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Energy Volume Plays: SandRidge Energy

Shares of heavily shorted SandRidge Energy see heavy trading as the oil and gas company publishes new results for wells that have been a cause for debate.



) -- Shares of

SandRidge Energy

(SD) - Get Free Report

are seeing heavy action on Wednesday, after the U.S. oil and gas company published encouraging results for a series of wells in its Mississippi horizontal acreage.

SandRidge published two new slides in its online investor presentation concurrent with an appearance at a Deutsche Bank energy conference on Wednesday.

Immediately after the well production results were published, SandRidge shares rose between 4% and 6% and the oil and gas play surpassed its average daily volume of shares traded -- roughly 9 million -- in the morning session on Wednesday. It marks the third consecutive day that SandRidge shares have surpassed their average trading volume. In fact, in 6 out of the past 11 trading days, SandRidge shares have been well above the 9 million share mark.

One thing for investors to remember about SandRidge is that it's one of the most heavily shorted names in its sector, with one analyst estimating that approximately 20% of the shares outstanding are shorted. Also, SandRidge shares are down more than 40% year-to-date, and the wells for which it published encouraging results on Wednesday have been used by short investors as one of the rationales for being bearish on SandRidge. The argument is that the well production numbers don't make a convincing economic argument for the company.

The short interest in SandRidge means any positive news will lead to short covering, and that's probably part of the action on Wednesday. It's also a $5 stock -- $5.53 in recent trading -- and so moves in SandRidge shares can be exaggerated.

In the past five days, SandRidge shares are up 23%, and SandRidge bears say that the latest upward trend can't be supported, even accounting for the new well production reports.

SandRidge bears do the math and say that if an investor models $500 for each of the 300,000 acres in question in Mississippi, it works out to 33 cents per share, and so Wednesday's run-up is excessive.

Bulls counter that the $500 per acre estimate could be understating the value of the assets considerably, and if it turns out that the acreage is worth $1,000 per acre, the run-up isn't overdone and investors are better off early rather than late into the name.

"The last report didn't look very good and so the wells look better overall, but I still don't think it's an entirely economic play, and when the stock is this short sold this is what happens," said one energy analyst familiar with the trading action in SandRidge.

"The more recent wells were better, so some investors will guess that the news will continue to be good, but so far they've only drilled a limited number of wells," the analyst added.

This is part and parcel of speculative oil and gas plays. SandRidge has also suffered from being top heavy in natural gas, and so the latest results help to push the oil side of the equation for the company, too.

Scott Hanold, analyst at RBC Capital Markets, was encouraged by the more recent data points. The 300,000 plus acreage position looks to be economic, and given how much SandRidge shares have been beaten down, some investors are giving the name a look, part of the general trend to focus more on oil than gas plays. Additionally, $500 per acre may only be a starting point, and if these wells end up being worth $1 a share as opposed to 33 cents per share, for example, that's significant for a stock valued at $5.

Investors have been disappointed about the performance over the past few quarters, but this has shown some opportunity for upside. "SandRidge is still an underperforming gas name for many investors, but it has a better oil story today, even if it's fair to say it's still a little early," Hanold concluded.

--Written by Eric Rosenbaum in New York.

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