SandRidge Energy Inc. (NYSE:SD) is an exploration and production company producing natural gas and oil (about 50% of its reserves, in terms of barrels of oil equivalent, are oil). Its stock price is down 13% year to date, roughly tracking the movements of natural gas prices, bringing the company to a market capitalization of $3.3 billion. Unlike at some other natural gas-oriented companies, SandRidge reported good growth in the second quarter of 2012: its revenues were up 31% compared to the same period in 2011 and its earnings increased from $196 million to $809 million. The company attributed its gains to considerably higher oil volumes. Natural gas production was also up, but a fall in prices eliminated any gains from that revenue driver. SandRidge acquired fellow exploration and production company Dynamic Offshore Resources, which strengthens SandRidge’s position in the Gulf of Mexico to further complement its onshore assets.
Wall Street analysts expect that SandRidge Energy Inc. will be barely profitable in 2013, with a consensus of 14 cents in earnings per share. This yields a forward P/E multiple of 52. Partly because energy prices are so tied to economic activity, and partly because it carries large amounts of debt (enterprise value is about twice the market cap), SandRidge has a beta of 2.9 and thus tends to rise or fall by a greater degree than the broader market.
Billionaire Paul Singer’s Elliott Management, which Singer founded 35 years ago and has managed ever since, reported ownership of 7.7 million shares of SandRidge Energy Inc. at the end of the second quarter. This was a 75% increase from what it had owned at the end of the first quarter of 2012 (find more stock picks from Elliott Management). SandRidge was one of the top five holdings of Mouth Kellett Capital Management. Mount Kellett, managed by Mark McGoldrick and Jason Maynard, was founded in 2008 and is a distressed and special situations investor (see more of Mount Kellett’s top picks).
SandRidge can be compared to large oil and gas producers Apache Corporation (NYSE:APA), Devon Energy Corporation (NYSE:DVN), and Anadarko Petroleum Corporation (NYSE:APC) as well as natural gas-focused Chesapeake Energy Corporation (NYSE:CHK). Apache, Devon, and Anadarko are more mature companies and have considerably higher market caps, with Devon having the lowest valuation of these three peers at about $25 billion. As such they also are considerably cheaper in relation to their forward earnings estimates than SandRidge is: Apache, Devon, and Anadarko have forward P/Es of 8, 13, and 16 respectively. All three of these peers experienced a decline in revenue in their most recent quarter compared to a year ago, with both Devon and Apache declining at double-digit rates.
Chesapeake encountered financial difficulties earlier this year after management issues sparked short sales, which multiplied as the market realized that low natural gas prices would force it to sell assets, possibly at fire sale prices; it seems to have stabilized, but the company does still need to complete an asset sales program. It trades at 15 times forward earnings estimates, and counts billionaire activist investor Carl Icahn (who entered the stock earlier this year when it first began to show financial distress) among owners of the stock. Read our recent analysis of Chesapeake.
It’s tough to make a call between the high-growth, high-valued SandRidge and some of its larger peers which are taking hits to its business but are quite cheap in terms of their earnings multiples, including on a forward basis. Chesapeake is more of a special case, but we think it has similar amounts of upside in the future while still delivering considerable value in the near term.