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).

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…