Why SandRidge Energy Is Not a Dud

Friend and Fool blogger Robert Zimmerman recently wrote a post entitled, "A Proven Winner, a Likely Winner and a Dud." While I agree wholeheartedly with his two winners, I have some issues with his calling SandRidge Energy (NYSE: SD  ) a dud. Let's drill down into his thesis and why I think he, and investors like him, are letting the company's spotty past cloud its future potential.

Topping the list of criticisms is CEO Tom Ward and the eerily similar "shenanigans" (as Bob calls them) to Chesapeake Energy's (NYSE: CHK  ) CEO Aubrey McClendon. Now, I'll be quite honest with you, I have my questions, too, and after hearing about McClendon's early retirement I wondered if Ward might be next. SandRidge, with Ward at the helm, has made many of the same mistakes as Chesapeake in taking on too much debt and betting that borrowed money too heavily on a volatile commodity.  

Both men have profited wildly, and in some cases questionably. It is hard to justify how Chesapeake's Founder's Well Program and SandRidge's conflicted related-party transactions were completely aligned with shareholders. Meanwhile, investors have suffered as shares of both companies have crumbled.

However, the value in the company goes much deeper than management's ability to destroy it. Bob points out that the all-in strategy to develop the Mississippian Lime will likely be the wrong one. I don't think the numbers would agree with that.

Sure, given the recently reported poor results from SandRidge's two royalty trusts, SandRidge Mississippian Trust I (NYSE: SDT  ) and SandRidge Mississippian Trust II (NYSE: SDR  )  there is reason to be concerned. It's hard to spin the numbers as SDT's sales volumes increased just 1% due to higher natural gas production and slightly lower oil production. This led SDT to produce a 10% lower distribution per unit than was targeted. Over at SDR, sales decreased 7% due to lower oil production along with slightly higher natural gas production. That caused SDR to produce an 11% lower distribution per unit than was targeted. The key takeaway on both, oil volumes were down and gas was up, not exactly the mix you want to see on what's supposed to be an oil-levered play. However, it is still very early in the play and, more importantly, the key metrics being reported by SandRidge are a bit more positive.

This is a company that delivered 20% reserve growth, with its oil reserves growing even faster at 35%. Further, its proved reserve replacement was up 454%. Reserves are the lifeblood of an oil and gas company, so growth here is important. Production was also up and the company expects its Mississippian Lime production to jump 72% in 2013. If you can find a company growing both production and reserves, then you've found a potential winner, even better if that growth is in oil and liquids. 

This is a company that's also improving its financial metrics in that core Mississippian Lime play. Drilling and completion costs dropped by 14%, or half a million dollars per well, over the year. A lot of this was due to a 20% decrease in spud-to-spud cycle time as the company has the best spud-to-first sales in its class. These are really important metrics for improving margins and cash flow; it's something you really want to see from an energy investment.

Now, I'm not saying that SandRidge is the best energy investment out there, but the company really could surprise investors. If the Mississippian turns out to be even halfway decent SandRidge could have multibagger potential because the expectations are so low. SandRidge is really an intriguing story and one worth a deeper look.

SandRidge is halfway through its ambitious three-year plan to profitability and the future looks bright. If you are unsure about the future of this emerging oil and gas junior, and are looking to find out more about its strengths and weaknesses, you should view this brand-new premium report detailing SandRidge's game plan and what to expect from the company going forward. To get started -- click here!


Read/Post Comments (13) | Recommend This Article (7)

Comments from our Foolish Readers

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 March 05, 2013, at 3:38 PM, 1golfdoc wrote:

    as a shareholder of SD, I believe the only way to move ahead, is for Ward and the BOD to be removed. too much similarity to CHK management.

  • Report this Comment On March 05, 2013, at 3:52 PM, TMFmd19 wrote:

    @1golfdoc - It certainly wouldn't hurt and in my opinion is likely given what happened at CHK

  • Report this Comment On March 05, 2013, at 4:03 PM, jwoneil356 wrote:

    Your commentary runs along similar themed comments over the years. Wall street does not believe in Ward's ever changing plans. Witness today's market action. Dow all time high, SD near all time lows. Perhaps TPG can unlock share holder value through new management or a company sale. The current old dogs are out of tricks. IMO

  • Report this Comment On March 05, 2013, at 8:13 PM, TylerEnergy wrote:

    Ward and crew are the reason SD is making the oil and gas growth it is. Seems like if you don't do things the New York way then they want to "take their football and go home." Amazing how some only want to make money on others hard work.Sd in this case.

