SD - SandRidge Energy

[Cardboard]

"Cardboard, I would note you have a history of freaking out and criticizing management when things take longer to "work out" than you want them to."

 

Sure that is true and I intend to keep that trait over time! I have seen too many managers abusing shareholders and that is especially true if you are involved with "value investments". They are protected by the legal system, weak board with few if any large shareholders, golden parachutes weather they succeed or fail. The only thing to keep them in line is their honor if they have any.

 

Each time it reminds me of the movie Stalingrad when Kruschev goes to the office of the general in charge of the defense of Stalingrad and hands him out a loaded gun telling him that the boss (Stalin) is not happy. He knows what to do next...

 

While it is extreme, it is clear that today's entrenched CEO's do not have anything to fear from shareholders.

 

So if we go back to some of your investments, I think that I was right to say that it was time for Jim Crowe to move on. How did you do afterwards? I also don't think that I was that far off to say that Dan Hesse was dumb in his treatment of CLWR and ended up paying much more for it than he should have been.

 

Regarding Bennett, I have nothing to say but, praises. However, I diverge from your thinking. This guy knows what NAV looks like now and what it should look like in 1, 2 or 3 years based on their plans. If an offer is made now that looks to compensate shareholders adequately, then his job is to sign on the dotted line. He should not care about where shareholders will put the proceeds, taxes to be paid (we are March 27 and not in December), etc. His fiduciary duty is to maximize value and if the premium looks sufficient then the right thing to do is to let go. Too many CEO's will refuse claiming that there is more to be extracted from the lemon, so they get to stick around in the CEO seat but, I think that with TPG, Mount Kellett and Omega all keeping an eye on things that common sense will prevail.

 

That also goes back to my point of knowing much more about today's oil patch than I did when I first invested in SD: transportation, gas/oil treatment, waterfloods, permitting, leases, land, etc. This knowledge and digging has lead me to other names that are very cheap and in more repeatable drilling locations than SD. It is much more complex, risky and capital intensive than I appreciated at first. So, I think that I have a better understanding around its reasonable value because of all these comparisons that I have done over time. IMO, $9 - $10 a share is a price that we should be quite happy with.

 

Cardboard

[oldye]

You guys are crazy and desperate!  This thing is worth north of $10.  You would be giving it away at $8.  I think they will find a buyer in the $9-11 range.  But they are smart and in no rush.  Cheers!

 

I hope they don't sell anytime soon.  In 3 years they will be producing 100+k boe/pd ..by my estimates debt will not go up significantly even if they don't monetize anything else and the stock will be worth 12+ without a buyout or a major find.  I also think there is a high likelihood natural gas will return to the mean and trade for 8-10+ if we have a cold winter next year.  Why is everyone in such a hurry?  I think too many investors destroy their brains by looking at the share price everyday.  Find something better to do. 

 

 

[constructive]

Honestly Txlaw, there is always too much hope and IF's in your analysis. Weather it is SHLD, CLWR, LVLT, BBRY and now SD. In that sentence above, you are assuming multiple positives all inter-related. Everything has to move in sync to create the value that your are hoping for.

 

It's not about optimism vs. realism.  It's about not trading away optionality for an overly emotional need to realize (tax inefficient) cash return as soon as possible.  Especially when uncertainty about that optionality recedes with each passing quarter.

 

See, all of those names you mentioned were/are all low downside, potentially high return investments.  That is, I was willing to trade away the opportunity cost of a reasonably certain decent/high return for the possibility of a slam dunk or, in the alternative, a par/subpar positive return.

 

An alternate theory is that if you buy risky assets in a risk-on bull market, the market will usually bail you out.

[txlaw]

So if we go back to some of your investments, I think that I was right to say that it was time for Jim Crowe to move on. How did you do afterwards? I also don't think that I was that far off to say that Dan Hesse was dumb in his treatment of CLWR and ended up paying much more for it than he should have been.

 

Completely agree on Dan Hesse being dumb, though I would suggest that the real negative consequence of his stupidity with CLWR was that he set Sprint's turnaround back a couple of years.

 

With respect to Jim Crowe, I think that he wasn't as bad as he was made out to be, and that LVLT would still have been a great investment even if Crowe remained on for another couple of years.  But I agree that Jeff Storey is doing a much better job, so it was really good that they let him ascend to the CEO position to make his mark on the company.

