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What: After plunging yesterday, shares of Sandridge Energy (NYSE:SD) continued to drop this morning, falling as much as 10%. But shares recovered quickly, and just after noon EST, shares were down just 2%.
So what: The big news today is a report from Reuters that Sandridge is planning to reduce its rig count in Oklahoma and Kansas by 75%. Falling oil prices have led oil explorers to slash capital spending budgets, but this would be one of the bigger cutbacks in the industry.
If the report is true, the move is a double-edged sword for companies like Sandridge. On one hand, reducing drilling could slow production growth and leave profits on the table if oil prices recover in the next year. On the other, this could be a prudent move to save cash, and if oil prices remain low for a year or two, it could possibly even stave off bankruptcy.
Now what: Sandridge was only profitable in the third quarter due to hedges it had in the oil futures market, and that's a one-time gain that can't fund operations forever. If management is indeed cutting back on future drilling, I think they're prudently preserving capital and waiting to see if oil markets improve. If they do, Sandridge can redeploy rigs, and in today's energy world I'd rather see an operator be overly conservative with capital than too aggressive.
The market may have punished Sandridge Energy early in trading, but I think cutting back drilling is a good move long-term. But the price of the stock and future profits are dependent on a recovery in oil, and no one knows exactly when that will take place.
Travis Hoium has no position in any stocks mentioned. 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.