Sandridge Energy Inc (SD)

[catdaddyrt]

http://seekingalpha.com/article/3070646-sandridge-energy-preferred-convertible-a-21-percent-yield-paid-in-shares-of-sd-common?auth_param=46e5d:1airda7:37fbff268ceb28645579f9cfc3d40d4c&uprof=45


SandRidge Energy Preferred Convertible: A 21% Yield Paid In Shares Of SD Common


Apr. 14, 2015 8:47 PM ET | 11 comments | About: SandRidge Energy, Inc. (SD), Includes: ARP



Disclosure: The author is long SD. (More...)






Summary
•Preferred dividends are now being paid in shares of SD common stock.
•A preferred stock dividend deferral is unlikely since dividends are no longer a cash cost.
•SDRXP yields far more than peer issues such as ARP-PD with comparable credit risk as measured objectively by bond yields.
•SD holders should consider swapping into SDRXP.



SandRidge Energy (NYSE:SD) is well known to energy sector investors, but few are familiar with its preferred stock issues. SDRXP and SDRXN are par $100 cumulative preferred convertible issues. I profiled SDRXP in this 3/3/2015 Seeking Alpha article. SDRXP traded lower, as oil prices dropped and some readers questioned whether SD would defer the preferred stock dividend in order to preserve cash. On 4/1/2015, the SDRXN dividend was declared and will be paid in shares of SD common stock. A deferral is now very unlikely since the preferred stock dividends are no longer a cash cost.

SandRidge Energy has been attacked by some recent Seeking Alpha articles, but bond market yields and credit agency ratings are a more objective way to measure credit risk than negative headlines. SandRidge has no near-term debt maturities and hedging provides some protection against low commodity prices for 2015 and 2016. Based on bond prices, SandRidge has comparable credit risk to Atlas Resource Partners (NYSE:ARP). SDRXP yields more than twice as much as the ARP-PD's par $25 cumulative preferred units.

The SandRidge 8.125% unsecured bonds due 10/15/2022 (CUSIP 80007PAQ2) last traded at $65.50 with a 16.3% yield to maturity. The Atlas Energy 9.25% unsecured bonds due 8/15/2021 (CUSIP 049296AE6) last traded at $72.75 with a 16.3% yield to maturity. The SandRidge Energy bonds are rated B2 by Moody's and B- by S&P. The Atlas Energy bonds are rated Caa1 by Moody's and B- by S&P. Based on the bond yields and credit agency ratings, SD and ARP have comparable credit risk. Given their comparable credit risk, SDRXP and ARP-PD should trade at comparable yields. At a recent price of $21.10, ARP-PD now yields 10.2%. At a recent price of $40.38, SDRXP now yields 21.1%, which is more than double the yield of ARP-PD!

The recent decision by SandRidge to begin paying the preferred stock dividend in shares of SD common is extremely favorable for preferred stockholders. The dividend is no longer a cash cost, so there is no incentive to defer it to preserve cash. Note that SDRXP holders actually get a slightly higher dividend when paid in shares of SD. The shares of SD are discounted by 5% as compared to cash dividend payments. The calculation of the dividend payment is detailed on page 8 of the SDRXP prospectus:
“

"If the Company elects to make any such payment, or any portion thereof, in shares of Common Stock, such shares shall be valued for such purpose, in the case of any dividend payment, at 95% of the Market Value as determined on the second Trading Day immediately prior to the Dividend Record Date for such dividend."

Given the recent decision to start paying the preferred dividend in common stock, SD holders should consider swapping into SDRXP. Using round numbers, 100 shares of SDRXP at $40 has the same cost as 2,000 shares of SD at $2. Suppose that SDRXP continues to pay the dividend in common stock for the next 3 years while commodity prices recover and suppose that SD shares trade at an average price of $2.50 during this period, the dollar value of 3 years of dividends received from 100 shares of par $100 SDRXP at 8.5% coupon is $2,550. Given these assumptions (ignoring the 5% discount), 100 shares of SDRXP would receive 1,020 shares of SD as dividend payments over the next 3 years.

Each share of SDRXP may be optionally converted into 12.48 shares of SD. Using the above example, after 3 years, 100 shares of SDRXP would have received 1,020 SD shares in dividends and be convertible into 1,248 shares for a total of 2,268 shares. In this example, if you bought SD common, you still have only 2,000 shares. SDRXP holders are clearly ahead. Note that SDRXP holders would not actually convert into SD common since it would still be far better to continue receiving the preferred stock dividend.

The payment of SDRXP dividends in common stock is very favorable to preferred stockholders. SD shareholders face modest dilution, as shares are issued to pay the preferred dividend. SDRXP deserves a closer look from high-yield investors, as well as SD shareholders.





Additional disclosure: The author is long SDRXP. SDRXP is covered in the Panick Value Research Report. The Panick Report is focused on high yield preferred stock issues, [e-mail] for the 2 week free trial.

















»















.