SandRidge Energy, Inc. (fka SDOCQ)

[catdaddyrt]

they are trimming the fat but have a long way to go and it will be very difficult with oil staying below 50 all next year, which is my educated prediction.


http://seekingalpha.com/article/3655916-sandridge-energy-is-on-the-prowl-while-cleaning-up-its-balance-sheet?auth_param=46e5d:1b3oqmc:06b7888ee32da4c905200af3bda47e83&uprof=45

SandRidge Energy Is On The Prowl While Cleaning Up Its Balance Sheet
Nov. 6, 2015 3:53 AM ET | 1 comment | About: SandRidge Energy, Inc. (SD), Includes: BBG
Disclosure: I am/we are long SDRXP. (More...)
Summary

SandRidge Energy has liquidity in excess of one billion dollars despite market expectations to the contrary from earlier this year.

North Park Basis Assets add low cost oil prospects to the primarily gas company's portfolio.

More than $500 million debt has been retired, and another $400 million could easily be retired one way or another by year end.

The company has been adding to its cash flow while eliminating debt and doing swaps. Even its one purchase was made with the goal of saving cash expenses.

Bankruptcy danger is currently fairly low, although SandRidge Energy is leveraged and has far from finished reorganizing. Commodity prices are hostile.

SandRidge Energy (NYSE:SD) is one company that the market expected would die. The company is overleveraged, its cash flow has dried up, and the market has seen no hope for some time. After another write-down due to lower commodity prices, it would be so easy to just give in and let the company go. Shareholders' equity went negative, which complicates the NYSE listing. In fact, SandRidge Energy cancelled the vote to do a reverse split on the shares to try and maintain that listing. More than a few observers were willing to begin writing the obituary of the long-struggling company for several months in a row now.

Company management, however, has other ideas:

(click to enlarge)

(Source: SandRidge Energy Third-Quarter 2015 Presentation)

The first thing an investor would expect any struggling company to do is to make an acquisition. NOT! From the third-quarter presentation, the company spent about $190 million to acquire some de-risked acreage in Colorado. I had previously written about another company with excellent costs in Colorado, and that company is Bill Barrett Corporation (NYSE:BBG). There are plenty of other companies claiming great costs in Colorado and project viability at current pricing. So, it's no surprise that this company was attracted to the area. During the conference call, SandRidge Energy management claims that the price is favorable, and the development of the acreage will fit into known company strengths. They further state that they will start out with pad drilling on the prospect to lower costs.

(click to enlarge)

(Source: SandRidge Energy Third-Quarter 2015 Presentation)

Ostensibly, this gave the company some badly-needed diversification. Plus, it added some oil prospects to what has been primarily a gas company. However, this purchase could also be a warning that some of the currently highly touted properties might not be as profitable as recently predicted, and therefore, this purchase was badly needed. As prices went down, the company cut back on drilling rigs steadily.

(click to enlarge)

(click to enlarge)

(Source: SandRidge Energy Third-Quarter 2015 Presentation)

Notice that the company does indeed show a favorable IRR comparison for the new purchase versus the IRR for current projects. However, new projects are always riskier, so it would be wise to wait and see how that prediction turns out. The company has an operating history with its current properties, and the grass always looks greener on the other side of the hill. After the purchase of this property, the company has already stated that by the first quarter it will spud a well on the prospect and if things go well have a two rig development pace going a little later. The company also stated that the capital allocation will be dynamic and that the company's best projects will fight for money, but right now this new project will start with a fair amount of money allocated to it. Those statements, and the action of an eventual two rig program speak to management's hopes as to the profitability of the program, and the ability of the new leases to increase the cash flow of the company. Let us hope they are right because the company cannot afford too many wrong moves at this point. If the profitability does work out as planned however, or even exceed projections, this has the potential to be a game changer for the company.

(click to enlarge)

(Source: SandRidge Energy Third-Quarter 2015 Presentation)

The company is hoping to use some of these same cost-saving ideas and more on the newly acquired acreage. If successful, it could provide hope for an increased IRR. This is really the first time that SandRidge Energy has held out the hope of significantly lower costs and higher profitability quickly. It has made remarkable progress on its acreage, but the progress was hidden by constantly decreasing commodity costs. This acreage gives the company more chances to allocate between oil and gas prospects, depending upon market conditions. Time will tell how well the new acreage fits the company strengths as management has claimed.

(click to enlarge)

(Source: SandRidge Energy Third-Quarter 2015 Presentation)

Even though the new acreage will not be a factor until at least the first quarter of the new year, SandRidge Energy has made enough progress on increasing production and recoveries from the current drilling to raise its guidance for the year. So, it's been successful attacking costs both from a cost reduction and a resource recovery point of view.
Financial Statements

The company has either retired or exchanged debt worth nearly $1 billion. Of that amount, approximately half is outstanding as convertible debt.

