Why SandRidge might be better off selling its Gulf of Mexico assets

Market Realist

Why did SandRidge sell assets it just bought a few years ago? (Part 2 of 4)

(Continued from Part 1)

Ex–Gulf of Mexico, the company can focus on its onshore potential

The sale of the Gulf of Mexico assets allows SandRidge’s management to focus its efforts on its Mid-Continent and Mississippian activity, which it believes is ultimately a better return proposition. These onshore assets located in Oklahoma and Kansas represent SandRidge’s major lever for growth. The company’s CEO, James Bennett, stated,

  • “The Mid-Continent business has matured to a point where we are ready to invest more capital in it. So why do this (asset sale) now versus later (given that it was generating positive cash flow). We think a couple of things. The Gulf of Mexico, it’s a higher risk, more volatile business in our earnings stream. It was masking some of the growth in our onshore business, and we’re at a point now where we’re ready to redeploy that capital. Our job as managers is to deploy the shareholders’ capital in where we think we can get the best risk-adjusted return.”

SandRidge believes that with its Mid-Continents assets, it has a ten-year inventory. This means that given its projected pace of drilling and the acreage it has rights to, the company can drill for ten years before running out of spaces to drill economic oil and gas–producing wells. This gives the company a long runway and relatively transparent and clear path for growth. However, note that there could be the risk that its inventory of well locations may not perform as well as expected, and also that hydrocarbon prices could come down, making the asset less attractive.

…As can investors

Plus, management pointed out that without the Gulf of Mexico assets, the growth story and asset value for SandRidge should now be clearer. Bennett noted that the company believes that its NAV (net asset value) is much higher than where the stock is currently trading (current market cap of ~$3 billion, enterprise value of ~$5.1) and that the “refocusing of the business” towards onshore development should help the stock trade more in line with the company’s perception of NAV.

The path for growth

SandRidge management also mentioned that it believes that year-over-year production growth in the mid-20% range is achievable given its current yearly capex spending rate of ~$1.5 billion, and that more details would be provided during its Analyst Day in March. Plus, management noted that it expects the growth in EBITDA and cash flow to exceed the growth rate of production given its operating leverage.

Continue on to the next section to see why management thinks that the company is now well-funded to pursue its growth strategy.

Continue to Part 3

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