2/5/13: Sandridge Mississippian Trust II No Longer a Buy

Shares of Growth Portfolio holding Sandridge Mississippian Trust II (NYSE: SDR) were dragged through the mud and discounted  nearly 15 percent Friday after the trust announced a disappointing quarterly distribution. Sandridge will pay just over 53 cents a share to holders of record as of Feb. 14, down from nearly 60 cents a share the prior quarter and 11 percent shy of its targeted distribution. Those distribution targets were set last spring based on Sandridge’s evaluation of reserves on trust properties as well as actual output during the first three months of last year. Raymond James downgraded the trust from Outperform to Underperform after the miss and drew a troubling inference about the future. The analyst noted that production declined 7 percent, and more than that for crude oil, despite a big increase in drilling by Sandridge. “We can only conclude that these wells are either not achieving the initial production results that we were expecting or are declining at a much faster clip than previously anticipated,” the analyst wrote. We have changed our rating on the trust to Hold and will have a further update in the next issue of The Energy Strategist. Hold Sandridge Mississippian Trust II.

Stock Talk

Ayan

Hi Rob,

As you probably noticed — there are further downgrades today on Sandridge and Sandridge Permian Trust. I am not completely sure that we should be waiting another 2 weeks for the Energy Strategist update to come out. Is it possible for you to call the management or get the analyst reports themselves and come to a decision. It seems to me that one of the keys to good performance is to cut losing stocks quickly (and let winners run). Further, based upon reduced well output — what do you actually value these stocks at fundamentally (i.e., what is the NPV of each based upon your models). There is a certain level of merit based selling and panic now. While yes we want to be deliberate; a quick analysis and respond here would be welcome. Additionally, have you modeled these stocks — what is their updated Net Present Value. Thanks….

Ayan

Rob,

One addendum to my comments above. Let’s see that there is a depletion issue — then what is the new intrinsic value of each trusts. If the stock price is below intrinsic value — then we should hang on; if not, then we do need to get to a clear action.

What is your updated cash flow analysis and NPV.

Let us know.

michael cipollaro

It is disappointng to note that the stock has fallen 33% since it was highly recommended early last fall. One reason for subscribing to Energy Strategist is to get timely insights, not after-the-fact reporting. I would think another month is too long to wait..one of your alerts is needed now.

David Lewis

SDR should be on the front burner for you as probably a great buy and not doing your homework and making inferences about future production seems at best a guess. Please, go out and do the necessary work and give us a “studied” opinion as the one now is the party line that everyone has and you can do better than that.

DL

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