SandRidge Energy, Debt and Natural Gas

A few years ago we drove to Big Bend National Park (a stunningly beautiful place) through the wild, arid terrain of west Texas.    En route I noticed operating oil and gas wells as we neared the park.
At the the time I didn’t know it, but this is a prime drilling area for SandRidge Energy (SD), operating from their Fort Stockton field office.   SandRidge is drilling and producing in the  Pinon field in the heart of the geological formation known as the West Texas Overthrust (WTO).
SandRidge Energy is headquartered in Oklahoma City, its current capitalization is around $1.3 billion.  The company focuses on exploration and production, but also gathers, treats, processes and distributes natural gas and oil.  Gas constitutes some 86% of reserves.   The bulk of activity is in the WTO area, though the company does oil and gas drilling elsewhere in the US.   Sand Ridge also gathers and sells CO2 - which is abundant in WTO gas deposits, for re-injection into wells to increase production.   A major competitor is the much larger Apache Corp (APA).  SandRidge was formerly known as Riata Energy and changed its name to SandRidge Energy in 2006.  The website is www.sandridgeenergy.com
The WTO, according to the company’s annual report, is relatively unexplored due to difficult terrain, complex geology and a lack of infrastructure in the area.   SandRidge is hoping the geologically complex WTO has abundant undiscovered gas reserves and is concentrating its exploration efforts in the area.
According to its 2007 Annual Report, SandRidge had total estimated net proved reserves of 1,516.2 billion cubic feet equivalent as of December 31, 2007, up from 300 bcfe in 2005.   Recent natural gas prices are around $4.5 per 1000 cubic feet, so reserves, as of December 31, 2007, currently have an in ground value of $8.2 billion.   Compare the $8,2 billion reserve figure to the current market cap of $1.3 billion.  SandRidge also has leases or interests in approximately 822,287 natural gas and oil acres.  Data for 2008 should be coming out soon.  It will be interesting to see how much reserves have increased over the last year.
Thanks to new technology such as horizontal drilling and 3-D seismic mapping, gas reserves, unlike oil, have increased significantly in the US and elsewhere over the last few years.  This increase has given prognosticators, such as T. Boone PIckens,  the promise of potential OPEC independence.  But, the infrastructure for expanding the use of this new-found supply of cheap, clean burning fuel is only just starting.   Using natural natural gas to fuel vehicles, for example, is in its infancy.  The promise is there but so far it is just a promise.
SandRidge’s common stock, at 7.9, is down 88% from its 52 week high of 69.  The stock may make a good re-inflation bet.  The main attraction to investing in this company seems to be its reserves and ability to grow reserves.
SandRidge, however, has close to $2 billion dollars in debt and only $898,000 in cash.  Also, Levered Free Cash Flow is a negative $1.5 billion (see Yahoo Finance). Most of the debt was incurred in the 2006 acquisition of NEG oil and Gas.  Declining gas prices and low cash on hand is not good in today’s credit environment.
Eventually, oil and gas prices will rebound.  Any investment in a company with substantial reserves and high potential growth may be rewarding.  In the mean time though, I would keep a close eye on the liquidity situation.  SandRidge could also be a potential take over target.