Investors remain wary of the stock
SandRidge Energy (NYSE:SD) recently had an investor conference where it spouted off another round of highly positive future projections and current performance statistics. For a detailed review of these remarks I suggest you read Richard Zeits' article detailing the conference highlights. This comes as no surprise to anyone who has been following the company. SandRidge has been putting up good numbers since the departure of Ward last year.
So why have investors not bought in yet?
The problem is investors are still wary the results may be fleeting. Much of the positive results have been related to cost cutting and operational efficiencies rather than improved well performance. Many are concerned the Mississippian Play may not be as productive as SandRidge believes. I was bullish on the stock last October but moved on due the fact the stock seems stuck in the mud. Now I feel the stock may be ready for a significant move higher.
(Chart provided by CNBC.com)
SandRidge undervalued on a net asset value basis
On a net asset value basis, the company could be worth anywhere from $10 to $15 per share depending on the math used. Bennett's most conservative estimate included a 15% discount regarding potential reserves. This would value the stock at $10 per share. Using a 10% discount and a best case scenario, the stock could be worth $15 per share which includes all proven and potential reserves. Earnings per share are expected to ramp up over 100% next year.
Leon Cooperman is still on board
Leon Cooperman is one of the best stock pickers around. I completely agree with his conservative methods. I was worried he may back off of his position based on the fact the stock has not performed well since he announced his position months ago. But Monday he reiterated his position on CNBC. He also mentions casually that SandRidge may be a potential buyout candidate. I completely agree.
Current geopolitical unrest bodes well for SandRidge
As I am sure you are aware, the Ukrainian crisis has once again put energy reserves front and center on everyone's mind. A major disruption of pipelines in Ukraine could send energy process skyrocketing. Further, since the start of the Ukrainian crisis, it seems everyone has forgotten what a tinderbox the Middle East remains. There are too many flare ups to list. I feel it's only a matter of time before some type of supply disruption occurs.
Why is SandRidge a buy at this level?
The stock is vastly undervalued currently. On a net asset value basis the stock is trading at a discount of anywhere from 50% to 100%. Add to this the current geopolitical climate and you have a recipe for the stock moving significantly higher. SandRidge's new management team has done a great job of getting the company turned around, now the question is can SandRidge keep it up.
Possible headwinds for SandRidge
Even with all these positive factors coming to light, the stock still has not moved significantly to the upside. The risk remains that SandRidge does not live up to the hype. One bad quarter and the stock could take a nose dive. Questions still remain regarding the estimates put on the company's Mississippian reserves. It remains to be seen if SandRidge can be successful where so many others have failed.
I say at this point the reward outweighs the risk. The new management team has done a bang up job cutting costs and creating synergies. The team has vastly increased the efficiency and effectiveness of operations. Many are taking a wait and see approach. This is why the stock is still trading for $6.50. After nearly six months of accumulation, I say the reward outweighs the risk at this point. My 12 month price target for the stock is $10 which implies about 50% upside from current levels. Further, the size of the company makes it an easy pill to swallow for any major oil and gas firm looking to buy up reserves. The stock is a buy here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.