SandRidge Energy, Inc. (fka SDOCQ)

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I put in a 4.00 stop today hope it does not get triggered



http://seekingalpha.com/article/2520355-pain-might-continue-for-sandridge-in-the-short-term?uprof=45






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Pain Might Continue For SandRidge In The Short Term
Sep. 25, 2014 9:43 AM ET | About: SandRidge Energy, Inc. (SD)
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary

The company is protected against the commodity price risk with the price swap contracts, which brings some certainty to the revenues.
The falling production level has played a major role in the decline in the stock price over the past few months.
Increasing efficiency in production will set up the company for the future growth and it will also result in increased profitability.
SandRidge's (NYSE:SD) price performance has been extremely poor since the start of the year, and the stock has lost over 25% year-to-date - the fall has mainly come from mid-June - in the last three months, the stock is down over 37%.

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The main reason behind the fall has been the production levels, which has been falling - for the most recent quarter, the company was unable to impress the market despite beating analyst estimates for the bottom-line - the top-line of the company fell short of the expectations, which further strengthened the fears about the long-term prospects as the production levels again came under debate. However, not everything is negative for the company, and it is progressing well on its restructuring efforts - successful execution of restructuring strategy might set up SandRidge for continued growth in earnings, making it an attractive investment.

Exposure to Oil Prices

The oil prices have shown an overall downward trend throughout the year. The reason behind it is explained by simple economics. The projected demand of oil exploration companies served as a motivation to produce more oil. However, the actual demand has turned out to be lesser than the supply, making it a buyer's market. The oil prices increased significantly in June due to chaos spread by ISIS in Iraq. The country accounts for roughly 4% of the global oil supply. The threat of halted supply from the region caused the price to rise. However, upon realizing that the extremist were not targeting the southern region, where the oil operations are based, the oil prices decreased again and are expected to remain in the same range in the near future.

In order to cover itself from this price exposure, the company has entered into price swaps on both oil and gas. SandRidge has price swaps for the second half of this year at $99.08, which covers the company for 2,054 MBbls. This output is almost double the production SandRidge had in the first six months of the year. In addition, SandRidge also has Three-Way oil collars - these contracts provide protection against a fall in the prices in the future - the company has collar for 4,140 MBbls - it has sold put at $70, Purchased put at $90.20 and sold call of $100 - three-way collars result in reducing the hedging cost and the premium paid and received bring down the overall premium outlay. These figures show that even if the company were to ramp up its operations to a double, it will still be safe from the price fluctuation.

In the same way, the company has entered into price swaps on 24,840 MMcf of natural gas at $4.28 and Natural Gas Collars for the second half of 2014 at $4-$7.78. These hedging efforts will protect the company from the commodity price fluctuations. The prices of oil are likely to fall to $90 a barrel in the winter. Therefore, these price swaps might prove to be good assets to the company. The following table shows the details of the discussed price swaps.

(click to enlarge)


Source: SEC Filings

Proven Resources

The company saw substantial reduction in production levels this year. However, its proved resources also decreased during this year. This is because the company had to sell its assets in the Permian basin and some other assets as well. The assets decreased 1.51% as of the second quarter year-over-year.

However, the company is also focusing on its drilling efficiency as discussed in our previous articles. Additionally, the company will be focusing on widening its resources and has set a capital budget of $1.4 billion for the year. We believe that the efficiency of the company is improving which should supersede the current reduction in oil reserves. The following table shows the details of reserves.

(click to enlarge)


Source: SEC Filings

Problems Might Continue in the Short Term

SandRidge is trying to tackle its main issues - one of these issues is the well cost - the company has been able to decrease its well cost by about 11% from $3.2 million to $2.85 million. This is an encouraging piece of news for the company as decreased costs will go some way in making up for the falling production levels, and the earnings of the company will improve further. One of the biggest issues for the company is that its acreage is in the Mississippi Lime formation - the company has over 650,000 acres of assets in the area. Mississippi Lime formation has been less efficient in terms of production compared to other formations such as Eagle Ford Shale - average at the Mississippi Lime formation for the well stands at around 400 barrels of oil equivalent per day, compared to 1,000 barrels of oil equivalent for the well at Eagle Ford Shale. The company will need to enhance its well efficiency from these assets.

Furthermore, the decision to buy back shares worth about $200 million was also taken as a negative as the shareholders were worried about the overall position of the balance sheet and feared that this might stretch the balance sheet further. SandRidge will need to tackle these issues and enhance its production levels in order to reverse the trend in the stock price. We believe the restructuring plan is on track and it should give SandRidge some breathing space.

Conclusion

SandRidge is moving in the right direction and we believe the successful execution of the strategy should allow the company to get better in the long term. The increasing efficiency of the company will yield profitable results once the company ramps up its production levels. It is protected against the commodity price exposure for both oil and gas. However, in the short term, SandRidge might continue to suffer.

Additional Disclosure: This article is for informational purposes only and it should not be taken as an investment recommendation. Investing in stock markets involves a number of risks, and readers/investors are encouraged to do their own due diligence and familiarize themselves with the risks involved.