SandRidge Pursues Reward With Risky Gulf Acquisition

SandRidge Energy (NYSE: SD) announced it was acquiring Dynamic Offshore Resources last week, and the market did not like it. The stock fell 10% on the news, and analysts expressed concern about strategy shift and net asset value dilution. The deal is worth $1.275 billion, comprised of $680 million in cash and 74 million shares of stock valued at $8.02 a share.

What SandRidge has to say for itself
On a conference call Thursday morning, SandRidge executives reiterated that the acquisition was part of its strategic three-year plan, similar to acquisitions in 2009 and 2010, when it acquired Arena Resources and increased its position in the Permian Basin.

CEO Tom Ward went on to say that the Gulf of Mexico is an attractive opportunity for SandRidge because it contains quality reservoirs with a history of proven production. Also noted is that many players in the Gulf are selling their assets too cheaply in order to get out of offshore in order to pursue onshore drilling in the U.S.

SandRidge plans to maintain Dynamic's capital plan for 2012 and will not assume any of the company's debt. Spending includes 37 well recompletions and drilling 16 wells, a handful of which will be exploratory. SandRidge will leave the new assets' gas production unhedged, while aggressively hedging oil.

SandRidge plans to use Dynamic's free cash flow to fund production of its own Mississippi Lime assets.

2011 results, 2012 goals
The acquisition wasn't the only news coming out of Oklahoma; SandRidge also released its operations results and proved reserves summary for 2011. The stats are all up: Proved reserves increased by 11%, proved oil reserves increased by 17%, oil production was up 60%, and overall production was up 16% over last year.

SandRidge drilled 970 wells in 2011: 803 in the Permian basin and 167 in the Mississippi Lime. The company is currently operating 38 rigs and plans to drill 1,139 wells in 2012 -- 759 vertical wells in the Permian and 380 horizontal wells in the Mississippian. All of them will target oil.

Foolish takeaway
The market was relieved when SandRidge sold acreage to Repsol as part of a joint venture agreement at the end of last year because it indicated that the company was making a push to pay down debt. Spending cash on a risky move away from the company's onshore business to offshore assets has befuddled those relieved investors. Though the move helps deleverage the balance sheet, it also dilutes shareholder value with the issue of new shares. If this risk pays off as SandRidge expects, it will have a tremendous impact on its bottom line. The company's other properties are producing, but that may not be enough of a hedge for debt-leery investors.

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