SD - SandRidge Energy

[ourkid8]

This has been my worst investment ever! (Thanks Txtlaw - joking)  I am really hoping we are able to see positive results in their cost cutting measures to reduce the cost per lateral well to $2.4mm or lower.  We are also seeing work being done to strengthen the balance sheet by diluting shareholders which is positive for the company but really hurts current shareholders! I am absolutely regretting not selling out when it went over $2/share. 

 

I am still extremely surprised how TPG has not put this company in play.

 

Tks,

S 

[txlaw]

This has been my worst investment ever! (Thanks Txtlaw - joking)  I am really hoping we are able to see positive results in their cost cutting measures to reduce the cost per lateral well to $2.4mm or lower.  We are also seeing work being done to strengthen the balance sheet by diluting shareholders which is positive for the company but really hurts current shareholders! I am absolutely regretting not selling out when it went over $2/share. 

 

I am still extremely surprised how TPG has not put this company in play and sold to a mid sized company such as Devon. 

 

Tks,

S

 

Hey, if I was too convincing, I'll take the blame on that. ;D

 

Yeah, one of my worst mistakes ever too:

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/some-lessons-from-a-value-investor/msg207220/#msg207220

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/some-lessons-from-a-value-investor/msg207265/#msg207265

 

I also can't believe TPG couldn't get this company sold. Maybe HWIC was putting too much of a stink.

 

What's crazy is Chesapeake is showing how great the rock can be, especially given the stacked play opportunities (Chester, Woodford) that are not even really taken into account for by the market. Too bad they haven't consolidated this play.

[kfh227]

US dollar:

 

Pray it keeps dropping!

http://www.marketwatch.com/investing/index/dxy

 

Then we'll get higher oil prices.  I'm learning the hard way that if you want to invest in oil, you need to understand the macro-economics of all major world currencies.  If anyone knows a famous investor that is good at predicting currency values, please let me know so I can learn from the best.

 

I believe Drunkenmiller said he sees the euro dropping to .80 vs the dollars as a possibility, and he's the mastermind behind the currency bet Soros is famous for. So there's that :)

 

Thank You much.  I'll try to read up on him tonight.

 

Found this though:

http://www.bloomberg.com/news/articles/2015-04-15/druckenmiller-bets-on-market-surprise-with-china-boom-oil-rise

 

Higher oil prices and weakening euro vs the dollar?  These are contradictory statements to me.  The dollar and oil are not 100% coupled but they are coupled enough to pay attention to the relationship.  I hope his oil thesis is correct.

[alertmeipp]

Missi asset probably not gaining much interest at this environment.

 

 

 

 

 

[txlaw]

Missi asset probably not gaining much interest at this environment.

 

Sure doesn't seem like it.

 

But CHK is selling the Miss to the public hard.  Maybe they're trying to get rid of it?

[ourkid8]

There is definitely a consolidation opportunity in the Miss between SD and CHK.  Like i mentioned before, i am shocked out of all these big hitters (TPG/Fairfax/Mount-Kellette/Omega ) not one of them tried to put this company in play OR look for consolidation opportunities. 

 

Even if HWIC created a stink, that's only 10% of the shares outstanding and they do not even have a board seat.  TPG is sitting on the board, what the hell are they doing!

 

Tks,

S

 

Missi asset probably not gaining much interest at this environment.

 

Sure doesn't seem like it.

 

But CHK is selling the Miss to the public hard.  Maybe they're trying to get rid of it?

[ourkid8]

Who is still holding SD?  I hope I am not the only one!

 

Tks,

S

[thepupil]

other than some weird scenario where pref's get screwed, why hold the common?

 

I have no interest here as I have my 2% in PWE leaps as my crappy levered oil bet, but I'm just curious as to what's the logic of owning the common when the pref's are a 33% yield and 4 bagger if SD lives to reinstate that divvy. if you think SD is going to go up more than 4X, then you could buy LEAP call spreads (like the $2 - $5 for 0.15 cents which would be a 20 bagger at full spread realization) instead of the common. People are paying 25% annualized to short the common...

 

So why would anyone not constrained by liquidiity ever hold the common?

[kfh227]

Who is still holding SD?  I hope I am not the only one!

 

Tks,

S

 

I am holding.

 

I am not worried.  Prem Watsa will dilute shareholders and own half the company in a year via convertible debt.

 

The company will be around.  I am just taking my time with dollar cost averaging.  I am almost expecting this thing to hit 50 cents.  If it does get that dire, I'll DCA at the time.  But 20 years from now I think it will prove to have been a wise decision.

 

But I am learning a lot lately.  I am basically giving up on investing and just dumping money into companies like FFH going forward.

[kfh227]

other than some weird scenario where pref's get screwed, why hold the common?

