SandRidge Energy, Inc. (fka SDOCQ)

[catdaddyrt]

I guess because a few said they thought SD might survive - that does not give me any confidence with the dilution and R/S plans - I do not think they can pull it out BK in imminent imo
If they had a lot of cash they would be paying their yields with it not shares - another credit line is just what they don't need

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Sandridge Energy Might See Progress, But Has A Lot Of Cash
Jul. 27, 2015 9:21 AM ET | 1 comment | About: SandRidge Energy, Inc. (SD)

Disclosure: I am/we are long SDRXP. (More...)
Summary

Most writers grudgingly give Sandridge Energy a good chance to survive right now, though challenges clearly remain.
The company has more than a billion in liquidity currently, and stands a decent chance of exiting the year with $700,000,000 in cash plus its $500,000,000 revolving credit line.
Significant cost reductions due to technology improvements continue and will provide unexpected and welcome help to the struggling company.
The 8.5% preferred issue offers an attractive return and goes ex-dividend next week. This is an excellent trade for a few weeks worth of work (potential 21% return).

Around the time of the last article that I wrote on Sandridge Energy (NYSE:SD), Richard Zeits wrote an article stating that Sandridge Energy was going to run out of cash. From the headline, I thought he was worried that the company lost their bank address and therefore would not access their line of credit, which at the time was around one billion dollars. Meanwhile, Dallas Salazar was convinced it was time to plan the company's funeral and had his suit out already to wear. The company itself, as Casey Hoerth noted, managed to raise $1.25 billion in cash. Including the reduction in the bank line to $500 million, it ended up with more than a billion in liquidity. So Dallas Salazar probably put his suit away and stopped waiting for the funeral. Richard Zeits learned that the company probably planned ahead for the cash situation and indeed could refill its coffers.

Now Richard Zeits wrote an article on the company with a far more moderate tone. He even admits that the company has a reasonable chance to exit the year with $700 million in cash and an unused credit line. That is far more optimistic than the first article. Dallas Salazar, has also moderated his tone. He still thinks that there is a significant chance that Sandridge goes broke, but the tone of his article appears to give the company a better than average chance of surviving, whereas before, he was sure the company was a goner.

Neither author gives the company a clean bill of health because the company does not deserve one. Both noted that the company faces considerable headwinds. It is leveraged, it has lost money, and after promising to work on the balance sheet, the company obtained $1.25 billion more debt. That is not exactly the way to for management to inspire confidence in their pronouncements. Even though the company is levered, it has cash and it had better have a plan to get out of this mess because the choices in the future are becoming limited. But for the next two years or so it has the cash on hand, a line of credit, the possibility of a master limited partnership offering, and some other asset sales. If it could manage an equity for debt swap that would give it even more breathing room.

On the production front Michael Filoon has some good news. Michael is noting production increases of 25% to 45% with some new well designs. This particular design had a 50 stage frac design. In another article Michael Filloon noted a 90 frac design by Emerald Oil (NYSEMKT:EOX) that did not achieve the desired results, but you can expect both Emerald Oil and other operators to play with this new idea until desired results are obtained. In the last article that I wrote about Sandridge Energy, I referenced an article that Michael Filloon wrote and reported on production improvements of 300% recovery over the last few years and cost decreases. With these additional improvements, its becoming increasingly clear that production costs are decreasing at break neck speed both from cost decreases and technology improvements. The improvements are far more significant and developing much faster than anyone could imagine. These new developments are complicating future forecasts about anything oil tremendously and it's a very pleasant complication. Filloon has noted that costs have come down so much and production methods improved such that energy prices no longer need to go up to make far more areas commercial than previously believed in this downturn. In short, he now believes the oil and gas industry can now recover at the current oil prices as the new technology spreads. That is a big change in attitude from a few months back.

Christopher Aublinger, who tracks the costs of production for oil companies feels that Sandridge and others will not make much money and indeed be in serious trouble when the hedges expire. In another article, he takes a sampling of shale producers and from his analysis of those producers concludes that shale oil companies cannot make money when the price of oil is at $60, let alone the current price.

