Is SandRidge Energy Inc. (SD) Wrong About the Mississippian Lime? – Devon Energy Corp (DVN), Chesapeake Energy Corporation (CHK)

It’s been said that one man’s trash is another man’s treasure. In the case of the oil and gas exploration business, one company’s core operations is another company’s non-core asset that’s ripe to be sold to the highest bidder. That’s why investors shouldn’t initially get so worked up about asset sales because they’re never as cut and dry as they would appear.

The values placed on an asset can vary for any number of reasons, and a company’s reason to sell could be due more to distress than unlocking asset value. That’s part of the intrigue with the Mississippian Lime formation in Kansas. To one company, it’s a treasure, so it is selling everything it has to shine up that treasure for the world to see. Others see it as an outlier; it has potential but it’s better to get what you can before it loses all of its luster.

As an investor, it’s tough to know who to believe. You’re talking about some of the smartest people in the energy industry with two very different opinions on the same energy play. Let’s take a close look at the play and see what all the fuss is about.

Source: SandRidge Investor Presentation

To SandRidge Energy Inc. (NYSE:SD) the Mississippian Lime is not just a treasure, but a gold mine. The company is basically building its business around this one asset. That’s why it seized the opportunity to sell its high-demand and attractively priced Permian Basin operations for $2.6 billion. The company’s plan is to invest all that cash to fund the development of its 1.85 million net acres in the Mississippian for the next two years.

This would appear to be in stark contrast to peers Chesapeake Energy Corporation (NYSE:CHK) and Devon Energy Corp (NYSE:DVN) which have both sold partial stakes in their Mississippian Lime acres in the past year. Devon Energy Corp (NYSE:DVN) has about 600,000 net acres in the play, but it sold a 33% joint venture interest to Sinopec Shanghai Petrochemical Co. (ADR) (NYSE:SHI) in a package with four other emerging plays for $2.5 billion last year. The deal covered 1.5 million net acres and a rough estimate puts the value of these acres at slightly less than $1,700 per acre. However, Devon Energy Corp (NYSE:DVN)’s sale was more about de-risking its emerging plays than anything against the Mississippian. In fact, the company currently has 15 rigs in the play and could increase that to 20 by the end of the year. It plans to drill about 400 wells and its early results are in line with expectations.