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Finding a great value play in the oil and gas sector is not too difficult if you know where to look. Better yet, if you know what not to overlook.

SandRidge Energy (SD) is a prime example. This company is looking even more attractive than in the past because of management's new strategy of striving to reduce debt while continuing to take advantage of great oil plays. The company currently owns 225,000 acres of leasehold primarily in the Central Basin Platform of the Texas Permian Basin. It is here where approximately 7,350 potential future drilling locations have been identified. Additionally, the company has leasehold in the Mississippian with 1.75 million acres, and more than 8,000 potential horizontal drilling locations identified. SandRidge keeps its activities of exploration and production in shallow, conventional on-shore and off-shore basins with plays in the Mid-Continent region of the U.S. including southern Kansas and northern Oklahoma as well as the Permian Basin, the Gulf Coast, the Gulf of Mexico, and West Texas.

Activity in the Permian Basin has been picking up this year reaching over 500 rigs this past quarter. Energen Resources (EGN) has gradually increased its position in this play since 2009 making six major acquisitions and increasing its position to 275,000 acres. Energen's most recent purchase came this past February when it acquired 3,200 net acres for $68 million. The company plans to spend $890 million on drilling and development in this region. Concho Resources (CXO) is another player in the Permian Basin and currently has 750,000 net acres under lease. Concho Resources is operating seven rigs in the Yeso formation in New Mexico and estimates that it has roughly 1,600 vertical drilling locations there.

Another competitor, Apache (APA), also employing vertical drilling, has 1.6 million net acres under lease. Apache will operate an average of 32 rigs in 2012 and hopes to drill 760 wells at a cost of approximately $1.9 billion. SandRidge continues to target multiple formations in this play, drilling wells to depths of 4,500 to 9,000 feet, with an average cost of $643,000, but producing 58 Mboe while providing an internal rate of return of approximately 80%. While a great producer, the Permian Basin is just one asset SandRidge continues to exploit. With other great plays and sound management practices, I believe SandRidge to be a company to buy now and enjoy the ride.

The Mississippi Lime play is where SandRidge has produced great results as well. After the company's joint venture agreement was final with Repsol YPF (REPYY), a leading international energy company based in Madrid, Spain, it provided leverage to catapult SandRidge to the largest acreage holder with 1.7 million acres encompassing over 8,000 possible drilling locations. Repsol S.A. is engaged in the development, and production of crude oil and natural gas primarily in Spain and Argentina. The company also operates 4,506 service stations and supply units that include 3,620 in Spain, 425 in Portugal, 166 in Italy, and 295 in Peru. Also in the Mississippi Lime play is Chesapeake Energy (CHK). Chesapeake is hoping that this productive play will provide needed cash for help with the company's debt issues. Chesapeake is betting on this and a handful of other unconventional plays to boost its cash reserves. SandRidge currently has 7,000 net potential horizontal drilling locations identified in the Mississippi play and is targeting vertical depths of 4,000 to 7,000 feet.

The company's average horizontal well for this region costs $3.2 million to drill and produces 456 thousand barrels of oil equivalent (Mboe). This provides an internal rate of return of approximately 98%. The company drilled 167 horizontal wells in the Mississippian in 2011 and expects to drill 380 horizontal wells in 2012 using an average of 26 active rigs.

As Chairman and CEO Tom Ward stated in his April letter to shareholders, "Every action we take, including our pending acquisition of inexpensive oil and cash flow through the purchase of Dynamic Offshore Resources (DOR), is meant to improve our ability to develop our Mississippian holdings and to fulfill our three-year growth strategy. Because of its exceptional economics, our Mississippian acreage has been a remarkable source of value creation for the company. We acquired two million acres of leasehold for a total investment of $400 million or roughly $200 per acre. In 2011, we monetized approximately 500,000 acres through three separate transactions-two joint ventures and one royalty trust-for a total of $1.83 billion. A second royalty trust is expected to raise another $500 million. Together these transactions will have raised $2.33 billion in non-debt capital, giving an implied value of $4,236 per acre to these properties." It is because of this type of laser-like focus that SandRidge is succeeding in this play as well as others.

SandRidge reported second quarter 2012 earnings of 0.07 per share, and had second quarter 2012 revenues of $478.43 million, 25.36% above the prior year's second quarter results. It had revenues for the full year 2011 of $1.42 billion, putting it at 1.89% above the prior year's results. Year-on-year SandRidge Energy had net income fall 43.29% from $190.57 million to $108.07 million despite a 51.89% increase in revenues from $931.74 million to $1.42 billion. In 2011, the company increased its cash reserves by 3,442.23%, or $201.82 million.

Cash Flow from Financing totaled $645.19 million or 45.59% of revenues. In addition the company generated $475.49 million in cash from operations while cash used for investing totaled $918.86 million. The company recently announced that its Board of Directors has declared a $3.50 per share semi-annual dividend on its shares of 7.0% Convertible Perpetual Preferred Stock that will be paid in cash on November 15, 2012 to holders of record on November 1, 2012. The company currently has 3,000,000 shares of 7.0% Convertible Perpetual Preferred Stock outstanding. It has a market cap of $3.12 billion, and a P/E ratio of 45.5 and P/S ratio of 2.2.

SandRidge has a solid foundation to continue building upon and will continue to please investors wise enough to jump on board.

Source: SandRidge - Don't Overlook This Hot Value Play