By Kathleen Martin
The wild ride that is the energy market is wreaking havoc on energy exploration and production companies. Most favor natural gas, as it is cheap and easy to source. Many companies have taken the position that while natural gas is in the basement price wise, it is a good time to ramp up production in anticipation of demand increasing in colder months for households and industry switching to the fuel for price reasons. SandRidge Energy (SD) has moved in the opposite direction, choosing to capitalize on its higher margin oil production to increase revenues and earnings for the company.
SandRidge Energy's principal focus is on exploration and production. It also owns and operates gas gathering and processing facilities and CO2 treating and transportation facilities. It owns and operates a drilling rig and an oil fields services business. Its exploration and production operations are in the Mid-Continent, Permian Basin, Gulf of Mexico, West Texas Overthrust, and Gulf Coast.
The company's first quarter 2012 results show increased operating cash flow of $153 million from $102 million in the first quarter of the previous year. Net income was $21.2 million or $0.04 per share compared with $7.7 million and $0.02 in the first quarter of 2011. First quarter highlights included daily average production increase of 23% in the Mississippian from the same period last year. The company experienced record oil production of 3.4 million barrels in the first quarter. Production peaked on April 29, 2012 to 99 thousand Boe per day. The company raised $590 million net from the SandRidge Mississippian Trust II in April 2012 and increased its borrowing base to $1.0 billion and extended debt maturity to 2017. It ended the quarter with cash of approximately $600 million and no borrowings against the $1 billion credit facility.
The average number of rigs operating in the first quarter was 36. The company had 240 operated wells in production in the first quarter of 2012. The company produced 3,427 barrels of oil in the quarter compared to 2,581 in the first quarter of 2011. The company produced 15,746 thousand cubic feet of gas compared to 17,266 in the first quarter of 2011. It produced 6,051 barrels of oil equivalent compared to 5,459 in the same period 2011. It received $86.27 per barrel net compared to $72.26 per barrel in 2011. It received $2.35 per mcf natural gas compared to $3.44 in the same period of 2011.
In 2008, SandRidge derived 90% of its revenues from natural gas. The company predicts that 85% of its 2012 revenues will come from oil. The company has incurred a lot of debt to transform itself to an oil producer in order to increase earning power from the higher margin oil business. In order to deal with the debt situation, SandRidge has opted to sell off some of its assets. It was recently announced that SandRidge sold the assets of its subsidiary, Chaparral Supply LLC to MRC Global (MRC), making MRC Global SandRidge's main distributor in Kansas and Oklahoma for pipe and valve fittings. Financial terms were not announced. The company also disclosed that it had sold some non-core assets in West Texas that produce 1,000 Boe per day for cash proceeds of $130 million. The sale was made to a private entity.
Energy companies make acquisitions and divest of assets all the time. It is all part of trying to stay ahead of commodity prices. Properties that don't deliver on promised exploration results are routinely shed and properties that are either in production or show promise are acquired to boost revenue and earnings. Apache (APA) has acquired many of the depressed assets of BP (BP) and has made no significant divestitures in 2011. Chesapeake Energy (CHK) has announced that it will sell almost all of its pipeline assets for $4 billion to deal with its debt obligations. Devon Energy (DVN) expanded its presence in the Utica Shale play by purchasing 125,000 acres in the last part of 2011.
SandRidge is a company that has good management with a stated plan that it is sticking to. It is difficult for companies to have the ability to move quickly when the commodities markets are against the business activity of the company. It is a brave move to cut back on natural gas production to invest in and produce more oil, an industry that is viewed as in the twilight of its lifespan. It is a high margin business. It is also a very expensive business. SandRidge has demonstrated that it is able to increase production and carefully manage the producing properties.
The major expenditures of exploration and development are very costly. A company with the expertise to hire the best geologists and engineers can compete in the market; it is just very, very costly and difficult. SandRidge is trading about halfway to its year high and about 50% up from the year low. The book value properly represents the current value of the company's assets which are being impacted by the low price of natural gas, and the company's midstream assets. The stock price can't seem to stay above $10 in the last year or so and seems to have found a level in this range.
SandRidge is a small player in a very big and very competitive field. The company looks like a takeover target at these prices, and in the current environment, with the company's debt load, it would be hard to imagine there would be much of a premium paid from this price level. If there is some remarkable improvement in the value of the underlying commodities, the landscape changes and this company will be an attractive takeover target for a larger concern.
The company can survive on its own, but the stock price just does not offer a whole lot of lift until the usual culprits of domestic recovery, European debt crises and demand from emerging economies provide some indication of stability for oil and natural gas.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
