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What's the Opportunity at SandRidge Energy?

By Matthew DiLallo - Apr 19, 2013 at 6:46PM

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SandRidge is putting all its eggs in one basket, but has it chosen the right basket to deliver investor returns?

SandRidge Energy (NYSE: SD) is emerging as one of the more intriguing oil and gas producers in the nation. It has basically sold everything it owned in order to concentrate on one big opportunity. Now, its building the company around the oil coming from the Mississippi Lime formation. 

When I describe SandRidge as intriguing, I do so for good reason. You have boardroom drama with an embattled CEO, tremendous liquids growth opportunities, and a company that's selling for a compelling discount to its net asset value. The parallels to Chesapeake Energy are rather striking, and the opportunity is as good, if not better, due to the higher ratio of liquids to gas production. 

The company has undergone a lot of changes over the past year. That's why I recently updated a premium report on the company. With so many changes, and more on the way, this is a company that investors need to keep close tabs on.  

Following is an excerpt from the report, laying out the company's opportunity. We hope you enjoy it.

The Opportunity

Like the natural gas assets in 2007, SandRidge is putting the company's future in one basket: 1.85 million net acres in the Mississippian oil play in northern Oklahoma and western Kansas. The company's strategy is to use the cash generated from asset sales and its Gulf of Mexico operations to develop its Mississippian assets.

The Mississippian play holds the keys to SandRidge's growth strategy. The company plans to aggressively grow production while simultaneously striving to improve its rate of return. This growth comes at a high cost, as the company recently sold its Permian Basin assets to fund its Mississippian growth plan through the end of 2014. While the company has multiple options to fund its plan beyond 2015, it will require billions in future capital to fully develop the play.

For oil and gas juniors, strong balance sheets and access to capital are essential as one down cycle can render a company inoperable. The sale of the Permian Basin assets sliced the company's leverage ratio in half (to two times), and boosted its liquidity to $2.4 billion. That went a long way to improving its liquidity picture as the company has no near-term debt maturities.

However, the company is still a long way from being self-funded. Last year SandRidge grew its EBITDA to $1.07 billion, though that number is just $748 million pro forma for acquisitions and divestitures. The Permian Basin sale was a setback in a sense -- the company still sits well short of its $2 billion EBITDA goal. However, if SandRidge can continue to cut costs and execute its Mississippian plan, it could develop into a long-term winner.

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