SandRidge: A Dirt Cheap $6 Stock With Huge Potential

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 |  About: SandRidge Energy, Inc. (SD), Includes: APA, CHK, CVX, TOT, XOM
by: Cris Frangold

The great thing about SandRidge (NYSE:SD) is that it is the kind of energy stock offering something for all types of investors. The company is a steady rock with successful plays in both oil and natural gas. Even with its closest competitor, Apache (NYSE:APA) and larger ones such as Exxon Mobil (NYSE:XOM), BP (NYSE:BP), Total SA (NYSE:TOT), and Chevron (NYSE:CVX), SandRidge doesn't get intimidated, but maintains a steady course. The company keeps cash on hand, investing in new plays only when they fit into the company's strategy for growth and only within its means, investing heavily for rapid oil production. The company definitely has a heavy work load for the next few years with its successful and impressive inventory of drilling locations in the Mississippi lime and the Permian Basin. Because of the great finds there and aggressive exploration in other regions, including creative joint ventures, I see this stock as a winner for many years to come. With the company's oil finds and the recent climbing of natural gas prices, SandRidge is geared to make some serious progress for itself and smart investors that jump on board.

Sandridge has been aggressively seeking oil since they saw the writing on the wall regarding natural gas several years ago. The company's first quarter 2012 statement revealed that SandRidge operated an average of 36 rigs and drilled 250 wells. This is pretty impressive for a company that only recently began focusing more on oil exploration and production. In fact the company had a total of 240 gross (213 net) operated wells that were completed and brought on production during the first quarter of 2012. Including five drilling saltwater disposal wells, the company currently has 42 rigs operating, of which 20 are SandRidge-owned Lariat rigs. In the Mississippian Play, the company drilled 68 horizontal wells in the Mississippian play: 55 in Oklahoma and 13 in Kansas. The company reported average production up 23% to 19,300 barrels of oil equivalent (BOE) from here during the first quarter of 2012. Production growth is expected to continue in the second quarter of 2012, with the company increasing production to 26,737 BOE per day. Currently, 640 horizontal wells have been drilled in the Mississippian play, and the company has an inventory of approximately 8,000 drilling locations on approximately 1.7 million net acres. This year, the company plans to drill approximately 380 horizontal wells in the Mississippian play and operate an average of 26 horizontal rigs. Competitor Chesapeake Energy (NYSE:CHK) is also active here, and is operating at close to the same level of activity as SandRidge operating 22 rigs producing 11,300 per day.

In the Permian Basin, the company has drilled 182 wells during the first quarter of 2012 and currently holds approximately 225,000 net acres in the play. The company plans to drill 759 gross wells into various formations in 2012 at a net capital cost of $479 million, and currently operates 12 rigs here. These rigs are operating on the Central Basin Platform drilling Grayburg/San Andres vertical wells at depths ranging from 4,500 feet to 7,500 feet. The average well in this location has an estimated ultimate recovery (EUR) of only 58,000 BOE, and the average cost to drill and complete of $643,000 translates into high returns for SandRidge. In the Gulf of Mexico, SandRidge completed the acquisition of Dynamic Offshore Resources, LLC in April and today the company is operating one rig in the Gulf of Mexico and plans to drill 13 wells and participate in the drilling of two non-operated wells during the remainder of 2012.

SandRidge focuses on keeping business simple in the manner in which it approaches production of oil and gas. The company strives to keep a laser-like focus on plays in both testing them and then bringing products to market from them. CEO Tom L. Ward, who just recently received the Executive of the Year award from Oil and Gas Investor Magazine, stated during a discussion of the first quarter 2012 results that, "We are efficient because of our relentless focus on a single place. In the Mississippian, this allows us to prepare lead time to install electricity and disposal before we drill and to watch our drilling cost very closely. We see a lot of companies talk about how much a well might make in a particular play on a particular day, but not many discuss what really matters, which is how much you spend, how you prepare and how much you find after drilling several hundred wells on our way to several thousand." SandRidge continues to produce successful plays based on this philosophy.

The company has been doing well based on financials. While still awaiting the promised rise of natural gas prices, SandRidge continues oil production with a wealth of good solid plays and sound finances. The company has a market cap of $3.02 billion and is part of the basic materials sector. The company has a P/E ratio of 55.8, equal to the average energy industry P/E ratio and above the S&P 500 P/E ratio of 17.7. First quarter 2012 results reveal adjusted EBITDA of $185 million compared to $149 million in first quarter 2011. The company had an operating cash flow of $153 million for first quarter compared to $102 million in first quarter 2011, and adjusted net income of $21.2 million, or $0.04 per diluted share, for first quarter 2012 compared to adjusted net loss of $7.7 million, or $0.02 per diluted share, in first quarter 2011.

With a tripod foundation of robust revenue growth, good cash flow from operations, and expanding profit margins, it is difficult to overlook this company as an investment for long-term growth. While the company is in the hands of good leadership and is poised to make true on its three-year plan, now is the time to buy a company at a bargain price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.