Tom Ward is doing his best to deflect the negative publicity directed his way from two ofSandRidge Energy's (NYSE: SD) largest shareholders, TPG-Axon and Mount Kellett Capital Management. Ward announced that SandRidge would go ahead and sell its Permian Basin assets for $2.6 billion to Sheridan Production Partners II.

Shareholder Activism

In a recent letter addressed to SandRidge's board of directors, Dinakar Singh, CEO of TPG-Axon Capital Management, makes three recommendations.

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

Second, the board must bring in new management, because the current management team's credibility has been irreparably damaged. Singh suggests 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 advisor to provide expertise. Singh recommends 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.

After Singh's letter, Mount Kellett Capital Management also published a letter echoing that of TPG-Axon. 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.

Management's Response

SandRidge's Ward responded to the letters by stating that his company would consider selling its Permian Basin assets. On Dec. 19, Ward followed through on his statement by selling Permian Basin properties consisting of approximately 24,500 barrels of oil equivalent per day of oil-heavy production. While this move will give SandRidge much needed capital to lower debt in addition to funding its Mississippian Lime production, TPG-Axon and Mount Kellett will likely continue to crusade for the overthrow of the current management team or even for an outright sale of the company.

Bottom Line

The $2.6 billion dollars will go a long way in closing SandRidge's 2013 capital expenditure funding gap, but the sale also deviates from the company's three-year plan. SandRidge had planned on using the cash flows from the Permian Basin to fund its Mississippian production. But now worry has arisen about the quality of the Mississippian acres — if the Mississippian does not contain as much oil as previously expected, SandRidge could find itself in trouble without the comfort of the predictable low carbonate play of the Permian Basin.

At the time of publication, Joel South owned no shares of the companies mentioned. The Motley Fool owns shares of Chesapeake Energy.