 

Regarding Bennett, I have nothing to say but, praises. However, I diverge from your thinking. This guy knows what NAV looks like now and what it should look like in 1, 2 or 3 years based on their plans. If an offer is made now that looks to compensate shareholders adequately, then his job is to sign on the dotted line. He should not care about where shareholders will put the proceeds, taxes to be paid (we are March 27 and not in December), etc. His fiduciary duty is to maximize value and if the premium looks sufficient then the right thing to do is to let go. Too many CEO's will refuse claiming that there is more to be extracted from the lemon, so they get to stick around in the CEO seat but, I think that with TPG, Mount Kellett and Omega all keeping an eye on things that common sense will prevail.

 

That also goes back to my point of knowing much more about today's oil patch than I did when I first invested in SD: transportation, gas/oil treatment, waterfloods, permitting, leases, land, etc. This knowledge and digging has lead me to other names that are very cheap and in more repeatable drilling locations than SD. It is much more complex, risky and capital intensive than I appreciated at first. So, I think that I have a better understanding around its reasonable value because of all these comparisons that I have done over time. IMO, $9 - $10 a share is a price that we should be quite happy with.

 

Cardboard

 

Reasonable people can disagree.  I think $9 to $10 is a nice approximation of reasonably certain NAV for SD.  What I'm saying, though, is that that NAV range does not take into account the potential optionality for SD. 

 

Specifically, the optionality I am talking about centers around the "stacked play."  Now, the sooner someone makes a reasonable offer for SD, the more willing I am to give up my stacked play optionality and let the benefits (if they materialize) accrue to the acquiror.  But if these guys slow play it or put forth a lowball offer, my preference is to monetize the infrastructure assets and explore the possible huge upside from the stacked play.  It may not turn out as hoped, but as I said before, with each passing quarter, we get more clarity on the resource potential that is there.  And then I can make a decision later on what the updated reasonably certain NAV range is and whether I should sell my stock at market prices.

 

Again, to be clear, I am willing to sell out -- but it depends on the price and the timing.  What Bennett is doing is putting shareholders in a better bargaining position by monetizing the infrastructure assets.

[txlaw]

Honestly Txlaw, there is always too much hope and IF's in your analysis. Weather it is SHLD, CLWR, LVLT, BBRY and now SD. In that sentence above, you are assuming multiple positives all inter-related. Everything has to move in sync to create the value that your are hoping for.

 

It's not about optimism vs. realism.  It's about not trading away optionality for an overly emotional need to realize (tax inefficient) cash return as soon as possible.  Especially when uncertainty about that optionality recedes with each passing quarter.

 

See, all of those names you mentioned were/are all low downside, potentially high return investments.  That is, I was willing to trade away the opportunity cost of a reasonably certain decent/high return for the possibility of a slam dunk or, in the alternative, a par/subpar positive return.

 

An alternate theory is that if you buy risky assets in a risk-on bull market, the market will usually bail you out.

 

Perhaps, but the proper view is to focus on actual IV -- and actual, rather than perceived, risk -- rather than on relative valuation.

[ItsAValueTrap]

Didn't you guys learn anything from ATPG?  If you can't figure out if they're inflating reserves, then maybe you shouldn't invest in the stock....

 

Sandridge has:

A- Poor free cash flow.

B- PDNPs.  I don't think that it's appropriate for a shale company to book any PDNPs.

[T-bone1]

Didn't you guys learn anything from ATPG?  If you can't figure out if they're inflating reserves, then maybe you shouldn't invest in the stock....

 

Sandridge has:

A- Poor free cash flow.

B- PDNPs.  I don't think that it's appropriate for a shale company to book any PDNPs.

 

I have no position in SD and I think it is likely cheap on an asset value basis, but this is not a shale company.

 

It is entirely appropriate for shale companies to book PUD/PDNP reserves if they are actually predictable and known, which they often are.  If a shale company drills one well from a pad, the well next to it is likely to have similar performance.

 

SD has shown no ability to predict what any of their wells will do in this conventional, water saturated reservoir.

 

My problem with SD is not the price/NAV, but my (relatively low) confidence in what the NAV actually is . . . lets call it $8 per share, give or take $5 in either direction, as a rough guestimate.

[ItsAValueTrap]

Hmm I made a mistake.

 

Sandridge has Gulf of Mexico assets that it is selling off.  They had a lot of PDNPs booked for those reserves.  PDNPs for those types of reserves is less problematic.

 

After selling off the GOM assets, Sandridge will become largely a shale company???

 

It is entirely appropriate for shale companies to book PUD/PDNP reserves if they are actually predictable and known, which they often are.  If a shale company drills one well from a pad, the well next to it is likely to have similar performance.

PUDs and PDNPs aren't the same thing.

