Give SandRidge a Chance Now That Ward Is out of Work

by Aaron Levitt | June 25, 2013 7:00 am

Ding-dong, the Ward is dead. Which old Ward? The Wicked Ward!

OK. So technically, Tom Ward isn’t actually dead. But long-suffering shareholders in SandRidge Energy (SD[1]) are rejoicing just the same. Since going public back in 2007, SandRidge has been on a straight shot downward — about 80% in total — and has been fraught with numerous issues pertaining to its CEO/founder.

Those issues put SD very much into the “don’t buy” camp. But after a bit of shareholder activism — resulting in Ward’s departure last week[2] — SandRidge is beginning to look like a compelling turnaround story for investors.

Mirroring Chesapeake

When former Chesapeake Energy (CHK[3]) CEO Aubrey McClendon needed help creating the firm, he turned to a veteran in the oil industry: Tom Ward. The two created one of the biggest natural gas-focused drillers in the nation. And as we’ve seen, Chesapeake became a cluster of crazy joint ventures, partnerships and potential shady dealings.

It seems Ward wrote the textbook that his student used.

After buying a significant interest and controlling stake in Riata Energy back in 2006, Ward became CEO and chairman, renamed the company SandRidge and spun off shares into an IPO. Which would be all fine and dandy, except performance has been beyond poor.

Aside from packing SandRidge with an enormous debt load, Ward has been living large, just like his pupil. Despite the stock’s abysmal performance, Ward himself has drawn on more than $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. The company also counts four intercontinental jet aircraft among its assets. Ward is allowed unlimited personal use of the fleet despite the fact that all its producer wells lie within a few hundred miles of each other.

The perks kept coming as Ward financed a stake in the NBA’s Oklahoma City Thunder — owned by his Chesapeake buddy McClendon — and used SandRidge money to buy courtside tickets and suites at the stadium.

While courtside seats, bonuses and other perks are bad enough when your stock is in the toilet, Ward also had some other dealings that crossed the “personal/public” business line. Like McClendon, Ward’s contract as CEO allowed his family to profit from personal energy deals that could potentially be conflicts of interest.

First, Ward’s son — through his company, WCT Resources — was granted the right to drill for oil and natural gas near SandRidge operations. Those drilling rights were granted at very beneficial rates.

Secondly — and perhaps more egregious — Ward’s various family trusts have been acquiring mineral/oil and gas rights hand over fist during the past few years. While that’s fine and dandy, the issue is that these various trusts leased those rights back SandRidge for a profit. During the past four years, SandRidge paid roughly $9.5 million to companies controlled by Ward and his family; the former SandRidge CEO then received royalties under a similar founder well participation program like his buddy, McClendon.

These actions, plus the firm’s poor performance, led to a round of heated shareholder activism with hedge fund TPG-Axon calling for Ward’s removal and changes to the overall board.

Last Friday, after a yearlong battle, Ward was sent packing.

Putting the Focus Back on Energy Production

SandRidge’s board found that Tom Ward’s actions were “proper” and granted him an insane severance package — $90 million worth of perks. Still, the company can now focus strictly on the business of energy production, so the time for SD’s turnaround could be at hand.

Despite the abysmal stock performance, SandRidge holds some pretty decent assets. During the past few years, the company has begun to transition from a strictly natural gas-focused company to one with broader energy ambitions — across both on- and offshore fields. SD has added assets in the Mississippi Lime and paid $1.275 billion for Dynamic Offshore Resources assets in the Gulf of Mexico.

All in all, these assets are growing, with the company’s Mississippi Lime production estimated to jump around 64% this year. That improving production across both conventional and unconventional plays has helped revenues leap over the last few months.

That in turn has worked toward cleaning up SandRidge’s disgusting balance sheet. Liquidity and cash flows at the firm are finally robust enough to fund its drilling program through 2014, and SandRidge has reduced its debt leverage to just 2.3x this year. It was a high 4.6x in early 2011. Additionally, by focusing on more oil-related assets, capex spending continues to drop and SD plans to slash its capital budget by $700 million year-over-year

Finally, Ward’s replacement — James Bennett — could be a bullish sign for the company.

Bennett’s background includes stints at variety of private equity and investment bank houses. That has prompted many analysts to believe that a major sale of SandRidge could finally be in the works. Estimates for a total break-up value for SD shares range anywhere from the $9 to $12 range. That’s much higher than the current going price of $4.80.

While SandRidge isn’t a slam-dunk investment just yet, the gears seem to moving in the right direction. For investors, a small speculative position in this potential rally play could be warranted.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

  1. SD:
  2. resulting in Ward’s departure last week:
  3. CHK:

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