Plenty of unconventional resources? Check. Great long-term potential? Check. Failure to execute on that potential, coupled with dwindling stock performance? Check. A founder CEO who hasn’t done right by retail investor shareholders? Check.
Let me guess: You thought we were talking about natural gas king-pin Chesapeake Energy (NYSE:CHK), right?
Well, think again. Instead, we’re talking about another struggling Oklahoma-based energy producer: SandRidge Energy (NYSE:SD).
The story remains largely the same, though — even intertwined. This energy producer has seen its share price implode over the last few years — much like the larger Chesapeake — as it’s been fraught with high debt, while over-promising and under-delivering. And like its larger rival, issues seem to compound themselves.
For investors, the struggles at SandRidge could serve as another lesson in what to avoid when looking for an energy investment.
An IPO Flop
When CEO Aubrey McClendon needed help creating Chesapeake Energy, he turned a veteran in the oil industry: Tom Ward. The two created one of the biggest natural gas focused drillers in the nation and Ward later used his “winnings” from Chesapeake to buy a significant interest and controlling stake in Riata Energy back in 2006.
He then became the CEO and chairman of that firm, which he also renamed SandRidge. The year after — in November of 2007 — SandRidge went public at roughly $26 per share. Shares flirted with a record high of $60 at one point, but soon sunk — and sunk hard.
Now, shares have lost a whopping 80% since going public.
So what exactly happened?
To start, like many producers in the natural gas sector, SandRidge has struggled to boost returns in an era of depressed natural gas prices. When the company went public, natural gas prices were much higher , while the current environment has taken much of the wind out of sales. To that end, SandRidge — also like many other producers — has shifted production towards more shale oil and natural gas liquids (NGL) plays. The company is focusing on drilling for oil in a rock formation in northern Oklahoma and southern Kansas called the Mississippi Lime.
However, despite the Mississippi Lime’s promise, SandRidge has recently made steep cuts to its estimates for how much oil it believes it can recover from key wells in the formation. Needless to say, that news disappointed investors.
Plus, the firm has a high debt load. Since going public in 2007, SandRidge Energy’s total debt has increased quite a bit — by a whopping 260% over the last five years. That put the total at $2.82 billion at the 2011. Total liabilities — which includes debt — come in at an eye-popping $4.6 billion. In fact, analysts now question if the firm will have enough cash to continue on. It seems that Ward has taken a page right out of his buddy McClendon’s book — but not in a good way.
Along the same lines, Ward is living large just like his buddy. Despite the stock’s abysmal performance, Ward himself has drawn on $150 million in payments from SandRidge since the IPO. Likewise, his inner circle of friends at the firm have also benefited big-time. SandRidge’s CFO has seen his pay quadruple to $6.8 million, while the company now counts four intercontinental jet aircraft among its assets. Ward is allowed unlimited personal use of the fleet — despite the fact that all of producers wells all lie within a few hundred miles of each other.
Oh, and Ward even helped his Chesapeake buddy McClendon even more as of late: by financing a stake in Oklahoma City Thunder basketball team and using SandRidge money to buys courtside tickets and suites at the stadium.
All of this — and the stock’s poor performance, of course — has finally gotten to shareholders. That ire has resulted in lawsuits, pending proxy battles and highly volatile share-price action.
The latest blow: Two retail shareholders filed a securities fraud lawsuit against the company that accuses its top executives — Ward, President Matthew Grubb and CFO James D. Bennett — of overstating SandRidge’s transformation to a high-margin oil producer. SandRidge’s stock dipped 9% after it disclosed that the Lime wasn’t meeting expectations.
Moves like this are just one of the reasons why several institutional investors are calling for the board’s heads and a sale of the company. Hedge fund TPG-Axon — which controls 6.2% of SD — has been the loudest proponent of change, saying Ward’s and management’s strategy has been “incoherent, unpredictable and volatile.”
As a result, the best move for investors is simple: Walk away and find a better energy investment.
Unlike, Chesapeake — who had tons of assets to sell — SandRidge is much smaller. While that small size could ultimately lead to a buy-out, Ward’s ownership and the company’s new poison-pill agreement won’t make it easy. Likewise, if the firm’s prize Mississippi Lime assets aren’t as good as they say, there’s simply not much to like.
Ultimately, I think SandRidge will remain a trading stock — going up or down based on whatever the day’s news brings. If that’s your bag, then go for it. However, as a long-term investment, I’d stay away.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.