One of SandRidge Energy's largest investors, hedge fund TPG-Axon Capital, is calling on the Oklahoma City-based exploration and production company to replace its CEO, realign its board of directors and consider the possible sale of the company.
TPG-Axon, which owns more than 4.5% of outstanding SandRidge shares, said it invested in the company because "the stock represents extraordinary value," with a $12-14/share range "realistic and achievable." But SandRidge stock "has been a disastrous performer," declining 76% from its initial public offering (IPO) five years ago, TPG-Axon said.
"Although we are enthusiastic about the value potential in SandRidge, we have grown increasingly concerned about the ability of the management team to deliver that value, or of the board of directors to protect shareholder interests," the hedge fund said in a 13-page letter.
SandRidge shares closed down Friday at $5.51, losing 9.57% for the day.
SandRidge values the opinions of shareholders and is "always open to constructive engagement with them," the company said on its website Thursday. "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. The board continues to actively work with management in taking steps to improve shareholder performance."
TPG-Axon is calling for reconfiguration of the SandRidge board, "with certain directors replaced by credible, independent directors, chosen after extensive consultation with large shareholders." Large shareholders should be invited to join the board, said the hedge fund.
The credibility of CEO Tom Ward, who was co-founder of Chesapeake Energy Corp. with Aubrey McClendon -- and who has been accused of running a secret hedge fund with McClendon (see NGI, July 2) -- "is too damaged to continue in his role," TPG-Axon said.
And SandRidge's board should hire an adviser to explore strategic alternatives, including a possible merger with another company, the hedge fund said. "We believe SandRidge assets would be highly desirable to many companies, and their value is likely to be even greater to a company with low cost of capital and the financial resources to optimize investment."
SandRidge on Thursday announced a 3Q2012 net loss applicable to common stockholders of $184 million (minus 39 cents/share), compared with net income of $561 million ($1.16/share) in 3Q2011. The company also said it is exploring the sale of some of its assets in the Permian Basin to fund its capital expenditure program in the Mississippian Play and to repay debt. The relevant assets produce about 24,500 boe/d (67% oil, 15% natural gas liquids and 18% natural gas), SandRidge said.
"Our acquisitions and development of properties in the Permian Basin over the last four years have been integral to our conversion from a natural gas company to an oil-rich enterprise," said Ward. "Now, we believe there is an opportunity to capitalize on current strong valuations for mature, conventional oil assets in the Permian Basin and convert the proceeds of a sale into development of our industry-leading position in the high-growth, high-return Mississippian Play. At the same time, this transaction would strengthen our balance sheet and provide liquidity that, together with cash flow, would fully fund capital expenditures through 2014."
SandRidge estimates production of approximately 39.2 million boe and capital expenditures of $1.75 billion in 2013.
Earlier this year SandRidge agreed to buy Gulf of Mexico producer Dynamic Offshore Resources LLC for nearly $1.28 billion (see NGI, Feb. 6). The company's previous strategy had been dedicated to the less-costly U.S. onshore plays, in particular the Midcontinent.
In late 2011 the company eliminated some funding issues hanging over its U.S. development plans after securing a $1 billion joint venture in a key onshore play with Spain's Repsol YPF SA (see NGI, Jan. 2). The agreement centered around 363,636 net acres in the Mississippian Lime in western Kansas, a tight oil play that for decades has seen vertical drilling success and of late a renewed interest from horizontal drillers armed with well fracturing stimulation techniques.
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