Is Management Holding SandRidge Energy Back?

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

SandRidge Energy (NYSE: SD  ) has recently taken a lot of heat. Two different hedge funds, both large SandRidge shareholders, have made a number of serious claims against the company. Among other things, they allege dismal corporate governance, profligate spending, and a complete disregard for shareholder value.

The crux of their argument is that SandRidge's management has been a terrible steward of shareholder rights and has been the biggest impediment to the company's success. Are they right? And if so, what should be done about it?

A primer on SandRidge
Oklahoma City-based SandRidge has come a long way since the company was founded by CEO Tom Ward in 2006. As its first purchase of a West Texas gas field suggests, the company's initial focus was on acquiring and developing natural gas properties.

But by 2008, the company's management made an informed decision to shift its focus from natural gas, which it believed was heading for substantially lower prices, and toward oil production. In hindsight, this was an exemplary move.

Unlike low-cost producers Ultra Petroleum (NYSE: UPL  ) and Southwestern Energy (NYSE: SWN  ) , which can remain profitable even with natural gas prices under $3 per Mcf, SandRidge most certainly would have encountered major difficulties had it not made the well-timed transition toward oilier plays.

SandRidge's assets
As the company transitioned toward oil production, Ward, leveraging his deep knowledge of the industry, sought out very specific kinds of plays. Unlike other small energy producers, such as Kodiak Oil & Gas (NYSE: KOG  ) , which focus exclusively on unconventional plays like the Bakken, SandRidge kept a keen eye out for lower-risk, conventional plays. As such, it scooped up a sizable acreage position in the Mississippi Lime, an expansive oil and gas play spanning parts of Kansas and Oklahoma, at very appealing prices.

In an effort to combat its persistent funding gap, SandRidge then monetized a large portion of its Mississippian acreage through trust vehicles and joint ventures. The company's SandRidge Mississippian Trust I (NYSE: SDT  ) , SandRidge Mississippian Trust II (NYSE: SDR  ) , and two joint ventures with Atinum and Repsol brought in combined proceeds of more than $2 billion.

Over the years, SandRidge has amassed a phenomenal portfolio of oil and gas assets throughout the country, with key holdings in the Mississippi Lime and the Permian Basin. Yet its shares trade at a massive discount to the company's net asset value. Is management to blame?

Is management holding SandRidge back?
Back in July, I wrote an article suggesting that, if it played its cards right and succeeded with its three-year plan, SandRidge's stock could triple in three years. I believed then, as I believe now, that SandRidge possesses some extremely valuable assets. However, successful company performance and successful stock performance don't come from simply owning great assets. Those assets need to be developed over the years in an efficient manner that is consistent with the company's strategic goals.

That's where management comes in. They're the guys who are supposed to have extensive knowledge of the industry, which they're supposed to use to develop the company's asset base in an optimal, shareholder-friendly way. Unfortunately for SandRidge, it looks like management has failed in this respect.

Despite its portfolio of high-quality assets, significant shareholder value has been destroyed because management dropped the ball. Guess they didn't learn much from all those Oklahoma City Thunder games they've been attending.

As somebody who has been very optimistic about SandRidge, in the hopes that the market would see what I saw, recent allegations against management are truly disheartening. In addition to claims of reckless capital spending and poor corporate governance, executive compensation is worth zeroing in on.

Executive compensation
Over the past five years, payments from SandRidge to Ward have totaled roughly $150 million. In fact, adjusted for market capitalization, Ward has been the highest paid CEO among all publicly traded American energy companies, as well as one of the highest paid American CEOs period. Given SandRidge's less than $3 billion market capitalization, this appears all the more shocking.

Moreover, since the company went public, a substantial portion of SandRidge's earnings and cash flow has gone toward paying its executives. Given the stock's precipitous decline, its severe relative underperformance, and a 60% drop in book value per share over this period, shareholder outrage is understandable.

So how can SandRidge turn things around?

Calls for reform and final thoughts
In a recent letter addressed to SandRidge's board of directors, Dinakar Singh, CEO of TPG-Axon Capital Management, a hedge fund that owns a sizable stake in SandRidge, made three recommendations.

First, he recommended a reconfiguration of the board of directors. He suggested that credible, independent directors – to be selected after extensive negotiations with large shareholders – should replace certain current directors.

Second, the board then must bring in new management, because the current management team's credibility has been irreparably damaged. Singh suggested that a management shake-up is the only way to lower the company's cost of capital and generate confidence that the value of its assets will be realized over time.

Third, the board should consider strategic alternatives and bring on an adviser to provide expertise. Singh recommended that the board carefully contemplate the possibility of selling SandRidge to another energy company, especially one with a low cost of capital and the financial wherewithal to wring the value out of SandRidge's assets.

These are all excellent points. For the value of SandRidge's assets to be reflected in its share price and for the market to regain confidence in the company's management, a board and management shake-up is in order. As we have seen over the years, shareholder activism can be an important catalyst for such change.

Restoring the market's confidence in company management through a reconfiguration of the board and major adjustments in compensation schemes for upper management should be key priorities. Let's hope that TPG-Axon's comments, which were echoed by Mount Kellett Capital Management, another hedge fund that owns a sizable 4.5% stake in SandRidge, provide the basis for major and much-needed reform at SandRidge.

If you are looking to find out more about its strengths and weaknesses, you should view this brand new premium report detailing SandRidge's game plan and what to expect from the company going forward. To get started -- click here!

Read/Post Comments (0) | Recommend This Article (11)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2130809, ~/Articles/ArticleHandler.aspx, 10/21/2016 10:58:39 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,072.64 -89.71 -0.49%
S&P 500 2,136.22 -5.12 -0.24%
NASD 5,243.86 2.02 0.04%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

12/31/1969 7:00 PM
SD.DL $0.00 Down +0.00 +0.00%
SandRidge Energy CAPS Rating: ***
KOG.DL $0.00 Down +0.00 +0.00%
Kodiak Oil and Gas CAPS Rating: *****
SDT $1.51 Down -0.04 -2.58%
SandRidge Mississi… CAPS Rating: **
SWN $12.36 Down -0.30 -2.33%
Southwestern Energ… CAPS Rating: ***
UPLMQ $6.43 Down -0.23 -3.38%
Ultra Petroleum CAPS Rating: **