 

PDNPs come from two places:

1- A well that has been drilled but not yet connected to a pipeline.  I have no issue with this and you won't see a lot of PDNPs from this.

2- "Behind pipe" reserves.  I'm not sure if it's appropriate for these reserves to be booked for shale wells.

 

Many shale companies do not book a lot of PDNPs (e.g. Southwestern).

 

If a shale company drills one well from a pad, the well next to it is likely to have similar performance.

Well... I disagree.  The following website gives a good primer on petroleum geology:

http://www.geomore.com/

 

[T-bone1]

Sandridge has Gulf of Mexico assets that it is selling off.  They had a lot of PDNPs booked for those reserves.  PDNPs for those types of reserves is less problematic.

 

After selling off the GOM assets, Sandridge will become largely a shale company???

 

You are correct that PDNP is not the same as a PUD, but they are functionally the same thing in that they are proved non-producing reserves.  It is entirely appropriate to book these in shale plays that are well developed and the results from every large company over the last 5 years have proven this in the developed shale plays. 

 

Sandridge has one asset, which is not a shale (I ignore the "stacked play upside", which any company in the Miss Lime could claim if they wanted to).  If you look at the publicly traded trusts they have sold in this non-homogeneous carbonate reservoir, you can understand why it may be inappropriate to book PUDs there because it is not predictable.

 

I don't wish to argue about the appropriateness of booking PUDs in shale or how conservative some shale companies are in doing so.  I only wished to make the point that the Miss Lime is not a shale play.

[Cardboard]

Has to be the worst oil stock in the universe. It is now going down in sympathy with the Nasdaq and momentum stocks. What a POS!

 

My Canadian oil stocks are up, some big. U.S. energy stocks are holding up very well. WTI is up over a dollar today and who knows what will happen in Ukraine. Like I mentioned in a different post about Russians having Ukrainians by the b.., Ukrainians have seen this week a 80% hike in their nat gas invoice. Ouch!

 

There is no trust for this company and there will never be. The tape is proving it. The more I look at it, the more I think, and I am pretty sure, it is due to the fact that it will never be able to repay its debt in most scenarios that you can come up with and analysts have been clear with most if not all E&P companies that they won't tolerate a debt to cash flow ratio above 2.0.

 

So they can keep growing cash flow 20% a year for a while but, it won't matter much on that standpoint. This company needs a home where all the debt will be spread over a bigger production. Staying on Wall Street means trading at a permanent discount because of that anchor.

 

Cardboard

[ourkid8]

I understand your frustration as this is a very large position in my portfolio as well but it has had a decent return so far.  This week it is up 2.38% and YTD it is up 9.02%.  What is your purchase price and how long have you held it for?  My purchase price is $5.09 and it has been a very nice return so far. 

 

All of us are patiently waiting for James Bennett to flip this company but it takes time to undo the mess TW created. Give it time my friend...

 

Thanks,

S

 

 

Has to be the worst oil stock in the universe. It is now going down in sympathy with the Nasdaq and momentum stocks. What a POS!

 

My Canadian oil stocks are up, some big. U.S. energy stocks are holding up very well. WTI is up over a dollar today and who knows what will happen in Ukraine. Like I mentioned in a different post about Russians having Ukrainians by the b.., Ukrainians have seen this week a 80% hike in their nat gas invoice. Ouch!

 

There is no trust for this company and there will never be. The tape is proving it. The more I look at it, the more I think, and I am pretty sure, it is due to the fact that it will never be able to repay its debt in most scenarios that you can come up with and analysts have been clear with most if not all E&P companies that they won't tolerate a debt to cash flow ratio above 2.0.

 

So they can keep growing cash flow 20% a year for a while but, it won't matter much on that standpoint. This company needs a home where all the debt will be spread over a bigger production. Staying on Wall Street means trading at a permanent discount because of that anchor.

 

Cardboard

[Parsad]

I understand your frustration as this is a very large position in my portfolio as well but it has had a decent return so far.  This week it is up 2.38% and YTD it is up 9.02%.  What is your purchase price and how long have you held it for?  My purchase price is $5.09 and it has been a very nice return so far. 

 

All of us are patiently waiting for James Bennett to flip this company but it takes time to undo the mess TW created. Give it time my friend...

 

Thanks,

S

 

 

Has to be the worst oil stock in the universe. It is now going down in sympathy with the Nasdaq and momentum stocks. What a POS!

 

My Canadian oil stocks are up, some big. U.S. energy stocks are holding up very well. WTI is up over a dollar today and who knows what will happen in Ukraine. Like I mentioned in a different post about Russians having Ukrainians by the b.., Ukrainians have seen this week a 80% hike in their nat gas invoice. Ouch!

