13 January 2015 HY Corporate Credit Energy Sandridge Energy Relative Value As a single-asset company with modest economics, SandRidge (SD) is relatively more vulnerable to the new, significantly weaker commodity price landscape. Notwithstanding the high-grading and the substantial operational improvements across its Mississippian acreage over the past two years, the company is likely to struggle to build a sustainable business over the long term given the weak outlook for oil prices. DB equity research sees the Mississippian Lime achieving a 10% IRR at $80/bbl oil, one of the most challenged plays in the US. The structural funding gap problem - the intensity of which had been steadily receding in recent quarters due to solid operational performance - is now front and center. Despite a sharp ramp down in its capital program - we expect annual capex to average $1 billion over the next two years (versus $1.6 billion in FY 14E) - we see the company burning $1.2 billion of cash through FY 16, exhausting most of its current liquidity of 81.3 billion. More worryingly, we see outlook for continued cash burn indefinitely beyond FY 16 even in a maintenance capex mode. We see annual run-rate EBITDA of -$710 million at $65 oil/$3.75 gas. Given annual interest obligation of close to $300 million, the company will clearly be unable to meet maintenance capex of, say, $500-700 million and remain FCF neutral This situation would be further aggravated in a downside scenario of $60 oil/$3.5 gas with EBITDA dropping to $560 million. In short, the Mississippian acreage is not well suited for a low commodity price environment. especially as a core play for a company as financially leveraged like SD. Further, the option of augmenting its liquidity via asset divestitures, which appeared to be a viable one just a few months back, is now all but gone. Its midstream infrastructure in the Mississippian play, which might have fetched a valuation of up to $1 billio