SandRidge Energy (SD) is an independent oil and natural gas company, engaged in development and production activities in the Mid-Continent area of Oklahoma and Kansas. It also owns and operates other interests in the Mid-Continent, Cotton Valley Trend in East Texas, Gulf Coast and Gulf of Mexico.
- SandRidge announced, in mid-March, that it reached a settlement with TPG-Axon Capital. TPG has been running an activist campaign for change at SandRidge, getting more aggressive near the end of 2012. At the end of 2012 the hedge fund was the largest hedge fund owner in SandRidge with 33 million shares, which is 10.8% of TPG's public equity portfolio (check out all of TPG's picks).
- The TPG-SandRidge settlement calls for SandRidge to add four TPG nominees to its Board of Directors with the potential for a fifth nominee over the summer. The Board will also be reviewing the employment status of current CEO, Tom Ward, which will require a decision by June 30th. Regardless, as of June 30, 2013, TPG will have a majority of the Board backing them. In return, it will drop its consent solicitation and withdraw its proposal to replace the Board.
- What does the settlement mean? TPG's nominees will push for cost cutting (especially in general and administrative), and de-levering of the company through potential divestitures of non-core assets. These moves will be aggressive and swift in nature.
- As a side note related to the pending internal investigation of Tom Ward, if he is fired without cause, he would receive around $90 million in severance.
- Worth noting is that TPG has big-name hedge fund managers alongside him. Fairfax Financial owned 32.4 million shares at the end of 2012 (check out Fairfax's portfolio). Other notable hedge fund manager, billionaire Leon Cooperman of Omega Advisors, bought up 24 million shares during the fourth quarter of 2012, but has not voiced support for either TPG or SandRidge management (see Cooperman's high upside picks).
- Mississippian uncertainty: SandRidge has yet to become cash flow positive in its Mississippi play and its recent divestitures indicate it will become a pure play Mississippian company. This is fine, except this play has yet to prove worthy of supporting major investment and the recent transaction by Chesapeake (CHK) in the same play has left the market with a bad taste in their mouth for the Mississippi oil & gas plays. Not to mention, the company also revised the decline curves and estimated ultimate recovery (EUR) downward for its wells in the Mississippian. The company plans to invest more in infrastructure in order to get its lease operating expenses down, but this play has a long way to go before it becomes a good investment. Management is also running its Mississippian economics on $100 oil and $4.25 natural gas, despite NYMEX strip pricing (out 5 years) at around $90 to $95 oil and $3.50 to $4.00 natural gas.
- CapEx and liquidity: After de-levering a little with the recent Permian asset sale, SandRidge has approximately $2 billion to $2.5 billion in liquidity, but projects to spend roughly that same amount in the Mississippian over the next couple of years in order to derisk its more than 800,000 net acres in Kansas/Oklahoma. Until the Mississippian play turns the corner and starts to produce cash flow, it will either have to spend outside of the company's operating cash flow beyond the next two years or halt all CapEx and production growth.
- What are the company's options? SandRidge's managers don't have many options in which direction they can take this company and with TPG joining the mix, things are definitely going to get interesting. The cost cutting, reducing debt, increasing liquidity, focusing on a core asset, and figuring out who the new CEO will be are all things that need to be done over the next twelve months. You could argue that it does not have a core asset worth investing in, but SandRidge definitely believes in the Mississippian play and the direction that can take the company. There is plenty to be said about what will happen there and TPG will definitely have a say in what happens.
There are two ways to look at this, which way you go depends on your appetite for risk: Value trap with poor assets and management OR light at the end of the tunnel with TPG leading the way to shareholder value creation.
We are leaning towards a value trap. There is market skepticism about the Mississippian due to their poorer than expected results (and changing EUR's), and the lackluster deal/JV recently struck by Chesapeake that puts pressure on the area.
That isn't to say that SandRidge can't turn the corner with its assets in the next year or two, lower its overhead costs and gain some liquidity through divesting non-core assets. The next two or three months will have a lot to say about what is next for SandRidge. I would accumulate a small position, and possibly consider some downside protection with covered calls (which is an income oriented strategy) and wait for good news or signs of change before growing the position further.