Why You Should Buy the SandRidge Energy Dip

Photo credit: SandRidge Energy

SandRidge Energy (NYSE: SD  ) reported really solid third-quarter earnings. It handedly beat estimates and even raised its full-year guidance. Despite this the stock sank. I don't know what those selling investors were thinking. What I do know is that I plan on buying this dip in SandRidge Energy and here's why investors should think about joining me.

Across the board improvements
There wasn't one thing about this past quarter's results that suggested the stock would sell-off. Earnings and cash flow increased. Production was up despite a lower rig count and a dozen wells being deferred due to infrastructure issues. The company is simply getting better at every single metric that matters. It's exactly what we want to see when buying shares of any company. Yet we see a company that at the time of this writing is off nearly 10% from its recent highs.

I think investors have forgotten just how far SandRidge Energy has come over the past few months. On the conference call with analysts, CEO James Bennett really did a great job of putting everything in perspective when he said this: 

It's my belief that the investing community may not appreciate the significant changes we have made in our business and how these translate into real cash flow growth. This year, we implemented a rigorous process designed to generate cash flow growth and returns. For example, in 2013, we significantly decreased our Mississippian per well cost, lowered LOE, lowered G&A, lowered our land spend, greatly improved the utilization of our infrastructure, thus lowering our infrastructure spending and at the same time improved our IP rates and well reserves.

He then put this into perspective by noting what this meant in real terms for the company by saying that,

Together the combination of these changes generates significant operating leverage in our business. In terms of these efficiencies, I still think this is the best and most concrete example. For the year-to-date period 2013 versus the same period in 2012, we have drilled 69 more Mississippian wells for $27 million less capital dollars.

Clearly SandRidge is moving in the right direction, even if its stock is now moving the other way. That said, SandRidge has the potential to get even better in the future.

More improvements still to come
If there was a concern on the quarter, it was the fact that initial production rates of newly drilled wells actually dropped on the quarter. There are a lot of factors that could have caused this to happen. Clearly it's one area the company can improve upon and recent results from its competitors in the play suggest that it can do just that.

One of its competitors in the Mississippian, Range Resources (NYSE: RRC  ) might have found a solution to improving well performance. Range tested completions with larger fracking stimulations this past quarter and those wells produced 45% above the type curve for the first two months. It didn't cost Range any more money than usual, which suggests that there are things SandRidge could do to improve results.

The other improvement is from the stacked pay potential within SandRidge's focus area. This past quarter the company reported awful results from its Woodford Shale tests. But Devon Energy (NYSE: DVN  ) had a lot of success from that formation, which suggest that there's potential for SandRidge as well. For example, two recent Devon Energy wells located around SandRidge's acreage produced at 997 barrels per day and 295 barrels per day respectively. Because of results like those SandRidge plans to continue to test the Woodford and better results in the future would add a lot of value to the company.

Investor takeaway
SandRidge's quarter looked very solid to me. The only two minor issues I saw were the sequential decline in initial production rates of wells drilling in the quarter and the poor performance of the initial Woodford tests. But neither appear to be a long-term trend as its competitors in the play aren't seeing the same thing. That's why I see the long-term outlook as being very positive, which is why I plan to take advantage of weakness in the company's shares to add to my position.

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Read/Post Comments (11) | Recommend This Article (20)

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 November 07, 2013, at 5:14 PM, insk wrote:

    So, would you also say that the various Sandridge Energy Trusts also should be bought? Just wonderin' . . . .

  • Report this Comment On November 07, 2013, at 6:37 PM, SUPERARR wrote:

    some one tell me their experience with options animal??

  • Report this Comment On November 07, 2013, at 7:03 PM, TMFmd19 wrote:

    @insk - I've looked at the trusts very briefly. I'm not a fan of trusts because there is no growth. I prefer MLPs like LINN Energy, BreitBurn Energy Partners or Vanguard Natural Resources instead.

    @Superarr - Do you mean writing puts/buying calls on SD? If so I've written puts before to buy shares cheaper. Buying calls isn't necessary because SD is basically a call option as it is.

