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SandRidge to Acquire Arena Resources


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"Oil and gas exploration firm SandRidge Energy is acquiring west Texas rival Arena Resources Inc. for $1.6 billion, a deal that shifts SandRidge further into conventional oil-field assets amid a continued fall in natural-gas prices.

 

SandRidge will pay Arena shareholders $2.50 in cash and 4.77 shares of stock for each Arena share, which values Arena at $40 per share. That is a 17% premium from its Friday close of $34.26."

....

"It's a transformation from a natural-gas company to a more balanced portfolio," Mr. Ward said. "The economics of natural gas just aren't as good today as they were a few years ago."

 

http://online.wsj.com/article/SB10001424052702303912104575163951499661086.html?mod=WSJ_hpp_LEFTWhatsNewsCollection

 

Corporate Presentation from Arena Resources Website dated 4-1-2010

http://www.arenaresourcesinc.com/Arena_Presentation/pdf_presentation/arena_presentation.pdf

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With this sort of speculative purchase Prem and co must have been buying management. Since their purchase the company has morphed from a natural gas play to now more of an oil play. Hard to understand how you now value the company and come up with a margin of safety type analysis.

 

Or perhaps the purchase was simply a hedge.

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More details regarding the deal:

 

Here is Sandridge's official press release:

http://investors.sandridgeenergy.com/phoenix.zhtml?c=196066&p=irol-newsArticle&ID=1409330&highlight=

 

"

....

The transaction uniquely positions SandRidge as one of the largest producers of West Texas conventional oil and gas. The oil opportunities will come primarily from drilling and development of shallow, low risk reservoirs located on the Central Basin Platform ("CBP"), a part of the Permian Basin in West Texas. The CBP has produced over 13 billion barrels of oil since the 1930s. The combined company will have over 200,000 net acres in the Permian Basin and 5,700 identified locations to drill primarily in the shallow San Andres and the Clear Fork formations. Additional upside exists with down spacing and future secondary and tertiary potential. SandRidge also owns low risk natural gas properties in the Pinon Field, and significant exploration opportunities in the West Texas Overthrust.

 

Tom L. Ward, Chairman and CEO of SandRidge stated, "This acquisition of Arena continues the strategic shift we initiated in 2009 to increase our oil production and reserves. This transaction will add low risk drilling opportunities in the Central Basin Platform where we have been drilling and acquiring since 2007. We plan to have hedged over $3.0 billion of oil revenues in total after closing and model this transaction to be accretive to 2011 cash flow per share." Mr. Ward further noted, "We also have exceptional gas assets in the West Texas Overthrust. We believe our Pinon Field is one of the premier plays in the United States and we have tremendous drilling upside for long-term natural gas growth and expansion."

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Will be intersting to find out Prem's reaction. i agree that they are heavily diluting existing shareholders, but Ward is taking a hit too. Could be that he is doing this to keep SD afloat until natural gas prices rise, and this means he feels that is further away than previously thought.....

 

cheers

Zorro

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Holding gas through the cycle only makes sense if you think you can survive it. Gas is coming off a 6 year bull market and we have a glut of it now. Not only do we have a glut of it but everyone including SandRidge is drilling for more. I think this is a good hedge, and seems like a decent price.

 

It is buying high though and selling low.

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Here is some additional detail. I wonder why Arena sold out.

 

The deal is part of a strategic change SandRidge CEO Tom Ward decided to make in late 2008, according to the report. Back then, Ward concluded that natural gas prices would stay low for years, so he decided to begin looking for oil assets, the report noted. Ward will be CEO of the combined company, and Arena's current management and board will have no role in the merged company, the report said.

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Here is some additional detail. I wonder why Arena sold out.

 

Still listening to the conference call from this morning, it appears Arena had some operational issues.  Arena had some problems with gas plants and hooking up oil production to pipeline operator....

 

Would love to know if FFH bought more today.....