    Oil and gas drilling takes guts and risk. If you can't do that then get out. The new board that is requested doesn't know oil and gas, nor have any experience in a company like SD. Either play the O&G game or go to the sidelines.

  • Report this Comment On March 06, 2013, at 5:15 PM, rjf53 wrote:

    "Drilling and completion costs dropped by 14%, or half a million dollars per well, over the year."

    Sorry Matt I heard Tom make this claim but I'm afraid he (and you) have some explaining to do.

    Others might not keep past presentations but I do.

    Mississippian well costs as reprted by the company.

    April 2011 2.7m

    Sept. 2011 3.0m

    May 2012 3.2m

    Aug. 2012 3.2

    So they are now reporting 3.1ish and are claiming to have reduced it by a half a million?

    How's that work?

    B

  • Report this Comment On March 06, 2013, at 6:51 PM, TMFmd19 wrote:

    @rjf53 - Check out slide 4 from the last earnings release: http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9M...

    -Let me know if this lines up or not with what you're thinking.

    Matt

  • Report this Comment On March 06, 2013, at 7:07 PM, mattryan wrote:

    As a shareholder of SD, I would like to vote with TPG and replace the current board. I belive the company has promising assets but current management does not have shareholder value in line with their own. Anybody know when this vote will take placr?

  • Report this Comment On March 06, 2013, at 7:31 PM, rjf53 wrote:

    Matt,

    I see what they claim now, but it has no relationship to what they reported last year. Just to be sure I went back and opened up a few more presentations.

    On Feb 6, 2012 their Credit Suisse presentation showed a cost of 3.0m then on Feb 27th at their 2012 Analyst Day Presentation they raised it to 3.2m. In both cases it was noted that their cost included infrastructure Capex.

    So if Q1 2012 did indeed come in at 3.6m then these guys were either lying, clueless as to what was going on in the field, or they drilled a bunch of 4.0m wells in March.

    I'd be glad to email you the original pdfs if you doubt what I am saying.

    B

  • Report this Comment On March 07, 2013, at 9:02 AM, TMFmd19 wrote:
  • Report this Comment On March 07, 2013, at 9:09 AM, TMFmd19 wrote:

    @rjf53 - I don't doubt what you are saying, there's a quote I love, "if you torture the data long enough it will confess to anything." It wouldn't surprise me if that's what is going on (not just at SD, but its pretty common). You take the data that best fits what you want it to say and that's what you use.

    If you wouldn't mind though send me those PDF's, I'd like to dig into that one a bit deeper. mdilallo@fool.com Thanks.

  • Report this Comment On March 07, 2013, at 12:29 PM, rjf53 wrote:

    "If you wouldn't mind though send me those PDF's"

    Done!

    B

  • Report this Comment On March 19, 2013, at 5:16 PM, snolsn wrote:

    i have not got an answer to my question.... why hasn't the sec done anything about this situation...my grandchilds college money was lost to this company....i asked oppenheimer to put this money into a safe investment to pay for his college...now he has to leave school.,,,i believe it was in june of 2012 when my investor at oppenheimer assured me that this was a safe investment...now its gone....i am sure that the phonecall i had with oppenheimer can still be listened to... i have not even received an explanation except that they trusted this company..something should be done about these firms... sdr and per were already in trouble a the time

  • Report this Comment On March 27, 2013, at 11:24 AM, snolsn wrote:

    as to my letter above...oppenhemer has never called me about the way their investor who assured me that this was safe investment isn't liable........after i myself finally looked into this company, my investor insisted that he still trusted his researcher. thats why i am so angry. i will take this further. if anyone is ready to sue oppenheimer please contact me....this investment was in trouble before it was sold to me.....i will not stop until i sue for this

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