SandRidge Energy, Inc. (fka SDOCQ)

[catdaddyrt]

Bingo give the man a Cigar - bankruptcy is on the way !!!



SandRidge - Abandon All Hope, Ye Who Enter Here 3.0
Sep. 23, 2015 5:35 PM ET | About: SandRidge Energy, Inc. (SD)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Summary

I update readers as to the newest developments in the epic SandRidge tale of wandering deep into Dante's Inferno.

Since July, just over the last 60 days, SandRidge is being priced at double the chance of 12-month failure probability by the risk pricing markets.

I believe SandRidge is now effectively cut off from the external debt/credit markets - a market it will need to win back to survive.

But can it? I don't believe it can. I also breakout SandRidge's concerning Net Outflow multiples.

SandRidge Energy (NYSE:SD) has yet to find a bottom even into what has been slowly stabilizing oil pricing - SandRidge as of last close priced at an all-time low of just $0.37. Yes, this is despite WTI pricing improving to a most recent close of ~$47 which shows that SandRidge isn't even trading in line anymore with its former 1:1 correlation to underlying oil pricing. That means that both the equity pricing and risk pricing markets are pricing SandRidge with additional core-risk outside of simply that coming from a low commodity pricing deck. Of course, this is a case I've been making for quite some time and a case that the risk pricing market has clearly been evidencing for quite some time.

(click to enlarge)

Still, it does deserve noting that just since July 2015 that the broader risk markets (credit/debt/etc.) have considered SandRidge as having twice the probability of rolling 12-month failure (via Kamakura - a risk management and consulting firm, SEE: Infographic below). Put simply, the risk pricing markets with each passing day of 1) this lower pricing deck and with each passing day of 2) SandRidge management not being able to make up better economics or a path to better economics for its terrible assets (as they've tried to do in the past, SEE: Q3/14 investor call) view the company as being at greater risk of total failure. The bad news for those long common stock from above is that this probability of failure doesn't improve much over longer durations, durations that my belief is include the expectation for a more accommodative commodity pricing deck.

At no point within the next 10 years, at least based on the current capital structure (which is exacerbating actual operating issues by creating a massive overhead that's punitive to all-in net realizations of economics) and the current technology for extracting resources, does the risk pricing market believe that SandRidge will have a less than 20% chance of failure over any 12-month duration. This matters in that SandRidge will need access to these markets more than a few times over the next several years if it is to survive. It's my opinion that SandRidge, outside of doing business "in-house" with debt/equity holders who are already stressed and staring at a high probability of failure anyways, has no access to the debt/credit markets. Now, I understand that SandRidge has made progress in restructuring and in relaxing certain credit tethered covenants as of late but these deals were again in-house:

(click to enlarge)

A look at SandRidge metrics from July (via CapGainr July E&P 12-month default and CDS report) - note that the implied CDS bid has been disappeared and note the overall 12-month default spike when comparing this graphic to the Infographic above:

(click to enlarge)

The question that SandRidge equity holders should be and have to be asking themselves at this point is, "will there be any change to this expectation of failure and is there any hope here for a turnaround over time?". Again the outside, non-"in-house" SandRidge market participants have already been asking themselves this question and have concluded the answer is "no". Sadly for SandRidge equity holders I have to continue to agree with them.

There is only one hope for SandRidge but it isn't realistic (in my opinion) and it isn't something that I believe those interested in stressed equity investing should make bets on. Based on very confusing and what have proven to be highly unreliable IRR modeling from SandRidge's investor deck (August 2015) if oil pricing were to price at levels substantially over $90 (this is assuming that SandRidge doesn't participate in upside limiting hedging collars - also not likely based on the E&P's history of risk managing via collars) for an indefinite amount of time (this would have to be at least 3-4 years consecutively) SandRidge should be able to "drill itself" out of its toxic capital structure. But really this is the only scenario in which a failure, which I've hedged this statement in the past by saying failure can take a long time, isn't in the cards. I just don't see a realistic scenario in which SandRidge has long-term viability.

Again, these concerns are based on the combination of less than ideal IRR from underlying assets that are being punished savagely by a toxic capital structure and toxic contractual obligation scheduling. This can be evidenced by SandRidge's long-running extremely high Net Outflow multiple. Net Outflow, for those unfamiliar, is a proprietary measure that differs from GAAP net debt multiples in that Net Outflow is inclusive of 10-K identified Contractual Obligations (ex. company specific items such as costs for new corporate facilities, benefit plans, IT upgrades, etc., that could potentially be abandoned or restructured easily under extreme stress or threat of insolvency) that aren't classified by GAAP as net debt. I believe my proprietary indication is more closely relating to real leverage than GAAP defined net debt:

(via CapGainr)

(click to enlarge)

I generally view anything over 10X as unsustainable and anything over 8X as indicative of an extremely levered, unhealthy, and most likely unsustainable in the mid-term model. Models operating at or above ~8X need extremely accommodative pricing environments to perform well and have a near-zero margin for error. While Net Outflow multiples are not a cookie-cutter way to determine if a trading opportunity exists they are an excellent starting point for fundamental analysis and are invaluable for determining total structural risk. I believe for oil and natural gas investing this is the single most important and differentiating data point at the far ends of the pricing spectrum (either high or low). We just so happen to be and have been at a far end of the pricing spectrum which puts SandRidge's Net Outflow multiple under a particularly powerful microscope.

You can clearly see that SandRidge has been operating at unhealthy Net Outflow multiples dating back to 2010 (its most unhealthy point of operations) but that improvements in health were made during a period of consistently high oil pricing. This, of course, is the obvious point I was making when discussing what hope SandRidge still has left for a turnaround. However, with the currently punitive commodity pricing deck you can see that SandRidge's levered model has given back years' worth of improvement to its Net Outflow multiple and that the E&P now operates at near all-time high levels of structural stress. This underlines my reasoning as to why I believe SandRidge is now operating on an island, cut off from the external credit and debt markets. Outside of structural abitragists and other entities that quite clearly would NOT be friendly or productive to SandRidge equity holder health I don't see anybody wanting to get involved in helping this model at current structural stress levels.

I continue to view SandRidge as a near certain failure and I continue to recommend an avoid under all circumstances.

Good luck everybody.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
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