The Motley Fool Previous Page

Why SandRidge Is a Great Buy Right Now

Arjun Sreekumar
July 23, 2012

SandRidge Energy (NYSE: SD  ) is a relatively young company with not much operating history. But in a short period of time, it's made some really smart moves that have created tremendous value for the company and its shareholders. This is definitely one oil and gas producer that should be on every energy investor's radar.

From natural gas to oil
As CEO Tom Ward recounts, SandRidge was originally a natural gas-focused company. But it has come a long way since its inception in 2006. As early as 2008, management saw the shifting tide and determined a period of low natural gas prices was on the way -- a remarkably prescient call in hindsight. So later that year, the company hedged all of its natural gas production for two years and began laying the foundations for a switch to oil.

At a time when other companies were still searching for natural gas properties, SandRidge acquired assets in the Permian Basin, an oil-rich play in western Texas. It made two acquisitions in 2009 and in 2010 for a total of $2 billion. The company then sold off a portion of those assets so it could fund its future projects in the Mississippian Lime, the most important part of the SandRidge growth story. 

Banking on the Mississippian Lime
You can't talk about SandRidge without discussing the company's presence in the Mississippian Lime. Unlike other small-cap producers such as Kodiak Oil & Gas (NYSE: KOG  ) , which are focused on unconventional plays like the Bakken shale, SandRidge is banking on lower-risk, conventional assets. The company is mainly concentrated on the up-and-coming Mississippian Lime play, a shallow and expansive carbonate oil play spanning parts of Oklahoma and Kansas.

While Chesapeake Energy (NYSE: CHK  ) is the biggest leasehold owner in the Mississippian, with around 2 million net acres, SandRidge isn't too far behind, with a 1.5 million net acreage position. Devon Energy (NYSE: DVN  ) is next in line, holding 230,000 acres in the expansive play.

SandRidge has reported 7,000 potential net drilling locations in the Mississippian and expects the average well to cost about $3.2 million, significantly cheaper than Bakken or Eagle Ford wells. The expected internal rate of return for Mississippian wells is 91% and some 380 horizontal wells are planned for 2012.

An aggressive, yet feasible, three-year plan
SandRidge expects to triple EBITDA and double oil production in three years. Ward elaborates: "We have a three-year strategy that no other company in the U.S. has, and th