Staying in the Game with Two Plays

 | Feb 02, 2012 | 2:00 PM EST  | Comments
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atpg

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sdt

The market's tough, but that's no secret. Long-term investments are fine, but to be truthful I'm not doing a lot of that positioning right now. I've been much more likely to be pulling money out of stocks in the last week or more.

But some speculative stocks jumped into my radar screen today and I'm thinking of a little mad-money splurges on them, just to keep me in the game: Sandridge (SD) and ATP Oil and Gas (ATPG).

Sandridge has had a history of relative sadness, as it has never recovered even partially from the grand deleveraging of 2008. In those days, Sandridge was the poster child for dedicated natural gas companies and, of course, it has suffered since 2009 from the double whammy of the explosion of shale plays in gas and the disastrous price devaluation in natural gas, now still looking bearish at $2.45 a mcf. But for the last year-and-a-half, Sandridge has moved as quickly as it could to try to become more dedicated to oil assets, particularly in the Mississippian Lime basin, where Sandridge is virtually alone. It is a complex shale play to develop, but Sandridge has shown just how successful it can be there, spinning off its first Mississippian Trust (SDT), which is up from an IPO price of $24 to trade at almost $34 today, and it's preparing another for trading soon under the ticker symbol SDR (which you should get in on if you can). Still, the transformation from gas to become "oily" is still a slow one and Sandridge shares have continued to lag. 

On Thursday, it announced it will buy Dynamic Offshore, a private shallow-water Gulf of Mexico driller for $1.275 billion. With the difficult debt issues already in place at Sandridge, the premarket dropped SD shares under $7 dollars again, a huge 7% drop based on the acquisition news.

The market's wrong. CEO Tom Ward has proven his sharpness at finding value in Mississippi, and I believe he is buying into the Gulf of Mexico at precisely the right time, just as the Gulf continues to be undervalued and still slow to get back to full production. He's not paying a deep premium for Dynamic and this acquisition is precisely following Sandridge's multi-year strategy of becoming much more oil-focused and less of a purely natural gas play.

Of course, it is the price that is the nicest driver of interest for me. Under $7 and as a purely speculative play, I like the action here and will be accumulating a new position. 

ATP Oil and Gas is an even more speculative play. Mired in debt and questionable as to whether they will even survive, their hopes have been based almost entirely on the (so far) less-than-stellar production from their Telemark wells in the Gulf of Mexico, where drilling has been moving in fits and starts, the production numbers have fallen well below expectations and the technological challenges continue to grow. With all of this, ATPG has been quite a volatile and speculative stock to hold. Its chance of a full-on bankruptcy and being buried by debt is not insignificant. But Wednesday's massive drop in share prices were nothing more than a panic-driven move by holders on the back of an announcement that ATPG would not be attending a Credit Suisse conference to report on progress. The rumor was that ATP was ducking the conference because it had nothing very good to report, although ATP said that one of their top executives had a personal emergency at the last moment.  In any event, ATP reported progress at Telemark anyway and there is little changed: ATP is still engaged in a race against time of production vs. debt load.

But the huge share-price drop is again interesting to me and becomes a worthy opportunity to pick up some very speculative shares at a very nice price.

These are two very speculative stocks, but both are worthy of a look on what I think are mostly undeserved price drops.

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