On Friday (May 21st) I made the tough decision to sell my shares of SandRidge Energy. I still think the stock is significantly undervalued BUT I'm also concerned there's a lot of downside risk, specifically:
1. A lower outlook for oil prices.
2. High leverage and a diluted shareholder base due to an ill-timed acquisition.
3. My portfolio already has significant exposure to the energy sector.
The SandRidge acquisition of Arena Resources will shift the company's focus to oil and away from natural gas in a significant way. Unfortunately, SandRidge made its bid when the price and outlook for oil was significantly higher - if the price of oil stays at its current level there's a very real possibility this merger will destroy shareholder value. If the price of oil falls further SandRidge could experience financial distress.
SandRidge is a very hard company to value - when I initially purchased the stock my estimate of the fair value was somewhere from $10 to $20 per share. Currently I think it's more like $5 to $15, but there's also a very real chance it could be worth even less. Ultimately, the risk/reward isn't as attractive as it used to be, but I'm going to keep an eye on SD b/c there are still a number of attributes that could make it a good investment.
