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E&P IPO Follow Up & Sandridge Deal

posted Feb 1, 2012, 11:22 PM by Jeff Davies
Matador priced at $12, below the $14-16 price talk.  Still looks like nothing more than a bet on an unknown operator in a new play for them, the EFS.  With service tightness in the 'hot' plays, I am wary of smaller, newer operators there, so would take a wait-and-see for more results.

I wasn't felling too smart when DOR got pulled as it seemed ok to me relative to MTDR, but in came Tom Ward in with a last minute takeover.  Interestingly, he had spoken a few days ago on bloomberg about wanting to stay away from tight rock, that they like permeability and porosity and would be willing to go into Gulf of Mexico to find rock like that.  Even after hearing that I never saw this.  The obvious question to me is if the MS Lime is so good, why buy into Gulf?  DOR was a rollup, does he expect to continue to grow through acquisitions or is it simply a cash flow and delveraging play?  The press release would seem to indicate the latter, but the lower financial risk will at least be partially offset by higher geological/operating risk.  The deal does help to delever SD by a bit more than a turn of Debt/EBITDAX.

DOR, SGY and WTI are very similar in size and  commodity mix, yet look at the cash flow margins below?  Cash flow is defined here as CFO before working capital, or FFO.  Why the difference?  SD, due to its high leverage and crappy gas assets has one of the worst CF margins in the sector and are buying a peer-lagging CF margin Gulf of Mexico operator.  

                2008        2009        2010        9ME 9/10        9ME 9/11
DOR            57%        14%            44%            43%                57%
SGY             66            65                65                65                 68                          
WTI              73            64                59                63                62

What might be missing in this deal is some crazy gas numbers from SD's year-end reserve results.

48% of SD's production in 3Q11 was natural gas, yet:
  • Only $287mm - or 4.2% - of the total $6.9 billion PV-10 is derived from gas assets.
  • 1.355 Bcf gas reserves represent 48% of total reserves.  The PV-10 value per Mcf = $0.21
  • 13% of PF YE10 gas reserves impaired
  • Drilling 0 gas wells in 2012