SandRidge Energy Inc (OTCMKTS:SDOC) Is A High Reward Opportunity

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SandRidge Energy Inc (OTCMKTS:SDOC) is perhaps one of the best opportunities for penny stock investors on the OTC markets. It is one of the best ways to play a potential rebound in the price of oil with shares trading at just 3 cents. The risk for investors is that oil prices continue heading lower and don't recover within the next year or two. If that's the case, SandRidge could declare bankruptcy and common shareholders are wiped out. However, if oil prices recover and head back towards $50 or $60 per barrel, shares of SandRidge would turn into a runner and investors would make several times their money. SDOC would then be what Peter Lynch calls a multi-bagger.

SandRidge Energy is an oil and natural gas exploration and production company headquartered in Oklahoma City, Oklahoma with its principal focus on developing high-return, growth-oriented projects in the U.S. Mid-Continent and Niobrara Shale. At the end of the third quarter, SDOC had $790 million in cash and $361 million in operating cash flow.

The biggest overhang on SandRidge besides the price of oil is its debt load. SDOC has $3.9 billion in debt on its balance sheet. However, its first maturity is not until 2020. SDOC was able to issue $1.25 billion in senior secured notes with an interest rate of 8.75% maturing June 1, 2020. This was a well-timed financing and gives SDOC four years for oil prices to recover and get back on track. In the meantime, the company is generating cash from the sale of oil and natural gas to keep operating.

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The real potential for SDOC is their Niobara assets. So far the results have been positive and SandRidge has drilling giant Baker Hughes (NYSE:BHI) testing its new LEAP adaptive production system on SandRidge wells. With this new technology, Niobara production could really take off for SDOC. According to the first test:

“Baker Hughes’ first field trial of its LEAP adaptive production system, installed on Dec. 12 at a depth of 5,200 ft in the Mississippi Lime play in Woods County, Oklahoma, for SandRidge Energy, is delivering 300% greater oil production and 200% higher natural gas production compared to the previous artificial lift solution. In continuous operation since its installation, the system was seamlessly deployed through the deviated section of the wellbore and started on its first attempt with no issues.”

Last month, some nervous shareholders panicked when it was reported by Reuters that SandRidge was exploring debt restructuring options. We think this is a good move by the company. This allows the company to bide time and look at all options for raising cash. The company was able to settle a dispute stemming from a 30-year agreement to send Occidental Petroleum Corp a fixed amount of natural gas from the Pinon field in west Texas each year. Occidental had been treating the gas to extract carbon dioxide which it uses in its own oil recovery business and then sending methane back to SandRidge. However, low natural gas prices have made it uneconomic for SandRidge to fulfill the contract and it faced potential penalties that could have eventually run into the hundreds of millions of dollars. Under the agreement, SandRidge will hand over the Pinon assets to Occidental plus $11 million in cash and Occidental will drop any claims from the previous deal.SandRidge said the settlement is expected to reduce its operating costs by $39 million in 2016. To raise more cash, SandRidge has put its headquarters in Oklahoma City up for sale in May, but has yet to find a buyer. Last April, it laid off at least 130 employees, or 20 percent of its workforce based there, public records show. It has also previously used a distressed debt exchange with creditors to lighten its debt load.

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We think a debt exchange with creditors is what will happen. On the last earnings call, CFO Julian Bott said the company has $790 million in cash and access to undrawn credit lines that gave it access to total capital of $1.9 billion. It is in the creditors best interests to negotiate a debt exchange because SandRidge could access all of its cash and bleed the creditors dry. In effect, this puts SandRidge in the driver's seat and not the creditors.We look at SandRidge Energy has a high reward opportunity. It's also like a lotto ticket with the potential for a total loss. Investors need to keep that in perspective when buying SDOC. However, if things do work out, SDOC will be a grand slam for investors that buy at current prices. Sign up to Insider Financial today and get the latest developments from SDOC and our continuing coverage of micro caps trading on the NYSE, NASDAQ and OTC markets.Disclosure: We have no position in SDOC and have not been compensated for this article.