(click to enlarge)

(Source: SandRidge Energy Third-Quarter 2015 Presentation)

The first debt for equity swap back in May was roundly condemned by the market as being too small and insignificant. However, that first swap may well have set the stage for the larger deals that followed. Notice that each deal is getting better for shareholders in terms of needing less cash for the deal. It is extremely important for SandRidge Energy to maintain as much liquidity as possible. Liquidity strengthens the company's hand in the negotiating process. Common shareholders are being diluted; however, many alternatives are far worse (in terms of dilution) than the current pathway.

Plus, the company just issued some more convertible debt, and as a result, now shows $449 million outstanding convertible debt. With $126 million converted (probably mostly from the first swap in August), the company has now retired nearly $650 million in debt. The company was pleased enough with the conversion of the first group of convertible bonds to issue more, so there is plenty of reason to project more conversions - probably at least another $200 million voluntary conversions over the next few months (hopefully most of it).

These conversions are significant in that the company has now retired about 15% of its debt without having to give additional security to the remaining bondholders. Best of all, it has retired this amount of debt by doing small deals that have slowly built up to a significant amount. Based upon the progress so far, one can project another 5-10% of the debt will be retired without the company having to lose much liquidity or give more security. Therefore, if the recession in the industry continues, SandRidge Energy is well placed to do further financial deals if more of them are needed. The CEO has stated several times that the company wanted to eliminate $1 billion in debt. The market laughed at that, especially looking at the May transaction. Now, however, the company is well on its way to achieving that initial goal and surpassing it.

Plus, the deals have increased cash flow. Every little bit helps, and that additional cash flow will take a little pressure off the operations side.

(click to enlarge)

(Source: SandRidge Energy Third-Quarter 2015 Presentation)

The company was roundly criticized by the market for issuing that secured debt back in the spring of $1,250 million. However, as a result of issuing that debt, it has repurchased more than enough debt at a discount to more than pay the interest expense on that debt. The interest on that secured debt runs approximately $110 million a year; however, the debt discount gain posted for the third quarter alone was more than $300 million; plus, the company was able to purchase some properties in Colorado that could prove to be very profitable (and significantly add to cash flow). So far, that secured debt is worth every penny it costs and probably a lot more to this company. Investors should expect that secured debt to continue to work hard for their benefit. When a company has to reorganize, nothing succeeds like cash, and SandRidge Energy is proving that point.

Second, its borrowing base was reaffirmed. Banks love to lend to companies that don't need the money, and right now, this company does not need to use much of its revolving line. That revolving line is senior to the other debt, and therefore, the bank's position is very safe. Plus, the bank group collects a fee even though the credit line is not being used much. Therefore, SandRidge Energy still has more than a billion in liquidity. This is far above any market projections made a few months back. The stock price clearly indicated that this company would run out of money by year end (it would be crushed by its debt load), and there were many forecasts to that effect. The market was clearly in error by a billion or so (in liquidity measurements).

The current debt structure is very favorable to the company in that it is mostly unsecured bonds, and therefore, SandRidge Energy has security interests it can use for bargaining later, should the downturn last longer than expected, or if it takes longer than expected for it to get its costs in line. In the meantime, none of the debt is due for several years, and the bank redetermination process is not nearly that important with the company maintaining its cash hoard.

From the income statement, SandRidge Energy was hammered by another cost ceiling write-down that wiped out shareholder equity and created a large deficit. As it reorganizes its debt, that situation could easily change, as the current debt swaps are providing significant gains. However, in the future, the company should use a far more conservative accounting method to avoid these large write-downs of assets during industry downturns. As noted above, the company has made significant progress with its current drilling costs; however, depreciation and depletion (and amortization) are a combination of historical costs, and therefore, would not be expected to solely reflect current cost (current progress as management has stated).

If oil and gas prices stabilize, an investor would expect cash flow to increase as more wells are drilled with the new technology (and on the new acreage), and the older wells become less significant to company income. However, oil and gas prices have not yet stabilized for any significant amount of time, and that has to be frustrating for shareholders (as well as management). In the meantime, the company is clearly doing everything it can to survive the downturn, and is well prepared to survive an extended downturn. The company has cash, it has a revolving bank line, assets to sell, and secured interests to use as bargaining, should the future circumstances require use of any of these items.

Shareholders should be very happy that the company has steered clear of bankruptcy so far, and has kept several very valuable bargaining points for the future, should they be needed (such as security interests for debt holders). Despite the leverage, the company is really not in danger of going bankrupt anytime soon. It is currently in compliance with all its covenants, and has plenty of cash to weather the downturn. So far, bondholders have negotiated with the company for a combination of shares and cash that have resulted in a significant reduction in long-term debt without severely impacting the liquidity. As long as that willingness to negotiate continues, or SandRidge Energy buys back bonds on the open market at a discount, this company has an excellent chance to survive the current downturn. Management is attacking each of its goals (both operational and financial) in piecemeal fashion, and so far, has excellent results to show for it. It would be reasonable to expect management to continue with the current level of success in the future. Clearly, there is more work to be done before the company can claim to be "turned around", but the progress to-date should please shareholders.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents, and press releases to see if the company fits their own investment qualifications.

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.