At the Delivering Alpha conference on July 17th, billionaire Leon Cooperman of Omega Advisors listed SandRidge Energy Inc. (NYSE:SD) as a potential turnaround and one of his top picks. We track quarterly 13F filings from Omega and hundreds of other hedge funds as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can see from our database that the fund owned about 27 million shares of SandRidge Energy Inc.(NYSE:SD) as of the end of March (check out more stocks Omega owned).
SandRidge Energy Inc.(NYSE:SD) had encountered trouble late in 2012 as activist investors attacked the company’s founder and then-CEO Tom Ward for poor management decisions, high compensation, and (in some cases) less than above board business activities. At the same time, SandRidge Energy Inc.(NYSE:SD) was struggling after overinvesting in natural gas production and being caught off guard as product prices remained low. Indeed, production volumes in MBoe terms grew by 49% in the first quarter of 2013 versus a year earlier. However, revenue was up “only” 34% on these production numbers and even if we add back a large loss on sale of SandRidge Energy Inc.(NYSE:SD)’s assets operating income only came out to about $40 million, with the company then being pulled into the red in adjusted terms by interest expense. The stock is down 24% in the last year, while market indices have risen.
Wall Street analysts are predicting that SandRidge Energy Inc.(NYSE:SD)’s troubles will continue in the near to medium term future, with net losses being forecast for this year and for 2014. We’d note that in statistical terms movements in SandRidge’s stock price tend to be highly correlated to those of market indices, as can be seen by the beta of 3.5. In addition to Omega’s interest, Fairfax Financial- which is managed by value investor Prem Watsa- was a major shareholder in SandRidge with more than 32 million shares in its portfolio (find Watsa’s favorite stocks).
Chesapeake Energy Corporation (NYSE:CHK) is another oil and gas company which has been seeing activism and management changes in recent years in response to its business’s troubles. It has also been struggling with its business recently, but quarterly numbers show rising adjusted EPS and the sell-side is forecasting $2.04 per share in earnings in 2014, making for a forward earnings multiple of 11. If Chesapeake Energy Corporation (NYSE:CHK) could hit that target it would be well positioned for any continued strength in the natural gas market (which might be driven by increased export capacity), and so the company is worth keeping an eye on.