TPG-Axon Commences Solicitation to Amend SandRidge Energy’s Bylaws and Replace the Company’s Board of Directors
TPG-Axon, the beneficial owner of 6.7% of the outstanding shares of
SandRidge Energy, Inc. (NYSE: SD) (the “Company”), today began mailing
consent solicitation materials to SandRidge stockholders, including a
letter urging stockholders to support TPG-Axon in its consent
solicitation.
The letter outlines why TPG-Axon believes sweeping changes need to take
place at the Company to maximize shareholder value. TPG-Axon urges
SandRidge stockholders to vote the GREEN consent card in favor of
its proposals to amend the Company’s bylaws and replace SandRidge’s
entire Board of Directors with its slate of highly qualified director
nominees.
TPG-Axon’s proxy solicitor, MacKenzie Partners, has mailed these consent
solicitation materials to certain SandRidge stockholders who were
stockholders of record as of December 13, 2012. TPG-Axon requests
stockholders return their signed and dated GREEN consent cards by
February 28, 2013, to ensure that their consent cards are received by
SandRidge prior to March 15, 2013, the deadline for submitting consents.
TPG-Axon also requests that stockholders refrain from returning the
white consent card issued by SandRidge.
For information on TPG-Axon’s proposals and on the process for voting
shares in favor of those proposals, go to www.shareholdersforsandridge.com.
A full copy of TPG-Axon’s letter to SandRidge stockholders can be found
below:
Dear Fellow SandRidge Energy Stockholders:
We are among the largest stockholders of SandRidge, with ownership of
6.7% of the common stock. We believe SandRidge shares are significantly
undervalued, and significant appreciation is realistic in the medium
term under the right circumstances. However, we believe change is
necessary to achieve this value. The current depressed level of the
stock is not an accident – it reflects the destruction of value under
current management, and the failure of the current directors to prevent
leakage of value from stockholders. Fortunately, we believe the company
still has significant asset value. However, we believe it will be
difficult to realize that value if the company’s strategy shifts
repeatedly and abruptly, overhead spending drains significant value from
shareholders, and management incentives and behavior repeatedly conflict
with shareholder interests. It is time for change – the company must
dramatically streamline, simplify and focus in order to build value for
shareholders. However, that change must begin at the top - please join
us in replacing the current directors with directors who will serve
stockholder interests.
The enclosed consent statement and GREEN
consent card are being furnished to you by TPG-Axon and our director
nominees in connection with our solicitation of consents to amend
SandRidge Energy’s bylaws to, among other things, de-stagger the Board
of Directors and permit directors to be removed with or without cause,
remove the current members of the Board of Directors and replace them
with our highly qualified director nominees who are committed to act in
the best interests of the company and its stockholders. Please consult
the enclosed consent statement and GREEN
consent card for important information on how to vote your shares in
favor of our proposals and director slate.
SANDRIDGE’S FUTURE IS IN OUR HANDS, IT’S TIME FOR CHANGE
- VOTE THE GREEN CONSENT CARD TODAY -
Stockholder value has been destroyed to a remarkable degree under
current leadership:
-
SandRidge stock has declined almost 80%
from its IPO in 2007
-
It is the single worst performing energy stock
in the Russell 1000 Index over that period
-
SandRidge stock performance is in the bottom
1% of all Russell 1000 stocks since the IPO
-
This underperformance is not just a function of 2008; SandRidge stock
has significantly underperformed its peer
group average on a 1-Year AND 3-Year AND 5-Year basis
-
SandRidge has diluted shareholders by 70%
by issuing equity 5 times in 5 years - vastly more than any peer
-
SandRidge now has the single worst credit
rating of any of its peers
-
SandRidge now has the highest cost of debt
of any of its peers
-
Book Value has declined a staggering 77 % since the IPO, and to
a degree greater than any of its peers
-
Net Asset Value (as estimated by many research analysts) has declined
dramatically as well since the IPO, and yet even after the decline,
the stock continues to trade at a meaningful discount to NAV.
What has caused this stunning destruction in value?
-
Poor strategic choices, and repeated shifts
in strategy: Mr. Ward’s decision to focus on high cost
natural gas production in 2007, and to enter into extensive long-term
Carbon Dioxide commitments with Occidental Petroleum in 2008 proved to
be extremely damaging. In subsequent years, repeated shifts in
strategy and focus have created additional concerns. A small company
cannot do everything well; it must focus. In just five years, the
company has oscillated between high-cost natural gas and CO2, and oil;
between vertical and horizontal drilling; between onshore and
offshore; between unproven areas to proven and even mature areas. We
believe the constant oscillation in strategy creates inefficiency in
cost, and confusion for investors.
-
Excessive spending and lack of financial
discipline: Spending dramatically in excess of cashflow has
created significant chronic strain on the balance sheet, required
repeated equity and debt financings, left the company vulnerable to
market and economic shifts, and driven financing costs to extremely
high levels. As a result, shareholder value has been drained by high
financing costs, massive dilution from equity issuance, and the sale
of good assets to fund shortfalls in cashflow.
