1 Energy Stock I'm Buying This June

A few days ago I participated in the Motley Fool's analyst roundtable and selected the one stock that I thought would be a great buy this month. That stock, SandRidge Energy (NYSE: SD  ) is one that I've been following closely over the past year. Based on what I've seen in the company over that time, I've decided to take my own advice this month and will be adding it to my portfolio as soon as trading rules allow.

I've boiled my SandRidge thesis down to three key points which when taken together lead me to believe that SandRidge is a special opportunity and that the time to buy is now.

The focused opportunity
SandRidge's asset portfolio has undergone several changes over the past few years. Today, the bulk of its portfolio consists of its core Mississippi Lime acreage and some shallow Gulf of Mexico operations. While the play isn't as oily as the company had hoped, the potential is there for it to be developed into an exceptional asset generating outstanding rates of return.

What I like here is that SandRidge is getting better at finding the oily parts of the play. Last quarter its Mississippian oil production rose from a mix of 45% oil and natural gas liquids to 46%, which might not sound like much. However, when 80% of the company's Mississippian cash flow comes from oil any improvement in its production mix hits the bottom line. Overall, as the industry develops the play, it's finding the oilier sweet spot.

Looking at last quarter's numbers Devon Energy (NYSE: DVN  ) and Chesapeake Energy (NYSE: CHK  ) both reported solid numbers from the play. Devon was able to bring on 24 wells, and several had initial 30-day production rates between 600 and 1,000 barrels of oil equivalent per day. Meanwhile, Chesapeake's top well in the play achieved a peak rate of 1,485 barrels of oil per day. These numbers, as well as those reported by SandRidge, show the play's potential. 

Source: SandRidge Energy 

The improved fundamentals
When you combine the potential of the Mississippian with SandRidge's own improving fundamentals it speaks to a compelling opportunity. In almost every metric SandRidge is improving. For example, oil as a percentage of its production is increasing, its well costs are declining, and the leverage ratio has been cut substantially. The company has shifted from growth at all costs, to a more measurable and prudent growth rate. That being said, growth is still exceptional with double-digit production growth overall, which is being driven by 60% growth from the Mississippi Lime.

SandRidge still has a long way to go, but I like the direction it is heading. I also like the fact that the company's capital plans are fully funded through then end of next year. It has several options at its disposal to extend its funding through 2015. Compare this to Chesapeake Energy which still has a billion-dollar gap to bridge this year. SandRidge is in its best financial position in years which removes a big risk as it invests to grow production.

The catalyst
For me, the two points above would be a compelling enough to buy shares of SandRidge. However, there is one looming catalyst which, in my opinion, means investors should buy sooner rather than later. You see, this catalyst comes with a very specific timetable.

The newly expanded board of directors has until June 30 to determine if CEO Tom Ward stays with the company. My gut feeling tells me that Ward will be joining the former Chesapeake Energy CEO in an early retirement. That could be the outcome of the board's decision at the end of the month, or if the board allows him to say, he might not stay long, as a majority of the board will then be made up of nominees from activist investors pushing for change.

So far, the activists have been, well, active. We've already seen SandRidge begin to focus its operations, cut its spending and give up on some of its overly ambitious plans. I don't see the newly constituted board stopping now, meaning that the company could explore strategic options to unlock some of its vast value potential.

My trade
I want to get ahead of this opportunity which is why I think that buying shares around $5 is a very compelling price to pay for the stock. However, because of the uncertainty surrounding SandRidge's future, this could be a bumpy ride. What I like to do in situations like this is to buy some shares and write puts to target additional shares cheaper. Specifically, my plan for SandRidge is buy half of my intended allocation outright and then write September $5 puts to try and fill out the rest of my allocation. The option income will help cushion any blow if shares initially react negatively to the board's decision at the end of the month.

Foolish bottom line
SandRidge Energy is one of the more compelling opportunities in energy today. It has a great position in an emerging oil and gas play, its fundamentals are improving across the board and it has a time sensitive catalyst. I like what I see here, which is why I'm buying SandRidge this June. 

