At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
SandRidge gets drilled
Man, Wall Street really isn't happy with SandRidge Energy (NYSE:SD) this week. Yesterday, SandRidge picked up its third downgrade of the week, as KeyBanc Capital Markets joined Citigroup and Canaccord Genuity in criticizing the company for costing too much and earning too little.
The downgrades began on Dec. 17, with Canaccord first downgrading the stock to sell, then following up with a later note blasting SandRidge's sale of its Permian Basin assets for $2.6 billion, a number Canaccord characterized as "not sufficiently value accretive to change our $4 per share target price."
Citi soon chimed in with a downgrade to neutral, and KeyBanc piled on with an analogous downgrade to hold. As KeyBanc sees it, SandRidge is trading superior Permian assets for cash that it will use to develop "inferior" assets in its Mississippian oil play. Worse, KeyBanc notes that trading the one for the other exposes SandRidge's financials to "dilution to nearly every metric, including CFPS, NAV, EBITDAX multiples, and R/P ratios."
Incidentally, Canaccord made similar objections in its note. Canaccord acknowledged that selling the Permian assets will give SandRidge enough cash to "execute the company's business plan through late '15." Problem is, the sale reduces SandRidge's cash flows (because it no longer owns the assets), while simultaneously leaving the company still spending more cash than it takes in, and at a rate of "~$1.2 billion per annum from '14-'17E."
Trouble all over
This is a key point with SandRidge, by the way. While technically "profitable" as GAAP accounts for such things, the hard truth of the matter is that SandRidge hasn't generated a single red cent of real free cash flow from its business... ever. To the contrary, over the decade for which financials are available, this company has burned through well over $5 billion in negative free cash flow. Indeed, over the last year alone SandRidge went $1.3 billion into the red on a FCF-basis. Canaccord's projections of another four years of capital spending exceeding cash income by "~$1.2 billion" suggest there's little reason to hope SandRidge will change its ways in the near future.
And that's the real problem with SandRidge -- and honestly, with a lot of these land-acquisitive, cash-poor oil companies in general. Whether it's Chesapeake Energy (NYSE:CHK) you're talking about, or Kodiak Oil & Gas (NYSE:KOG), or InterOil (NYSE:IOC) -- whether the company in question is burning $12 billion a year (Chesapeake), or $1.3 billion, or a measly $194 million (Kodiak and InterOil, respectively), the fact remains that all these companies are currently in the business of burning cash in order to obtain fuel for other people to burn.
To me, this has always seemed a foolhardy endeavor (and I'm not capitalizing the "f," either). That's why, if you feel you absolutely, positively have to put an oil company in your portfolio, I'd urge you to at least minimize the risk. Avoid the serial cash-burners, and value-destroyers, and put your money in a more stable business model like ExxonMobil (NYSE:XOM) instead.
With $20.8 billion in positive free cash flow generated over the past 12 months, Exxon's not a stock I'd want to own, personally, because it's nowhere near as powerful a profit generator as its reported "GAAP" profit of $44.3 billion suggests. But at least it's generating some cash to go on. At least it's going out of business a bit more slowly than the rest.
There's something to be said for at least knowing you've invested in the lesser of many evils. Not a lot, but something.
Fool contributor Rich Smith has no positions in the stocks mentioned above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 296 out of more than 180,000 members.
The Motley Fool owns shares of ExxonMobil and has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, long JAN 2014 $30.00 calls on Chesapeake Energy, and short JAN 2014 $15.00 puts on 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.