SandRidge Energy Delisted- Now What?
No doubt about it, the collapsing price of crude is still wreaking havoc on the oil industry. And nowhere is the pain more evident than the small-cap oil exploration space.
Fact is, this area of the energy market has been a minefield since late 2014 when West Texas Intermediate (WTI) careened below $80 a barrel.
But with the price of WTI diving to new multi-year lows near $31 a barrel in yesterday’s trading session, matters are clearly getting worse. Plenty of producer balance sheets are getting turned upside down.
And unfortunately, some companies have little hope for survival in 2016.
Take SandRidge Energy $SD for example…
The small-cap oil explorer was delisted from the NYSE late last week.
With shares trading under $1.00 for an extended period, regulators sent $SD to the pink sheets. Per NYSE regulations, a company becomes non-compliant with listing requirements if the average closing price of their shares is less than $1.00 over a 30-day period.
Since $SD has traded below $1.00 since late June 2015, the writing has been on the wall for quite some time.
With $SD now trading on the pink sheets, what’s the most likely outcome for the company?
I hate to say it, but the odds of bankruptcy are quite large, and growing.
With crude oil and natural gas trading at or near multiyear lows, SandRidge is stuck in a horrible situation- they have zero pricing power and an enormous debt load to service.
The only thing that can save the company is a spectacular rebound in the price of oil.
If that rebound comes in 2016 (which I believe it will), SandRidge has a slim chance of survival.
But if the oil downturn lasts into 2017, it’s game over.
Here’s the deal…
With shares trading at a mere $0.07 on the pink sheets (under the ticker $SDOC), SandRidge Energy has become a sort of long-term binary option play for new investors.
In other words, there are two simple outcomes for the company- survival or bankruptcy.
What’s more, you know exactly what the downside risk is should the company go bankrupt ($0.07 a share).
But there’s also substantial upside should SandRidge perform a miracle and get out of this hole. As a result, speculative investors may want to scoop up a carefully sized $SD position and tuck it away for a few years.
Given the obvious uncertainty, I only recommend you implement this risky strategy with a very small percentage of your capital (1% or less). You should also be comfortable with the idea of losing your entire investment.
What if you’re stuck in $SD from much higher prices?
It’s unfortunate, but since the lion’s share of your capital is already wiped out, you might as well hold on at this point.
After all, what’s another $0.07 of downside?
Whatever you do, don’t throw good money after bad by averaging down into your losing position. Remember, I gave you a well-defined game plan for trading $SD when shares were trading just shy of $2.00 in April 2015.
Are there other oil explorers in a similar situation?
Penn Virginia $PVA and Halcon Resources $HK look like they’ll follow $SD on to the pink sheets soon. So unless you have a well-defined plan for investing in near bankrupt oil companies, I would steer clear of them as well.
Until Next Time,
BIO: Justin Bennett is the head commodity research analyst at Commoditytradingresearch.com. With over a decade of real world trading experience, he finds ways for you to consistently profit from movements in commodities and the companies producing them. Sign up for our free reports and commodity newsletter at http://commoditytradingresearch.com/free-sign-up.
Category: Natural Resource Stocks