TEXT - S&P may cut SandRidge Energy rating

Fri Dec 21, 2012 2:24pm EST

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Overview
     -- U.S. oil and gas exploration and production company SandRidge Energy 
Inc. announced plans to sell its primarily oil producing properties in the 
Permian Basin in Texas. 
     -- The $2.6 billion sale proceeds will be used to repay SandRidge's debt 
and to fund development of the company's Mississippian play formations in 
Kansas and Oklahoma. 
     -- We are affirming our 'B' corporate credit rating on SandRidge. We are 
placing our 'B' issue rating on the company's $4.3 billion of senior unsecured 
notes on CreditWatch with negative implications.
     -- The stable outlook reflects our expectation that SandRidge will 
continue to aggressively grow its asset base while not materially increasing 
leverage beyond current levels. 
Rating Action
On Dec. 21, 2012, Standard & Poor's Ratings Services affirmed its 'B' 
long-term corporate credit rating on Oklahoma City-based SandRidge Energy Inc. 
At the same time, we placed our 'B' issue rating on the company's $4.3 billion 
of senior unsecured notes on CreditWatch with negative implications. Upon 
completion of the transaction (which we expect in February 2013), we expect to 
lower the recovery rating on the notes to '5', resulting in the lowering of 
the issue rating to 'B-'. A '5' recovery rating indicates our expectation of 
modest (10% to 30%) recovery for lenders in the event of a default. 

Rationale
The rating action follows the announcement that SandRidge plans to sell 
Permian Basin properties for approximately $2.6 billion. The transaction 
materially reduces the company's reserves and production but increases its 
geographic concentration in the Mid-Continent Mississippian play and Gulf of 
Mexico shelf. Sale proceeds, which we view as reflecting a relatively high 
valuation, also provide substantial cash that we expect the company to use to 
reduce outstanding debt and fund development of its very sizable Mississippian 
acreage position. The company's interest in the Permian Basin Royalty Trust is 
unchanged following the sale. 

The ratings on SandRidge reflect Standard & Poor's assessment of the company's 
"weak" business risk profile and "highly leveraged" financial risk profile. We 
base this assessment on what we deem to be an aggressive growth strategy and 
financial policies--with capital spending well in excess of internally 
generated cash flow. Somewhat offsetting this, the ratings also reflect the 
company's focus on increasing production of oil versus natural gas, reflecting 
the weak near-term natural gas prices.

Pro forma the transaction, SandRidge will have approximately 388 million 
barrels of oil equivalent (mmboe) of proved reserves in 2011 and production of 
approximately 78,500 barrels of oil equivalent a day (boe/d) in the third 
quarter of 2012, of which we estimate 43% were oil and natural gas liquids 
(NGLs). We view the reserve size as large for the rating, and the meaningful 
component of oil and NGLs is a favorable factor. Through sizable acquisitions 
and internal investments, the company has established reserve positions more 
balanced between natural gas and liquids, with reserves in the Mississippian 
formation in the Mid-Continent and in the West Texas Overthrust (WTO), Earlier 
this year, the company acquired Dynamic Offshore Resources for $1.2 billion, 
adding primarily offshore Gulf of Mexico reserves and production that is 
approximately 50% oil. 

The company's direct costs of developing and producing natural gas and oil are 
competitive. Its per-unit cash costs are relatively low for an oil producer, 
with lifting costs (including production taxes) of about $16 per boe and cash 
general and administrative expenses of about $6 per boe. We expect operating 
cost to change little following the Permian sale. Three-year average finding 
and development costs were about $18 per boe, excluding price-related 
revisions. As a result, SandRidge requires wellhead prices of about $40 per 
boe to achieve break-even EBIT profitability (before consideration of any 
hedges, interest expense, or income taxes). SandRidge has a substantial amount 
of oil production hedged at favorable prices through 2015 supporting cash flow 
stability.

We view SandRidge's high leverage and aggressive financial policies as 
constraining the rating. Incorporating the Permian sale and subsequent debt 
repayment, we expect the company's ratio of debt to EBITDA in 2013, to be an 
aggressive 5.2x (including our standard adjustments)-approaching the upper 
limit for the rating. Our forecast assumes that SandRidge generates EBITDA of 
more than $800 million over the next 12 months under our current 2013 pricing 
assumptions ($85 per boe for oil and $3 per million cubic feet for natural 
gas). In 2013, we assume production of approximately 93,000 boe/d, capital 
expenditures of $1.75 billion, and that the company will outspend cash flow by 
$1.1 billion--primarily to develop its Mississippian acreage--using proceeds 
from the sale and cash on hand to fund the shortfall. SandRidge's employs 
means to finance operations including a combination of royalty trusts, joint 
ventures, and asset sales as sources of funding, some of which we adjust as 
debt like obligations.

TPG-Axon, a shareholder in SandRidge, is currently pursuing a consent 
solicitation in order to remove the company's board of directors and replace 
management. Our ratings on SandRidge do not currently incorporate a view on 
the likely outcome the vote, which we expect to occur by the end of the first 
quarter.  

Liquidity
In our view, SandRidge's liquidity is "adequate". Our assessment incorporates 
the following expectations and assumptions:

     -- Pro forma for the Permian sale, we estimate that the company will have 
$2.9 billion of cash and cash equivalents.
     -- SandRidge had no borrowings on its revolving credit facility as of 
Sept. 30, 2012. The borrowing base is $775 million. We anticipate no change to 
borrowing base following the Permian sale.
     -- The company does not have any significant debt maturities until 2016.
     -- At our current price deck, we project that the company's capital 
spending will exceed internally generated cash flows by approximately $1 
billion in 2013 after capital spending of $1.75 billion.
     -- We expect SandRidge to fund the deficit with cash on hand. 

Recovery analysis
The CreditWatch listing with negative implications on SandRidge's senior 
unsecured debt reflects the reduction in asset value available to noteholders 
in a default scenario following the Permian sale. For the complete recovery 
analysis, please see our recovery report on SandRidge to be published on 
RatingsDirect following the release of this report. 

Outlook
The stable outlook reflects our expectation that SandRidge will continue to 
aggressively grow its asset base while not materially increasing leverage 
beyond current levels. We would consider lowering the rating if the company 
becomes more aggressive in financing its growth with debt, such that debt to 
EBITDA increases to more than 5.5x, without a clear view to deleveraging. We 
would consider raising the rating if the company is able to reduce and 
maintain adjusted total debt to EBITDA to the low-4x area.

Related Criteria And Research
     -- Standard & Poor's Raises Its U.S. Natural Gas Price Assumptions; Oil 
Price Assumptions Are Unchanged, July 24, 2012
     -- Key Credit Factors: Global Criteria For Rating The Oil And Gas 
Exploration And Production Industry, Jan. 20, 2012
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011
     -- 2008 Corporate Criteria: Our Rating Process, April 15, 2008
Ratings List
Ratings Affirmed

SandRidge Energy Inc.
 Corporate Credit Rating                B/Stable/--        
 Preferred Stock                        CCC                

Ratings On CreditWatch 
                                        To                 From
SandRidge Energy Inc.
 Senior Unsecured                       B/Watch Neg        B
   Recovery Rating                      4                  4
FILED UNDER:
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