SandRidge chief ward shuns shale as investors pay price

SandRidge Energy Inc. (SD), the U.S. explorer that pumps oil from aged fields while competitors drill in younger shale plays, has become the most-leveraged independent producer as it ramps up crude production.

Chief Executive Officer Tom Ward, who has built up debt to 3.8 times earnings, this month made his third major purchase since 2009 in a $3.7 billion drive for cheaper fields. The self- described contrarian positioned SandRidge as an alternative to shale explorers such as EOG Resources Inc. (EOG) and Chesapeake Energy Corp. (CHK) that as a group invested more than $33 billion in 2010.

Ward, who owns $225 million of SandRidge shares, says the takeovers and expanded drilling will help triple earnings in three years. His plan in the past 12 months led to a 19 percent tumble in the stock, almost three times a 6.5 percent drop in the Standard & Poor’s 500 Explorers and Producers Index, while 59 percent of analysts recommend holding or selling the stock, data compiled by Bloomberg show.

“Tom is one of those CEOs where he’s going to do what he wants to do,” said Logan Moncrief, principal at private equity fund Moncrief Willingham Energy Advisers in Houston, who declined to disclose his current position. “Every time you think you have it figured out, they do something to make you question it again.”

Ward’s strategy at the Oklahoma City-based driller drew investor criticism as it helped swell total debt to $2.8 billion, or 3.8 times last year’s earnings before interest, tax, depreciation and amortization.

Debt Ratio

That’s the highest Ebitda ratio among U.S. independent producers with a greater than $2 billion market value, according to data compiled by Bloomberg. EOG, the largest oil producer in the Eagle Ford Shale in South Texas, has a debt ratio of 1.1.

Ward, a co-founder of Chesapeake, is the largest investor in SandRidge, with a 6.2 percent stake, according to Bloomberg data. He counters investor skepticism by vowing to meet a three- year plan to double oil production by the end of 2014, triple Ebitda and reduce its debt-to-Ebitda ratio, which has fallen from 4.9 a year ago.

“Our credit metrics are improving,” Ward told analysts and investors on a Feb. 24 earnings call, brushing aside the idea that debt should be reduced soon.

SandRidge rocketed to a record $68.54 eight months after a November 2007 initial public offering at $26, benefiting from rising oil prices that peaked at $147 in July 2008. The stock fell back into single digits as commodity prices plunged and the global recession took hold. The shares closed yesterday at $8.82, down by two-thirds from the IPO price.

Dynamic Sell-Off

The stock dove as much as 14 percent during the day on Feb. 2 after Ward announced he was paying $1.3 billion for a set of wells in the shallow Gulf of Mexico. SandRidge’s acquisition of closely held Houston producer Dynamic Offshore Resources LLC raised the question of whether SandRidge, a mostly land-based producer, would lose its focus by growing in the Gulf.

“I didn’t expect anyone to understand the strategy until we prove it out,” Ward said in an interview.

Ward says the wells’ 25,000 barrels-a-day of production, about evenly split between oil and gas, secure SandRidge a steady source of cash that will help pay for expanded drilling in the Mississippian, SandRidge’s largest asset in northern Oklahoma and southern Kansas.

“The company will struggle to meet its stated growth targets and close a significant funding gap,” Anne Cameron, an analyst at BNP Paribas, wrote Feb. 15 in a note to investors. She rates the shares at “reduce,” according to the note. She’s skeptical of SandRidge’s economics in the Mississippian.

‘Tackling’ Concerns

Ward said yesterday at an analyst day meeting in New York the Mississippian acreage will be the company’s growth engine.
“We found something that we knew about that others weren’t focused on a few years ago,” Ward said of the Mississippian at the meeting. The key to profiting off the play is the company’s own disposal-well system for getting rid of the large amount of water that comes up with the oil, he said.

By continuing to acquire assets, the company will increase cash flow and its overall size, shrinking its debt load in comparison, said Duane Grubert, a Stamford, Connecticut-based analyst at Susquehanna Financial Group, which owns at least 1 percent of the company’s shares.

The strategy has “scared away some plain vanilla institutions,” said Grubert, who considers SandRidge the most under-recognized company among independent exploration and production companies. “I see this thing as really emerging as a home run over the next year or so.”

‘Anti-Shale’ Producer

Competitor EOG is aiming for average costs per well of about $5.5 million in the Eagle Ford, almost twice as much as SandRidge’s plan for about $3 million in well costs in the Mississippian.

By seeking out conventional fields in the Permian, the Mississippian and the Gulf of Mexico, SandRidge is turning itself into an “anti-shale” producer, BNP’s Cameron wrote.

Ward has described SandRidge before as being a “back to the future” company. He likes the older fields in the Permian and the Mississippian because they’re less crowded with competitors who push up the price for service companies.

With service costs staying flat in its two largest plays since the middle of 2009, SandRidge is getting a 72 percent return on investment in the Permian Basin in West Texas and “close to 100 percent” return in the Mississippian play in northern Oklahoma and southern Kansas, Ward told analysts and investors on the earnings call.

The company, with a 1.5 million-acre stake in the Mississippian, is the most active operator in the formation. Chesapeake, Devon Energy Corp. (DVN), Range Resources Corp. (RRC) and Royal Dutch Shell Plc (RDSA) have all moved in, as well.

SandRidge more than quadrupled annual spending on drilling and production to $621 million in its Mississippian regional unit last year and boosted the Permian unit 57 percent to $701 million compared to 2010. That came as SandRidge chopped spending from three other units by a combined 89 percent. As a result of the Mississippian and Permian plays, yearly oil production climbed 60 percent to 11.8 million barrels in 2011.