Hey yo, welcome back to the “Investment screw ups” series where I make the mistakes so you don’t have to. In this article, I will review the abortion that was my decision to invest and hold on to Sandridge Energy. The thing is that I knew there was a real possibility of me fucking up, seeing as how this was my first O&G investment and all. But looking back at my analysis of Sandridge, I can only conclude that I was down with a case of financial autism at the time.
Lesson number 1: It’s the debt, bitch.
I think I picked out Sandridge as a potential investment candidate because it had the lowest level of indebtedness among the O&G companies I screened. This is ironic as hell since part of the reason the company is currently in the shit is because of its crushing level of debt. It certainly didn’t help that the company went on to add almost a billion in debt after I bought the stock. However, the main problem was me screening for companies in the O&G space with the lowest debt/equity ratio when I should have been looking out for the debt/EBITDAX or EBTDAX/interest ratios. I left out the EBITDA ratios because I thought that oil prices wouldn’t take long to bounce back. I thought that I would be underestimating the company’s financial health if I calculated its EBITDA based on oil prices back then. Of course, oil prices are so bad today that I would literally get sexually aroused if oil prices went back up to the levels they were at when I published my analysis of Sandridge. Fuck $80 oil, I’ll settle for $45 oil for the time being.
The debt/equity ratio can be an illusion of financial strength, especially for natural resource companies whose assets can get impaired real bad when the commodities they produce see a significant drop in price. At the end of the day, you need them cash flow to make interest payments and convince your creditors to roll over your debt. What’s the point of having more assets than debt if the future cash flows from those assets are going to be significantly lower than what was assumed when the assets were last valued. Eventually the company would have to write down the value of its assets and shatter the illusion.
Lesson number 2: Markets can remain depressed longer than a company can remain solvent
It was Sandridge’s hedge position that convinced me to actually buy the stock. At the time I bought the stock, the company’s hedges would allow it to enjoy high prices for its oil for about a year. I was like oil will surely bounce back within a year, it ain’t no thing. A year has almost passed and the price of oil has hit an all time low. Just fuck me.
If this lesson sounds familiar, it’s because it is the same damn lesson from my Alpha Natural Resources case study in part I of the “Investment screw ups” series. At least the time between my purchase of Alpha and my purchase of Sandridge weren’t that long. So, I don’t think I’m guilty of the cardinal sin of repeating the same mistake twice. Not yet, anyway.
Lesson number 3: you need to have hustle if you want to find better opportunities
I should have also widened the number of smaller sized O&G companies in my screening process. I’m sure that I could have found something better if I just looked a little harder. Better yet, I should have used the yahoo finance screener that I learned about way back when I was still in university. Turns out randomly clicking on related companies below a stock quote in Google Finance isn’t the best way to go about finding potential investments.
Lesson number 4: See the writing on the wall
I should have known that it was unlikely for the price of oil to rebound to levels that would be comfortable for Sandridge by 2016, especially after oil’s rally to $55+ per barrel faltered. I could have exited my position in Sandridge at a significantly higher price had I just seen the writing on the wall a bit earlier.
Alright, that does it for this article. I hope you learned something from my fuck ups. Thank you for reading. Take care and stay rational.