Should Investors Worry About SandRidge Energy’s Debt?

SandRidge Energy (NYSE: SD  ) currently has just under $3.2 billion in total debt. That's actually $400 million more than the company had in 2011. What's interesting is that even though SandRidge has more debt now, it's actually in much better financial shape. That's because SandRidge's leverage ratio has fallen from 4.6 times down to a more manageable 2.4 times.

What's a good number?
The question is if a leverage ratio of 2.4 times is solid enough or if investors should still worry. Looking at its peers, SandRidge's leverage ratio is roughly in line with Chesapeake Energy's (NYSE: CHK  ) , which recently stood at about 2.3 times. On the other hand, it is well above Continental Resources' (NYSE: CLR  ) 1.8 times leverage ratio, which is around the industry's average according to the following chart.

Source: Continental Resources

An acceptable leverage ratio is really up to each company to decide. For example, at a recent conference Jeff Mobley, Chesapeake Energy's Senior Vice President of Investor Relations and Research, noted that his company wasn't ready to state a specific leverage target. However, he did say that Chesapeake does want metrics that will stand up to investment grade ratings. That would suggest a debt-to-EBITDA ratio of less than two times.

What's SandRidge's plan?
That's not something that's on SandRidge's radar just yet. In fact, according to CEO James Bennett, investors can actually expect the company's leverage ratio to head higher. However, he's not that worried about it. On the company's last conference call, he pointed to four reasons why, when he said that, "although our net leverage will be increasing over the coming quarters, we are comfortable with where leverage will trend over the next couple of years given our liquidity, our strong oil hedge position, our growing Mississippian production and cash flows and our lack of near term maturities."

The big difference between the SandRidge Energy of today and the SandRidge of a few years ago is its liquidity. At $1.88 billion the company has enough money to fund its growth plans through at least 2015. Further, its strong hedging position has locked in a good portion of its cash flow. So, while it's not enjoying the high-margin oil rich growth of its less levered peer Continental Resources, there isn't reason to worry about the company at the moment.

When to worry
There is, however, a number to watch. CFO Eddie LeBlanc pointed to a leverage ratio above 3.5 times as the number that would make management worry. However, even at that number there is some cushion. SandRidge doesn't have any debt maturities coming up until 2020. Further, it's pretty well hedged which gives its cash flow some more certainty.

It's not likely the company will ever get close to that number. SandRidge would likely either slow down its growth or look to sell some of its assets as its debt started to strain the boundaries of its comfort zone.

Investor takeaway
There's no doubt about it, SandRidge is a bit more levered than many of its peers. However, the company has done good just to cut its overall debt levels. So, even though its debt levels remain high, there is nothing to worry about.

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