its capex spending to the Granite Wash, where it's moving all of its gas rigs to oil and has hedged 100% of its production for the next five years. Kodiak Oil & Gas (NYSE: KOG) was able to smash through earnings expectations on the basis of its hedging activities last quarter.

While the hedging will likely benefit the drillers in the near term as oil prices remain below their highs, Goldman Sachs (NYSE: GS) predicts we're entering a secular period of stable pricing in the $90-a-barrel range that may pressure profits for drillers over the long haul. Like natural gas, drillers are extracting oil from previously hard-to-reach assets at ever greater rates, and while it's hard to imagine pricing getting pummeled like gas, even the investment bank has reined in how high it expects oil prices to go. It now anticipates Brent oil at most averaging $110 in 2013, down from its previous call of $130 a barrel. 

Regardless, SandRidge doesn't appear as though the range-bound pricing forecasts will hurt it all that much, but investors need to be wary of its debt load, and not everyone is comfortable with the excessive levels of compensation lavished on executives. Yet even conservative estimates of its net asset value are below its enterprise value, as fellow Fool Arjun Sreekumar points out, suggesting it remains an undervalued play.

A clear picture of growth
I've rated SandRidge to outperform the broad market averages on CAPS, believing it will surmount the few yellow flags that surround the driller. Making this bullish CAPScall holds me accountable for the bullish sentiments I've expressed, but tell me in the comments box below whether you think SandRidge Energy will be able to outrun the market.