 

There is no trust for this company and there will never be. The tape is proving it. The more I look at it, the more I think, and I am pretty sure, it is due to the fact that it will never be able to repay its debt in most scenarios that you can come up with and analysts have been clear with most if not all E&P companies that they won't tolerate a debt to cash flow ratio above 2.0.

 

So they can keep growing cash flow 20% a year for a while but, it won't matter much on that standpoint. This company needs a home where all the debt will be spread over a bigger production. Staying on Wall Street means trading at a permanent discount because of that anchor.

 

Cardboard

 

I agree with that sentiment.  Our cost is $4.80.  I think it's worth at least $9...likely more.  I think patience is warranted here.  Also, often market prices aren't in line with improvements in fundamentals.  How anyone can say that SD isn't in better shape today, than the last days of Tom Ward's reign are beyond me. 

 

Give it time.  You have good, solid management in place that is really watching the bottom line...not unlike what we saw with Brian Moynihan at Bank of America.  I think things will continue to improve little by little.  At some point, they will get offers and it will be sold to someone much bigger.  Cheers!

[Cardboard]

Low $5's, so still making money but, who cares. I want a high rate of return for my investments. This is an anchor on my portfolio returns so far. Woman cost me a lot!  ::)

 

You see I keep questioning myself. Nat gas is way up. WTI oil is above $100 which was a big concern before. The Miss. while not exceptional seems to be giving them expected results. Costs have been trimmed. Focus has returned. Debt is down. Management is better. We even have star hedge fund manager pumpers. So what gives? Were we wrong on valuation?

 

By the way Sanjeev, how did you get down to $4.80? It traded there for a while last year but, I recall you initiating in the mid $5 or close. Is it due to selling puts which you exercised? Nice cost anyway.

 

Cardboard

[Parsad]

Low $5's, so still making money but, who cares. I want a high rate of return for my investments. This is an anchor on my portfolio returns so far. Woman cost me a lot!  ::)

 

You see I keep questioning myself. Nat gas is way up. WTI oil is above $100 which was a big concern before. The Miss. while not exceptional seems to be giving them expected results. Costs have been trimmed. Focus has returned. Debt is down. Management is better. We even have star hedge fund manager pumpers. So what gives? Were we wrong on valuation?

 

By the way Sanjeev, how did you get down to $4.80? It traded there for a while last year but, I recall you initiating in the mid $5 or close. Is it due to selling puts which you exercised? Nice cost anyway.

 

Cardboard

 

Kept averaging down to the bottom...was very overweight...then sold the stuff at higher prices as the stock rebounded.  Now it's a big, comfortable position with our average cost at $4.80.  I do that with pretty much all of our stocks.  We will keep buying till we hit rock bottom, unless I can't buy any more because of ownership limitations, and then we get rid of the excess stock when prices rebound and hold on to the position we want.  Although that is US GAAP.

 

In Canada, all you can do is just buy more and more at lower prices, so we tend to buy larger quantities as we hit bottom.  The average cost is a bit higher...closer to $4.95 in the Canadian fund.  Often, we start nibbling in the U.S. fund, even when we aren't buying in the Canadian fund because of FIFO.  So a lot of times, by the time we start buying in the Canadian fund, the discount is greater.  Once in a while, we'll miss an opportunity, but most of the time we get to participate.  Cheers! 

[Cardboard]

Hi Sanjeev,

 

Sounds like your U.S. average cost is not a true economic average cost while the Canadian one is. That may explain why over the years I could never figure out how some people had such amazingly low average costs.

 

Again, if I understand right, it is an average cost for U.S. tax purposes where you can essentially elect to book a loss on your higher priced shared right away and then are holding a lower priced "inventory". Makes any sense or am I totally off track?

 

Cardboard

[Parsad]

Hi Sanjeev,

 

Sounds like your U.S. average cost is not a true economic average cost while the Canadian one is. That may explain why over the years I could never figure out how some people had such amazingly low average costs.

 

Again, if I understand right, it is an average cost for U.S. tax purposes where you can essentially elect to book a loss on your higher priced shared right away and then are holding a lower priced "inventory". Makes any sense or am I totally off track?

 

Cardboard

 

Correct.  Thanks to "first in, first out" tax loss rules in the U.S. 

 

Although, it is a true economic cost over the long-run, because you eventually pay tax on the gains if you are correct, or take smaller losses from a lower ACB. 

