Sale Should Bode Well For SandRidge High Yield Bond

Below are details of a High Yield bond issued by SandRidge Energy (SD). As part of Bondsquawk’s High Yield Portfolio released earlier, this bond offers an investor an opportunity to capture high income with the potential for price appreciation.

SandRidge Energy (CUSIP 80007PAL3)

8.75% Fixed Coupon Paid Semi-Annual basis

January 15, 2020 Maturity Date

January 15, 2015 Next Call Date at $104.375 Dollar Price

Current Market: Offered at $109.50, Yield to Worst of 5.83% according to Trade Monster’s Bond Trading Center

+547 basis points Yield Advantage over comparable maturity U.S. Treasury (On the run 3-Year)

$108.56 Dollar Price, 6.30% Yield to Worst at time of Inclusion of Bondsquawk’s High Yield Portfolio

‘B’ Rating by Standard & Poor’s which falls on the High Yield spectrum

Company Profile
SandRidge Energy, Inc. (Ticker: SD) was founded in 1984 and is an oil and natural gas exploration company with a focus in the U.S. The company’s core drilling operations are on its oil properties located in West Texas (Permian Basin) and the Mid-Continent area (Mississippian) of Oklahoma and Kansas. Furthermore and as a result of the Dynamic Offshore Resources acquisition, the company has sizable assets in the Gulf of Mexico. The company is headquartered in Oklahoma City and has over two thousand employees.

Key Drivers
Growth: SandRidge reported Third Quarter EBITDA of $297 million which was higher than the consensus estimate of $281 million. 2012 Third Quarter EBITDA is up 74% from a year ago and 11% from the previous quarter due to strong Mississippian production. Management is guiding continuing production growth of 18% in 2013 while expecting only 10% growth coming from oil production.

Sale of Assets to Pay Down Debt: The company is looking into a sale of assets in its Permian Basin due to its high-margin production. Street analyst estimates range anywhere from $1.7 billion to $2.6 billion for the Permian sale given market pricing. While total debt has grown by $1.5 billion in the past year to $4.3 billion, the monetization of assets will be used to pay down debt and help fund Mississippian operations.

Growing Cash: According to JP Morgan analyst, Joseph Allman, the company should be cash flow positive by the end of 2017 (not accounting for the potential Permian sale). JP Morgan expects the company to outspend their cash inflows for a total of $2.7 billion during this time period. SD has enough access to liquidity to cover this shortfall. As of the Third Quarter, the company has $674 million in cash (up from $325 million posted a year ago). Furthermore, the company has access to credit facility for a total of about $745. In total, SD has $1.4 billion in total liquidity which coupled with inflows, should be enough as the company reaches a positive cash flow balance in the years ahead.

Relative Value versus Peers: The bond is callable on and anytime after the following dates with minimum 30 days notice and at the following prices:

January 1, 2015 $104.375 Dollar Price 5.83% Yield to Call
January 1, 2016 $102.917 Dollar Price 6.18% Yield to Call
January 1, 2017 $101.458 Dollar Price 6.38% Yield to Call
January 1, 2018 $100.000 Dollar Price 6.52% Yield to Call

At a current price of $109.50, the bond has a Yield to Worst of 5.83% assuming the bonds are called in 2015. Yield to Worst takes the lowest of the Yields (including Yield to Maturity of 7.02%) for a “worst-case” scenario.

This bond has a better yield to worst than some of its Energy Exploration and Production sector peers with similar rating and call date. Oasis Petroleum (OAS) 7.25% Coupon Maturing 2-1-2019 with a Call Date in 2015 is yielding just 5.32%. OAS is rated ‘B’ by S&P. Similarly, Plains Exploration Co (PXP) 6.55% Coupon, Maturing 11-15-2020 with a Call Date in 2015 has a Yield to Worst of 4.30%. S&P has ESL rated ‘B.’ Furthermore, Wells Fargo Credit Research reported that the average Yield to Worst of the sector which comprises of 54 High Yield issuers is 5.63%.

Disclaimer
The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

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