If you'd like to read more of my research detailing the future of this emerging oil and gas junior, then check out The Motley Fool's premium research report detailing SandRidge's game plan and what to expect from the company going forward. To get started, simply click here now!


Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

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  • Report this Comment On June 04, 2013, at 11:05 AM, rjf53 wrote:

    Hi Matt,

    I'm still not stalking you, but you keep showing up on my Google alerts. :<)

    I find it rather ironic that you decided to go long SD just as we enter hurricane season. Although on balance I think many investors over state the risk to companies from hurricanes, given SD's already existing challenges, if a significant event were to impact SD's gulf operations it certainly wouldn't be pretty for SD's shareholders. The good news is (potentially) if we get a good hurricane scare it could very well provide a catalyst for getting shares a lot cheaper. :<)

    Now about your " In almost every metric SandRidge is improving." statement. To this I've got to ask; Compared to when? Simply stated, you need to be using a pretty short time frame to justify your statement as anything approaching accurate.

    I've already demonstrated to you that their claim of lowering drilling costs is only true because they escalated so badly immediately prior to their "reductions" and if you go back a year or longer for your comparison then their "lower" well costs are actually higher.

    Ditto for your assertion that they are getting oilier, where in this case you only need go back 6 month to see how arbitrary this description is. And your percentage comparisons don't capture the whole problem because not only has the % of oil gone down but within that % we now know much of that "oil" is in fact ngls. Maybe no one else remembers, but I haven't forgotten how Tom Ward repeatedly emphasized the fact that the numbers they were reporting were "real oil". So unless your definition of improving is to take two steps backward and one step forward this statement is simply untrue.

    Lastly, on your assertion that "SandRidge is in its best financial position in years". To this I say; I guess that depends how you measure it. Certainly you can make that case if you are just going by various debt ratios. Unfortunately that alone is a meaningless metric unless you factor in their ability to pay down that debt. Although I don't necessarily disagree with your statement, if we measure it by what the company has told us in the past then at a minimum I'd say the jury is still out on the question. Again if we are comparing to last year they had a "3 year plan" that was supposedly going to get them to cash flow positive by the end of 2014 which would enable them to start paying down the debt. My question to you is what is that date now and how is it progress if that can has been kicked down the road?

    In the end you may be right, but the short term evidence you are using to make your case is pretty darn weak IMO.

    I wish you luck anyway. :<)

    B

  • Report this Comment On June 09, 2013, at 8:04 PM, TMFmd19 wrote:

    I just saw your comment -

    Thanks always for the comments, you always provide great counterpoints. Here are my thoughts on each:

    1. Hurricanes - SD does account for volumes in the Gulf being down due to hurricanes. The company isn't as levered to the Gulf so while it would hurt, it won't kill investors.

    2. Well costs - I understand where you are coming from but I still think its apples/oranges. Well costs as a whole have been heading higher since 08, so SD (and the industry) have been keeping costs down in light of that pressure. You are also looking at different well designs and a range of other costs such as infrastructure so its not exactly comparing the same well costs.

    3. Oil - SD isn't the same company is was just 6 months ago. Selling the Permian Basin took out a lot of oil production, but it improved other metrics. What I'm seeing is that in the Miss oil/NGL production is going higher 45% to 46%. With 80% of cash flow in the Miss from liquids, this is an improvement, especially in light of the fact that overall production is also heading higher.

    Bottom Line - I see SD as a different company than it was when I first started following it last year. I see a company that's improving, has a catalyst and looks cheap based on its potential asset base. The short-term evidence might look week because the company might be early in its turnaround. I like the potential I see giving the price that the shares are trading.

    Matt

  • Report this Comment On June 10, 2013, at 9:02 AM, rjf53 wrote:

    Hi Matt,

    I wonder if you would mind shooting me an email. I have something I would like to share, get your comments on, but I'm not sure I should link it here as it involves a Fool competitor.

    Thanks,

    B

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