 

I have no interest here as I have my 2% in PWE leaps as my crappy levered oil bet, but I'm just curious as to what's the logic of owning the common when the pref's are a 33% yield and 4 bagger if SD lives to reinstate that divvy. if you think SD is going to go up more than 4X, then you could buy LEAP call spreads (like the $2 - $5 for 0.15 cents which would be a 20 bagger at full spread realization) instead of the common. People are paying 25% annualized to short the common...

 

So why would anyone not constrained by liquidiity ever hold the common?

 

I don't know when SD will recover ... so LEAPs are not an option.

 

I don't know how bad things will get but if the common gets low enough it will probably be a wonderful bet from a risk/reward standpoint.

[thepupil]

But the pref is lower risk  (incrementally and relatively, it's still of course probably a zero) than the common and offers 4X upside, correct? So by buying the common, aren't you saying "I need more than 4X". That strikes me as greedy. I mean buying the common over the HY bonds in the h50's is greedy but I can understand the logic there. I can't rally understand the logic of needing more than 4X.

 

And even if you wanted more than 4X, you could roll a bullish call spread that requires a far lower capital commitment (less risk), several times before you would have risked more than buying the common.

 

Holding anything junior in the SD cap structure means you are risking permanent loss of capital (including the HY bonds). If you're going to do that the common strikes me as an inferior way to do so.

 

Also I doubt Sandridge common and preferred are considered the same security by the IRS, so those who owned the common can realize a giant tax loss and then buy the preferred if they want to stay in the game.

 

 

[thepupil]

here's a real world example. during the financial crisis, strategic hotels preferreds and common collapsed. the low for the common was between 0.60 and 1.00. the prefs got down to 1.70-2.00 ($25.00 par) so let's call it 8 cents on the dollar. The prefs enjoyed a full recovery of par plus accrued divvy's in arrears. I think it was something like 130 cents  ($32.5) so a 16 bagger from $2.00. The common is up 20X from its absolute low and 12X from $1.00. You didn't get paid to go even further out in terms of risk and buy the common.

[alertmeipp]

Sdrxp is paying dividend using common at five percent discounts.

 

Not a bad way to accumulate common  if you think they are hear to stay. Commission free.  Not sure why the tax will work out tho.

 

 

[gokou3]

Sdrxp is paying dividend using common at five percent discounts.

 

Not a bad way to accumulate common  if you think they are hear to stay. Commission free.  Not sure why the tax will work out tho.

 

I am interested in the preferred. what are the chances that the company will suspend even the comMon stock dividend payments in the near future? If I understand correctly the issue is cumulative. Also, is there a limit on how lomg they can keep paying the dividends in common shares in lieu of cash? Tia.

 

http://www.sec.gov/Archives/edgar/data/1349436/000095013409000802/h65499exv3w1.htm

[Cardboard]

Before jumping into the preferreds are they worth something?

 

Doing a simple calculation of net debt per boe/day of production using only the debt (excluding the preferreds face value) shows that you can find other stocks in the Canadian oil patch trading at similar EV/boe/day metric with similar oil/nat gas ratio. Some even cheaper.

 

In other words, if oil stays this low for a long time, there might not even be enough production and assets to cover the debt alone. At the very least, you can get involved into other companies with a fighting chance.

 

Cardboard

[sriraja]

Private Offering of Senior Secured Notes for $1B - http://investors.sandridgeenergy.com/investor-relations/press-releases/press-release-details/2015/SandRidge-Energy-Inc-Announces-Private-Offering-of-10-Billion-of-Senior-Secured-Notes/default.aspx

[valuecfa]

Any thoughts on added value from an IPO of the the saltwater disposal subsidiary?

[bizaro86]

here's a real world example. during the financial crisis, strategic hotels preferreds and common collapsed. the low for the common was between 0.60 and 1.00. the prefs got down to 1.70-2.00 ($25.00 par) so let's call it 8 cents on the dollar. The prefs enjoyed a full recovery of par plus accrued divvy's in arrears. I think it was something like 130 cents  ($32.5) so a 16 bagger from $2.00. The common is up 20X from its absolute low and 12X from $1.00. You didn't get paid to go even further out in terms of risk and buy the common.

 

That chart is one of my favourite things to look at, because it has a big lesson and some happy memories. Buying that pref at $2.05 is the best investment I've ever made. Selling half the position "because it had doubled" at $4 is one of the worst on a "how much more money would I have today if I hadn't done that" basis.

[NoCalledStrikes]

The PV10 using 2014 prices for oil is less than the company's debt. To buy the common or the preferred at this point is a bet on seeing $150 oil before the debt comes due in 5 years.  Barring a war in the Middle East, this is just a slow motion restructuring in progress - see Molycorp.

