SD - SandRidge Energy

[Myth465]

I am very happy with the recent moves Ward has made. It should be very interesting going forward to see what he does with all the extra acerage. I hope he holds on to it and either increases the size of the royalty trust or JV with another company. Oil, gas or both - he has now positioned the company for whatever lies ahead!

cheers
Zorro

I think we have to JV or buy more rigs. I would like him to pull a CHK and do a JV where they pay us cash to deliver and pay 1/3 - 2/3 drilling costs. Im excited and really should have bought more. I may once I hear the audio feed. Zorro where do you peg value at and are you buying more. I know north of here but was waiting for the 10k to pin a number on it.

I think 2013 leaps are very attractive though I dont want to pay the premium.

[Zorrofan]

Myth,

I did a quick & dirty spreadsheet to come up with some projections. I tried to keep everything reasonable, except for 2014 where I did a little daydreaming. I kept oil prices at $85 per barrel and show steady increases in production, I have kept gas production constant (again except for 2014) & kept interest and admin costs constant at 2010 levels. Over all by 2013 SD could be making $2/per share. SD has a lot of potential with steady prices and even more if you think oil and gas prices can go higher.  Not sure what the ultimate target price should be but I am confident it is a lot higher than where it is today. Ward holds a lot of shares and has both money & reputation on the line. Let me know what you think of the projections…..

Sandridge projection 2011 to 2014                                                      
Year            2011      2012      2013                               2014   
                           
oil production in barrels      40000      55000      70000                             85000   
natural gas in
 billions of cubic feet       112 $4.50   112  $4.75    112   $5.00                       150  $8.50
Revenues:                           
oil production      $1,241,000,000      $1,706,375,000   $2,171,750,000      $2,637,125,000   
natural gas      $504,000,000      $532,000,000   $560,000,000      $1,275,000,000                                             
Total revenues      $1,745,000,000      $2,238,375,000   $2,731,750,000      $3,912,125,000   
                           
Less operating costs:                           
production costs      $297,840,000      $409,530,000   $521,220,000      $632,910,000   
depreciation & amortization   $523,500,000      $671,512,500   $819,525,000      $1,173,637,500   
interest charges      $258,000,000      $258,000,000   $258,000,000      $258,000,000   
administration costs   $165,000,000      $165,000,000   $165,000,000      $165,000,000   
income taxes      $0         $0      $0         $0   
                           
Total expenses      $1,244,340,000      $1,504,042,500   $1,763,745,000      $2,229,547,500   
                           
Less preferred stock dividends $34,526,000      $34,526,000   $34,526,000      $34,526,000   
                           
Net income for shareholders   $466,134,000      $699,806,500   $933,479,000      $1,648,051,500   
Per share         $1.02         $1.54      $2.05         $3.62   

cheers
Zorro

[Zorrofan]

The table looked okay in preview so I am not sure what I did wrong.....anyone, help please!

cheers
Zorro

[Myth465]

Your numbers look very reasonable but inmo anything could happen with Net Income / CF. I believe this is and has always been an asset play. Ward confirmed it today, he said FCF will come with asset sales.

I want to get the proved numbers from the 10k and then do some basic valuations on the Miss play. Right now we have too many moving parts and are selling assets every quarter.

Ward said a number of key things which got me excited.

1. As suspected he is up to $1 million acres.
2. Again can only hold 250,000 with 10 - 11 rigs.
3. Noted that he believes on a whole the acreage is the same or similar throughout and has the best economics.

4. Will likely do more royalty trusts. As discussed earlier the cash up front makes this the best way to raise capital and provides a higher NPV vs. a JV. He doesnt think they can trust it all though. I am not sure why but probably because they likely have to sell producing reserves with the promise to drill new wells.

5. Will likely see a JV or true asset sell at some point for the remaining acre.

---

Ward did this with SD originally and shares hit $60 on strong natural gas and drilling results. He found a nice field to drill and focused on it. Then the bottom feel out of gas. He basically bet on the wrong horse and is now doing it with oil. This time I believe he will hedge more, he knows a slow down here or in China will kill oil prices.

