At the Delivering Alpha conference on July 17th, billionaire Leon Cooperman of Omega Advisors listed SandRidge Energy Inc. (NYSE:SD) as a potential turnaround and one of his top picks. We track quarterly 13F filings from Omega and hundreds of other hedge funds as part of our work researching investment strategies (we have found, for example, that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year) and can see from our database that the fund owned about 27 million shares of SandRidge Energy Inc.(NYSE:SD) as of the end of March (check out more stocks Omega owned).
SandRidge Energy Inc.(NYSE:SD) had encountered trouble late in 2012 as activist investors attacked the company’s founder and then-CEO Tom Ward for poor management decisions, high compensation, and (in some cases) less than above board business activities. At the same time, SandRidge Energy Inc.(NYSE:SD) was struggling after overinvesting in natural gas production and being caught off guard as product prices remained low. Indeed, production volumes in MBoe terms grew by 49% in the first quarter of 2013 versus a year earlier. However, revenue was up “only” 34% on these production numbers and even if we add back a large loss on sale of SandRidge Energy Inc.(NYSE:SD)’s assets operating income only came out to about $40 million, with the company then being pulled into the red in adjusted terms by interest expense. The stock is down 24% in the last year, while market indices have risen.
Chesapeake Energy Corporation (NYSE:CHK) is another oil and gas company which has been seeing activism and management changes in recent years in response to its business’s troubles. It has also been struggling with its business recently, but quarterly numbers show rising adjusted EPS and the sell-side is forecasting $2.04 per share in earnings in 2014, making for a forward earnings multiple of 11. If Chesapeake Energy Corporation (NYSE:CHK) could hit that target it would be well positioned for any continued strength in the natural gas market (which might be driven by increased export capacity), and so the company is worth keeping an eye on.
We can also compare SandRidge to Devon Energy Corp (NYSE:DVN), EOG Resources Inc (NYSE:EOG), and Apache Corporation (NYSE:APA). Each of these companies is expected to dramatically increase their earnings per share over the next year and a half, though by the end of 2014 their valuations are supposed to be in quite different places. Apache Corporation (NYSE:APA) is the cheapest in forward earnings terms, with a P/E multiple of only 9 on that basis; we’d note, however, that revenue and earnings were both down at double-digit rates in its last quarterly report compared to the first quarter of 2012. Similarly, while Devon Energy Corp (NYSE:DVN) is valued at 11 times forward earnings estimates, recent reports show its sales slipping as well and so investors should be cautious in thinking of it as being likely to deliver the rise in EPS that analysts expect. EOG Resources Inc (NYSE:EOG) has actually been growing rapidly, with net income up over 50% in its most recent quarterly report compared to the same period in the previous year, but the trailing earnings multiple of more than 50 already includes quite a bit of future growth. It would be worth checking in on the company in a few quarters, however, to see if the multiple has fallen enough in light of higher earnings to make the price look more reasonable.
SandRidge is a possible turnaround, but investors should be aware that analysts are expecting net losses next year even as their forecasts for many of its peers are fairly rosy. It certainly seems that those investors who want to invest in a stock tied to natural gas prices might be better served by going long Chesapeake at this time, and should at least wait for SandRidge to start showing operating profits and improvements in its business given that it seems to be dependent on outperforming sell-side forecasts for 2014.
Disclosure: I own no shares of any stocks mentioned in this article.
