After years of disastrous share-price performance under the leadership of founder and former CEO Tom Ward, SandRidge Energy (NYSE: SD), now captained by its former CFO, appears to be on the mend. Let's quickly recap the company's harrowing past year and then take a closer look at how changes under its new leadership are helping improve its financial health and providing much better visibility into its funding prospects over the next couple of years.
SandRidge's tumultuous year
Though Ward deserves much of the credit in guiding SandRidge's timely transition away from natural gas and toward liquids, he faced harsh criticism for alleged excessive spending that ultimately led to his departure. Under his leadership, shares of SandRidge lost more than 90% of their value, as the company's share count tripled and debt reached uncomfortably high levels.
Outraged at the company's dismal performance and profligate spending, shareholders revolted. Late last year, activist hedge funds TPG-Axon Capital Management and Mount Kellett Capital Management pointed the blame at the company's board of directors, which, they claimed, failed to combat the company's excessive spending and allowed Ward to earn tens of millions in annual compensation, while the company's shareholders suffered from excessive dilution and a plunging share price.
Well, the board heard the calls for change and finally did something about it. In June, it appointed James Bennett, SandRidge's former chief financial officer, as the company's new CEO. While it's too early to tell whether he will be successful in helping SandRidge unlock the true value of its assets, initial progress has been encouraging.
Improving financial health
In the second quarter, the company's operations in the Mississippi Lime continued to impress, despite an 8% sequential decline in total production caused by the sale of the company's Permian assets. Second-quarter Mississippian production soared to 47.3 Mboe/d, up nearly 90% year over year and 20% sequentially, bolstered by strong well performance and reduced well costs.
But perhaps the most promising sign from the quarter was SandRidge's improving financial position. As of the end of the quarter, the company had roughly $3.2 billion in long-term debt, down from $4.3 billion as of the end of last year. Net debt came in at $2.1 billion, down from $1.9 billion as of the end of the first quarter.
This reduction in net debt helped the company achieve a leverage ratio of about 2.4, which, while not ideal, is more than manageable, given the company's outlook for continued double-digit growth in oil production and its strong hedge position.
It also compares favorably with peers such as Chesapeake Energy (CHKA.Q) and Kodiak Oil & Gas (NYSE: KOG), which have leverage ratios of roughly 2.3 and 3, respectively. At any rate, given that the average leverage ratio for exploration and production companies is roughly 1.8, SandRidge's ratio of 2.4 is not particularly concerning.
Last but certainly not least, SandRidge ended the quarter with roughly $1.8 billion of liquidity, which is crucial because it suggests that the company should be able to fund its growth through current liquidity and cash flows from operations for at least a couple of years -- something it has failed to do in past years.
The bottom line
With production growing robustly and capex still at more or less the same levels as last year, SandRidge is showing clear signs of improvement. And while it's true that the company's net leverage is likely to rise in coming quarters, this shouldn't raise any alarm bells since its financial health is clearly improving.
Not only should SandRidge have enough liquidity to fund its drilling program through 2015, but it is also well hedged into next year and doesn't have any debt maturities until 2020. Going forward, the company plans to keep improving its financial position and is open to several funding options, including joint ventures, monetization of its infrastructure assets, and the sale of royalty trust units, to help it achieve that goal.
