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Anytime a legendary investor pounds the table that a stock is worth double its price, investors ought to take the time to review the prospects. In this case, Lee Cooperman of Omega Advisors continues to be bullish on the reorganization progress at SandRidge Energy (UNKNOWN: SD.DL ) . With the stock trading in the $6 range, Cooperman recently repeated claims that his analysis values the company at over $10.
SandRidge Energy is an oil and natural gas exploration and production company focused on the Mississippian formation in Oklahoma along with Gulf of Mexico and West Texas assets. The stock has long struggled due to Wall Street's lack of understanding of the deal made by the previous CEO Tom Ward. Under his leadership, SandRidge constantly made grand transactions that never added value in the minds of investors and constantly caught analysts off guard. The recent third-quarter financials are ripe with the issues of the last two major deals to unload Permian Basin assets and purchase unrelated Gulf of Mexico producing wells.
The messy financials of SandRidge sit in stark contrast to the straightforward results at Range Resources (NYSE: RRC ) and Southwestern Energy (NYSE: SWN ) . For these two stocks, investors don't need to adjust numbers for pro forma comparisons or adjust numbers to review organic growth. All of the noise in the quarterly report of SandRidge continues to hide the production gains made on the back of reduced well costs -- a great combination and a further sign of what happens when a firm focuses on being the experts in a formation: greater production efficiency and lower costs.
Betting with Lee
Cooperman is unique among investment advisors in his willingness to discuss positions that he sees as substantially undervalued. He favors Sprint, which has soared recently, and expects similar results from SandRidge. Last year, he suggested McMoRan Exploration even after it struggled for an extended period. Eventually, Freeport McMoRan Copper & Gold bought the Gulf of Mexico natural gas exploration firm for a large premium.
Lower capital expenditures
Efficiencies in capital expenditures are a prime reason for finally keeping an eye on SandRidge. The oil producer continues to increase Mississippian production even while reducing its rig count by 15% during the quarter. In fact, SandRidge guided 2014 production from the formation by 35%, all while keeping total capital expenditures equal to 2013 levels.
The best example of the improvements in capital efficiency are the reduced costs per average well to below $3 million. In fact, SandRidge drilled 340 horizontal wells for $647 million during 2013 year to date, versus drilling 271 horizontal wells for $676 million during the comparable period in 2012. Anytime a company produces roughly 25% of the same item while spending less money, it typically portends positive results in the future.
Consistent production growth
A constant theme from companies with positive market value gains is focused production growth. In the case of SandRidge, the production growth has been spotty from the standpoint of the financials considering all the deals -- the current quarter being a prime example with all the pro forma data points to remove the sold Permian assets.
For the most part, Range Resources and Southwestern prospered from remaining focused on natural gas even during the worse commodity prices in the last decade. Neither company made any significant jump to liquids similar to the shift toward oil made by SandRidge.
Range Resources recently hit a production milestone of 1 Bcfe per day after only producing approximately 200 Mmcfe per day when it first drilled a Marcellus well back in 2004. The company achieved 20% annual growth in the last decade and continues to forecast production growth that will exceed 20% for the next few years. All of these gains in production have helped push the stock to a value above $13 billion.
Southwestern Energy is now worth nearly $14 billion, yet it still guided toward 14% production growth for 2014. The natural-gas-focused energy producer expects to achieve these goals on a roughly flat capital expenditures budget of $2.3 billion. It's interesting to note the vast valuation difference with SandRidge worth under $3 billion, yet Southwestern plans to spend only 50% more on capex next year. Southwestern expects to achieve these production goals by growing Marcellus output by an astonishing 60%.
With SandRidge focused on expanding the industry-leading position in the Mississippian formation, the stock could reach the targets proposed by the legendary investor Cooperman. Both Range Resources and SandRidge have provided the roadmap to a successful future in the sector: Focused production growth attracts investors. SandRidge is finally on that road to success.
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