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

blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!