|SandRidge goes offshore: one more surprise from a company full of surprises.|
The privately held offshore company it acquired -- Dynamic Offshore Resources --- had filed to go public in 2011, backed by the Carlyle Group. Capital contributions to Dynamic from Carlyle and its partner Riverstone Holdings equaled roughly $200 million in the three years between 2008 and 2010, according published reports at the time of the S-1 filing. Seems like the real cheap deal went, as usual, to the private equity players, turning a few hundred million into close to $1.3 billion payday. Why didn't the company end up waiting to go public after it filed in late 2011? Because SandRidge ended up paying just under the targeted IPO value. So why take the risk -- during the period of time it takes to dot all the "i's" and cross all the "t's" required of an IPO filing -- of a potential fall in crude oil prices caused by a global economic slowdown, which could dampen enthusiasm for the offering? As far as SandRidge's take that it was an offer the company couldn't refuse, analysts say SandRidge paid a value that is equal to recent deals in the Gulf of Mexico. That means it wasn't cheap, but simply in line with peer comps.
For a company all about the huge opportunity in the shale, what's it doing suddenly saying it can't resist an offshore bolt-on acquisition? "What does it imply about the opportunities in the horizontal Mississippian and Permian?" asked Morningstar analyst Mark Hanson. "Are they conceding that they can't achieve their plan? Or are they finding the free cash flow to invest in the Permian and mid-Continent, a cash flow bridge to their longer-term strategic goals?" "This takes them pretty far afield. This has been a company focused on land drilling and now it's headed into the higher risk offshore well world?" Hanson wondered. 3. We'll know part of the answer to this question when SandRidge provides 2012 guidance.
Notably, Sandridge did not provide updated 2012 guidance on Thursday. The question won't be whether it meets it existing goal for 2012 but whether 1+1=2. In other words, with this deal SandRidge can no longer simply meet its pre-existing goals; it must exceed them. Otherwise, the guidance will imply that the offshore assets are making up for a disappointment elsewhere that wasn't expected. SandRidge came up just short of its 2011 production goal, 2% lower than its target, when it last reported its guidance in November. Its existing production guidance for 2012 was unchanged at the time, targeting 27.7 millions of barrels of oil equivalent (MMboe). Oil and natural gas production is expected to be 16 million barrels and 70 billion cubic feet, respectively. The company will report fourth quarter earnings on Feb. 24. 4. The deal ain't cheap, and isn't strategic, but it does de-lever the balance sheet.
SandRidge is the most levered E&P company among peers covered by Wall Street,
It's the glass half full or half empty dilemma. Issuing more shares makes the financial model look improved, but do the assets that shareholders get in return have an equal or greater value than the dilution? The only big positive from this deal, which is overall a negative, is the delevering of the balance sheet, Stifel wrote. 6. Just one more surprise from a company full of surprises.
For SandRidge shareholders, it's always a rocky ride. Any 10% gain in shares is likely to be met by a 10% decline shortly thereafter when the company announces something unexpected. Most recently, it was a major increase in its spending plan and a buying spree in the Mississippian. Before that, it was the acquisition of Arena Resources. "Is this just the first of additional acquisitions in the Gulf of Mexico?" asked Stifel analyst Amir Arif. "There is a steep treadmill in the Gulf. Most land-focused E&Ps have been stepping away from the Gulf," he added, referring to the maturity and short-lived nature of the production assets. Hanson said after the huge increase in capex and previous "radical departures" from strategy, as well as a financial model