With the recent round of announcements coming out of the SandRidge Energy (SD) camp, it's a toss up as to whether the oil/gas company is turning the corner with respect to production and asset yields, or whether it's merely overshadowing the longer-term issue, the company's funding gap, possible hocus pocus.
Back in April, we noted that while SandRidge might possess some long-term potential we were on the "value trap" side of the fence. Since then the stock is up over 15%. It's now time to have another look.
The volume has been robust of late, thanks to a number of recent announcements, but the drawdown is still nearly 30% from the highs early this year and the broader trend is downward.
As we noted...
There are two ways to look at this, which way you go depends on your appetite for risk: Value trap with poor assets and management or light at the end of the tunnel with TPG leading the way to shareholder value creation. We are leaning towards a value trap.
SandRidge is an independent oil and natural gas company, engaged in development and production activities in the Mid-Continent area of Oklahoma, and Kansas. It also owns and operates other interests in the Mid-Continent, Cotton Valley Trend in East Texas, Gulf Coast and Gulf of Mexico.
Most of the recent bounce in SD is a result of its recent announcements concerning successful Mississippian wells and better-than-expected 2Q results.
Operationally. SandRidge reported EBITDA of $268 million for last quarter, flat from last year's $269 million. But over that period SD sold off its Permian Basin assets to better focus on Mississippian acreage. Thus, the matching EBITDA is fairly impressive. This was in part due to the reduction in well costs, down to just $2.95 million per well, and below 1Q's $3.1 million.
The other keys include:
- For the six months ended in June, EBITDA was up to $537 million, compared to $454 million in the prior year.
- Production guidance is up 2% for the year
- SD brought 111 Mississippian wells online in 2Q with an IP rate of 300+ Boe.
The real gold mine is the Middle Mississippian. Initial testing showed that the average 30-day IP rate is over 700 Boe/d, based on 11 wells that it drilled during the second quarter. Compare this to the wells drilled in Chester and Lower Mississippian that averaged around 460 Boe/d.
Management shakeup. Since the departure of former CEO Tom Ward, SD has replaced the executive team with a couple quality guys in James Bennett and Eddie LaBlanc. Both have an extensive history in the oil and gas world from an investment and accounting point of view, respectively. While these guys are not all-stars with big names, they are most certainly what SD needs at this point. We expect them to work hard on correcting market perception of SD's ethical standards to help grow this company back into the prominent OKC company it was.
There's no denying that the Mississippian production is catching hold and with well costs being reduced as well, but we remain cautiously optimistic.
The funding gap is still a big overhang for the stock.
The company has kept its 2013 CapEx plans at $1.45 billion and plans to spend another $1.5 billion on CapEx in 2014. This will help boost Mississippian production 30% year over year.
Although the interim might not appear so bad, it's 2015 and beyond that still has overhang. SD has $775 million available via its revolver and $1.09 billion in cash, which gives the company funding through 2015. In 2015, we see SD as having the potential to generate some $700MM in operating cash flow, but this still puts the company's leverage ratio up to 3.5 times, well above management's 3 or below comfort level.
We believe that...
Until the Mississippian play turns the corner and starts to produce [meaningful] cash flow, it will either have to spend outside of the company's operating cash flow beyond the next two years or halt all CapEx and production growth.
The other issue? Management seems to be content with uncertainty. The company has put the monetization of assets on hold, until 2015. The likely monetization efforts will be a JV of an MLP for its salt water disposal system or monetizing its Gulf of Mexico assets.
The other problem with SD's outlook for the Mississippian is that the company still appears to be overestimating the outlook...
Management is also running its Mississippian economics on $100 oil and $4.25 natural gas, despite NYMEX strip pricing (out 5 years) at around $90 to $95 oil and $3.50 to $4.00 natural gas.
There is nothing extremely appealing about this company in terms of massive production upside or new major discoveries on the horizon. The company is a long-term story, and if you have a steel stomach now might be a good time to buy.
Within the last couple years, the company hit the $10 mark, and billionaire investor/hedge fund manager Leon Cooperman of Omega Advisors believes the shares are worth $10 per share. This $10 target seems like a long shot from here, but nonetheless a possibility as new management takes hold of the Mississippian playand the company and parlays it into new opportunities.