During the week of October 4, 2016, Sandridge Energy emerged from its re-organization and the positions in both the Pender Corporate Bond Fund and the Pender Value Fund were converted to new Sandridge common equity (trading on US exchanges under the symbol “SD”). The bump in valuation that our position received on October 7, an uptick slightly more than 22%, was a result of this position emerging into the more liquid common equities market from its prior status as a defaulted bond.
Thus far, Sandridge has been a very good investment for our Funds, with the as-converted value of the new securities now representing an 85% uplift from our original purchase price. Put in terms of the original bond price, our March purchase of Sandridge debt at 25 cents on the dollar is now worth approximately 45 cents, in the context of the current share price being $21.00.
What is Sandridge Worth?
Price is one issue, value is another. When we originally evaluated Sandridge, based on its asset values, expected production levels and cost position, a value of as much as 75% of original face value seemed to be a reasonable expectation. Since that time, a lot of uncertainty surrounding the company’s re-organization has been removed. Also since that time, the company has had very successful results from a key oil drilling zone in the North Park region of Colorado.
We calculate the current guidance of the company equating to an “EV/EBITDA” or simple cash flow multiple on the business being approximately 3x. On that basis, we view Sandridge as trading at a marked discount to its peers where EV/EBITDA ratios are generally above 5x. Once the company begins reporting quarterly results, and once analysts become re-acquainted with the recapitalized Sandridge, we believe that Sandridge’s discount may close as compared to peers.
We believe Sandridge is still materially undervalued. While the Pender Corporate Bond Fund can own equity securities, we do this as little as possible, and our “hurdle rate” for equity positions is quite high. However, at its currently large discount, Sandridge qualifies as an exception. We expect debt-free Sandridge to gain appreciably in value going forward.
The price increase in Sandridge as it emerged from bankruptcy is also interesting when considering the Fund’s stake in the second lien bonds of Energy XXI and the Fund’s position in workout bonds of Brazilian telecom company Oi, both of which are expected to emerge from bankruptcy protection over the next twelve months. Energy XXI, in fact, may emerge from bankruptcy before the end of 2016, and we consider it highly possible that a similar valuation bump may be realized on that event.
October 11, 2016