What: SandRidge Energy (NYSE:SD) participated in today's oil stock relief rally. While the stock dropped a bit from its high on the day, it was still up more than 10% heading into the market's close.
Today's rally was fueled by rising oil prices. After a nearly unabated sell-off for the past few months, oil prices were up about 2.5% in late afternoon trading. A smaller than expected decline in crude inventories helped to spark the rally.
So what: Unfortunately, today's surge is a very small blip for a stock that is off a sickening 69% for the year.
While plunging crude prices have been the main cause of that drubbing, the stock's plunge also has investors worrying about the company's debt and its ability to grow. While SandRidge Energy has ample liquidity and no near-term debt maturities, that is not stopping investors from bailing on the highly leveraged company. Investors are acutely worried that SandRidge might prove unable to grow its way out of debt, as it needs higher oil prices to make money in the Mid-Continent areas it drills.
Now What: SandRidge Energy's future is tied to the direction of oil prices. If oil moves back toward $100 per barrel in the next year or so, the company should be just fine. However, if oil prices stay in the $50s for an extended period, the company could face problems in meeting its debt covenants down the road. While the company has options to avoid a liquidity crisis, those options become much more compelling at higher oil prices. This is why only investors with an extremely high risk tolerance should consider buying SandRige Energy until we get some clarity regarding the future of oil prices.
Matt DiLallo owns shares of SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. 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.