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SandRidge Energy Inc. (SD): Should We Still Trust Them?

It’s been just under a year since SandRidge Mississippian Trust II (NYSE:SDR) IPO’d on the New York Stock Exchange.  The IPO price was right around $21 per share.  This was an attractive entry point for some analysts, with at least one analyst expecting a 50% run-up in price in the first year.  The trust’s prospectus also laid out the target payouts for this trust for the first year.  So, here we are one year later.  How did our analysts and prospectus do?

50% Run-Up?

insider trading sandridgeWell, right off the bat we should address the elephant in the room.  This stock did not appreciate 50% in value–in fact, it didn’t appreciate at all.  It didn’t even hold fast at the IPO price.  No, this stock has been hammered down a whopping 40%.

SDR data by YCharts

(Watch out for that steep slide at the end…it’s a doosy.)  Ever since the new year, this stock has been sliding pretty fast.  If you account for re-invested dividends, the return on this stock improves, but only slightly.

It’s interesting to note that the slide of SandRidge Mississippian 2 largely mirrors that of all things SandRidge Energy Inc. (NYSE:SD).

SDR data by YCharts

Things for SandRidge have only gone down, down, down.  The company is being plagued in important metrics like long term debt, net income, and free cash flow.

SD Long Term Debt data by YCharts

These numbers from SandRidge are enough to make any investor skeptical.  I would be very hesitant to invest in SandRidge right now.  This seems to be a case of “as goes the parent company, so go the kids.”  SandRidge Mississippian Trust 2 is being negatively affected by their association with SandRidge Energy Inc. (NYSE:SD).

How are Payouts?

For the first three quarters, this trust exceeded their payout goals.  This had given me a very positive outlook on this trust.  I just love it when companies not only do what they say they are going to do, but also do better than expected.  But the most recent payment fell far short of the goal.

Quarter Estimated Payout Actual Payout +/-
1st $0.26 $0.2677 +$0.0077
2nd $0.46 $0.4972 +$0.0372
3rd $0.56 $0.5986 +$0.0386
4th $0.60 $0.5326 -$0.0674
Total $1.88 $1.8961 +$0.0161

In their prospectus SandRidge Mississippian Trust 2 had estimated that they would pay out $1.88 in distributions per unit their first year.  What investors got was $1.90.  The last payout missed what they had hoped by a long shot, but for the year the payouts actually exceeded expectations.

The missed payout and speculation on future payouts have led Bank of America Corp (NYSE:BAC) to downgrade the stock.  They have lowered their target price from $19 to $14.  Here’s what they had to say: “We are reducing our PO based on our lack of confidence in the company’s ability to meet its targeted production and cash distribution stream.” (emphasis mine)

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