[Ok-sus] Fwd: With production coming up short, investors 'basically screaming' for change at Okla. oil company

Bob Waldrop bwaldrop1952 at att.net
Tue Nov 13 19:10:18 CST 2012

Nothing is forever in the oil bidness.  The Oklahoma economy is littered 
with the bones of energy companies who built themselves up while 
headquartered in Oklahoma, but when they got interesting enough, big 
money swooped in and -- POOF -- they are gone.

Bob Waldrop, OKC

-------- Original Message --------

With production coming up short, investors 'basically screaming' for change at Okla. oil company
Saqib Rahim, E&E reporter
Published: Tuesday, November 13, 2012

Investor unrest is building over SandRidge Energy Inc., where shareholders are complaining that the company's oil production plan is stuck in gear -- again.

Shares of Oklahoma City-based SandRidge jumped briefly last week when TPG-Axon Capital, a hedge fund holding more than 4.5 percent of its shares, published a letter blaming management for squandering the company's true value. TPG-Axon founder and CEO Dinakar Singh demanded a CEO change, a board reshuffling and a potential sale of the company, encouraging shareholders who want reform.

But the ticker has stumbled again since Friday, when SandRidge reported quarterly earnings and announced that its crown jewel -- drilling rights in the Mississippian oil play in Oklahoma and Kansas -- hasn't yet shown the oil cornucopia that was hoped for. SandRidge, whose ticker is SD, closed at $5.39 a share yesterday; a week before, it was at $6.22.

To some, it is a story of potential unrealized.

"With thousands of wells to drill, SD has captured a position that when fully developed is worth by itself more than the current price of the company's stock," said Brian Lively and Brad Pattarozzi, analysts with Tudor, Pickering, Holt & Co., in a note yesterday. "Thursday's activist letter and then Friday's frantic trading activity both show, however, that investors are basically screaming for company management to find a strategic direction and move prudently down the path of maximizing shareholder value."

In a colorfully worded letter, Singh of TPG-Axon gave his explanation for SandRidge's unfulfilled potential. SandRidge's express strategy is sound -- to switch more of its production from gas to oil, and to devote more of its resources to developing the Mississippian play.

But Singh said this strategy has been horribly mismanaged, with excessive budgets and borrowing that leave the company's finances chronically unstable. The company makes mystifying and unpredictable strategic choices, the letter said, and the instability has made it even more expensive for the company to borrow money.

SandRidge is the worst-performing energy stock and one of the worst stock performers in the entire U.S. market, Singh said: Its value has declined 76 percent since it went public in 2007.

Meanwhile, he charged, executive compensation has been "nothing short of egregious." SandRidge Chairman and CEO Tom Ward has received $150 million in company payments in the past five years, and his high pay often came as the company was scraping for cash itself, the letter said.

"Upon examining corporate governance at SandRidge, one can understand why stock performance has been remarkably poor, and the 'management discount' applied to the stock by the market is very high," Singh said in the letter. "Management's incentives have been to take value from shareholders, rather than grow value for shareholders, and that is the only area in which they have done a spectacular job."

Some of the issues echo those that shook Chesapeake Energy Corp. last spring. News reports revealed an unusual corporate perk for Chairman and CEO Aubrey McClendon even as the company struggled against low natural gas prices.

The ensuing shareholder outcry led to McClendon surrendering his chairmanship and turnover on the company's board (EnergyWire, June 22).

McClendon and Ward co-founded Chesapeake in 1989.

As for SandRidge, TPG-Axon has filed federal paperwork to increase its control of the company. The investor's goal is to liberate the company from the forces holding it at around $6 a share, to the $12 to $14 per share that it believes reflects the company's true worth.

SandRidge issued a brief response after TPG-Axon's letter came out: "While our perspectives on various points made in the letter from TPG-Axon differ in many instances, we agree that SandRidge has valuable assets and that we need to focus on improving performance for shareholders."

'Red flags'

TPG-Axon is not likely to be SandRidge's largest shareholder at present; as of March, at least six investors held more than 5 percent of the company.

"We've been flagging this company for a long time in terms of its risk," said Paul Hodgson, senior research associate at GMI Ratings, a group tracking companies' governance.

In October 2011, he said, GMI flagged SandRidge on a "Risk List" of the 10 North American companies whose value was most vulnerable to a litigation, governance or other kind of disaster.

The "red flags" were on SandRidge's environmental, executive compensation and excessive borrowing practices, he said. Hodgson also claimed the company uses accounting sleight of hand to inflate profits.

SandRidge also has a board structure that irks corporate-governance reformers: Its board members cannot all be voted out at the same time, posing a challenge at companies where board members are known to be close to, and loyal to, the CEO and chairman.

"If you can only unseat one to two directors a year, it makes it really difficult to force change at a company like this. Almost impossible, in fact," Hodgson said. "It'll take you three years to get rid of a board. And if you're an active investor, [you] will have sold the shares by then," leaving longer-term investors with lower value.

Difficult bet in the Mississippian

Last quarter, SandRidge posted record oil production and nearly $30 million in profits, but observers still walked away with reservations.

Last week, shortly after the TPG-Axon letter, SandRidge announced it hopes to sell conventional oil assets in the Permian Basin -- a low-risk, high-value asset whose sale could help shore up the company's books.

On a conference call, CEO Ward said the announcement was unrelated to the hedge fund's letter. Still, he framed the sale as a way to raise cash for the long game: getting more oil and liquids out of the Mississippian.

What Wall Street analysts took from the call, though, is that the Mississippian has yet to deliver. So far, most of the production has been natural gas -- a low-value commodity at the moment -- and the oil reservoirs haven't shown consistent production.

Investment bank UBS lowered its price expectation for the company from $7.50 a share to $6. Analysts led by William Featherston doubted the company could raise enough from the Permian sale to repair the company's deep financial troubles. They questioned whether the Mississippian would ever live up to its promise.

Despite a much-talked-about shift to liquids-rich plays, the analysts said, SandRidge's 2013 plan actually increases natural gas production by 27 percent, while oil ticks up 9 percent.

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