A few days ago I participated in the Motley Fool's analyst roundtable and selected the one stock that I thought would be a great buy this month. That stock, SandRidge Energy Inc. (NYSE:SD) is one that I've been following closely over the past year. Based on what I've seen in the company over that time, I've decided to take my own advice this month and will be adding it to my portfolio as soon as trading rules allow.
I've boiled my SandRidge Energy Inc. (NYSE:SD) thesis down to three key points which when taken together lead me to believe thatSandRidge is a special opportunity and that the time to buy is now.
The focused opportunity SandRidge Energy Inc. (NYSE:SD)'s asset portfolio has undergone several changes over the past few years. Today, the bulk of its portfolio consists of its core Mississippi Lime acreage and some shallow Gulf of Mexico operations. While the play isn't as oily as the company had hoped, the potential is there for it to be developed into an exceptional asset generating outstanding rates of return.
What I like here is that SandRidge Energy Inc. (NYSE:SD) is getting better at finding the oily parts of the play. Last quarter its Mississippian oil production rose from a mix of 45% oil and natural gas liquids to 46%, which might not sound like much. However, when 80% of the company's Mississippian cash flow comes from oil any improvement in its production mix hits the bottom line. Overall, as the industry develops the play, it's finding the oilier sweet spot.
Looking at last quarter's numbers Devon Energy Corp (NYSE:DVN) and Chesapeake Energy Corporation (NYSE:CHK) both reported solid numbers from the play. Devon was able to bring on 24 wells, and several had initial 30-day production rates between 600 and 1,000 barrels of oil equivalent per day. Meanwhile, Chesapeake's top well in the play achieved a peak rate of 1,485 barrels of oil per day. These numbers, as well as those reported by SandRidge, show the play's potential.
The improved fundamentals When you combine the potential of the Mississippian with SandRidge's own improving fundamentals it speaks to a compelling opportunity. In almost every metric SandRidge Energy Inc. (NYSE:SD) is improving. For example, oil as a percentage of its production is increasing, its well costs are declining, and the leverage ratio has been cut substantially. The company has shifted from growth at all costs, to a more measurable and prudent growth rate. That being said, growth is still exceptional with double-digit production growth overall, which is being driven by 60% growth from the Mississippi Lime.
SandRidge still has a long way to go, but I like the direction it is heading. I also like the fact that the company's capital plans are fully funded through then end of next year. It has several options at its disposal to extend its funding through 2015. Compare this to Chesapeake Energy which still has a billion-dollar gap to bridge this year. SandRidge Energy Inc. (NYSE:SD) is in its best financial position in years which removes a big risk as it invests to grow production.