Finally he said on the Trust deal about $110 million was for 10,000 acres. The rest was for PDP and future drilling. Thats a very interesting value for the play if I heard correctly.

Interestingly enough he doesnt see gas coming back anytime soon. I agree.

I plan to rotate some of my flat ATPG leaps into SD. Just have to figure out which ones to buy on the 2013.

[bathtime]

Fwiw, some skeptical takes on SD from an energy investor board when I asked about it:

----

Zman: I've taken a hiatus from the name until they make some guidance numbers and deliver on promises. Easier names to follow. I think the value is probably there long term but I don't feel a need to catch the bottom so am not watching it closely. Name has completely facelifted over the last year (was a Pinon Gas play, now a Permian oil play). Probably ought to pay more attention and will look at the presentation but I'm in the fool me twice, three times, etc camp there at the moment.

----
jiveyjr: re: SD…I'm expecting it to encounter resistance 8.45-8.50…I'm selling all but just a small piece of mine there….been a long, long frustrating hold for me….

---
Zman: no, the [Mississippian] well control out there should be extensive, not a problem with that, more an issue with management. The story got complex and overly leveraged to gas and under hedged and a lot of things went wrong. Management has experience but the CFO we liked quit, I don't know anything about the new guy and yet Ward continues to be pretty well paid. And has not, last I checked met a recent production goal. I probably ought to go have another look at it. 

---

BOP: SD — it's like the Boy Who Cried WOLF…. or LION…. or ZOMBIE… or BIG FOOT… or GIANT TOMATOES….
 
Someday, something will show up at SD's door… they just keep changing the HYPE and the STORY on a rolling basis.  People just got a little weary… well, that, and a leveraged balance sheet peppered with accounting shenanigans and hedging swings.  But SOMEday — if they live long enough — SOMEthing will indeed show up at SD's door.

---

Zman: Bath – also part of that is me. I'm cold on SD right now and I don't feel the need to chase all the girls which is just the way I operate. It means I miss some moves but I do look at a lot of names and if I see a compelling reason to take a closer look I'm start working it up. 

---

jiveyjr Says:
Bill should chime in on SD…he and I were the two longest holding bagholders in the name…I kept holding but think Bill just had enough a few months ago….
lots of people hate companies run by people that build big real estate edifices to aggrandize themselves and pay themselves heavily when shareholders are so under water….once in the doghouse it takes a while for investors to forget

----
Bill says:
Regarding SD, I lost confidence in Ward and sold. I bought too high and sold too low. They are pretty good with the hype and ward hasnt met a forecast in 4 qtrs.

Problems as I see it
1. Their debt is out of control.
2. Operating costs too high– sd acknowledges cost per boe is 73 to $ 80 per boe
3. Too many idled assets that they refuse to sell.
4. Ward compensation and oversight corporate governance at sd. He gets more shares when the stock dives, bonus is fixed
5. Move to oil good, but he hedged too low. based on his number released yesterday he is under water by 200-250 m. This hasnt gone thru the PL yet–Yeah I know non cash but people wont be expecting another loss this qtr. ie headline risk
6. New cfo would be a dolt if he didnt clean up the balance sheet lets throw some more one time asset impairments for the non productive ng assets to the mix and it should be an ugly qtr.
7. Ignoring all the one timers, if they presold at 86 and their cost is 80 they make 6 bucks a boe times 9 m = 54 m pre tax 500 m shares = 10 cents …—$ 8.25 stock for 10 cents of earnings
8. i wish one analyst would ask why he is losing money qtr after qtr if he makes 100 % Irr on his wells
I have to conclude there are better values elsewhere. Im buying puts pre earnings
----

[Myth465]

All of those comments are true. Just about everyone of them. Half the people are pissed off about how he handled the gas run up. The other half are pissed off that he learned his lesson and is doing better on the oil run up (hedges, asset sells, low costs).  

