Is SandRidge Energy's CEO Worth It?

CEO compensation is a hot topic, especially now that the Dodd-Frank Act requires say-on-pay votes. With CEO pay and performance seemingly disconnected at the following company, the Fool invites you to judge for yourself whether this business's boss actually deserves such a hefty paycheck.

Earlier this week, while examining the ugly pay practices at Chesapeake Energy (NYSE: CHK  ) , I noted that Chesapeake co-founder Tom Ward has brought the same lavish pay schemes to the company he's now running, SandRidge Energy (NYSE: SD  ) .

From a business perspective, SandRidge and Chesapeake make similar cases. SandRidge is a natural gas player headquartered in Oklahoma City, and an active driller in its onshore U.S. holdings. The company has also made a strategic move to increase the amount of oil in its production mix. One primary difference between the two is that SandRidge focuses largely on conventional -- that is, easy-to-tap -- resources, whereas Chesapeake goes after unconventional fields. With a $4.5 billion market cap against Chesapeake's $20 billion, SandRidge is also a good deal smaller.

From an investor's standpoint, the investment case for SandRidge is also somewhat similar to Chesapeake's. Investors anticipate that the company's aggressive development and acquisitions in recent years will pay off down the road.

The pay
Unfortunately, the egregious pay situation at SandRidge looks all too familiar for anyone who's perused a Chesapeake proxy filing. Let's peek at just how much moola the board of directors is pushing in Tom Ward's direction:

Year

Salary

Bonus

Stock Awards

Total Compensation

2010 $1.5 million $1.5 million $17.3 million $21.8 million
2009 $1.2 million $1.4 million $9.4 million $13.7 million
2008 $1.2 million $1.1 million $15.8 million $19.3 million

Source: SandRidge 2010 proxy filing. Total compensation includes other compensation not listed under salary, bonus, and stock awards.

Note that the total compensation includes a variety of fun perks for Ward that are strikingly similar to what McClendon gets over at Chesapeake, including personal use of the company's jets, personal security, club membership dues, and accounting services. The last one may be my favorite: SandRidge must just pay Ward so much that figuring out the accounting for all of that money is supremely expensive. They couldn't possibly leave him high and dry there, right?

As with Chesapeake, stacking up SandRidge's pay against that at many other major energy companies gets downright scary:

Company

Market Cap

Total 2010 CEO Compensation

Chevron (NYSE: CVX  ) $211 billion $16.3 million
Schlumberger (NYSE: SLB  ) $116 billion $15.6 million
ConocoPhillips (NYSE: COP  ) $104 billion $17.9 million
Apache (NYSE: APA  ) $47.8 billion $19.3 million
Halliburton (NYSE: HAL  ) $45.9 billion $14.9 million

Source: SEC filings.

While Ward's pay package may seem nuts on its own, it looks even crazier when we consider that he's getting paid more than the CEOs of companies that are between 10 and 47 times SandRidge's size. Ward's pay even looks lofty compared to McClendon's $21 million, when we consider how much larger Chesapeake is.

And of course, we don't want to forget related-party transactions, which can often be a lot of fun as well. As with Chesapeake, SandRidge is a sponsor of the Oklahoma City Thunder, paying a $3.3-million-per-year sponsorship fee. Is anyone surprised that Ward happens to be a 19% owner of the Thunder? The company has also done business with and purchased interests in assets owned by Ward and his family. That includes a $1.8 million purchase of a working interest in leases owned by a trust set up for Ward's children.

As of yet, I don't believe that SandRidge has bought any map collections from Ward -- an infamous move from Chesapeake in 2008. However, the company did spend $321,000 buying sports and entertainment tickets from Ward last year.

The performance
All I can really do here is repeat what I said for Chesapeake: If the company had been producing unquestionably outstanding returns over this period, I would have much less of a problem with the pay package for Ward. But that was hardly the case.

Over the three years ending in 2010, while Ward was compensated $55 million, shareholders endured a stomach-churning collapse of the stock. At the close of 2010, a $1,000 stake in SandRidge purchased at the beginning of 2008 would have been worth $210. A similar investment in the S&P 500 index would have left the investor with $869.

But of course, it's nearly impossible for a CEO to do much about the stock price for anything but the shortest of timeframes. So we also need to look at some of the fundamental performance metrics for the company.

