SandRidge Energy, Inc. (fka SDOCQ)

[catdaddyrt]

if they don't get the brakes on this it will go bankrupt I am not riding it to the bottom _SD sold its Permian Basin assets -Go Figure look at this comparison and you will see what poor management can do to a company


seekingalpha.com/article/2535845-stacking-sandridges-mississippi-lime-against-encanas-permian-focused-athlon-acquisition?uprof=45

tacking SandRidge's Mississippi Lime Against Encana's Permian Focused Athlon Acquisition
Oct. 2, 2014 7:21 AM ET | About: SandRidge Energy, Inc. (SD), Includes: ATHL, ECA
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary

Encana just paid $7 billion for Permian focused Athlon Energy which produces 30,000 barrels of oil equivalent per day.
Meanwhile Mississippi Lime focused SandRidge Energy produces 70,000 barrels of oil equivalent per day and is valued for $2 billion less than the Athlon purchase price.
Recently there has been a renewed interest in the Miss Lime with several recent transactions. Given Athlon's transaction metrics SandRidge could have considerable upside if play economics improve.
As the owner of several inexpensively valued Canadian oil and gas (mainly oil) producers I find myself green with envy this week. The cause of that envy... is the price that Athlon Energy (NYSE:ATHL) shareholders are going to receive for their shares in the announced purchase of Athlon by Encana (NYSE:ECA).

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Encana is paying $58.50 per Athlon share which is almost three times the IPO price of $20 that Athlon came to market with in August of 2013.



Source of image: Yahoo Finance

That is a good decade worth of returns for Athlon shareholders who got in on day 1. The beauty is that they received all of those returns in less than a year.

When you factor in the $1.15 billion of senior notes that Encana will assume as part of this deal the total purchase price for Athlon is $7.1 billion.

For that $7.1 billion Encana is going to receive:

- 30,000 barrels per day of production (80% liquids)

- Potential for 5,000 horizontal wells

- Potential recoverable oil of 3 billion barrels

- 140,000 net acres of land

- 173 million barrels of proven reserves

My envy of this deal is rooted in the transaction multiples that all of this implies.

Price per flowing barrel - $7.1 billion / 30,000 boepd = $236,000

Price per barrel of proved reserves - $7.1 billion /173 million = $41.04

I'm not sure I've seen a deal of this size have that kind of multiple of production. Land in the Permian is apparently worth some big dollars.

When you value the transaction based only on the company's current production and booked reserves you are really not factoring in one very important thing.

That thing is the value of its undeveloped, unbooked acreage. In the case of Athlon with 5,000 future horizontal well locations that ignores a lot of value. In discussing the deal Encana pointed to the fact that it thinks it can recover 3 billion barrels of oil from this land over time.

Compared to 3 billion barrels of oil, maybe that $7 billion price tag seems more reasonable. That Permian land obviously has a lot of value.

For some reason this deal made me think of the long suffering shareholders of SandRidge Energy (NYSE:SD). Shares of SandRidge which had experienced a nice run immediately after the ouster of founding CEO Tom Ward are currently back near all time lows.

A comparison of Athlon and SandRidge is intriguing.

SandRidge Enterprise Value - $5.2 billion

Encana Price For Athlon - $7.1 billion

SandRidge Current Production - 70,000 boe/day (50% liquids)

Athlon Production - 30,000 boe/day (80% liquids)

SandRidge Proved Reserves - 377 million barrels

Athlon Proved Reserves - 173 million barrels

The heavier liquids' weighting should make Athlon's production and reserves more valuable. But it is still amazing to me that Athlon, which has less than half the production and less than half the reserves is worth $2 billion more than SandRidge's current market valuation.

Clearly the market does not think nearly as highly of SandRidge's core Mississippian play as Encana (and everyone else) feels about the Permian and its stacked zone bounty.

I can't help but wonder if perhaps the relatively inexpensive multiples assigned to SandRidge presents an opportunity. In fact I've recently noticed a bit of a renewed interest in the play after having seen some of the larger players leave it in 2013.

On September 15, 2014 Eagle Energy acquired 20,000 net acres in the counties of Alfalfa, Grant and Woods for $195 million. As you can see in the SandRidge presentation slide below, these counties are right in SandRidge's core area of the play.



Source of image: SandRidge Energy Sept '14 Presentation

On September 12, 2014 Stratex Oil and Gas Holdings (OTCQB:STTX) entered into a joint venture on 35,000 acres of land in Ford County in Kansas.

And back in July of 2014 Petro River Oil (OTCQB:PTRC) entered into a memorandum of understanding on an $87 million deal with a Chinese firm. That cash will help fund the development of Petro River's 100,000 plus acres of Mississippi Lime land.

For whatever reason the interest in the Mississippi Lime seems to have picked up in recent months.

According to SandRidge's most recent corporate presentation the current economics on one of its typical wells (at current commodity prices) generates an IRR of 65%.



Source of image: Sep '14 SandRidge Energy Presentation

That isn't terrible as is, but what I think is noteworthy is what happens to the economics if SandRidge and others can continue to make progress in bringing well costs down (or productivity per well up).

The question I keep asking myself is whether I'd rather pay a very expensive price like Encana did for a popular play like the Permian, or pay a bargain price for a play like the Mississippi Lime where a technology or technique advancement could create a step change in profitability.

Paying the steep price would certainly be the less risky option provided the play performs as expected. Paying the bargain price for the less well liked play would certainly have more upside should well costs come down or the well design improve, but that would carry more risk as there is no way to know if or when either of those things should happen.

The one thing that would really turn the tide for the Mississippi Lime is an improvement in the price of natural gas. That is something many investors have been waiting on for a long time.

I sit on the sidelines of this play as an interested but not invested observer.

Source of financial information: SandRidge Energy SEC Filings and Encana's website detailing the Athlon Purchase