 

The one advantage it does provide is that averaging in to ideas as prices fall will almost always work out for you if you maintain a batting average above 0.500.  It allows you to take losses earlier and reduce your average cost earlier, so you overweight, and then adjust the allocation as prices to back up.  Cheers!

[thefatbaboon]

http://www.reuters.com/article/2014/04/07/us-water-ogis-sandridge-idUSBREA361D720140407

 

 

[OracleofCarolina]

Cramer: Hated stock to generate lovely returns?

 

When pros hate a stock, it can take a while for them to recognize that the company has made big changes. Did somebody say opportunity?

 

Read more: http://www.cnbc.com/id/101589869

 

 

[Cardboard]

Thank you Jim Cramer!

 

Like he did with Fairfax before, Jim is helping us out with Sandridge. If his push is sufficient to finally make the stock breakout from the current trading range, then it will force short covering and finally give us a solid performing stock reflecting improvements at the company.

 

Cardboard

[CorpRaider]

Cramer would probably be ok if he only had to do a weekly show or something.  He's got too many hours to fill.

[Zorrofan]

Thank you Jim Cramer!

 

Like he did with Fairfax before, Jim is helping us out with Sandridge. If his push is sufficient to finally make the stock breakout from the current trading range, then it will force short covering and finally give us a solid performing stock reflecting improvements at the company.

 

Cardboard

 

Cynically I will venture it is the pre-earnings run-up followed by the after-earnings collapse.  sigh.

 

cheers

Zorro

[Myth465]

http://seekingalpha.com/article/2147313-you-must-be-in-denial-to-bet-your-farm-on-sandridge-energy-at-the-current-levels?ifp=0

 

As posted on another thread. I think this guy is one of the best O&G Analysts posting on public boards.

I really like many of his recommendations. I sold SD a few months ago when I too realized there were Canadian companies sitting on proven plays, with 5-10 years of drilling inventory, EOR opportunities, trading at 4x CF, paying a yield, and trading at less than 2x debt to CF.

 

[muscleman]

http://seekingalpha.com/article/2147313-you-must-be-in-denial-to-bet-your-farm-on-sandridge-energy-at-the-current-levels?ifp=0

 

As posted on another thread. I think this guy is one of the best O&G Analysts posting on public boards.

I really like many of his recommendations. I sold SD a few months ago when I too realized there were Canadian companies sitting on proven plays, with 5-10 years of drilling inventory, EOR opportunities, trading at 4x CF, paying a yield, and trading at less than 2x debt to CF.

 

Would you mind disclosing what the Canadian names you are looking at?

[Myth465]

Some of them are listed in the Canadian O&G thread.

Pretty much all of them have run 25% over the last 5 months. I held SD for 3 years. I did ok with it but you dont want my recommendations.

 

Crocotta, Rock Energy, Gear Energy, Legacy Oil and Gas, ect.

 

Forget what I have to say though. Eric Nuttall was on BNN 3 days ago and his recommendations are always worthwhile.

He was correct, money is flowing back to Canada. They have some of the cheapest REITs and O&G holdings I have seen.

 

http://www.bnn.ca/Shows/Market-Call.aspx

 

Here are his recommendations.

 

http://www.stockchase.com/expert/find

Type Eric Nuttal

 

I am coming around to his view point, when something is cheap in the space its cheap for a reason.

[zippy1]

Q1 result.

http://finance.yahoo.com/news/sandridge-energy-inc-updates-shareholders-201500066.html

•Total production of 7.1 MMBoe (79.2 MBoe per day) included 1.3 MMBoe of divested Gulf of Mexico production. $276 million capital spend was below plan due to temporary weather impacts.

•Extreme winter weather temporarily curtailed production and capital spend, now offset by a robust April ramp-up in well connections bringing 45 wells online vs. 71 in the entire first quarter. As a result, Mid-Continent production improved to 55 MBoe per day in April vs. Q1 average of 51 MBoe per day. Due to the ramp-up, annual production guidance is reaffirmed.

•71 Q1 Mid-Continent wells had an average 30-day IP of 410 Boe per day vs. an average 30-day IP of 366 Boe per day for the 2013 well set.

•Company record seven wells delivered 30-day IPs over 1,000 Boe per day during the quarter.

•Success in southern Grant and northern Garfield County, OK expands our focus area by 10 townships into northern Garfield County. During the first quarter, 11 test wells delivered an average of 406 Boe per day (28% above type curve) with 55% oil.

•Kansas dual stacked lateral well with 707 Boe per day 30-day IP (44% oil) completed for $5.2 million vs. $6 million for two standard wells, demonstrating breakthrough multilateral drilling cost upsides.