Doubts return at SandRidge a year after CEO ousted by investors
In June 2013, activist investors got the board of SandRidge Energy Inc (SD.N) to fire its CEO Tom Ward, arguing that he had mismanaged the Oklahoma City company and destroyed billions in shareholder value.
The oil and gas producer's shares rose as much as 50 percent in the year following Ward's ousting on optimism about the impact of cost cutting, asset sales and higher initial production rates from some of its wells. But in the past 10 weeks a lot has gone wrong - and the stock has lost virtually all of those gains.
The energy company's oil and gas output has dropped below Wall Street expectations, casting doubt on its growth prospects, and its Chief Operating Officer David Lawler - who had been seen as key to some of the improvements it had made - departed for BP Plc's (BP.N) (BP.L) U.S. shale unit. At the same time, a restructuring proposal that would have tax benefits is being held up by the Internal Revenue Service.
The reversals at SandRidge show that activist investors' pressure for major changes at energy companies don't always work out. The number of such campaigns has tripled in recent years compared with the rate in the previous nine years. Among the success stories for shareholders was Elliott Management at Hess Corp (HES.N) and Chesapeake Energy Corp (CHK.N) has slashed spending under the watch of Carl Icahn. Both shares have climbed since the activists' interventions.
At SandRidge, large shareholders include a powerful triumvirate of investors -- New York-based hedge fund TPG Axon Capital, led by Dinakar Singh, has a 7 percent stake in SandRidge, Leon Cooperman's hedge fund Omega Advisors owns about 10 percent, and Prem Watsa's Canadian investment group Fairfax Financial Holdings owns about 7 percent.
But plans to turnaround the company's fortunes are currently being dashed on the rock formation known as Mississippi Lime, of which SandRidge has more than a million acres.
"They've got what many would consider to be second-tier rock," said Mark Hanson, a Chicago-based analyst who follows SandRidge for Morningstar. "If you are looking for someone to take these guys out, I'm not sure I could name anyone," he added in reference to any possible sale of the company.
The head of one Houston-based firm which specializes in selling oil and gas properties said that the Mississippi Lime has not been "proving out as well as hoped for some," as the rock is so far not producing as much oil and gas as many other basins. The top average initial production rate for a Mississippi Lime well is about 400 barrels oil equivalent per day (boed), while wells in the Eagle Ford shale formation in Texas produce more than 1,000 boed on that same basis, according to analysts at Bernstein Research.
According to data from oilfield services company Baker Hughes, the number of rigs working in the Mississippi Lime is down 5 percent so far this year - a possible sign of lackluster interest in the field.
TPG Axon declined comment on the reasons for the weakness in the stock and a representative for Fairfax did not return a call seeking comment. Omega said it was pleased with progress made at the company in the past year.
LOST MONEY ON GULF DEAL
Ward was blasted by investors when he purchased Gulf of Mexico offshore assets in 2012 for $1.2 billion cash, a move that TPG Axon criticized as "strategically incoherent" because SandRidge had not previously been an offshore operator.
The Gulf assets were sold in January for $750 million, setting the company up to focus more intently on growing onshore oil and gas production on 650,000 acres in northern Oklahoma and southern Kansas' Mississippi Lime formation using horizontal drilling and hydraulic fracturing.
While the company has succeeded in bringing down operating expenses and has drilled wells with increasingly higher initial production rates, output growth has been bumpy, something that has disappointed some investors and weighed on the stock.
While SandRidge forges ahead, other companies have scaled back or sold their Mississippi Lime acreage in a search for better returns in other fields like the Permian Basin in Texas. In March, Royal Dutch Shell Plc (RDSa.L) sold 600,000 acres in the Mississippi Lime to Ward's new firm, Tapstone Energy.
In the second quarter, SandRidge's oil and gas output fell 6 percent below Wall Street forecasts on weaker than-expected oil production because of operational glitches and problems with some wells in the Permian Basin. The company also said its 2014 oil and gas production will be less than expected.
At a conference on Sept. 3, SandRidge CEO James Bennett said the second-quarter issues, which included power disruptions to pumps needed to lift oil and gas out of the ground, were being addressed and would not impair long-term plans.
Omega points to operational and cost improvements made since CEO Bennett took over a year ago.
"We've been happy with their drilling results as the company has focused on the core of their acreage position in the (Mississippi Lime)," Omega said in an email.
SandRidge's average well cost in the Mississippi Lime have declined 11 percent to $2.85 million from $3.2 million and the company's selling, general and administrative costs have been slashed, Omega noted.
However, Lawler's departure is seen by analysts as another problem.
"It was a pretty big loss," said Neal Dingmann of Suntrust.
Lawler had helped SandRidge push ahead with some exploration initiatives, including drilling into different oily layers of the Mississippi Lime, said Dingmann.
A spokesman for SandRidge described Lawler as a "tremendous talent," but said the company's success in lower costs and increasing production rates is "driven entirely from a robust team effort." An "exhaustive" search for a replacement for Lawler is underway, the company said.
MIND THE VALUATION GAP
While its engineers try to figure out the most effective and profitable way to drill Mississippi Lime wells, the company has looked at shorter-term measure to boost its valuation.
On Thursday after the close of trading, it announced a $200 million stock buyback. The stock fell 1.2 percent on Friday amid concern the buyback will stretch its balance sheet.
SandRidge has also contemplated putting its $1 billion drilling wastewater business into a tax-advantaged master limited partnership (MLP), to lower its cost of capital and achieve a fuller valuation for the unit, but a request to see if it qualifies as tax-free is hung up by an Internal Revenue Service review of the sector.
At its analyst meeting in March, SandRidge executives estimated the company's net asset value at $9 to $15 per share. But currently SandRidge is trading around $5 per share.
TPG Axon has previously said SandRidge is worth $14 a share. The stock traded around $60 per share in 2008.
Cooperman said that so far he is pleased with Bennett's leadership and had advocated for a buyback.
"(It) seems pretty sensible to buy back stock that is very undervalued," Cooperman said in an email.