After several months and who knows how many dollars spent by both sides of the fight, Sandridge Energy's Board of Directors and Activist Hedge Fund TPG has reached an agreement.
That agreement does not look good for the future of Sandridge (NYSE:SD) founder and current CEO Tom Ward. Here are the key parts of the agreement announced Wednesday:
· Four of the TPG-Axon Group's nominees Stephen C. Beasley, Edward W. Moneypenny, Alan J. Weber and Dan A. Westbrook will be added to the Board of Directors effective immediately.
· The Board of Directors will complete a review by an independent firm of the related-party transactions that have been outlined by TPG-Axon, and expects the results of that review to be completed no later than June 15, 2013. Mr. Ward will remain Chairman and CEO while the Board completes its review.
· The Board of Directors will decide by June 30, 2013, whether or not to terminate Mr. Ward's employment. If the Board does not terminate Mr. Ward by June 30, 2013, three current directors will resign, and one additional TPG-Axon nominee will be elected to the Board, resulting in a majority of the Board being TPG-Axon nominees.
· In the event that Mr. Ward is no longer CEO, James Bennett will be appointed interim CEO, and the Board will conduct a search for a successor CEO. Mr. Bennett has been appointed President andJeffrey Serota has been appointed lead independent director. In the event Mr. Ward is no longer Chairman of the Board, Mr. Serota will be appointed interim Chairman, for a term of six months.
This agreement means there are two possible future outcomes for CEO Ward.
Possible Scenario #1 - After a few more months of an investigation into his dealings the Board of Directors decides that Ward should be fired.
Possible Scenario #2 - After a few more months of an investigation into his dealings the Board of Directors decides that Ward should stay. However if that is the case, three members of the current Board of Directors will resign and one more representative of TPG will join the Board thereby giving the hedge fund control.
Either way, Ward has lost control of Sandridge. In the best case for him, Ward will stay and have to do exactly as TPG desires since they will control the Board of Directors.
TPG of course being the activist investor that has been publicly questioning Ward's ethics for months and demanding that he be fired.
That doesn't sound like a great working environment for Mr. Ward. It also sounds like a lousy best case scenario.
TPG's true desire of course is to sell Sandridge Energy to the highest bidder. And now that TPG is either assured of having control of the Board, or almost having control of the Board if Ward is fired then I think that sale is a likely outcome.
Even without control of the Board of Directors TPG won't have Ward which is the main impediment to a sale in the way.
A second activist investor, Mount Kellett, calculates the value per SandRidge share as being over $20 using the following assumptions:
In the Company's Mississippian play, we believe the Company's original 750,000 acres to be worth approximately $6,800/acre on a developed basis. Further, we believe the 1,000,000 excess acres in the extension of the Mississippian play into Kansas to be worth approximately $2,500/acre based on comparable transactions. In total, the Company's Mississippian assets could represent an approximate $8 billion asset.
The Company's Permian assets, pre-royalty trust interests, are worth up to $4 billion, based on Apache's purchase of BP's Permian assets in 2010, at approximately $22/boe when oil was at $75-$80 per barrel. The Company's own reported PV-10 of its Permian assets is approximately $4 billion. Additionally, we believe that if the Company were to continue to monetize portions of its Permian assets through a royalty trust structure, such as the SandRidge Permian Trust ('PER') or a Master Limited Partnership ('MLP') structure, the Company would continue to realize premium valuations for these assets.
We estimate the Company's other production, undeveloped proved reserves, undeveloped acreage and Gulf of Mexico assets are worth $3.6 billion. In addition, the Company has other assets that have not been properly highlighted.
-- Mississippian Infrastructure: The Company has invested huge amounts of capital to develop the water disposal and electrical infrastructure necessary for future Mississippian development. This front loading of infrastructure has increased the value of the Company's Mississippian assets, providing the Company with a competitive advantage on its acreage and should enable the Company to accelerate development over the coming years. We commend the Company's operations team for successfully managing such a large and complex project. We estimate that the Company has spent approximately $500 million in mid-stream infrastructure, gathering system and salt water disposal wells in this area. We believe these assets could ultimately have tremendous value to an MLP buyer who would be willing to pay a multiple of in-place cost, especially with the prospect of attracting third party volumes as the play continues to develop.
-- Mississippian Drilling Carry: By our calculations, at year-end the Company will have approximately $650 million of drilling carry remaining in the Mississippian.
-- Pinon Field: The Company's Pinon field in the West Texas Overthrust, while of little value today, should have tremendous value in a higher natural gas environment or in the hands of the right buyer.
With shares of Sandridge under $6 per share and a fairly intelligent party suggesting that $20 plus is a fair value, buying now in advance of TPG forcing a sale should be rewarding. Even if Mount Kellett has overvalued the company by 100% that would still suggest that $10 per share is a fair price. That is a 70% premium from the current share price. And without Ward in control of Sandridge the actions of the company are likely going to be much more controlled and the riskiness of the investment reduced.
It is remarkable how the end of the game is going to be basically the same for Ward and his former Chesapeake Energy (NYSE:CHK) business partner Aubrey McClendon who has already officially set a retirement date.