A a huge plume of gas burns at a natural gas hydraulic fracturing site in Michigan.DALE G. YOUNG/The Associated Press
Prem Watsa's Fairfax Financial Holdings Ltd. has had a string of investing successes over the past three decades, with the company's book value per share compounding 20 per cent annually over that time.
This story is not about any of them. Instead, it's about SandRidge Energy, a U.S. natural-gas company fighting for its life, and the 60-million-plus shares Fairfax owns.
As the North American energy sector has been crushed by low oil prices, SandRidge shares are struggling to stay above 50 cents (U.S.) apiece. The Oklahoma-based company has high-quality, yet low-cost properties. It also has more than $4 billion of debt, and the hedges it has in place to support its production begin to slide off in 2016.
According to filings made with U.S. regulators, Fairfax owns just under 51 million common shares of SandRidge. With the stock off 90 per cent from its 52-week high of $5.38, Fairfax has lost just under $250 million in SandRidge in the last year. (Fairfax also owns debt that's convertible into around 10 million more SandRidge shares, which I've exempted from that calculation of losses.)
At one time, SandRidge looked like a great value buy. As I detailed in this column, the company went public in 2007 at $26 per share and traded as high as $69 in the summer of 2008. But the decline in natural gas prices during the financial crisis sent SandRidge shares down by 90 per cent by the end of 2008.
Fairfax filings with U.S. regulators suggest it first took a position in the third quarter of 2008. In November, 2009, it invested $200-million in a series of SandRidge preferred stock when the company seemed to be beginning a rebound. The shares were volatile; when they dipped significantly in November 2012, to the $5 to $6 range, Fairfax bought more.
There hasn't been much good news since, and the retrenchment of the energy sector has crushed SandRidge shares. They last traded above $1 in June. (A Fairfax executive did not respond to emails sent Aug. 14 and Aug. 19.)
The latest news at the company is typical for struggling concerns: SandRidge issued two new series of convertible debt, paying a robust 8.125 per cent and 7.5 per cent, and swapped it to existing bondholders for some of the debt they held. They also paid cash to retire other debt at a rate of 38 cents on the dollar.
Debt-rating service Moody's further downgraded SandRidge's credit rating last week, calling the transactions a "distressed exchange" and a limited form of default. "The downgrade of SandRidge's ratings reflects the company's weak cash flow metrics and potentially unsustainable capital structure," Amol Joshi, a Moody's vice president, said in the announcement. "With weak commodity prices exacerbating the impact of its relatively high interest expense and operating cost structure on cash flow, the risk of further debt restructuring has increased."
It also increases the risk of a total loss for Fairfax on its SandRidge equity.
David Milstead