 

cheers

Zorro

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I would say he got a good deal based on production growth and cash flow. I am not sure why Arena sold though.

 

Listened to the conference call yesterday. Arena management was upbeat about gaining the long-term exposure to SD's gas assets. Arena shareholders end up with 47% of the combined company. With Forest and now Arena assets SD is the major player in their region.

 

cheers

Zorro

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Myth,

 

Long-term natural gas should do well. How well depends on a host of factors: is oil production reaching it maximum limits (i.e. peak oil), what are the decline rates for conventional natural gas production and shale gas (quite high for both I believe), will carbon emission restrictions encourage natural gas over coal-fired electric generation, will Pickens get his natural gas powered cars? But yes, long-term I think pricing will improve.

 

As far as SD goes - It helps that both FFH & Prem bought in, though it would help even more if they bought more yestersday and/or today. Ward has a lot at stake personally, seems smart (SD is putting the emphasis on cashflow not just growing production), and I think the move to oil is a good one. The price may be on the high end though, but it should buy the company time until natural gas does recover. SD seems to have some very interesting gas fields when pricing does improve.

 

That's my $0.02!

 

cheers

Zorro

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My big concern is that it seems Ward is making this move to primarily increase cash flow so he can continue to service SD debt, oil cash flow being much higher than gas cash flow. Someone already said he is selling cheap assets to buy expensive assets. Couple this action with the $100mil headquarters he is building, and I have some real problems with this guy.  :-\ 

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Will be intersting to find out Prem's reaction. i agree that they are heavily diluting existing shareholders, but Ward is taking a hit too. Could be that he is doing this to keep SD afloat until natural gas prices rise, and this means he feels that is further away than previously thought.....

 

cheers

Zorro

 

 

Perhaps farther away than it's easy to imagine.  Don't news reports say that the recent technological advances in drilling have more than doubled the potential economically recoverable reserves of natural gas in the US?

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Guest longinvestor

Perhaps farther away than it's easy to imagine.  Don't news reports say that the recent technological advances in drilling have more than doubled the potential economically recoverable reserves of natural gas in the US?

 

 

I just read a report saying that the known shale resources (3 locations, mainly PA) is about a 100 years consumption worth.

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Technological advances have increased the amount of gas that is recoverable, however the big question is how much of it can be economically recovered at these levels. IMHO it will require higher prices to make it economical to recover the majority of the shale gas. At this point there are a number of producers producing gas, while losing money, just to keep cashflow going. Higher prices may mean waiting for a number of the weaker players to go under, leaving the stronger players who can reduce production in exchange for higher prices. I think Ward understands this and thus is positioning SD for the wait.....But while on the topic of SD, if FFH has been buying more when do they need to file?

 

cheers

Zorro

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Natural Gas is being priced like airline seats. The dumb competitors are drilling the prices into areas which make it hard to make money. Half the rig count is keeping supply and demand even which is scary. Its like the paradox of trift in reverse. Everyone knows drilling needs to stop for decent pricing but everyone is hoping that others will stop the drilling and is drilling for tax / cf reasons.

 

I have moved away from it due to this and am actually a bit jealous of SandRidge. I wish I could have picked up in whole Arena for a similar price. Luckily these wells decline very quickly and the uses of natural gas in the future are growing - electric cars and vehicles. I think the buying time argument makes the most sense.

 

 

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I agree Myth,

 

the annual decline rate of "legacy" production (every US natural gas well that was drilled before this year) is around 28% . . . so its as if there are two many airline seats, but 28% of the planes will be scrapped every year.

 

I don't think we'll have to wait too long for natural gas to get back to a reasonable level.

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The non conventional stuff has an even higher decline rate. It should be interesting watching it all unfold. We need a crisis though to really bring supply and demand in line. I believe there is still too much capital drilling too many wells.

 

Natural gas wells drilled in the large shale basins of the United States which have been the major source of new gas in recent years exhibit exceedingly high decline rates, many wells declining 65 percent in the first year.

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