The recent concerns over oil and natural gas have resulted in a frigid overall attitude towards oil and gas stocks lately. In contrast to this general sentiment, however, SandRidge Energy (SD) is one company that stands out as a promising stock. Many investors are bullish on the stock, as the company has done well in managing the transition from natural gas to oil. SandRidge's management is more focused and has risen above the management of many competitors, most notably Chesapeake Energy (CHK). SandRidge should have no problem maintaining its current trajectory.
Over the past year, SandRidge has been engaged in the sale of assets related to natural gas, as the abundance of natural gas has led to unprofitable margins. By getting rid of unnecessary drilling rigs, SandRidge has begun a successful transition into oil drilling. This has balanced its portfolio, which was once weighted very heavily in natural gas. It has also bolstered its margins, so this makes the stock look very appealing at the moment.
Analysts have taken notice of this as well. One writer even notes that earnings per share are expected to increase by over 93% next year. Reviews like this will help the stock continue to do well, as it will attract a large number of investors to the stock. It certainly does not hurt, furthermore, that the company declared semi-annual dividends a little over a week ago. SandRidge is doing a lot that should keep its current investors very pleased and continue to bring in new investors as well.
SandRidge did not get these good numbers by luck, however, as it has been proactively switching its business to improve margins and eliminate unnecessary assets. For example, SandRidge is selling its subsidiary company Chaparral Supply to MRC Global (MRC). Chaparral supplies SandRidge with the pipes, valves, and fittings it needs to run its oil wells, so this sale may initially concern investors. SandRidge will not lose the benefits of its relationship with Chaparral, however, as the deal states that MRC Global will still provide SandRidge with the equipment it previously got from Chaparral. For SandRidge, this is highly beneficial. It gets to unload an asset it does not need while maintaining the product it does need.
SandRidge also recently completed the $130 million sale of non-core assets to a private party. This is part of its overall initiative to becoming predominately a gas producing company. As I have mentioned, this has kept the company's margins high. Impressively, the company has changed over the past few years. It had 90% of revenues from natural gas in 2008, but it now has 85% of revenues from oil. Almost needless to say, such a large turnaround was due in part to successful management. This turnaround is the main driver of optimism surrounding the stock. While there are other companies, such as Chesapeake, that are attempting the same turnaround, none have done it so quickly or so effectively. SandRidge continues receiving positive press for these actions, and this is well-deserved. As a result, SandRidge stock should do quite well.
Chesapeake is not necessarily a bad stock to own either, as it appears that the worst is already behind the company. Similar to SandRidge, it is exploring the sale of some of its assets. It is considering the sale of a pipeline to Global Infrastructure Partners. This move is an attempt to cut costs, but there are some that believe it should hold on to these assets. It needs to sell $7 billion by the end of the year to avoid a credit downgrade, but many of these assets are oil-related. Chesapeake might not want to dispose of too many oil-related assets, as it is trying to weight its portfolio heavier in oil. I think this stock will stay fairly steady for the time being, but it does still have some work ahead of it.
Encana (ECA) has an outlook that is similar SandRidge, but it is not quite as good. Encana has actually cut back capital expenditure on natural gas, showing that it is transitioning to a more oil-weighted portfolio. This stock will likely be increasing as a result, much like the case with SandRidge stock.
Anadarko Petroleum (APC) is also looking good at the moment. With its portfolio heavily weighted in oil, this stock has a lot of room for growth. In fact, FBR Capital has set a price target on the stock at $90 with a market perform rating. The stock is currently trading around $63, so an increase to $90 would be an extraordinary increase for investors. Especially given the current volatility of the energy industry, Anadarko stock is looking strong. It should perform well for many of the same reasons that SandRidge stock will do well.
There are some non-oil heavy companies that are poised for growth as well, but these are better long-term investments. For example, Devon Energy (DVN) is a strong natural gas producing company. Do not expect short-term returns on this stock, but a long-term investment should pay off. As the LNG export market develops and companies change vehicles to run on natural gas, the long-term outcome is a rise in the price of natural gas. This will make Devon stock profitable once again, and it will have a positive impact on similar companies as well. People must determine which stocks can survive the wait though.
With many companies undertaking similar initiatives to cut back on natural gas and further produce oil, there is little to differentiate stocks. For SandRidge, the successful transition from natural gas to oil has been quicker and better managed than competitors. This gives it an edge in the industry that should translate well to the stock. Natural gas will continue to be low-priced in the near future, so increasing production of oil might be the only route SandRidge can take. Doing so will keep its margins high and please investors. SandRidge is a good stock to own at the moment and should be for quite some time.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.