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Sandridge Energy (SD), morphing into an oil company.

|Includes:Chesapeake Energy Corporation (CHK), FST, HK, SD, SWN

Sandridge Energy (NYSE:SD) is a land based E & P company that’s previous focus had been NG production. NG has been in a 2 year slide. SD has a leveraged Balance Sheet and has an excess of 2 b in debt. Sd has very nice NG hedges thru 2010, but is unhedged after 2010 for NG

Many do not believe SD can manage its way thru this environment and it is one of the heaviest shorted energy names in the sector, more than CHK & HK or SWN combined

Are the shorts right?? I think not.

Sandridge is executing a strategy to increase oil production and will be reducing gas-drilling-related CapEx and shifting more capital to the Permian Basin and accelerating the development of their oil plays.

SD had five oil rigs in January, to 13 today, drilling for oil. SD plans to be at 18 oil rigs by the fourth quarter without the impact of the new Arena acquisition. Therefore, oil production will be increasing rapidly. The majority of the wells take less than one week to drill, and the entire Permian Basin inventory has a rate of return of more than 80% based on today's oil strip.

In addition, SD has made strategic investments by acquiring oil assets from Forest Energy and its recent Arena Acquisition.

In Feb oil production for 2010 was forecasted to be 5.2 Mmbls rose to 5.8 Mmbls in May and should be raised again for 2010 to account for the Arena Acquisition to 7.3 Mmbls.  The company CEO is on record saying production will be 22,000 per day or over 8.0 Mmbls per year. At $80 per BBL , oil is 640 m in revenue just for the oil component.

SD is well hedged for 2010 and is enjoying $9.15 per Mcfe prices on nearly 90% of its production this year. Earlier this year they added about 3.4 million barrels of oil hedged to $84.40 per barrel.

SD will continue to develop the high CO2 Warwick Thrust reservoir in the Piñon Field with a 10-rig program. Finding cost is 1.00 per mcf and and the output will be processed by its new OXY Century Plant coming online later this summer.

Sooner or later, the supply demand picture will get better on the NG side. Until then Sandridge will continue to focus on higher margin oil.

SD stock has fallen more than 50 % YTD. Recent pressure in the price was due to selling by Arena holders who prefer to move on. This, coupled with the new focus on higher margin oil, has created a unique buying opportunity in my opinion. Most analyst’s have a $10 target which might be proven as too conservative.



Disclosure: Long SD, other energy names
Stocks: CHK, SD, HK, FST, SWN