Cheaper, Faster Growing, Less Levered Alternative To Sandridge

Includes: ATXDY, CHK, DVN, RRC, SD
by: Josh Young

Tom Ward deserves a lot of credit for repositioning Sandridge (NYSE:SD) in the aftermath of the collapse in natural gas prices in 2008. Had he stayed the course, Sandridge's only asset would have been its West Texas Over-thrust properties, and the company would have gone bankrupt as that asset was written down to near zero value. Instead, he bought and leased up assets in the Permian Basin, leased up and started aggressively developing almost two million acres of Mississippi Lime acreage, bought substantial Gulf of Mexico production, and sold down billions of dollars of assets via drilling trusts and asset sales at significant profits.

Mr. Ward has built up a tremendous company, and appears to be continuing to create value and grow the company. And to many investors interested in getting exposure to the ultra-high rates of return generated from drilling Mississippi Lime wells, Sandridge is the obvious choice. It is a big company, it is liquid, and other than its Gulf of Mexico assets, it is a pure-play Mississippi Lime investment.

There are other large companies with exposure to the play. Chesapeake (NYSE:CHK) had almost as large a position as Sandridge in the play, but it just sold down a large portion of its acreage and production and it appears to be in divestment mode since its long time CEO, Aubrey McClendon, is leaving the company. Range Resources (NYSE:RRC) and Devon Energy (NYSE:DVN) have drilled some of the best wells in the play, but both of them have considerable other assets that comprise the bulk of their value, making it difficult to "play" the Mississippi Lime via investment in their stocks.

There is an alternative - a company that is substantially less financially levered, with more acreage per dollar Enterprise Value, more rapid growth and higher percentage oil production. The downsides to the company are that it is traded primarily on the Australian stock exchange, and that its stock is less liquid (although it is impressively liquid for the size of the company). The company is Austex Oil (OTCQX:ATXDY).

The numbers and the math are simple - Sandridge has a current enterprise value of $4.8 billion, $2 billion in net debt, 1.85 million Mississippian acres and is producing 68,000boepd (pro forma for Permian asset sale, 44% oil). Austex has a current enterprise value of $54 million, 0 net debt, 23,000 Mississippian acres and is producing 700 boepd (expected March exit rate production, 72% oil).

Sandridge is trading for $160,000 per barrel of oil produced per day (excluding low margin gas production) or $2,594 per Mississippian acre, and Austex is trading for $107,000 per barrel of oil produced per day (also excluding gas production) or $2,348 per acre. Additionally, Austex expects to reach 1,300 boepd by the end of 2013, or 86% growth, while Sandridge expects to grow 38% to reach 93,000 boepd by the end of 2013.

Finally, Austex is projecting over 90% IRRs from its drilling activity, due to higher % oil cut, versus Sandridge's projection of ~55% IRRs - so if both companies meet their targets, Austex should grow more capital efficiently than Sandridge due to higher rates of return from drilling.

Obviously there are a number of caveats here - Austex is smaller, its stock trades primarily on the ASX, and its stock is less liquid. However, investors able to accept less liquidity in exchange for a more compelling valuation, higher growth rate and better capital efficiency, could find Austex to be an attractive alternative for exposure to the Mississippi Lime.

Disclosure: I am long OTCQX:ATXDY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.