Last week, oil dropped below $90 per barrel, causing prices to drop across the board in the energy sector. This drop in oil, along with an earnings miss, drove SandRidge Energy
As of Friday's close, SandRidge had a diluted market cap of $3.9 billion. In addition, the company also has net debt of $2.9 billion and preferred stock outstanding of $765 million. Its PV-10, or net present value of proved reserves, was $4.5 billion as of the end of 2010. That's more than SandRidge's market cap, although it does not factor in this company's big debt.
Taking a deeper look
SandRidge's main assets are 900,000 net acres in the Mississippian and more than 200,000 net acres in the Central Basin Platform of the Permian Basin. Currently, SandRidge has 16 rigs operating in the Permian and 14 rigs operating in the Mississippian. With 100% of its rigs dedicated to drilling for oil, SandRidge is in rare company along with Concho Resources
By the end of 2014, management's goals are to achieve EBITDA of $2 billion, to raise production annually by double digits, to fund capital expenditures with its cash flow, and to achieve debt-to-EBITDA of better than 2:1. These are all ambitious goals. For perspective, SandRidge's EBITDA in 2010 was $357 million, which is a far cry from its 2014 goal of $2 billion.
Looking at its cash flow statement, it's quite clear that SandRidge plans to meet these goals by ramping up drilling and production. Capital expenditures have outstripped operating cash flow by a very large margin in recent years and this trend looks to continue unabated.
I'm quite fond of SandRidge's shift to oil production. In fact, this is one of the main reasons I own Chesapeake Energy
One big question mark
The company has already announced plans for $1.8 billion in capital spending for 2011 and 2012. This compares to trailing cash from operations of only $393 million. Recent years' aggressive drilling program should lead to increased production and operating cash flow, but it's hard to imagine that cash will accumulate quickly enough to meet SandRidge's spending plans.
Thus, the company will likely issue more debt and common stock to make up the difference. While SandRidge's ramp-up has been quite impressive, it's uncertain how much dilution awaits investors in the company's future. Investors looking for more visibility ahead might consider more established onshore exploration and production outfits like Devon Energy
Foolish bottom line
The recent hit to SandRidge shares has put it solidly on my radar. SandRidge is making bold moves to become a major producer of onshore oil and analysts are expecting the company to be profitable this year and next. Since this company is on the high-risk end of the spectrum, it will likely offer a wild ride to investors who decide to buy in. I've yet to take the plunge, but I'll become more interested if the stock continues its recent slide.
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Paul Chi owns shares of Chesapeake Energy. The Motley Fool owns shares of Devon Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.