Source: SandRidge Energy.
Billionaire investor Leon Cooperman owns 9% of SandRidge Energy Inc's (NYSE: SD) outstanding shares. That's a rather outsized position for Cooperman's hedge fund, Omega Advisors, as it had been a 12% position within that fund. Needless to say, Cooperman made a big bet on SandRidge Energy. However, it's not a bet he's willing to double down on now that the stock is 75% off of its 52-week high. Though, he's not giving up on the stock either.
There's a lot of value, but...
Earlier this year Cooperman did up the ante on his SandRidge Energy bet by raising his stake to its current position. He'd already gone on record saying that he thought the stock could double from its then $5 price to upwards of $10 per share, if everything went right. Meanwhile, CEO James Bennett thought the stock was worth upwards of $15.50 when it was selling for $6.25 per share. However, those calls were made when oil prices were well over $100 per barrel and there was a general consensus that prices would stay at, or above, that level. However, with the price of oil falling like a rock, it has acted like a weight and taken SandRidge Energy's stock down along with it.
WTI Crude Oil Spot Price data by YCharts
If the price of oil stays this low for a long period of time, this could be a big issue for SandRidge Energy. That's because at the company's current well cost it won't make much, if any money, in the future if current oil prices persist. As we see on the slide below, the company was banking on a $90 oil price in 2015 in order to earn a decent return on drilling new wells.
Source: SandRidge Energy Investor Presentation.
As the return sensitivities chart shows, the lower oil prices go the weaker the company's returns on new wells. It's important to note that the chart doesn't even project returns when oil prices are less than $80 a barrel. So, we're left to guess at the company's breakeven point.
Why this is a problem
The problem here is that if oil prices stay low for a long period of time then SandRidge Energy would be in trouble. This was noted by Leon Cooperman in a recent CNBC interview where he discussed his position in SandRidge and why he's not buying more of its stock at the current distressed price. He said,
If present prices persisted for several years SandRidge's survival would be an issue. So, I haven't added to it and it has become a smaller part of my portfolio because of the big price decide. But we still own it.
Here we see that Cooperman isn't selling, nor is he buying. He's only holding because if prices do return to higher levels then SandRidge Energy should be fine. However, that's a pretty big if because no one expected oil prices to drop in the first place and no one knows where prices will go from here.
If oil prices remain low, SandRidge Energy's survivability issues stem from its heavy debt load. However, it doesn't have any near-term debt maturities so that buys it some time. That said, with profitable growth from drilling future wells now in question, it has investors on edge. The other issue is that its cash flow from already producing wells is only partially protected by oil hedges. Like many of its peers, SandRidge Energy made extensive use of 3-way collars to hedge production and those collars are proving to be a big problem given the sheer drop in oil prices. So, the longer oil prices remain low, the greater risk it is for SandRidge Energy's survival.
Investor takeaway
Oil prices are known to be quite volatile, but no one expected prices would be this volatile. Right now, SandRidge's future is really tied to where oil prices go over the next few months. Higher oil prices means that SandRidge Energy will be fine and can go back to profitably drilling wells in the Midcontinent. However, if oil prices stay where they are for a few years, then SandRidge, and many other highly indebted drillers, will be in trouble. That's why buying the stock here is really taking the bet that oil prices will rise, because that's the only way SandRidge can drill itself out of its debt problems.
