SandRidge Energy Buys Oil Developer to Reduce Its Reliance on Suffering Natural Gas

SandRidge Energy, Inc. (NYSE: SD) on Sunday announced it would pay $1.6 billion for Arena Resources, Inc. (NYSE: ARD) to develop a more oil-focused business, as natural gas prices remain low.

SandRidge will pay $2.50 in cash and 4.78 SandRidge shares for each Arena share - a 17% premium to Arena's $34.26 Thursday closing price. The combined company will be valued at around $6.2 billion.

This purchase makes SandRidge one of the largest producers of conventional oil and gas in West Texas. It's the second acquisition for the company since November, when it paid $800 million for Forest Oil Corp. (NYSE: FST) properties.

"Starting in late 2008, we felt it would be a hard couple years for natural gas," Sandridge Chief Executive Officer Tom Ward told The Wall Street Journal. "We believe the market is more prepared for a move to oil today than ever before."

About 28% of SandRidge's production is devoted to oil and 72% gas. However, oil accounts for 54% of revenue.

"This makes us a company more balanced between oil and gas," Ward told The New York Times. "If you were to find an equivalent amount of oil and natural gas in a well today, it would be 10 times more valuable to pursue oil."

Natural gas prices have fallen 27% this year and are expected to stay low through 2010. Oil prices on the other hand are over $80 a barrel. Natural gas prices have fallen 63% since the end of 2005, while oil prices have climbed 34% in the same period.

Crude oil yesterday (Monday) hit its highest level in 17 months following positive U.S. employment reports. March data showed employers added the most jobs in three years as payrolls rose by 162,000. Crude oil rose by 1.2% hitting $85.89 a barrel on the New York Mercantile Exchange.

Chesapeake Energy Corp. (NYSE: CHK) and Petrohawk Energy Corp. (NYSE: HK) are among those oil and gas companies hoping to increase their oil assets in order to boost profits.

"We feel like we have enough [natural gas] to last us the rest of our lives," Chesapeake Energy Chairman and CEO Aubrey McClendon said at an industry conference in Fort Worth, Texas.

Oil and gas companies were using new technologies to explore new natural gas fields in Texas, Louisiana and Pennsylvania when the recession hit and a spending decrease cut into demand, leaving an oversupply of gas and pushing prices to painful lows.

Chesapeake Energy focuses on shale gas, found in shale rock formations which hold huge volumes of resources but is more expensive to drill. SandRidge pursues more traditional oil and gas reserves that offer smaller supplies of oil but keep drilling costs much lower. Arena's wells can cost under $500,000 to drill, according to Ward, as opposed to shale wells' price tags in the millions.

Despite the struggling industry, all hope is not lost for some of the natural gas companies. Money Morning Contributing Writer Kent Moors, Ph.D named Chesapeake one of the top five natural gas companies to watch in 2010.

"Unconventional production, especially shale gas, is providing more volume at lower prices than fast-maturing free-standing gas fields," Moors said. "Smaller producers - ones that can provide constant volume at cheaper rates - will be the smart investment moves. Lean, hungry, niche operations will be the ones who will make money."

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