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Sandridge Energy - Balance Sheet Repair 101
Aug. 17, 2015 5:22 PM ET | 3 comments | About: SandRidge Energy, Inc. (SD)
Disclosure: I am/we are long SDRXP. (More...)
Summary
The beginning trend of the debt deals is larger and favorable to the common shareholders.
Since December, the company has rearranged $750 million of preferred stock and debt to the benefit of shareholders.
A patient strategy should yield deals that favorably rearrange more than half of the company's debt.
As long as the industry outlook is so bleak, there is no need for the company to rush to repair its balance sheet.
Many institutional holders favor these deals, and that will aid the company in repairing its balance sheet.
This past week Sandridge Energy (NYSE:SD) announced a debt swap. First they paid off $250 million for the bargain price of $94.5 million. Then the company swapped $250 million of its debt for $250 million of convertible debt and pushed the average due date further out a year or so.
Back in December, 2014, the company forced the conversion of $200 million of preferred stock.
On May 19, the company swapped $50 million of its debt for equity by issuing about 28 million more shares. The market appeared to react negatively to the deal at the time, but right now, that deal is looking fairly decent for share holders even if it was not that large.
At this point in time the company has announced deals of $750 million since last December. About $550 million of these deals relate to the company's debt. The debt swapped or paid off so far rearranged has exceeded 10% of the company's total debt. $300 million in debt is now off the company books, and the company is going to book an approximately $94 million gain in the process. Therefore this process looks good for the shareholder.
The outlook for the industry is so gloomy right now that debt prices have dropped to ridiculous levels. The company can afford to take its time and bargain with groups of debt holders for the best deal out there. Even if debt prices started to rise in the industry, there would still be good deals to be made, so there is no need to rush.
The first debt deal that the company made, debt for equity, was very small and derided all around. But the next deal for $500 million is definitely on the radar. Plus the stock market reacted better to this deal. So it looks like the company is starting to attract the attention of the institutional shareholders and hedge funds. These kinds of investors know how to lock in profits on a trade like this and pass potential risks off to someone else. Plus they love instant profits, and the company is offering them instant profits compared to the prices of the securities these investors hold right now.
As was noted in previous articles, the company is working on the operations, and in the last quarter reported $111 million in cash flow. Annualized, that cash flow is not sufficient for a company this size even with the interest savings from a large scale debt swap for equity. The company clearly needs time to work on the operations side of the business to cut costs, raise cash flow, and raise income. The benefits of going slowly on these debt deals is that good news on the operations front may raise the stock price and allow for better deals before the prices of debt rise. The market is so pessimistic right now that securities have not been moving lockstep the way some learned in MBA classes. The efficient market does not appear to be very efficient right now either in some of these securities. Of course bad news would have the opposite effect, but the risk of far worse deals appears minimal at this time.
Combined with the lack of clarity about the future of oil prices, a piecemeal approach is indicated to fixing the operational challenges as well as the balance sheet challenges. Such an approach is a variation of the cost averaging approach that has been so successful in many ways by past users. It will particularly benefit the preferred shareholders with two issues, SDRXP and SDRXN being the most undervalued of the group.
Based on the above data, the company should keep going the way it has in the immediate past. The company should be able to swap much of its debt doing these deals one at a time. Sooner or later, with great hindsight, investors will be able to tell when and where the best deal was made. But with the future so uncertain, let's allow management some leeway to run the company and see how much it benefits shareholders. The preliminary results are encouraging, so let's not stop a potentially very profitable pathway.
Disclaimer: I am not an investment advisor and this is not a recommendation to buy or sell a security. Investors are recommended to read all of the company's filings and press releases as well as do their own research to determine if the company fits their own investment objectives and risk portfolios.
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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