Management not only needs to be well adept to spot the right chance to get involved in the oil market, but also must be flexible to deal with any problems that may arise in the near future. Tom Ward(CEO) had an impressive track record during his time with Chesapeake Energy, but that is a company only focused in the natural gas market and the oil market is a completely different animal. The company needs to hire experts concerning their shift into the oil market so they can construct a business model for short and long-term success. We recommend that SD should sell some of its non-core assets and use that generated revenue to invest in oil as the company’s key growth area.
The biggest problem with SD currently is the debt they have incurred over the past year. The company is having some cash flow issues and because of their shift into the oil market they have purchased Forest Oil and Arena Resources. They currently have a debt of around 3.00B. The belief is that oil prices will continue to rally and therefore the cash flow will strengthen. As Sandridge (SD) diversifies their assets, obtaining more oil plays, they must refine their operations on both sides to make sure they are getting the most out of their assets. With EBITDA currently trailing CAPEX, it is essential that SD carefully plays out their oily transition. As Deutsche Bank specifies, planned transactions include the selling of non-core oil assets in the Permian Basin, as well as plans to sell inessential plays on the Mississippian properties.
Sandridge has been aggressively switching into the oil market. SunTrust summarily describes that the company “should derive over 80% of production/revenue this year from oil versus over 75% from natural gas in 2008.” Why is SandRidge switching over? Oil  trades at a significantly higher price on the market than oil, and through internal research, does not project as much success as oil could provide for them. And after underperforming in recent years, it is time for SD to improve their standing. Over the next two years oil prices are predicted to steadily increase from $92 to $99 from February 2011 to December 2012. This bodes well for equity investments in SD and should help to shrink the current operating margin of -31.31%.
Though SandRidge derives their oil from American sources, the oil market is predicated on the Middle East. As such, recent turmoil there has created volatility and an uncomfortable feeling within the market. Take for example, the uprising in Libya, a significant country in the oil trade at 5% of OPEC and 2% of global production.
February 22nd, 2011 was a particularly chaotic day for Libya, and the unrest is reflected in a significant drop in SD’s stock on that very day. Though the stock has since risen to normal levels, the volatility of the Middle Eastern oil market cannot be discounted in its direct relationship to SD. 