SandRidge: Now Debt Free, Generating Huge Free Cash Flow

Nov. 10, 2021 7:14 AM ETSandRidge Energy, Inc. (SD)XOP55 Comments
Josh Young profile picture
Josh Young
7.39K Followers

Summary

  • SandRidge paid off all of its debt.
  • Added $28.4 million net cash in Q3.
  • Added $16.8 million subsequent to quarter end.

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SandRidge Energy (NYSE:SD) delivered another strong quarterly result. In addition to improved price realizations and holding production flat, the company paid off all of its debt and added $28.4 million in net cash to its balance sheet in Q3. And even better, it added $16.8 million in net cash in the first 36 days of Q4, implying approximately $42 million run rate quarterly free cash flow.

It was possible to analyze the Q2 result and identify the rapid cash build. My prior analysis indicated $14 million of free cash flow early in Q3, over a similar time frame to the $16.8 million generated in early Q4. This was a major improvement from the $14.1 million of free cash flow generated in the entire second quarter. And it presented a likely re-rate in the share price once understood by the market. Note SandRidge's performance vs the oil and gas equity ETF XOP.

SD vs SPY price
Data by YCharts

With $115.8 million in net cash versus a $500 million market cap, cash is rapidly becoming a material asset to the business. Despite an approved share repurchase plan, the company did not buy back any shares. With no current dividend, the cash pile may continue to grow until shares are repurchased, a dividend is announced, or an acquisition is made.

Until then, a $168 million annualized run rate free cash flow business versus an enterprise value of $384 million seems too cheap. This compares too favorably to public company peers at much lower free cash flow multiples, and could see another re-rate similar to the recent movement in the share price. Or it could see SandRidge as an acquisition target, even with Carl Icahn as the largest shareholder with control of the board.

The company also announced an interesting ESG angle. It is evaluating using its extensive pipeline infrastructure network for carbon capture and sequesteration, in partnership with the University of Oklahoma. While still early stage, this asset has a replacement value likely in excess of $1 billion. And companies active in this part of the market garner much higher valuations than oil and gas companies, offering potential upside if a successful sequestration plan is identified and deployed.

Carbon Capture, Utilization, and Sequestration ("CCUS")

The Company is actively exploring Carbon Capture, Utilization, and Sequestration potential across its operated asset base. The Company owns and operates an existing infrastructure network of more than 1,000 miles of saltwater pipelines and electrical lines and more than 60 active saltwater injection wells. Along with the University of Oklahoma ("OU"), the Company is evaluating the technical feasibility of utilizing these assets to one day transport and/or sequester CO2 emitted from nearby industrial facilities.

In addition to the environmental benefits of reducing emissions, proposed federal tax legislation contemplates meaningful financial incentives for the injection and/or sequestration of CO2. While these projects are in their infancy and require additional research before moving into commercial stages, the Company is excited to continue exploring their potential through its partnership with the University of Oklahoma.

SD vs SPY vs XLE price
Data by YCharts

SandRidge has materially outperformed since my initial thesis a year ago. But with a large and rapidly growing net cash balance, an approved share buyback, and optionality from a large land base and infrastructure ownership, the best could be yet to come.

This article was written by

Josh Young profile picture
7.39K Followers
Josh Young is the Chief Investment Officer of Bison Interests, an investment firm focused on publicly traded oil and gas companies. And he is the former Chairman of the Board of Iron Bridge Resources, which sold to Warburg Pincus and CPPIB backed Velvet Energy in 2018 for $142 million. He is a value investor primarily focused on energy stocks, natural resources stocks, and companies trading at low multiples to earnings, cash flow, or book value. He has presented at numerous investment conferences, including Platts, LD Micro, Oil & Gas Money, Louisiana Energy Conference, and the Global Resources Investment Conference and has been featured in media including Barrons, Bloomberg, Business Insider, Fox Business News, RT and Oil & Gas Investor Magazine. He is a graduate with honors from the University of Chicago in economics.

Disclosure: I/we have a beneficial long position in the shares of SD either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Important Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises may buy or sell shares without any further notice.

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