What happened
Shares of U.S. exploration and production company SandRidge Energy (SD +1.28%) dropped as much as 13% in the first 90 minutes of trading on Nov. 10. As of roughly 11 a.m. EST, the stock was still lower by 10% or so. The likely catalyst for the move was the company's third-quarter earnings update, which hit the market after the close on Nov. 9.
So what
On the surface, the results in the third quarter of 2021 were nothing short of spectacular. Revenue came in at $46.6 million, up from $27.7 million in Q3 2020. Expenses were lower by more than 70%, though that was largely because the third quarter of 2020 was saddled with a number of one-time charges. And adjusted earnings per share, which pulls out one-time charges, increased to $0.80 from $0.15 in the prior year. The company also took a number of steps to improve the strength of its balance sheet and now has no term debt or revolving debt obligations. The biggest story here, however, was the notable increase in the price of energy, which is what really buoyed SandRidge's results.
Image source: Getty Images.
That makes sense, given that SandRidge is an exploration and production company and its financial results are tied to the ups and downs of energy prices. That said, oil equivalent production in the third quarter of 2021 was actually lower than it was in Q3 2020 by a touch more than 16%, even as the company has been working to bring shuttered wells back on line. On the one hand, this is evidence of management's discipline, which is a positive given that U.S. drillers have historically overreached when oil prices rise. On the other hand, it means that SandRidge may not be benefiting fully from the higher prices that have juiced the broader energy sector lately. That's not such a good thing.
Now what
So there was good and bad news in SandRidge's third-quarter earnings update. But that needs to be put into context with regard to the stock price, which is -- even after today's drop -- up more than 400% over the past year. In other words, investors have priced in a lot of good news here and it seems the third quarter didn't quite live up to Wall Street's lofty expectations. Generally weak energy prices in early trading today didn't help matters any, either.
This tiny energy company is probably not a great pick for most investors, because even after the big share price advance over the past year, its market cap is still under $500 million. If you are looking for an energy name to add to your portfolio, you will likely prefer a larger, more diversified option such as Chevron or ExxonMobil.
