Sand Ridge: 85% natural gas production, all U.S. onshore

• What’s To Like:
  • Growing like a weed, just put up a 35% growth target for next year
  • Management and multiple professionals from (CHK)
  • Operating costs in good shape
  • It just plunged 28% in 2 days after beating earnings and issuing that guidance; analysts are confused as to the reason but suspect it is over a lack of details regarding some recent well results.
  • Moreover, the stock is down 50% since its peak in mid June
  • See 2Q08 Note at the bottom of this post.
  • See my original look at the company here.
  • They have East Texas acreage underlain by the Haynesville/Bossier Shale. This could be worth $1 to 1.5 billion.
•  What’s To Knock:
  • High CO2 content which must be stripped from gas in its core field. This can present production bottlenecks until processing capacity is added…so far this has not been much of problem but its worth noting.
  • Complex geology and a relatively new name mean it is one of the first to get shelled in uncertain times. Unfair, but apparently true.
  • Increasing debt to total cap: began year at 32%, now increased to 46%. Still manageable but it may be reason for a bit lower multiple than the stock has enjoyed until now.
  • Possibility of an equity and debt deal in 2009. Given their current capital program expectations for 2009, they will not need to go to the markets for additional capital if they can sell their East Texas asset.
• Where’s It Trade:
  • P/CF of 7.0x 2009 numbers which should continue to rise. This is a little high to the group but lower than it has been and I’d be pretty comfortable with a multiple closer to 9x given the growth and positives surround the story … in a more stable natural gas price environment.
  • TEV/EBITDA  7.5x on an ‘09 EBITDA estimate
  • Given their expected growth and the visibility of said growth and in my opinion the likelihood that they can upgrade that production target early next year to a higher number (say 40%) I think they slightly elevated multiples to the group are warranted.
  • I think they are due a near term bounce from this harsh correction but will take time to grow into that multiple and with that time will come a better understanding of their WTO play.

Chesapeake Energy (CHK): 92% natural gas production, all U.S. onshore

• What’s To Like:
  • Finding costs are falling.
  • Production growth of 20%, 20%, 19% 2008-2010. Few of their peers can provide this level of visibility
  • Domination of major shale plays
  • Economies of scale in drilling
  • Expertise applied to a truly massive prospect inventory
  • Partnering up in their major plays to deflect costs
  • Hedges:
    • Q308 - nearly  90% of expected gas production hedged at just short of $9
    • Q408 - 76% hedged at nearly $9.50.
    • 2009 - about 60%  hedged at almost $9.75.
    • (see below)
  • Based on booked and unbooked reserve potential, NAV can be argued north of $100 with the stock trading at $45.
• What’s To Knock:
  • They have been dubbed a serial filer, issuing equity to supplement cash flow
  • They have gone from outspending cash flow to a plan of staying within their internally generated funds and back again within the span of 6 months…analysts are wary that some other shiny play will catch Aubrey’s eye
  • Debt to cap of 57% is high to the group
  • Hedges: people think they are giving away the upside and I would add that when the group sells off, hedges don’t save you as fund managers don’t use logic when puking up shares.
  •  
• Where’s It Trade:
  • P/CF of 3.9x, in line to low with peers
  • TEV/EBITDA of 5.0x in line to a little high to its mostly slower growing peers.
  • Lengthening R/P (reserves/production measured in years) ratio augers for a high P/CF ratio and we saw this begin to materialize
  • The stock hit a high of $74 on July 2 and has since fallen 40% while natural gas has fallen 37% despite their hedge position and given that hedge position, the change in cash flow generation due to this decline is negligible.

Odds & Ends

Analyst Watch: Nada