Energy Winners: SandRidge Energy

NEW YORK (TheStreet) -- SandRidge Energy(SD) shares moved up on Thursday by close to 10% on elevated trading volume after the company said it would raise as much as $721 million in a royalty trust offering for assets in the Permian Basin.

The planned deal is the second such royalty trust from SandRidge, which in April closed on a royalty trust of $315 million for assets in the less proven Mississippian play. Royalty trusts allow exploration and production companies to monetize assets and raise capital, without selling acreage outright and without diluting common shareholders through a secondary equity offering.

Funding needs running ahead of available cash has long been an issue for SandRidge, and the Permian deal provides investors with visibility into 2012 with the risk of shareholder dilution.

Wall Street had been expecting another royalty trust from SandRidge after the success of the first deal, and considering its spending needs. However, BMO Capital Markets analyst Phillip Jungwirth said the Permian was a surprise. "It's a catalyst because the first one worked and now with the second it's bigger than we thought and we didn't expect the Permian either, which funds a good portion of 2012, which was overhang on stock." He had expected another royalty trust involving Mississippian assets, and still does, toward the end of 2011.

SandRidge shares have been as low as $7 this year and as high as $13.34. After the 8% rise on Thursday, shares were recently trading at $11.75.

SandRidge has a gap of roughly $600 million in its 2012 spending plan, according to BMO Capital Markets data, and the Permian royalty trust would close this gap. The company has ambitious plans for its Mississippian acreage, saying in its most recent conference call that it would "at least" double the rig count in the Mississippian in 2012, to 24 rigs.

BMO Capital estimates 2012 spending at $1.4 billion and, as a result, before this deal, estimated that SandRidge would outspend cash flow, including preferred dividends and existing royalty trust payments by $600 million.

Tapping its Permian assets -- 15,900 acres of a total of 210,000 acres -- allows SandRidge to attract an even higher valuation that it can for Mississippian assets, and structure a larger deal overall. The Permian is much more developed than the Mississippian and its per-acre value much higher. The planned royalty trust incorporates roughly 10% of SandRidge's proven oil reserves. The planned Permian deal of $721 million compares to the Mississippian deal, closed in April, of $315 million.

By Eric Rosenbaum