So how can the two views of Aublinger and Filloon be reconciled? The reader needs to realize that Aublinger is examining the past and what has made it into the books. There are two types of accounting in the oil industry, the successful efforts method and the full cost method. The successful efforts methods usually results in more expenses up front, whereas the full cost method allows a company to place its costs in a cost center and then spread those costs out over production. In both cases the companies are using historical costs. Everything that Aublinger used was in the past or at best the present. Even if Aublinger goes with what the companies are stating as current costs, its still the present.

Filloon has a front seat on where future costs are going and what is going to survive as new low cost practices. He knows what is about to go on the books is a far lower cost than has been recorded in the past. Filloon reports on the changes that are coming and have an excellent chance of being adopted. He is actually telling the reader how Aublinger's numbers are going to change in the future. So there really is no conflict between the two authors.

So what does all of this mean for Sandridge Energy? I continue to believe that Michael Filloon's published operational improvements will dominate, and that for the time being more improvements are on the way at a pace and significance no one could have imagined a few months back. Because I believe that the company will adopt these improvements as it can be applied to its leases, its costs will rapidly decrease.

These technology improvements, even with the reduced level of activity will provide some very welcome and unexpected help that could dominate the company's financial picture far more than expected originally. I don't know how many new wells are needed to show a significant improvement in the company's overall cash production costs, but I would expect some guidance each quarter as the improvements are implemented and slowly work their way through the balance sheet to the income statement. Because these costs are mixed with older historical costs on the balance sheet, it will be hard for the investor to determine the new costs from the income statement. We are going to have to trust the reporting of management a little bit here, but the weighted average of costs should improve each reporting quarter throughout the fiscal year, and well into the next one.

This will lead to rapidly increasing cash flow as long as oil prices remain steady. Sandridge needs to increase its cash flow to the point where it can survive when the hedges are gone, and the cash pile and other contingency plans run low. Hopefully this happens before all the options run out and save the shareholders some angst. Right now, it looks like a very comfortable plan as the company was well on its way to increasing cash flow in the first quarter by lowering costs.

The company still will have to report non-cash charges (to adjust the value of its producing properties on the books) because the average price of oil that is used to calculate the ceiling for accounting purposes is going to continue to drop. Therefore the whole industry, not just this company is going to have to revise their producing assets downward as the ceiling comes down and that process will continue through the end of the December reporting period at least. Very few companies will not have significant write-downs (although those companies that use the full cost method of accounting will average greater write-downs). However, I do expect the company to report a small profit from operations before the non-cash charges.

Any significant difference from a small profit will be noted and my strategy will be adjusted if needed. The investor will need to focus on the current operating costs of the company and their per unit reduction. The company needs to show reasonable progress towards their stated goal, and will hopefully exceed those goals with the new changes sweeping the industry.

I still like the 8.5% preferred stock (SDRXP). The price is still a steal. It closed at $20 on July 24, and that is down from $22.90 on 6/29 when I wrote the previous article. That resulted in a loss of about 14.5% in that time period. Its not a great performance, but the performance of the preferred is far better than how the common stock fared. For new investors, the preferred will provide an excellent return over the next few weeks and is a great trade. Preferred stocks beaten down this much rarely drop a lot more or even at all when they go ex-dividend.

The preferred stock will go ex-dividend on July 29 for shareholders of record on Aug 1. They will pay the semi-annual dividend in common stock using the fifteen day average common stock price ending on July 29 and include a five percent discount in that average price. The payment will be made on August 15. This means that next week shareholders of the preferred are eligible for the semi-annual dividend of $4.25 if they meet the above qualifications. That semi-annual dividend is a yield of approximately 21%(and the annual dividend rate is 42%) at the current price and should more than make up for the decline in the preferred stock price since the original article was written. The actual return may vary some because the calculation of the dividend in stock is an average price, plus some may have significant selling expenses if they choose to sell the stock, but even so the six month dividend distribution will be attractive for most at the current stock price.

I still believe that the risk of a reverse split and dilution of the common equity runs high right now and would therefore avoid the common. However, if a lot of things go right, potentially the common shareholders may not have to suffer dilution. That is a small possibility.

Disclaimer: I am not a registered investment advisor, and this article is not a recommendation to purchase or sell shares of any stock. Investors are advised to do their own research, read the company filings and press releases to determine the suitability of any stock as an investment that suits their risk profile.

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.

Additional disclosure: The author reserves the right to purchase more SDRXP in the next 72 hours.


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