Sold Sandridge Energy (SD)
I’ve just sold my smallish position in Sandridge Energy at $6.95. I hit the 1 year, long-term capital gains holding period threshold, and with the shares up over 40% and no asset sales or buyout in the public domain I can no longer justify maintaining the position. My original investment thesis was that the shares were significantly undervalued due to 1) the former management’s aggressiveness resulting in a heavy debt load, 2) an unexpected continued weakness in the price of natural gas, 3) Mr. Market’s skittishness as regards to SD’s share price as it had fallen 80+% over the past 5 years and 4) my belief that the new management would quickly sell off assets or, preferably, the whole company. Unfortunately the catalysts on which my thesis was based have not really materialized. The company has reduced debt by selling off assets, but at a much slower pace than I had hoped for, and a sale of the company does not now seem to be in the offing. Natural gas prices have firmed up somewhat, but not as much as Mr. Market anticipated, with the result that gas producers have not been revalued upward as much as I had anticipated. As I have no particular competence in valuing Oil & Gas E&P companies, I really can’t determine whether SD continues to be significantly undervalued. Thus it was time to sell. I bought at a time when it appeared to me Mr. Market was valuing the company based on a worst case scenario, at a fire sale price. There was no need to be precisely right about the valuation. Any positive event was bound to make Mr. Market revalue the company. So even without the most positive of outcomes for my investment thesis, a sale of the company or a significant jump in natural gas prices, the company has been revalued upward by some 42%. I am content with that result as I look into other potential investments that appear to have a clearer discount to intrinsic value.