What: Another day, another SandRidge Energy (UNKNOWN:SD.DL) sell-off. The stock is off just over 10% in early morning trading and is now off 14% for the year, which is just two trading days old.
Today's sell-off is again linked to the unrelenting sell-off in oil prices. The price of U.S. oil benchmark WTI is down about 4% to roughly $50.50 per barrels due to strong supply data from Russia and Iraq. This supply data is overshadowing the escalating violence in Libya, which is threatening that country's oil exports.
So What: Every dollar the price of oil drops adds more weight to the worry that SandRidge Energy might not survive. Its core drilling area in the Mid-Continent requires higher oil prices to deliver the strong returns it needs to keep drilling. That's a big worry because the company has a hefty debt load that in had planned to drill its way out of, but that won't be an option if oil prices keep falling.
Now What: There's not much investors can do right now as SandRidge Energy's future is binary at the moment. If oil prices keep falling and stay depressed at these levels for a few years then there is a growing possibility that some day the company will be forced to declare bankruptcy. That being said, if oil prices do improve to about $70-$80 per barrel it would ease the bankruptcy worries and send the stock price higher. Because of this binary outcome investors should avoid adding new money to SandRidge right now as there are less risky opportunities out there for investors looking to invest in a rebound in oil.
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.