I've been
thinking that SandRidge is a possible breakup investment opportunity - albeit speculative.
I see the oil and gas company's focus on development and production of assets
in the Mid-Continent area of Oklahoma and Kansas, and in western Texas as solid
opportunities. One positive is that the estimated proven reserves are around
50/50 oil and gas, which gives the energy company a solid mix.
The natural gas companies have seen enough pressure on their own, where the First Trust Natural Gas ETF is down over 15% year to date. SandRidge is down only 23%, but this is in part due to the fact that is up 10% over the last month after getting some hedge fund backers.
What's really driving my investment thesis is the fact that a number of hedge funds are supporting the breakup of the energy company. Driving this force is TPG which owns over 5% of the company. TPG's interest in the company includes the breakup and restructure of its board. The value in SandRidge is its asset base and the fundamental issue is that management is mismanaging the assets. TPG sees that the assets will be useless in a couple years if management does not rearrange its utilization. The underlying issues for the energy company is its large overhead costs and high a cost of capital.
SandRidge trades at trailing and forward P/E ratios, and a huge price to sales discount - over 50% discount. When SandRidge restructures management a more in line price to sales ratio of 2.5x coupled with 2013 estimates would put potential upside of over 100%.
More to come to in the premium section - including break up valuation.