Sandridge Or Chesapeake, Is Either Management Team Worth Betting On?

| About: Chesapeake Energy (CHK)

High debt loads and low natural gas prices aren't the only things that Ward and McClendon have been facing at their respective companies. Both Sandridge Energy (NYSE:SD) and Chesapeake Energy (NYSE:CHK) are being taken to task by unhappy and activist shareholders.

In May of this year, large Chesapeake shareholder Longleaf Partners because of questionable corporate governance issues forced McClendon to relinquish his position as chairman of the board of directors.

Now two large shareholders in Sandridge Energy are calling for Ward's removal from the company he founded because of "critical failures of management and board oversight."

Management Teams Worth Betting On?

As an outside investor, there are plenty of reasons to want to avoid trusting McClendon and Ward with your hard earned investment capital.

Chesapeake has been a poster boy for being tone deaf when it comes to investor interests. Here is my short list of shareholder grievances with Chesapeake:

1. In 2008 with the world in financial chaos and heading into a very scary recession (and as far as we knew then, possibly depression) Chesapeake paid McClendon a bonus of $75 million. At a time when the capital markets were absolutely frozen and oil and gas prices plummeting, paying out this kind of cash was clearly not in the best interests of Chesapeake shareholders.

2. Also in 2008 with the world in financial chaos, Chesapeake Energy bought a collection of antique maps from McClendon for $12 million. I don't actually work on a drilling rig, but I'm almost certain that an energy company does not need antique maps to operate.

3. The above two items are ridiculous enough on their own, but are made even worse when you consider that they followed immediately after McClendon who was receiving the cash losing hundreds of millions of dollars because of margin calls triggered by the fall in CHK's stock price. It is hard not to conclude that the payments were an effort to improve the CEO's financial position.

4. In April it was disclosed that McClendon has roughly $1 billion in personal debt that is secured by natural gas properties that he shares a small interest in with Chesapeake Energy through a Founders Well Participation Program. While I think the entire Founders Well plan is a ridiculous idea it was at least always been disclosed to shareholders. The billion dollars of personal debt was never disclosed.

5. Reuters revealed that McClendon was involved with a hedge fund that traded in the very commodities that Chesapeake produces. How can it be anything but a conflict of interest for the CEO of one of the largest producers of natural gas to also separately and not on behalf of shareholders be involved with a hedge fund trading natural gas?

Sandridge hasn't been a heck of a lot better when it comes to protecting shareholders. Activist hedge fund TPG-Axon describes the concerns investors have which TPG summarizes as:

1) Management strategy has been incoherent, unpredictable, and volatile, amplifying uncertainty regarding the future course of the company

2) Perceived reckless spending has resulted in repeated 'financial emergencies', and caused massive dilution, soaring cost of capital, and unnecessary risks for shareholders.

3) Corporate governance has been appalling, which has drained tremendous value from shareholders and completely mis-aligned management and shareholder interests.

It is amazing that both of these men are facing at the same time the exact same issues at two completely different companies three decades after they started business together.

The Best of Both Worlds?

As an investor, if you have doubts whether you can trust management to be a good steward of your capital, there is no reason to invest. Up until this year, there was a definite case to be made about avoiding both Sandridge and Chesapeake on those grounds. Now however, the pressure applied by outside investors has put protecting shareholder interests first and foremost.

The Chesapeake Board of Directors has been reconstituted with members now laser focused on reigning in McClendon. And McClendon is drinking the shareholder first Kool-Aid as well. He has to or he will be given the boot from the company he built.

Ward's life is about to change at Sandridge as well. Either he is going to accept a board makeover like what Chesapeake has gone through or he is going to be gone.

And I think this likely provides investors of Sandridge and Chesapeake with the best of both worlds. Both Chesapeake and Sandridge are going to move into value realization mode and out of the free spending, overleveraged and growth modes of Ward and McClendon.

That free spending, aggressive, heavy debt mode that Ward and McClendon employed was risky but has set both Sandridge and Chesapeake up with some extremely valuable assets. If these companies can now prove to the market that the Ward/McClendon risk factor is being reigned in I think the market is going to price those assets more appropriately which should see the share price of each company improve in the coming years.

Now is likely the least risky time there has ever been to bet on Chesapeake and Sandridge.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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