Metric

2007

2010

Change

Revenue $678 million $932 million 37%
Operating profit $185 million $31 million (83%)
Diluted share count (dilution) 110 million 315 million 186%
Simple free cash flow* ($1.0 billion) ($578 million) NM
Total debt $1.1 billion $2.9 billion 164%
Shareholder equity $2.2 billion $1.5 billion (32%)
PV-10** $3.6 billion $4.5 billion 25%

Source: Capital IQ, a Standard & Poor's company, and company filings. NM = not meaningful.
*Calculated as cash flow from operations less capital expenditures and net acquisitions.
**The estimated present value of future cash flows from proved oil and natural gas reserves, less development and production costs and discounted at 10% per year.

I guess there are a couple of areas that SandRidge can crow about: Revenue has grown, and the PV-10 measure is also up. And while the operating profit measure looks awful, we can potentially give the company somewhat of a pass due to the crash in natural gas prices. However, looking at this table as a whole -- from the lack of profit growth and positive free cash flow, to the huge share growth and debt load -- it doesn't seem like performance that merits any sort of outsized payday for the CEO.

What now?
SandRidge investors still have time to vote their 2011 proxy -- but you've got to hurry, since the annual meeting takes place June 3. You can vote by telephone, Internet, or by showing up at the meeting in Oklahoma City. (You'll find more info in the proxy here.)

To let management know how you feel about Tom Ward's ridiculous compensation, I would recommend the following:

  1. Vote "against" in the vote to approve the executive officers' compensation.
  2. Vote for "1 year" in the vote on how often a compensation advisory vote should be held. (The board recommends three years -- the longest stretch.)
  3. Withhold your vote from the board members up for reelection.

In addition, you can write or email SandRidge's investor relations to let them know how you feel about the compensation being doled out to Tom Ward.

And, finally, don't overlook the compensation of SandRidge's directors. Like Chesapeake, SandRidge pays its non-employee directors a ridiculous amount, particularly when considering the size of the company. The SandRidge directors received, on average, $387,506 in 2010. For sake of comparison, the directors at ExxonMobil -- which is 91 times the size of SandRidge by market cap -- paid its directors an average of $318,381.

Thanks to the risky capital structure at SandRidge, I'm a good deal less excited about the company as compared to Chesapeake. However, I find myself no less repulsed by the way it compensates its CEO.

The Motley Fool owns shares of Schlumberger. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy and Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Chevron, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policyprefers dividends over a sharp stick in the eye.


Read/Post Comments (4) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 04, 2011, at 2:28 PM, rockhat wrote:

    20 million out of a market cap of 4.4 billion is about 1/2 of a percent -- which is percentage of stockholders money the CEO is sweeping into his pocket every year. After 10 years he has 5% of your money. This is how the rich get richer.

    An appropriate compensation would be about 1 million annually -- that is if the stock does well.

  • Report this Comment On June 07, 2011, at 12:11 AM, mrconnors0531 wrote:

    What seems to be omitted here is that Tom Wards call to purchase oil producing properties inland ahead of the gulf blow up. What kind of profit would Sandridge receive if they put these properties up for sale now. As far as his increased drilling costs going forward, if he does not drill wells on leased properties with in set periods he will lose the leases on those properties. I believe he has made great calls in the last two years and is deserving of his pay. I bought his stock at $5 and am happy at $10.

  • Report this Comment On June 09, 2011, at 7:56 AM, kmacattack wrote:

    I like Tom Ward and own the stock, bought it at about $6.50. I also own Chesapeake and am not so fond of Aubrey McClendon, and their board which includes a former Governor, Frank Keating, and a former Senator, Don Nichols, who are paid about $275,000 per year, for what I don't know. I would think they would be useful for lobbying purposes, but they can't even get their republican friends to stop filibustering the energy bill, which would do wonders for the economy in job creatiion, and eliminate 40 percent of foreign oil imports in 5 years. The bill would also force oil prices (and gasoline prices) down dramatically, because the big oil boys will finally have some real competition in the transportation market. Having said that, Ward and McClendon are both grossly overpaid, as are their respective board members. When Tony Hayward was forced out at BP after Obama called him on the carpet and got a committment for BP to place $20 billion in escrow for the Gulf Horizon spill, there was talk that he was losing a job which probably paid $25 million per year, until it was revealed that British corporations limit CEO compensation to $1.5 million per year, which should be enacted here. No one is worth $15 or $20 milllion per year- they are just colluding with the boards to steal from their stockholders. The British rule, by the way, is set not by the government, but by the stock exchange. Bank robbery is now legal in the USA, and most of it is done by the CEO's and the board of directors of the "too big to fail" institutions. What some would consider "socialism" I would counter might be considered criminal embezzlement.

  • Report this Comment On July 16, 2011, at 7:43 AM, nottoosavvy wrote:

    I could never understand why anyone would be paid such exorbitant salaries.

    I own some SD stock and have done well, but I think if SD can pay CEOs high salaries why not pay share holders more.

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