Why Sanchez Energy Corp.'s Stock Is Sinking Today

What happened

Shares of Sanchez Energy Corp. (NYSE: SN) fell on Tuesday and were down more than 11% at 11:00 a.m. EST. Several factors weighed on the Eagle Ford shale driller's stock today, including the fallout from releasing its fourth-quarter results yesterday.

So what

Sanchez Energy reported its financial results before the market opened yesterday. All things considered, they were pretty good, with the company earning an adjusted profit of $21.8 million, or $0.28 per share, beating the consensus estimate by $0.09 per share. Production averaged 82,000 barrels of oil equivalent per day, which came in at the midpoint of the guidance range. Those results initially sent Sanchez Energy's stock skyward yesterday, rising more than 10% in the morning before giving back most of those gains and closing about 4% higher.

Those gains have now completely evaporated as investors digested that report further as well as some other news items over the past 24 hours. One of the weights was last night's announcement that the company would start paying its preferred stock dividends in cash instead of common stock. That decision will leave it with less money to drill wells or pay down debt. Meanwhile, an analyst at Northland Securities downgraded the stock today. The analyst cut the stock's rating from outperform to market perform while slashing the price target from $6 to $4 per share, which is about where it closed yesterday.

Now what

While Sanchez Energy's latest results were solid, the company has some challenges to overcome, including having a weaker balance sheet than most rivals. For example, it ended last year with a leverage ratio of 3.4 times, which is well above the comfort level of competitors that are working to keep that number below 2.0 times. That weaker financial situation could continue weighing on Sanchez, especially if oil prices take another tumble. That's why investors might want to avoid this high-risk oil stock and consider a lower-risk option instead.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.