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Has SandRidge Energy’s turnaround been successful?

Diana Key

TPG-Axon Capital Management’s 3Q14 positions (Part 11 of 11)

(Continued from Part 10)

TPG-Axon and SandRidge Energy

TPG-Axon reduced its position in SandRidge Energy (SD) during 3Q14. The stock accounts for 11.52% of the total portfolio, down from 13.88% of the fund’s 2Q14 portfolio. TPG-Axon further reduced its stake in 13D/A and 13G filings. It currently owns 32 million shares, or a 6.5% stake in SandRidge.

Hedging

SandRidge has exposure to falling oil and gas prices. The company aims to reduce oil and natural gas price risks by entering into derivative contracts, which helps it reduce commodity price volatility. SandRidge hedged more than 10 million barrels of oil at $90 a barrel and 15 billion cubic feet of gas at $450.

SandRidge expects to generate ~10% return on its wells at the $50 oil price, while current WTI is ~$48. It would be uneconomical for the company to drill at the current oil prices.

SandRidge troubled with lawsuits

Shareholders, mineral rights owners, and some of its former employees sued the company in various issues. The shareholders lawsuit addressed alleged violations of federal securities laws.

SandRidge’s turnaround

SandRidge Energy promotes itself as a turnaround story after ousting CEO Tom Ward in June 2013. The company sold Gulf of Mexico assets in January 2014 for $750 million. During his tenure in 2012, Ward purchased Gulf of Mexico offshore assets for $1.2 billion. TPG-Axon noted this move as “strategically incoherent,” as SandRidge is an onshore operator.

SandRidge Energy again shifted its focus to onshore assets with northern Oklahoma and southern Kansas’s Mississippi Lime formation. However, the company is currently facing challenges on its million-plus acres of Mississippi Lime.

According to analysts at Bernstein Research, “The top average initial production rate for a Mississippi Lime well is about 400 barrels oil equivalent per day (or boed), while wells in the Eagle Ford shale formation in Texas produce more than 1,000 boed on that same basis.”

SandRidge’s high leverage

SandRidge’s leverage ratio, or net debt to EBITDA (earnings before interest, tax, depreciation and amortization) ratio, was 3.17x. It was highest among its peers, followed by Denbury Resources (DNR) 2.70x, Chesapeake Energy Corp. (CHK) 2.03x, Anadarko Petroleum Corp. (APC) 1.23x, and Apache Corp. (APA) 1.04x.

Analyst estimates

In its January 9, 2015, report, Credit Suisse analysts noted that the risk factors associated with SandRidge are extremely high leverage, and it plans significant capex cuts in 2015. The company’s cuts in spending are expected to limit cash flow and production growth, leading to overall underperformance.

According to Wunderlich Securities analyst Jason A. Wangler, “The low oil price environment…SandRidge’s high debt level, declining liquidity position, and difficult economics cause us to believe there remains downside to the story.”

Please visit Market Realist for additional information on the energy and power sector .

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