I would be annoyed if I bought at + $10 - $20 or so and sold at $5. Basically those who bought with $10 plus gas expectations got hosed. SD's numbers are a mess but they are turning things around. My only issue is I have no way to effectively model cash flow due to all the sales, screwed up balance sheet, and total change in strategy. SD has assets (which everyone agrees are worth more than the current sale price), and cash to drill so I believe things will improve. You dont bring on that many wells and not see improvement.

Ward is an overpaid wildcatter oil man, but while people were complaining about him diluting us out of gas assets he was staging a turn around 2-3 years before everyone else. He probably saved the company and if you listen to any nat gas company all you will hear about is the move to liquids / wet gas (except for MCF). Ward was 2/3 years ahead of the curve.

He sold oil he got cheap high (those acquisitions were quite cheap), and bought more cheap oil (miss). I think his plan was good, though was aggressive. He got killed due to a lack of hedges and gas going from $10-$14 to around $4. They are a high cost gas producer due to CO2 and debt. I dont see the bottom falling out of oil, and we will have hedge losses because he has learned his lessons. They will drill, hedge, sell / jv, and drill and hedge.

Thats what I want to see. This happens in every stock. People buy, get hosed for 2-4 years, and cant move past it. It happened to me in several names (I will never look at KSP or USMO). Anyone who bought SD at $5 or so has made a killing, and I hope anyone who bought at $8-9 will make a killing. I just swapped half my position to 2013 leaps and out of 2012s. I went in the money for $5 options (have limited confidence in cash flow).

Quarterly numbers for the next 2 - 3 quarters will be absolutely brutal. They are right about that. If I was CFO I would write off anything and everything though Ward wouldnt like that. Also Ward seems to know value - I dont know why they need $100 million of land and building for the new head quarters but he thinks it will make money once its all built up. I had my doubts on the miss play, and will simple give him the benefit of the doubt with the office space.

He is overpaid but outside of Prem, Buffett, and a handful of other guys who isnt? They will ramp up to some ungodly production number via JVs and asset sells. The converts will convert, and the remaining debt will be refinanced. If Ward finds some other cheap oil he will take on a crap load of debt to get his hands on it at cheap prices.

It will be a bumpy ride but you have to ask yourself one question. Do you feel lucky punk? No not that, do you believe in a world of high volatility but overall, over the long term rising oil prices (and perhaps gas). If so I think SD is the best way to play it (outside of an explorer who can explore). They delivered on gas, just the bottom fell out. If you think it will happen with oil then I would move along.

Do me a favor. Please let me know what these guys think about ATPG, ESV (with the merger), and DO.

----

Interesting link.

http://www.youroilandgasnews.com/osage+gives+details+on+its+7,000%2B+acre+land+position+in+the+nemaha+ridge+horizontal+mississippian+play+in+oklahoma_59216.html

[bathtime]

Thanks, Myth. Like Don Coxe says, could be a case of those who know it most love it least (and miss the value).

Darn, I was looking at Osage on Friday when researching possible small cap plays, missed the one day quadruple.  Their acreage is outside SD's perimeter map, which is why I didn't look more closely, but Ward did indicate yesterday that there was prospectivity outside the perimeter.

Here's a thread with landmen comments on the Mississippian activity from a Sooners board:

http://www.landthieves.com/forums/viewtopic.php?f=12&t=2726

I'll see what I can find out for you on your other picks.

[Myth465]

Thanks for the link.

I really need to make time for the o&g small caps. Seems like every other day one of these is going gangbusters.

[Zorrofan]

Just in case you don't have enough to read, SD has filed for the royalty trust......

http://investors.sandridgeenergy.com/phoenix.zhtml?c=196066&p=IROL-secToc&TOC=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDExOTMxMjUtMTEtMDI5MTIzL3RvYy9wYWdl&ListAll=1

cheers
Zorro

[brker_guy]

Looks like Mr. T Boone Pickens also loaded up on SD last quarter:

http://www.bloomberg.com/news/2011-02-14/bp-capital-management-largest-holdings-in-4th-qtr-13f-alert.html?cmpid=yhoo