Posted on Saturday, 3rd April 2010 by James Martin

Sandridge Energy (SD)

The energy sector is always shifting pace to meet the needs of consumers across the world. This is evident in the price of various resources within the sector such as oil and natural gas. Companies involved in this sector are constantly trying to find the right balance between their offerings and the needs of consumers. Recent changes in demand have forced SandRidge to become one of those companies. The company announced plans to acquire west Texas rival Arena Resources Inc. for $1.6 billion. SandRidge will pay $2.50 in cash and 4.78 SandRidge shares for each Arena Resource share, a 17 percent premium to Arena’s April 1 close of $34.26. How will this acquisition change the company’s primary business? Will this deal end up costing the company more in the long-run?

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Stock Analysis

SandRidge Energy’s principal focus has been exploration and production of natural gas and oil since its creation. The company is dedicated to harvesting and supplying this country’s natural resources to the U.S. market in a safe, quick and cost-effective manner. Considering all these factors, the company’s latest acquisition will bring about some changes to their primary business.

The purchase of Arena Resources Inc. will boost SandRidge exposure to oil, which could be a positive or negative thing. SandRidge Chief Executive Tom Ward said the acquisition “makes us a company more balanced between oil and gas.” Falling natural oil prices prompted the company to start looking into other opportunities. About 85 percent of SandRidge’s revenue at the end of 2008 came from natural gas. Natural gas prices have fallen about 26.5 percent this year, while oil prices are up 7.4 percent to more than $85 a barrel. Mr. Ward concluded late in 2008 that gas prices would likely remain at low levels and the company needed to focus on acquiring other oil assets. SandRidge said the deal positions it to be one of the largest producers of West Texas conventional oil and gas.

As SandRidge shifts away from natural gas to focus more on oil, exposure to additional risks become a big possibility. The oil market can be very volatile at times, causing prices to shift in different directions from one day to the next. SandRidge is moving into oil to offset declines in natural gas, but oil prices may end up declining too. The good news for the company is that the purchase of Arena Resources will create a balance between natural gas and oil. If natural gas rebounds and oil declines, the company will be able to offset declines by focusing more on its natural gas business. SandRidge is not the first company to strike a balance between these two resources. In recent years, companies such as EOG Resources Inc. (EOG: Charts, News, Offers), Petrohawk Energy Corp. (HK: Charts, News, Offers) and Chesapeake Energy Corp. (CHK: Charts, News, Offers) have made a similar shift.

Overall, SandRidge’s latest acquisition was definitely necessary to help the company cope with the declining natural gas market. The company’s transformation into a more balanced portfolio will help profits in the long-run. The merger is still subject to approval by shareholders of both companies as well as other customary closing conditions. It is expected to be completed in the second or third quarter of this year.

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Tags: Oil, Oil Natural
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