Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: SandRidge Energy's (NYSE: SD) stock is up nearly 10% Monday. The Mid-Contentment focused oil driller is rallying thanks to a rebound in oil prices as crude was up well over 2% Monday, as it has nearly recovered all the way back up to $50 per barrel.
So What: The recent rally in oil prices might be meaningful or it might be just noise. Investors are beginning to bank that its meaningful and that a bottom has been reached so that the recent rally will continue. There are signs that the rally might be sustainable as we've seen a rapid decline in the number of rigs drilling in the U.S. over the past few weeks. This should help to ease the oversupply of oil and push oil prices higher.
If oil prices are going to keep rallying then it would be very meaningful to SandRidge Energy as it needs higher oil prices to survive over the long-term. At $50 oil the company's returns from drilling new wells are less than 10%, which really makes much of its drilling program uneconomical. Higher oil prices would do wonders for the company's returns as it would earn 20% on new wells if oil prices rallied to $60 per barrel and it would earn 40% on new wells at $80 oil. These higher returns are needed as the company has been trying to drill its way out of its debt issues and lower oil prices aren't helping one bit.
Now What: SandRidge Energy is really at the mercy of oil prices right now. While the company has a lot of liquidity its debt metrics have been worsening over the past few quarters and will continue to weaken due to the drop in oil prices. This quickest way to fix its problems the price of oil to head high enough so that SandRidge can proceed with its turnaround plan, which included drilling its way out of debt.
