NEW YORK (
) -- Shares of
are among the market's biggest gainers on Friday.
SandRidge reported a smaller quarterly loss than the Street consensus in the fourth quarter, but analysts say it's SandRidge's outlook for 2011 and the latest update on the SandRidge's oil reserves that are pushing shares up by more than 13% on Friday.
It was a new 52-week high for SandRidge shares on Friday, on trading of more than 31 million shares by mid-afternoon, or more than 3 times its average volume of trading.
SandRidge raised production guidance for the first time in 6 quarters, from 21.6 million oil barrels to 23.3 million barrels. The raised production guidance, alone, would be noteworthy. However, it's also a key that it came in tandem with raising capital expenditures from $1.1 billion to $1.3 billion.
"Cap ex went up by a greater percent than I had in my model, but it was one of the best reports we've seen so far in terms of strong oil growth and low costs of drilling. The Street loves an oil growth story and SandRidge is a great stock for this bull market given its oil exposure," Said Phillip Jungwirth, analyst at BMO Capital Markets.
In November 2010, SandRidge raised its capital expenditure plan for 2011 and announced a preferred note offering without an increased production target. That led to a selloff in SandRidge shares. Raising capital expenditures again, by itself, may have been met by skepticism, but raising it in line with a production increase changes what could have been another negative catalyst to a positive catalyst for shares, analysts argue.
The BMO analyst said that an earnings selloff had been the trend for SandRidge. The last four quarters SandRidge sold off by 10% on average.
The details of SandRidge's oil story were a big part of the more optimistic outlook from investors.
SandRidge oil reserves more than doubled from year end 2009.
Oil sales are expected to generate about 80% of SandRidge revenues in 2011.
SandRidge costs of drilling, due to its shallow reservoirs, are not facing the same peak pricing as the U.S. land drilling industry more generally.
The BMO analyst noted that the spending increase was still greater than the production outlook increase in the latest numbers, but described the rally as a sigh of relief from some investors.
BMO's Jungwirth concluded, "Normally, capital expenditures being increased more than production would be a negative. The type of market we are in has a lot to do with the move, but given their track record and the fact that they came out with optimistic expectations, and with a proven reserve number that was good, all that matters is incremental change at the margins."
Another energy analyst, who can't be quoted because of current compliance constraints related to SandRidge Energy, said that given the inventory of drilling assets in SandRidge's horizontal Mississippian and Permian Central Basin Platform and the lack of pricing pressure, it's a timely transition to oil for the company.
However, analysts contend that nearing $11, SandRidge is an expensive stock, and it's a stock with a highly levered balance sheet and a funding gap looming for 2012.
BMO's Jungwirth says that 2011 funding is not an issue, but the funding gap returns in 2012. "While SandRidge has made a huge transition over the last year, there are plenty of challenges with its balance sheet leverage. The 2012 spending gap is the main one."
SandRidge announced, concurrent with its earnings, that it plans to raise $200 million in the sale of New Mexico assets, which was $50 million higher than the Street was modeling. However, for a company as highly levered as SandRidge, the $50 million difference alone is not a game-changer, analysts noted.
The second energy analyst said that a share price of $11 or $12 on SandRidge and it would be difficult to recommend new positions, especially as valuation for assets in its horizontal Mississippian assets remains unproven.
SandRidge announced one royalty trust transaction for Mississippian assets that was valued at $287.5 million, and some people had been extrapolating from that one deal a value for all of its assets. But future valuations cannot be guaranteed to mirror that deal, the analyst said.
"It's an expensive stock and there is a lot we still don't know about the Mississippian," BMO's Jungwirth said.
The second analyst said, "That royalty trust was a richer valuation than what I think they will command for assets across the company," adding that SandRidge might prefer the royalty trust as a funding vehicle, but that the market cannot expect that it will be attractive to all investors and that SandRidge will continue to purse joint ventures and asset sales.
BMO's Jungwirth thinks that selling down its Mississippian acreage will continue to be a focus for the company, as opposed to any near-term plans to tap the capital markets again.
The crude oil trade lost a little steam on Friday with reports that Saudi Arabia was adding to its production by 8% to compensate for the Libyan production disruptions.
The U.S. independent energy companies have rallied strongly with the price of crude oil, and SandRidge has been in on the action even before Friday. Shares are up 40% this year, and 11% on Friday. The year-to-date action in SandRidge shares mirrors the performance in
. Chesapeake shares are up 35% year-to-date.
The comparison between SandRidge and Chesapeake is not unwarranted, either, as SandRidge CEO Tom Ward founded Chesapeake Energy with Chesapeake CEO Aubrey McClendon. Both companies have been aggressive acquirers of top acreage positions in U.S. oil and gas plays, and levered up corporate balance sheets as part of the acreage acquisition strategy.
The levered balance sheet has resulted in volatile trading for both SandRidge and Chesapeake, and analysts who cover SandRidge said that with its continued move up, negative catalysts are always a risk. SandRidge shares were recently trading at $10.43 and hit an intraday 52-week high of $10.44 on Friday.
Analysts say the next major catalyst for SandRidge shares could be right around the corner, when it holds its annual investor day on March 1.
-- Written by Eric Rosenbaum from New York.
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