As a longtime analyst, I must admit to finding it pleasurable to undertake a comparison of strong companies, as I was able to do a week ago with Apache Corp. (NASDAQ:APA) and Anadarko Petroleum (NYSE:APC).
The task is somewhat more sobering, however, when the comparison involves companies that are similarly struggling. At least for now, I'd categorize Oklahoma City neighbors Chesapeake Energy (OTC:CHKA.Q) and SandRidge Energy (NYSE: SD) that way. Further, it becomes even more difficult to avoid cynicism when, as is the case with the latter two companies, they're seemingly joined at the hip in an amazing array of respects. As you may know, SandRidge CEO Tom Ward co-founded Chesapeake in 1989, with the latter's frequently embattled CEO, Aubrey McClendon.
Splitting the sheets
In 2006, Ward left Chesapeake and joined then privately-held SandRidge in its top executive post. The company's initial public offering occurred the following year. Interestingly, It appears that McClendon and Ward jointly managed a $200 million hedge fund between 2004 and 2008, both when they were together at Chesapeake, and later when they were manning separate helms. That's not necessarily illegal, but it does raise conflict-of-interest questions.
McClendon has come under fire for a now-cancelled program at Chesapeake that permitted him to personally invest on the side in his company's programs. He used the resulting personal stakes as collateral for billion-dollar loans from a firm that was simultaneously arranging financing for Chesapeake. Similarly, In October 2008 -- after SandRidge's highest-ever share price near $65 had been reached during the prior June -- the company paid $67.3 million to Ward for interests in wells he had acquired since joining the company.
For the sake of perspective SandRidge's share price decline since its all-time high represents a more than 90% tumble through Monday's market close. By contrast, EOG Resources (NYSE:EOG), one of my favorite independent producers, closed Monday within 10% of its price on that same June 2008 date.
Punting the Permian
The Chesapeake-SandRidge similarities continue. Ward's company's two most noteworthy onshore U.S. plays include the Permian Basin, which covers portions of southwest Texas and southeastern New Mexico. SandRidge entered the newly revitalized play in 2009 through an acquisition from Forest Oil (NYSE: FST). It has since drilled hundreds of wells there each year. It's other area of concentration, the Mississippian of Oklahoma and Kansas, generally involves shallower and less costly operations than many of the nation's more technically demanding shale operations.
As you may know, Chesapeake also has been involved in the Permian, along with most of the other significant U.S. plays, except for the Bakken formation of North Dakota. Recently, however, McClendon et al. unloaded the company's Permian assets in an effort to slim down Chesapeake's portly balance sheet. Now, you guessed it -- SandRidge has stunned its shareholders by putting its Permian assets on the block. It's plans: to trim its own overly-leveraged balance sheet and generate funding for its Mississippian operations.
That's a curious decision for SandRidge, however. On his post-release call Friday, Matthew Grubb, COO of the company, which, like Chesapeake, purports to be attempting to ratchet up its liquids production vis-a-vis gas output, said:
As for the Mississippian, while the gas performance has been on target, we are seeing a steeper oil decline than we previously anticipated and have made revisions to our model accordingly for 2013.
So, let me get this straight. The objective is to unload solid Permian assets in favor of those in the Mississippian, where the oil decline curves have surprisingly steepened?
Think the uncanny similarities between the two Okie companies end there? Think again. Earlier this year, McClendon was forced by disgruntled outside investors, including Carl Icahn, to surrender his chairman's seat. The company's board was also reconstituted, and involved the ouster of five of its members in favor of candidates selected by Icahn and Southeastern Asset Management, a major shareholder.
Surprise, surprise. Last week, SandRidge received a missive from TPG-Axon, a hedge fund that holds about 4.5% of the company's shares. The less-than-fawning communiqué called for Ward to step down, labeling his strategy for the company "incoherent, unpredictable, and volatile." The fund is headed by Dinakar Singh, the former co-head of a Goldman Sachs trading desk. Singh is also demanding a shakeup of the SandRidge board.
The Foolish bottom line
The matches between the two companies are uncanny, aren't they? At this juncture, we're seemingly best advised to simply watch the two companies from the sidelines, while keeping our wallets stowed in our pockets regarding share purchases. Let's just see if the companies -- and their respective CEOs -- are able to extricate themselves from the mud in which they've become mired.