SandRidge Targets Shift to Oil From Gas in Acquisition of Arena Resources

Arena Resources Inc.’s oil reserves were the main target of SandRidge Energy Inc.’s $1.55 billion acquisition of the company as the buyer turns its focus to crude from natural gas production. “Our oil reserves were the real attraction to SandRidge,” Arena Resources Chairman Tim Rochford said in an interview. Reserves stood at 69 million barrels of oil equivalent as of Dec. 31, he said. Oklahoma City-based SandRidge will pay $2.50 in cash and 4.78 SandRidge shares for each Arena Resource share, a 17 percent premium to Arena’s April 1 close of $34.26, the companies said yesterday.

The purchase is SandRidge’s second in West Texas since November, when it bought properties from Forest Oil Corp. for about $800 million. By buying Arena Resources, SandRidge becomes one of the largest producers of West Texas conventional oil and gas. SandRidge said it will primarily drill shallow, low-risk reservoirs in the so called central basis platform, a part of the Permian Basin in West Texas. SandRidge is shifting its focus to oil as crude rises and gas futures fall. The company explores for both, though SandRidge Chief Executive Officer Tom Ward said last month at the Howard Weil Energy Conference that drillers can make “10 times more money” producing oil rather than gas.

Transformation to Oil

“We’ve been transforming from strictly a gas company to an oil company over the last couple of years,” Ward said in an April 4 telephone interview. SandRidge fell 38 cents, or 4.8 percent, to $7.47 at 10:42 a.m. in New York Stock Exchange composite trading. The stock has dropped 21 percent this year. Tulsa, Oklahoma-based Arena Resources rose $2.70, or 7.9 percent, to $36.96. About 85 percent of SandRidge’s revenue at the end of 2008 came from natural gas, Ward said. The company’s current production is split at about 28 percent oil and 72 percent gas, while oil makes up about 54 percent of revenue, based on 10-year futures prices, he said.

SandRidge will be about 35 percent oil in terms of production, including the Forest and Arena transactions, Ward said today on a conference call with analysts and investors. The combined company will hold about 200,000 acres in the Permian Basin and 5,700 in other areas. The purchase will add to SandRidge’s cash flow in 2011, Ward said.

Gas Slump

“There have been a couple of hard years for gas,” because of the drop in demand that occurred in the recession, Ward said. “We’ve been looking for oil assets.” The agreement reflects SandRidge’s “contrarian style” of buying assets for terms that are below perceived value, said Scott Hanold, an energy analyst at RBC Capital Markets in New York. RBC values Arena Resources shares between $45 and $50, said Hanold, indicating that SandRidge is acquiring the company at a 10 to 20 percent discount.
Natural gas futures on the New York Mercantile Exchange have tumbled 27 percent this year. Crude oil is up 8 percent in the same period and 68 percent over the past year.

“Gas has been under pressure,” said Andy Lipow, president of consulting firm Lipow Oil Associates LLC in Houston. The Arena Resources acquisition, subject to the approval of shareholders of each company, is expected to close in June or July, Ward said. Deutsche Bank AG and Covington & Burling LLP are advising SandRidge, and SunTrust Banks Inc., Tudor Pickering Holt & Co., and Johnson & Jones PC are counseling Arena Resources.

Reporter Mark Shenk can be contacted at mshenk1@bloomberg.net.


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