Photo credit: SandRidge Energy
Now that founder and former CEO Tom Ward is out of the picture, SandRidge Energy (NYSE: SD) has the opportunity to make some real strategy changes in order to maximize the value of the company. This is something that long-suffering investors have been hoping for as the previous strategy has yet to deliver results. Unfortunately, investors were disappointed after new CEO James Bennett said the company had no plans to change its strategy... yet :
All of our assets are for sale at some price. We're capitalist. We're here to maximize the share price. If the valuations in any part of the business ... [are] more than we think they're worth in our enterprise then, we would certainly look at selling those, any of those, yes.
What investors were hoping for, at a minimum, is a change in its capital plans which the company currently can only fund through 2015. Many thought that SandRidge would embrace the wave of fiscal discipline that has hit the industry of late. In fact, many investors and analysts were surprised when Chesapeake Energy (CHK +0.00%) announced that starting next year its capital investments would be funded through its cash flow. Chesapeake, which incidentally was co-founded by Tom Ward, was well known for its strategy of drilling aggressively and funding it through selling assets.
SandRidge has also funded a lot of its aggressive drilling plans by selling assets. That's the reason why the company currently has the liquidity to see it through 2015. That worries investors; there is a concern that until those asset sales go through the company will be weighed down from just the overall uncertainty that it needs to get a deal done at a fair price.
The bigger issue for SandRidge is that it sees the potential to drill more than 3,000 wells in just the core of its Mississippian play. At a cost of $3 million per well, that's a $9 billion investment, which is a lot more than SandRidge can handle, given that its current total enterprise value is just $5 billion. That had several analysts on the company's conference call this past quarter wondering if SandRidge might be selling out to a larger partner.
What was surprising is that Bennett didn't dismiss that thought. Instead, he said that "in terms of longer-term, should we merge into another partner? We will do the best thing for the shareholders." In fact, when pressed further on the issue, Bennett said that a sale of the company to a larger enterprise is "always an option". That would seem to indicate in my mind that at some point SandRidge is likely going to sell itself to a company that has access to capital but is struggling to actually grow its production.
While a sale isn't likely for some time, at the right price it would appear that the company is more open to that option as an exit strategy. And clearly the activist investors that wrestled control of the company from Tom Ward will want to sell their investment at some point. An outright sale of the whole company would be the best way to get that accomplished. In my mind that makes SandRidge a rather compelling opportunity as it has current production growth to bolster its value in the near term, with future upside from what would appear to be a likely future sale.
