By Siraj Sarwar
If such a thing existed, every single investor would certainly fall upon the perfect stock. However, up until now the "perfect stock" has been considered largely an object of myth. Nevertheless, it is impossible to locate such an investment if you never even look.
We will therefore now proceed to consider the main qualities of a "perfect stock" and then determine whether or not SandRidge Energy (NYSE:SD) fits this description. In particular, we will consider company growth, margins, balance sheet, money-making opportunities and the dividend prospects for the perfect stock.
In the Mississippian wells region, SandRidge improved production by 31 percent quarter-over-quarter, and 200 percent year-over-year. It also enhanced its financial stability by raising $615 million through the closure of the Mississippian Trust II IPO, and the sale of additional items belonging to the Mississippian Trust I. SandRidge raised an additional $130 million through the sale of non-core tertiary assets. SandRidge also elevated 2012 production suggestions to 33.0 MMboe from 32.3 MMboe.
In Q2 2012, SandRidge reached record oil generation levels amounting to 4.6 million barrels of oil and a total of 8.2 million boe. SandRidge revenue has therefore been growing at a rapid rate over the last five years. At the end of 2011, SandRidge's five-year annual average revenue growth rates were at 29.52 percent. Meanwhile, the year-over-year growth rate was 51.89 percent at the end of 2011.
In addition, SandRidge has demonstrated its ability to efficiently convert revenues into net profits. The company increased both its profits and operating cash flow in the second quarter over the same period last year. It also increased the amount of net income available to common stockholders by an outstanding 75 percent. This helped the company to report earnings of $0.07 per share for Q2 2012, as opposed to earnings of $0 per share in Q2 2011.
In order to complete this stock analysis it is also useful to examine company margins and other such metrics.
Margins % of Sales
Return on equity
Return on invested capital
Financial Leverage (Average)
(Table is sourced from Morningstar.com)
SandRidge is making very sensible and low-cost investments in order to generate greater revenues. In 2011, the company spent only 35.37 percent on its COGS and produced a high gross margin of 64.63 percent. Furthermore, it produced 66.66 percent in gross margins in the following twelve months. During this period, the oil and gas driller operating margin amounted to 60.58 percent, with a net margin of 46.92 percent. Analysts often give excellent ratings to a stock if it produces gross margins above 35 percent and a net margin over 15 percent. The table above stands as clear evidence that SandRidge has surpassed these assumptions.
Moreover, SandRidge is committed to improving its balance sheet. SandRidge has a market capitalization of about $3.4 billion. SandRidge is also providing higher returns on equity amounting to 35.09 percent in the past twelve months. Meanwhile, SandRidge's chief competitors, Devon Energy (NYSE:DVN) and Chesapeake Energy (NYSE:CHK) are offering ROEs of 11.06 percent and 16.17 percent, respectively.
SandRidge had a strong current ratio of 1.19 for the latest quarter. It also has a debt-to-equity ratio of 1.3. SandRidge is thereby generating impressive returns of 13.96 percent on invested capital, while DVN and CHK have reported returns on invested capital amounting to only 7.77 percent and 8.47 percent, respectively.
Some investors may be concerned since SandRidge currently pays no dividends. However, investors may well gain significant rewards from the company's share growth. In spite of an overall decrease in oil prices, combined with generally depressed natural gas prices, SandRidge has performed very well. Although the company has a market capitalization just under $3.4 billion, it is well-positioned for considerable growth in the near future.
Since last year, SandRidge Energy has improved significantly by picking up four stars from Morningstar. Most of the gains in net margin and return on equity are derived from gains on derivative contracts, which may help to clarify why the stock is up only ten percent in previous years.
SandRidge began as a natural gas corporation. While competitors such as Chesapeake Energy and Devon Energy shifted toward more profitable production of oil and gas liquids instead of dry gas, SandRidge has opted to develop its oil exposure. This is all in response to a dramatic drop in the natural gas rates as a result of the shale gas boom. At the moment, this company has a vast array of assets in a multitude of different areas, including Mississippi Lime, the Permian Basin, and overseas in the Gulf of Mexico.
SandRidge is seeking to grow a lot over the next three years. At the moment, it has substantial amounts of land assets but has not yet enhanced its production levels to anywhere near their full potential. Nevertheless, this corporation has performed admirably by discarding non-core assets in order to increase cash flow. SandRidge can use this cash to invest in drilling activities which ought to ultimately improve company output.
For SandRidge to keep improving, it will need to deal with its expenses and begin using cash flow to pay off debts, as well as beginning to pay a dividend to investors. In the meantime, given that SandRidge is currently expanding, and assuming that energy prices keep the current upward trend. This company ought to grow significantly over the next few years. The company is already increasing its revenues and effectively converting that revenue into net profits. I therefore believe that SandRidge could be a nifty stock for potential investors.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Siraj Sarwar, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.