Please ensure Javascript is enabled for purposes of website accessibility

3 Reasons to Buy SandRidge Energy

By Matthew DiLallo - Apr 9, 2013 at 10:31AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

SandRidge is one of the more interesting emerging oil plays on the market. Here are three reasons why you'd want this company in your portfolio.

Over the past few years SandRidge Energy (NYSE: SD) has undergone several transitions, which has dramatically altered the company and in some ways clouded its investment picture. In an effort to simplify the investment thesis, I've distilled everything down to three reasons why you'd buy shares of the company.

1. SandRidge is the top lease holder and most active driller in the Mississippi Lime formation. The central thesis to an investment in SandRidge is your belief in the company's Mississippian growth plan. While the company has operations in the shallow water of the Gulf of Mexico and the West Texas Overthrust, SandRidge is virtually synonymous with the Mississippian. It has twice the wells as its closest competitor, Chesapeake Energy (CHKA.Q). It's running three times the number of drilling rigs as Devon Energy (DVN 0.59%). As you can see in the slide from a recent SandRidge Energy investor presentation below, the company is simply head-and-shoulders above its competitors in the play:

Source: SandRidge Energy Investor Presentation

The company has also spent nearly half a billion dollars to build out its own saltwater disposal system and it's even installed its own electrical grid. It's done all this in an effort to get its well costs down as low as possible. These wells, which produce on average 45% oil and natural gas liquids along with 55% natural gas, yield a very high rate of return for the company. That rate is increased thanks to the aforementioned infrastructure investments.

The rest of the energy industry is beginning to take notice of the play's potential. Phillips 66 (PSX -0.60%) recently signed a deal to get Mississippian oil shipped to a local refinery. When added to SandRidge's recent percent-of-proceeds natural gas liquids contract with Atlas Pipeline Partners (NYSE: APL) we're beginning to see some validation of the Mississippian's tremendous potential for SandRidge.

2. The company has improved its financial position and its capital plan is fully funded through 2014 with multiple options to fund its plan through 2015. Like most of the smaller oil and natural gas exploration and production companies, SandRidge has more potential for growth than it can fund through its current cash flow. That's forced the company to sell assets, including the recent sale of its Permian Basin acreage. That deal provided enough capital to enable the company to pay down its debt, while fully funding its capital plans through the end of next year. The company has a variety of options to access additional funding which puts it on very solid financial footing for the first time in years.

3. SandRidge grew its Mississippian production 131% year over year while also growing its oil reserves by 35%. The company's investments in the Mississippian are beginning to pay off with visible production growth. Last year the company more than doubled its production in the play. Meanwhile, it was also able to grow its overall oil reserves by 35%.

The company sees its Mississippian oil and liquids production jumping another 78% in the year ahead, with overall production up 72%. This liquids-focused growth is important given that 80% of its Mississippian cash flows come from oil production. However, if natural gas prices continue to rise, there is potential here for some significant upside given the natural gas production that is coming out of the Mississippian.

The bottom line here is that you're investing in SandRidge because you believe in the future of the Mississippian. While that is an important part of the story, it's by no means the whole story. 

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Chesapeake Energy Corporation Stock Quote
Chesapeake Energy Corporation
CHKA.Q
Devon Energy Corporation Stock Quote
Devon Energy Corporation
DVN
$69.92 (0.59%) $0.41
Phillips 66 Stock Quote
Phillips 66
PSX
$93.79 (-0.60%) $0.57

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.