Billionaire investor Leon Cooperman says SandRidge Energy (UNKNOWN:SD.DL) stock has the potential to double. That's not a pie in the sky valuation if everything goes right for the oil and gas producers, which now sells at $5.65 per share. Cooperman believes that the underlying value of the company is already at $10 per share, it's just that the market has yet to recognize how much SandRidge has improved. That's why he has called it one of his five favorite stocks.
Why it matters what Leon Cooperman thinks
Cooperman isn't just another talking head in the financial media. He's an investor with quite the track record. He spent 25 years at Goldman Sachs, eventually becoming the chief investment officer for the bank's equity product line. From there he founded Omega Advisors which in 2012 outperformed most money managers with a return in excess of 25%. Those returns provided quite a payday for Cooperman, who netted $470 million to become the ninth-highest-earning hedge fund manager, according to Forbes. Bottom line, Cooperman knows how to make money for investors, and himself, which is why his opinion matters.
Since starting Omega in 1991, Cooperman's annual returns have averaged 16%. When someone with that track record is interested in SandRidge Energy, and others names in the energy sector including Atlas Energy (NASDAQOTH:ATLS) and LINN Energy (NASDAQOTH:LINEQ) investors should take notice. Overall, about a third of Cooperman's holdings are in the basic materials sector as he sees a lot of value in the space. Along with seeing SandRidge Energy worth twice what it is now, he pegs LINN Energy's net asset value at about $40 per unit and has called Atlas Energy his top small-cap stock pick. Chances are he'll be right on all three.
Why he'll be right on SandRidge Energy
In a recent CNBC interview, Cooperman noted that when investment firm TPG launched a proxy fight against the company it valued SandRidge at $11-$12 per share. TPG's argument was that the company simply needed a high-quality managers focused on creating value for investors instead of themselves. It won that fight and installed a management team focused on returns. The problem is that the market doesn't seem to notice the gains SandRidge has made.
New CEO James Bennett took that issue head-on during the company's November conference call:
It's my belief that the investing community may not appreciate the significant changes we have made in our business and how these translate into real cash flow growth. This year, we implemented a rigorous process designed to generate cash flow growth and returns. ...Together the combination of these changes generates significant operating leverage in our business. In terms of these efficiencies, I still think this is the best and most concrete example. For the year-to-date period 2013 versus the same period in 2012, we have drilled 69 more Mississippian wells for $27 million less capital dollars.
Under Bennett, SandRidge is taking steps in the right direction to push toward better returns on the capital it invests. For example, adjusted EBITDA is up 42% over last year as the company has focused on its best oil prospects. That's why oil is now 47% of its total production, up from 42% last year. Clearly, SandRidge Energy is moving in the right direction.
Not only that, but SandRidge is more focused than ever on extracting value from all of its assets. That's why the company is focusing attention on additional zones within its core midcontinent land holdings, as well as looking at its potential deeper in the Gulf of Mexico.
Cooperman has developed a top-tier reputation as a money manager, which is why investors should listen to what he says. He sees real tangible value in the oil and gas properties that SandRidge Energy owns, which is why he believes the stock could double. He also sees solid potential in other energy names like LINN Energy and Atlas Energy, both of which he says are trading under net asset value. Given his impressive track record, long-term investors should do very well in following in Cooperman's footsteps by adding some energy to their portfolio.
Fool contributor Matt DiLallo owns shares of Linn Energy, LLC and SandRidge Energy. Matt DiLallo has the following options: short January 2014 $6 puts on SandRidge Energy. The Motley Fool recommends Goldman Sachs. 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.