The last time I wrote about trading the options of Sandridge Energy (NYSE:SD) was in March when I gave an $8 price target on the stock. SandRidge was unable to meet that $8 price target and the stock has actually traded down from its $6.5 trading price in March to close a little over $5 today.
In case you are not familiar with SandRidge Energy, the company with its market capitalization of $2.57B is an independent oil and natural gas company. The Company is engaged in development and production activities in the Mid-Continent, Gulf of Mexico and Permian Basin in west Texas. Its primary area of focus is the Mississippian formation, a shallow hydrocarbon system in the Mid-Continent area of northern Oklahoma and Kansas.
Reasons for a Potential Doubling in Share Price
Shares of SandRidge Energy started another downshifting in July and the stock has been trading down ever since. However, I strongly believe that SandRidge Energy has the potential to at least double its share price as the calculation below shows.
The market capitalization of SandRidge Energy as at market close today stood at $2.6B while its Enterprise value was $6.17B. Without writing another sentence in favor of SandRidge Energy’s undervaluation, the disparity in its Enterprise Value and Market Capitalization makes a solid case for undervaluation.
However, SandRidge Energy’s investor presentation provides useful insight into SandRidge Energy’s net asset value. The company has a PV-10 value of $4.1B based on its proved reserves and a PV-10 value of $6.2B based on its probable and possible reserves. Hence, SandRidge Energy is worth about $10.3B based on the combined value of its proved, probable and possible reserves. In addition, the company boasts of assets worth some $1.15B in a water disposal business. Therefore, all of SandRidge Energy assets are worth about $11.45B.
In order to avoid a fallacious calculation of SandRidge Energy’s inherent value in assets, it is essential that we subtract the value of the company’s independent subdivisions and the company’s net debt from the total asset value. Hence, subtracting the $800M value of the SandRidge’s trusts and the company’s net debt of $1.6B will make SandRidge Energy worth about $9.5B in Net Asset Value.
The net asset value by itself does not provide any distinct information about the share price of a company. Hence, we divide the net asset value by the total company share in order to arrive at a figure for the intrinsic value of the company’s share. Dividing the net asset value of $9.5B by 580 million shares then makes the shares of SandRidge Energy worth about $16.37 each.
How to Trade SD Options
Shares of SandRidge Energy are trading a 28.90% discount to the 50-day moving average and at a 22.15% discount to the 200-day moving average. In addition, an RSI Index of 19.65 suggests that the stock is seriously oversold and we can expect a massive turnaround in its share price going forward. I recommend buying the SD Jan 2015 7.000 call (SD150117C00007000) at its asking price of $0.18.
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