SandRidge Energy (SD) Gets Downgrade But Is Still A Buy

SandRidge Energy Inc. (NYSE:SD) recently saw Citigroup downgrade the stock from a buy to neutral due to declining cash flows and the flood of oil to market. SandRidge is an oil and natural gas company focused on development and production of assets in the Mid-Continent area of Oklahoma and Kansas, and in western Texas. One positive is that the estimated proven reserves are around 50/50 oil and gas, which gives the energy company a solid mix. SandRidge has the likes of billionaire investors Ken Griffin, Steven Cohen and Jim Simons owning shares of the stock. T. Boone Pickens is also one SandRidge’s top investors with 5% of his 13F invested in the energy company (check out T. Boone Pickens’ top picks).

T Boone Pickens

TPG-Axon Capital – which owns 6.5% of SandRidge – has expressed notable interest in breaking up the energy company and restructuring its board. TPG has watched SandRidge for a long time, and the firm is transitioning its strategy toward an activist role. TPG utilizes a selective activist strategy where the firm will put up a fight assuming it has the possibility to double its money. TPG sees great value in the company, assuming it restructures or pursues a sale.

TPG loves the SandRidge asset base, but the fundamental issue is that management is zigzagging too much. Without action, TPG believes that in a couple years those assets might not be useful. The majority of the stock’s recent downward pressure – down 20% year to date – is likely due to the fact that investors have a complete lack of confidence in its CEO. The other big underlying issues for SandRidge have been large overhead costs and high a cost of capital.

TPG believes that what might be best is for an organization with a lower cost of capital to initiate a takeover of the asset base. TPG described SandRidge’s 3Q earnings as essentially “pulling rabbits out of a hat” to appease shareholders, i.e. the company continues to sell assets to pay for other assets.

Based on earnings uncertainty, SandRidge trades at incalculable trailing and forward P/E ratios, but only a 1.6x P/S ratio – a 50% discount to its peer average P/S ratio. Assuming SandRidge can restructure its management and asset utilization it could easily trade at only a 25% discount (2.5x). Putting a 2.5x P/S on next year’s sales estimates shows potential upside of over 100%.

Continue reading to see how SandRidge can make you more than its competitors…

Occidental Petroleum Corporation (NYSE:OXY) is the largest integrated oil and gas company listed at a $60 billion market value. On a valuation basis, Occidental is very attractive, trading at a cheap P/E of 11x. Although Occidental might be too large to boast some of the higher growth opportunities provided by small-cap explorers, it does have the lowest debt ratio of the five stocks listed, at 11%. A subsidiary of billionaire Steven Cohen’s SAC Capital upped its stake 250% last quarter (check out Steven Cohen’s newest picks).

Energen Corporation (NYSE:EGN), meanwhile, is a solid small-cap oil/gas explorer that also pays a 1.3% dividend yield. The stock trades at only 11x forward earnings, compared to 16x on a trailing basis, but also trades the cheapest – besides SandRidge – on a P/S basis (2.2x). Billionaire Jim Simons dumped almost 80% of its stake last quarter (see Jim Simons’ top picks).

Laredo Petroleum Holdings Inc (NYSE:LPI) is the most expensive oil/gas stock listed on a P/E basis at 45x trailing earnings and 21x forward earnings. With this high valuation does come high growth – 25% expected earnings growth over the next five years (annually). We still remain cautious given the energy company has an elevated debt ratio of 45%, the highest of our players listed here. Billionaire Ken Griffin – founder of Citadel Investment Group – dumped of all his shares last quarter (check out Ken Griffin’s newest picks).

Concho Resources Inc. (NYSE:CXO) operates in Texas and Mexico and promises investors solid growth with 14% 5-year expected earnings CAGR. The oil/gas company is down over 15% year to date after having missed earnings estimates each of the last four quarters. Even after the pressure, Concho still trades richly at 30x earnings and 4.4x sales. Concho saw billionaire George Soros dumping its entire stake last quarter (check out George Soros’ top picks).

In short, we believe that SandRidge is an interesting turnaround story that may remain weak in the near-term, but enough pressure from activist investors should unlock shareholder value in the interim. Check out some other coverage of these issues below:

SandRidge Is One Of 6 Stocks Short Sellers Don’t Believe In

Read TPG-Axon’s Other News Stories

Read Our Previous Analysis About SandRidge

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Click here to Read Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 74 percentage points in 2.5 years. Our beta is only 1.2 (download a FREE newsletter and see the details inside)

Lists

Best Selling Magazines in the World

Shortest People in History

The Most Celebrated Holidays in the World

Most Expensive Handbag Brands in the World

Top Selling Comic Book Issues of this Century

The Most Powerful Women in Politics

Best Paid DJs

Most Rebellious Female Artists

Best Paid TV Actresses of 2014

Best Paid Actors of 2014

Most Expensive Horses in the World

Tallest People Ever

Most Encouraging Feminist Celebrities

Best Paid Supermodels of 2014

Top 10 Suburbs for Retirement in 2015

10 Wealthiest Cities in America

Top 10 TED Talks for Entrepreneurs

Best TED Talks on Education

25 Most Dangerous Places to Live in America

Top 10 Ski Resorts in the United States – 2014 List

Top 10 Most Remote Places in the World

Most Visited Museums in the United States

Wealthiest Photographers in the World

Most Famous Gay Athletes

The World’s Most Famous Circuses

Best Hair Stylists

Most Popular NASCAR Drivers

The Best Romance Movies of all Time

The Most Wanted Drug Lords

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!