    Matt

  • Report this Comment On November 07, 2013, at 7:28 PM, Fisherwon wrote:

    I have trouble buying this kind of business where the debt is almost double the equity.

  • Report this Comment On November 07, 2013, at 7:29 PM, cmalek wrote:

    Matt,

    Do you believe everything that a company CEO says?! How many shares of Tyco and Enron did you buy when Kozlowski and Lay were shoveling their cow manure, assuring stockholders and analysts that everything was hunky-dory?

  • Report this Comment On November 07, 2013, at 7:29 PM, BeachBumCB wrote:

    Run from SD, do not walk. The administration has pushed all gains into their own pockets. Look for better managed opportunities. RUN, RUN, RUN.

  • Report this Comment On November 07, 2013, at 9:34 PM, rjf53 wrote:

    <i>two recent Devon Energy wells located around SandRidge's acreage produced at 997 barrels per day and 295 barrels per day respectively.</I>

    I wonder why they didn't tell you about this well Matt.

    GEIHSLER 5-21N-4W

    Oops, only 150 barrels and only 50 of them oil.

    Devon, like most producers talks up the good and never mentions the not so good. They better have luck in their Garfield County/Woodford wells because their Garfield County/ Mississippian wells pretty much sucked.

    But maybe this time is different. :<)

    B

  • Report this Comment On November 07, 2013, at 9:56 PM, TMFmd19 wrote:

    B - I'm actually surprised SD even mentioned their duds in the Woodford. So, I give them some credit for that. As for DVN, they seemed pretty high on the Woodford at first glance. Too many companies reporting all at once though so I need to dig a little deeper into that.

    I really like the risk/reward at SD and must say, I like the new CEO a lot. I have been looking for the stock to stop going higher so I could add to my position.

    Matt

  • Report this Comment On November 08, 2013, at 9:24 AM, sevenheart wrote:

    In general a great article. One point I'd like to make is that in any play there are fairways, areas that produce better than others because of the way the formations were deposited, heat factors for thermal maturity, etc. While the Woodford is a great play, not every well drilled will be a gusher. I agree that Sandridge is moving in the right direction. Other companies are late making that move. I'm working in the Granite Wash, where Range drills and completes wells for $4.2 million per well. A major I will not name drills and completes for $7.9 million, entirely due to sloppy operations and lack of efficiencies. But at 1000 bbls/day IP rate sloppiness is tolerated, those wells will pay off in 90 days rather than Range's 45 days production.

    As for Royalty Trusts, do your research and understand the trust. Everything is spelled out in the Trust documents. I personally avoid trusts which have no value at the end of the trust period. Many will pay the portion of the royalty and then disperse the remaining value of the trust. Some pay monthly, others quarterly, and it can be a very nice cash stream for reinvestment. Due to market conditions I would trend toward trusts with a higher oil or liquids production ratio to gas. Indicators are that gas prices will be bearish for a good part of the next decade, oil and liquids will remain stronger in the market (all relative to economic recovery, supply/demand disruptions, geopolitical influence, etc.) Your research should guide you to avoid overpaying for shares of a trust.

  • Report this Comment On November 08, 2013, at 8:37 PM, Ladybird22 wrote:

    I watch energy stocks with both awe and horror.

    All Mr. DeLallo had to say was that Sandridge is

    copying competitors' "fracking stimulation" to up production.

    N(on) I(in) M(y) B(ack) Y(ard)! Panola Co., TX is now wealthy but has homes with cracked foundations due to increasing frequency of never-before-heard-of earthquakes! (I hate it when the plates & pictures fall off the wall)....

    Probably no relation, huh?

  • Report this Comment On November 09, 2013, at 4:55 PM, 3Rules wrote:

    >> I don't know what those selling investors were

    >> thinking.

    I don't have an opinion one way or the other on this stock, but maybe this article will answer your question.

    http://seekingalpha.com/article/1810622-sandridge-energy-hig...

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