SandRidge Energy, Inc. (fka SDOCQ)

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Does Saudi Arabia Hate Sandridge Energy?
Oct. 17, 2014 4:51 PM ET | 17 comments | 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

Saudi Arabia offered discounted oil pricing to Asian customers to increase market share.
The goal appears to harm marginal producers around the globe including producers in the US.
Sandridge Energy appears one of the vulnerable producers in the US with minimal profits from past capital spending plans.
The recent decision by Saudi Arabia to offer discounted oil prices to Asian customers has grave indications for the modern domestic oil producers. Only a few months ago, domestic oil producers appeared destined for non-stop drilling growth with WTI crude prices hanging above $100. With the recent substantial declines in oil prices and growing supplies, one has to wonder if the OPEC led by Saudi Arabia isn't hoping to crush upstart shale produces in the U.S. that were previously drilling full speed ahead without any real regard to long-term prices. The risk OPEC faced is that higher oil prices would encourage further ramped up drilling in the U.S. and other regions.

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One has to wonder if the goal isn't to stall the previous forecasts that shale drilling in the U.S. would turn the country into the leading producer in the world by 202x. Saudi Arabia loses a ton of global influence once the U.S. is no longer dependent on that country and the only way to stop that shift is to harm the marginal producers around the world and specifically in the U.S. One prime example is Sandridge Energy (NYSE:SD) where the stock price of the oil producer was down roughly 50% in the last three months. Even fellow oil and natural gas producer Chesapeake Energy (NYSE:CHK) was down roughly 35% in that time period. Clearly these stocks will face more questions regarding obtaining capital near-term and especially if oil prices continue heading down below $80.

Saudi Arabia Discount

Reportedly, Saudi Arabian Oil Co. cut prices in November to Asian refineries for Arab Light by $1 a barrel to a discount of $1.05. The discount to the Oman and Dubai crudes was supposedly matched by state-run National Iranian Oil Co. marking the lowest prices since December 2008. As the chart below indicates, oil prices at the current levels aren't new. The real key is the length prices stay this low or even lower.

(click to enlarge)


According to Bloomberg, both Iran and Saudi Arabia claim that the moves weren't the start of price wars. Though, the moves are counter to what Saudi Arabia typically does in order to maintain higher prices. While it isn't in the best long-term interest for these countries to create a price war, it undoubtedly is beneficial to maintain market share and eliminate marginal producers.

Considering that OPEC continues to produce at full throttle though the oil markets appear well supplied, one has to assume that Saudi Arabia wants to turn off the spigot at marginal producers. If you saw daily headlines out of the U.S. about impending supply increases, wouldn't you consider a move to ensure the market acts in a rational way?

Sandridge Energy

This scenario brings us to the story of Sandridge Energy. The company continues sputtering with the recent quarterly report missing estimates. Following the startup by former Chesapeake Energy co-founder to his eventual ouster last year, the company always offered high potential and limited success due to shaky decisions. If not for the large rally the two previous trading days, the stock would sit around all-time lows below $4.

Despite all of these bad decisions, Saudi Arabia has to wonder why it's competing against this company for oil sales. For 2014, Sandridge Energy plans to spend $1.5 billion on capital projects in order to grow production by 20% to around 27,200 MMboe. The company ultimately hope to grow production at a 20% to 25% compounded annual growth rate.

The good news for investors is that Sandridge is hedged on the majority of liquids production in 2014 and a majority in 2015 at over $92/bbl. Clearly the price won't have immediate impacts, but the company can't hedge 2016 production without taking serious hits to realized prices now.

Remember that Sandridge is only marginally profitable when it was collecting nearly $100 per barrel of oil sold. The one wild card in this analysis is that most of the producers in the US have significantly reduced well costs. Wells that might have not been drilled three years ago with oil heading below $80 are now marginally profitable with drilling and completion costs down dramatically. Sandridge Energy has already reduced the costs for a Mississippian well from $3.9 million to only $2.85 million in less than two years.

(click to enlarge)


Source: Sandridge Energy presentation

Takeaway

It might seem a stretch that Saudi Arabia 'hates' Sandridge Energy, but it surely understands that cutting production to keep oil prices high would only allow similar oil producers to continue growing. By offering discounts and pushing prices down to multi-year lows, Sandridge Energy has to start re-considering capital spending budgets if produced oil only obtains $80 per barrel or even less. Remember that the shale wells only have meaningful production spans of a couple of years making it impossible to drill a well and assume prices will rise before production runs its course over the next 10 to 20 years.

Ultimately, Saudi Arabia has to hate the scenario where it competes against Sandridge Energy and that appears a prime reason for the discounted oil price. If it and other OPEC players can harm the growth trajectory of shale producers in the U.S., those countries are better off in the long run.

Sandridge Energy and even Chesapeake Energy were extremely over sold prior to the bounce the last couple of trading days. One should use the opportunity to sell stock and move into consumer stocks that benefit from lower oil prices. It is unclear how long the shakeout will last, but Saudi Arabia won't achieve its goal until marginal oil producers around the globe reduce capital spending.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal