SandRidge Energy, Inc. (SD): Initiating coverage with a Neutral "o'Piñon" - Goldman Sachs - 12/17/07
Investment view
We are initiating coverage of SandRidge Energy with a Neutral rating. We expect above-average production growth and see immense exploration potential from the West Texas Overthrust (WTO) area in which SandRidge has a dominant acreage position. However, we believe that at $34.31, the share price is already giving some credit for exploration success. With results expected in the late third quarter or fourth quarter of 2008, we believe a Neutral rating is currently appropriate. We have a positive view of management, which we see as a believer in, committed to and, in the case of CEO Tom Ward, personally invested in WTO success.
Core drivers of growth
We expect production growth of 53% in 2008 and 25% in 2009 led by the Piñon field. Key areas of upside from current levels are: (1) drilling on WTO acreage outside Piñon, with initial results expected in 3Q/4Q2008; and (2) potential to derive value from associated CO2 production at Piñon.
Risks to the investment case
Commodity price volatility, drilling results, cost pressures, government pronouncements and the ability to finance growth are key risks. On the latter, we note that SandRidge's growth is expected to be accomplished with a high level of spending that gives SandRidge the least attractive free cash yield among our E&P stocks over the next few years.
Valuation
At 12.2X 2008E EV/debt-adjusted cash flow, SandRidge currently trades in middle of unconventional gas pure-plays for 2008 and at the upper end for 2009-12. We see 11% upside to a $38, 12-month discounted cash flow-based target price versus 25% upside for peers.
Industry context
We have an Attractive coverage view on E&P stocks. |