 

[gokou3]

Interested in the preferred shares, but worry about the company terminating the dividends.  What are the consequences if the company does not declare preferred dividends (not even in common shares)?  Other than the dividend being cumulative and the preferred shareholders getting two board seats (after certain conditions), I don't see any detrimental costs to the company for skipping all future dividends.

 

On the other hand, what is the motivation for management NOT to declare even common share dividends for the preferred given that they are not cash costs?

 

 

[valuecfa]

The PV10 using 2014 prices for oil is less than the company's debt. To buy the common or the preferred at this point is a bet on seeing $150 oil before the debt comes due in 5 years.  Barring a war in the Middle East, this is just a slow motion restructuring in progress - see Molycorp.

 

Correct me if i am wrong, but at a cost of around $500 million to build, I don't believe that the MidCon Midstream unit that is likely to be spun out this year is even a part of Sandridge's PV10, and it is equivalent in cost to Sandridge's market cap.

[thepupil]

The PV10 using 2014 prices for oil is less than the company's debt. To buy the common or the preferred at this point is a bet on seeing $150 oil before the debt comes due in 5 years.  Barring a war in the Middle East, this is just a slow motion restructuring in progress - see Molycorp.

 

Correct me if i am wrong, but at a cost of around $500 million to build, I don't believe that the MidCon Midstream unit that is likely to be spun out this year is even a part of Sandridge's PV10, and it is equivalent in cost to Sandridge's market cap.

 

can they really pull off a spin to equity holders? that would be pretty crazy. I'm no capital structure expert but seems tough to do with the $4B of debt and preferred ahead of the equity. What's your basis for a spin off occurring? I don't follow this company at all so I apologize if this is obvious.

[valuecfa]

The PV10 using 2014 prices for oil is less than the company's debt. To buy the common or the preferred at this point is a bet on seeing $150 oil before the debt comes due in 5 years.  Barring a war in the Middle East, this is just a slow motion restructuring in progress - see Molycorp.

 

Correct me if i am wrong, but at a cost of around $500 million to build, I don't believe that the MidCon Midstream unit that is likely to be spun out this year is even a part of Sandridge's PV10, and it is equivalent in cost to Sandridge's market cap.

 

can they really pull off a spin to equity holders? that would be pretty crazy. I'm no capital structure expert but seems tough to do with the $4B of debt and preferred ahead of the equity. What's your basis for a spin off occurring? I don't follow this company at all so I apologize if this is obvious.

 

They already filed an S-1: http://www.sec.gov/Archives/edgar/data/1622869/000119312514447125/d807090ds1a.htm

 

 

The IRS has been fielding a growing number of requests for private letter rulings from companies that provide services to the oil and gas trade and want to operate as MLPs. The IRS put a hold on any further rulings in March 2013 while it evaluated where to draw the line. Sandridge only recently got the IRS's blessing to form an MLP from this unit.

 

http://www.reuters.com/article/2015/06/01/sandridge-mlp-idUSL1N0YN2JH20150601

http://okenergytoday.com/2015/06/sandridge-energy-receives-favorable-news-from-irs/

[thepupil]

yes they will IPO the company, but they won't spin it to shareholders, correct?

 

Would seem a little fraudulent conveyance-y to me. The 2nd liens that just came in won't be having any of that, at least I wouldn't think so.

 

When you say "the cost basis of Midcon > Sandridge Market Cap" it doesn't have much meaning because MidCon doesn't belong to common equity holders. Won't proceeds from the IPO be used to pay the $4B in front of it common?

 

Are the covvies so light as to allow for a spin off when this company is in distress?

[thepupil]

 

What is the basis for "likely to be spun out this year"?

 

Should not the senior creditors have a good firm grip on this company's gonads?

 

If not, then that would obviously be a game changer. But I don't understand why a spin is possible, much less likely. 

 

From the note issuance. https://www.sec.gov/Archives/edgar/data/1349436/000110465915041380/a15-12943_18k.htm

 

revised senior credit facility also is expected to contain various covenants that will limit the Company and certain of its subsidiaries’ ability to: grant certain liens; make certain loans and investments; make distributions; redeem stock; redeem or prepay debt; merge or consolidate with or into a third party; or engage in certain asset dispositions, including a sale of all or substantially all of the Company’s assets. Additionally, the revised senior credit facility is expected to limit the Company and certain of its subsidiaries’ ability to incur additional indebtedness with certain exceptions.

 

The Company expects the obligations under the revised senior credit facility will be guaranteed by certain of its subsidiaries and will be secured by first priority liens on all shares of capital stock of certain of its material present and future wholly owned subsidiaries; certain intercompany debt; and substantially all of its assets, including, consistent with the existing senior credit facility, proved oil, natural gas and NGL reserves representing at least 80.0% of the discounted present value of proved oil, natural gas and NGL reserves considered by the lenders in determining the borrowing base for the revised senior credit facility.