SandRidge Energy Slammed By Higher Spending For No Good Reason

Aug. 5.12 | About: SandRidge Energy, (SD)

After reporting earnings on Thursday night, SandRidge Energy (SD) dropped 3% even as the market soared on Friday thanks to the bullish jobs report. For some reason the market was disappointed with a forecasted increase in capital spending while oil approaches $91.

The company is an oil and natural gas exploration and production company focused on the Mississippian, Permian Basin, and now Gulf of Mexico.

The market is very focused on reduced spending in the domestic natural gas sector that any added spending is seen as negative. Though natural gas still struggles around $3, the market is missing that oil remains strong. Why wouldn't an oil exploration company attempt to produce more oil at these prices?

Q2 2012 Highlights

The company reported the following highlights for Q2 2012:

  • Adjusted EBITDA of $269 million for second quarter 2012 compared to $157 million in second quarter 2011.
  • Operating cash flow of $222 million for second quarter 2012 compared to $136 million in second quarter 2011.
  • Net income available to common stockholders of $809 million, or $1.47 per diluted share, for second quarter 2012 compared to net income available to common stockholders of $196 million, or $0.42 per diluted share, in second quarter 2011.
  • Adjusted net income of $36.8 million, or $0.07 per diluted share, for second quarter 2012 compared to adjusted net loss of $1.6 million, or $0.00 per diluted share, in second quarter 2011.

Analysts expected earnings of $0.01 so the reported earnings of $0.07 easily beat analyst estimates. The Mississippian production increased by 31% over Q1 providing for significant oil gains.

Guidance

The company provided improved guidance for the rest of 2012 as follows:

  • Increasing 2012 production guidance to 33.0 MMBoe from 32.3 MMBoe
  • Increasing 2012 capital expenditure guidance to $2.1 billion from $1.85 billion
  • For the second half of 2012, 81% of projected oil production is hedged at over $100 per barrel and another 37 million barrels of oil are hedged from 2013 to 2015

While the market didn't like the increased capital expenditure guidance, the company is producing more oil at very attractive prices.

Drilling Activities

The company averaged 43 drilling rigs during the quarter with the majority of the rigs working in the Mississippian play. With an inventory of 8,000 drilling locations on approximately 1.7M net acres, SandRidge is set for years.

One major benefit from this play is the close proximity to the Cushing oil hub. The benefits are huge over plays such as the Bakken in North Dakota where production has a difficult time of reaching market.

The Permian Basin and Gulf of Mexico plays will provide some diversity for the company.

Not Only Spending Increase

While SandRidge was slammed on Friday for higher capital expenditures, WPX Energy (WPX) was hit on Thursday after boosting its 2012 spending plan.

This stock dropped nearly 8%, the biggest decline since it began trading as a spin-off from Williams Companies (WMB) back on January 3rd.

Per this Bloomberg report, analysts are cautious on higher capex in what is claimed as a weak price environment. While the natural gas and natural gas liquids markets are weak, the oil sector remains strong.

The company is increasing capital spending to $1.4B from $1.2B primarily for additional land purchases in oil-focused properties, along with Bakken Shale drilling and completion costs.

Stock Price

The price action of SandRidge remains ranged bound now for three months. The stock has been stuck between $6 and $7 since mid-May. Considering the stock has been in a very tight range, investors might want to look for a breakout in either direction as a time to move.

1 Year Chart - SandRidge Energy

(click to enlarge)Click to enlarge

Conclusion

This company remains difficult to value considering the volatile swing between prices for natural gas and oil. Regardless, the increased capital spending by SandRidge and even WPX appear warranted considering the spike higher in oil prices.

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

Additional disclosure: Please consult your financial advisor before making any investment decisions.