SandRidge Energy Inc. (NYSE: SD) is a company that I'm very familiar with - and yet it's an enigma even to me.
I mean that quite literally.
You see, I recently paid a visit to the SandRidge building during a trip to Oklahoma City. After getting my security badge, I began to make my way to the 12th floor.
There was just one problem: When I got into the elevator there were no buttons below 16.
What do you do when you go to see someone and their floor isn't on the list? I decided to ride the lift all the way to the top floor.
Fortunately, the staff that met me at the top floor was kind enough to point me in the right direction - but not before I looked around a little bit.
I just couldn't help but be entranced by the amount of activity up there. The top floor of the SandRidge building was absolutely humming.
Well, what I didn't know at the time was that Sand Ridge was about to shock everyone. The company was about to go where nobody expected.
Tom Ward - SandRidge's CEO and a man best known as the co-founder of Chesapeake Energy Corp. (NYSE: CHK) - was taking his new company to the dreaded Gulf of Mexico resource basin.
It would soon be revealed that SandRidge had agreed to buy Dynamic Offshore Resources LLC - an offshore energy producer - at a time when most oil and gas companies are moving operations onshore.
Basically, Ward is taking a real contrarian approach to asset-gathering. He saw flowing oil assets being sold cheap and decided he wanted the whole company before it could be priced to the market.
Tom Ward is one of the true wildcat businessmen of the oil and gas sector. He left Chesapeake Energy when it was at a peak in 2006. He saw the transition in shale and adjusted early at SandRidge. Now he's buying up offshore production.
As investors we should take note. It's often a good idea to pay attention to what the true visionaries are doing.
So it's time to "Buy" SandRidge Energy Inc. (**) and watch what Tom Ward does with the underpriced assets.
SandRidge Energy's Gusher in the Gulf
Let's take a quick look at the deal itself. It has a nameplate value of $1.275 billion, which is made up of 74 million shares at $8.02 a piece and $680 million in cash.
I like that the assets purchased came at a discount to their SEC PV-10 value. I like that the company was able to pay for half of it with equity. These assets are in shallow waters and will help pay for the onshore developments.
Ward said in a statement that the assets, which were valued at more than $50,000 per flowing barrel, will contribute free cash flow in excess of $200 million.
SandRidge drilled 970 wells in 2011. Oil production increased by 70%, while overall production was up 16%. The company plans on drilling more than 1,100 new wells in 2012.
"As larger and larger companies want to come onshore and compete, service costs are rising and they're moving away from a traditional place that was the cheapest and that's the Gulf of Mexico," said Ward. "We look at this as a very large opportunity to be contrarian but also for value."
Investors should look at it the same way.
SandRidge currently trades with a market cap of $3 billion. Taking net cash and debt levels into consideration, the company has a $5.5 billion enterprise value.
SandRidge is headquartered in Oklahoma City. The company has over 2,000 full-time equivalent employees. As of December 31, 2010, its estimated proved reserves were 545.9 million barrels of oil equivalent, of which approximately 46% were oil. The company also had interests in 5,323 gross producing wells, as well as in approximately 1,982,000 gross acres under lease.
CEO Tom Ward is one of the best market-timers in history, and when everyone is trying to sell assets for a discount, he is the type to step forward and purchase the discounted assets.
So let's pick up 50% of our position now at these prices. We can put in a limit order 10% below our first fill to finish off the position during the next weak cycle in the sector.
(**) Special Note of Disclosure: Jack Barnes has no interest in SandRidge Energy Inc. (NYSE: SD).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning on Mondays. In his BSH column last week, Barnes analyzed Facebook Inc.
News and Related Story Links:
8-K with Press Release
SandRidge Inks $1 Billion drilling pact with Repsol
SandRidge Energy to buy Dynamic Offshore
- Money Morning News Archive:
Previous "Buy, Sell or Hold" Features.
Confessions of a Macro Contrarian.