Saturday, July 21, 2012

Why This Energy Stock Could Triple in Three Years

For a multitude of reasons, there are times when a company trades at a considerable discount to the value of the underlying business. Within the energy sector, I think I've found a stock that the market may be unfairly discounting. It's a small-cap oil-focused producer with some very valuable assets. And it could be significantly undervalued.

A natural-gas-focused beginning
I'm talking about Oklahoma City-based SandRidge Energy (NYSE: SD ) . Before I get into the details of why I think it's undervalued, let's talk about some of the great moves the company has made since its inception six years ago.

CEO Tom Ward started SandRidge in 2006 after leaving Chesapeake Energy, where he served as chief operating officer. The company's first purchase was a gas field in West Texas. As Mr. Ward recounts, SandRidge was originally a natural gas story, predicated on the then-prevalent belief that natural gas prices would stay above $7/mcf.

The early shift to oil
But by 2008, the company's management believed natural gas prices were headed much lower. Later that year, SandRidge hedged all of its natural gas production for two years with a new and steadfast focus on oil. Since that time, the MMBTU price for natural gas has fallen to just a fraction of the price of oil. With the benefit of hindsight, this was an incredible strategic move. (more)

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