SandRidge Energy (UNKNOWN:SD.DL) stock now sells for slightly more than $6.25 per share. That puts its total market cap at just about $3.2 billion, which CEO James Bennett argues vastly undervalues the company. He sees shares worth upward of $15.50 each. Here's why.
Adding up the reserves
During the question and answer section of SandRidge's latest analyst and investor day, Bennett was asked to assess the net asset value of the stock given the potential of the company's drilling program.
Bennett went through the math a couple of different ways. He first noted that the base value of the company was in proved reserves which currently have a PV-10 value of $4.1 billion. In addition to those proved reserves, the company also has probable and possible reserves with a PV-10 value of $6.2 billion. After backing out the $800 million of those reserves owed by SandRidge Mississippian Trust I (NYSE:SDT), SandRidge Mississippian Trust II (NYSE:SDR), and SandRidge Permian Trust (NYSE:PER) that pushes down the value of the company's reserves to about $9.5 billion. That's well above the company's current enterprise value of $5.5 billion, but we're not done yet, according to Bennett.
This hidden asset has value
In addition to the value of the resources still in the ground, the company also owns a valuable saltwater disposal system that it doesn't get credit for creating. Bennett suggested that if this was owned in a MLP structure it would be valued between eight and 11 times EBITDA. He noted that the asset produces $135 million in EBITDA and used a value multiple of nine times EBITDA to demonstrate the value SandRidge has created by building the system. Under that scenario the value for these assets would be $1.15 billion. That's substantially more than the $470 million of capital SandRidge energy has invested into the business.
SandRidge Energy is working on unlocking its value, as the following slide shows:
Given the comments that management made at the analyst day, it wouldn't be surprising to see the company either create a MLP structure to hold the asset or sell part of the resource to another MLP company in order to unlock a portion of this value.
Add it all up
Adding up the proved reserves, resource potential, and the value of the saltwater disposal assets, while subtracting the value of the reserves owned by the trusts, as well as the company's $1.6 billion in net debt, gets the company to a net asset value of about $9 billion. Apply that across the company's 580 million shares and that equates to a per-share value of about $15.50.
While that might be an aggressive value, an even more conservative assessment of the company's assets yields a value much higher than today's share prices. In another scenario, Bennett ascribed a more conservative value to the probable and possible reserves by discounting them by 15% instead of 10%. That dropped the net asset value to about $6 billion, or $10 per share. Finally, even assigning no real value other than book value to the saltwater disposal system yields a net asset value of $9 per share.
Clearly SandRidge Energy is worth much more than the current stock price would indicate. Bennett thinks the company's shares should be selling between $9 and $15.50, which leaves a lot of upside from today's stock price.