-
Leakage of value from extraordinary overhead
spending: SandRidge spends extraordinary amounts on
corporate overhead, particularly for a company of its size. Overhead
spending is the single highest of any peer company, and as much as
triple that (as a % of market capitalization) of some peers. In a
competitive business environment, no company can thrive with such
spending – we believe it is irrational, and wasteful. Overall the
combination of high overhead with high financing costs poses a
tremendous ongoing impediment to profit creation. The recent
announcement of the sale of Permian assets is a stark illustration.
Management has highlighted its success at selling the Permian assets
for a significant premium to their purchase price. Yet, the stock has
continued to underperform in recent years, and the company has failed
to show significant profits (net income available to stockholders).
Why? One reason is that any gains in one investment or transaction
have been heavily offset by significant ongoing costs, or losses in
other transactions. The net result – negligible profit over the past
year, and a massive loss over the past five years.
-
Extraordinary compensation and related-party
transactions: The company has enriched management, even as
shareholders have suffered. We find compensation levels to be
unconscionable, given SandRidge’s size and performance; and they have
also drawn criticism from ISS and Glass-Lewis. Various related party
transactions appear to have been in clear conflict with, and at the
direct expense of, stockholder interests, and have resulted in
significant payments by the company to Mr. Ward. In addition to these
direct transactions, entities controlled by Mr. Ward’s family also act
in a manner that we believe is competitive with SandRidge. A primary
activity for SandRidge is the acquisition and development of mineral
rights in the Mississippian Lime, in parts of Oklahoma and Kansas. In
this regard, they compete with other oil & gas companies with interest
in the Mississippian, including Shell Energy, Apache Energy, Devon
Energy, Range Resources, etc. As we have examined records of mineral
rights transfers in many counties, we have been shocked to discover
that entities controlled by Mr. Ward’s family also appear as frequent
acquirers and sellers of mineral rights in the Mississippian. We do
not believe it is appropriate for entities established by Mr. Ward,
and controlled by his family, to be actively participating in the very
same business in which SandRidge is in, and often in the very same
places.
Company actions have had the effect of enriching Tom Ward but not
stockholders. Can you rely upon current directors to supervise
management and rebuild shareholder value? Consider the following
actions taken under their watch:
-
Tom Ward has reduced his % ownership by 75% since 2008, and has sold
shares in each of the past 5 years, selling a total of
approximately 20.6 million shares over such time period…
-
…even as his compensation increased 70%, to $25 million
(between 2007 and 2011) - a level vastly higher than peers
-
Overhead spending has increased, to staggering
levels – over 6% of market capitalization per year – and higher by
market capitalization than any of its peers. What is driving the
extraordinary levels of overhead spending? Extraordinarily high levels
of, and growth in, compensation for senior management and directors
since the IPO, a fleet of private jets, personal
accounting services for Tom Ward, television advertising, extraordinary
levels of real estate spending, payments to the professional
basketball team owned by Mr. Ward, and so on…
-
Related-party transactions that appear to be in clear conflict with
shareholder interest. The two worst examples are…
-
Granting Mr. Ward personal participation in the company’s natural
gas wells while commodity prices were rising, only to immediately
repurchase them for $67.3 million in cash, when commodity prices,
and the company’s financial condition, began to plunge in October
2008. Just months later, the company publicly announced a shift
towards oil assets. Today, the wells purchased from Mr. Ward are
essentially worthless. Overall, in our view the well
participation plan, and the subsequent repurchase were an
unconscionable indirect transfer of wealth from stockholders to
Mr. Ward.
-
Allowing entities created by trusts established by Mr. Ward,
and controlled by his son, to engage in the acquisition and sale
of mineral rights in the Mississippian. This practice appears
to have been repeated, and ongoing, and we believe poses an outrageous
conflict of interest with shareholders. In numerous areas of
Oklahoma and Kansas, family-controlled entities such as WCT
Resources or 192 Investments have appeared repeatedly as buyers of
mineral rights, often alongside, or even sometimes in advance of,
SandRidge purchases in the same areas. These entities have
actively acquired mineral rights in areas in which SandRidge had
an active or subsequent interest, and then either retained them,
sold them to other energy companies, or even flipped them to
SandRidge. The company states that WCT Resources is independently
controlled by Trent Ward (Tom Ward’s son), and that Tom Ward has
no current economic interest in WCT. We would note that WCT
Resources was established by trusts created by Mr. Ward for the
benefit of his children, and until 2011 shared an address with
SandRidge Energy. In several instances, TLW Land & Cattle (an
entity directly affiliated with Tom Ward), acquired mineral
rights, then flipped them to WCT Resources, which then flipped
them to SandRidge.
SandRidge Energy has enriched management, but shareholders have
suffered. What should be done to restore value for shareholders?
-
Restructure the Board of Directors, and replace the CEO: The
current board has presided over remarkable destruction of value, and
transfer of wealth from the company to Mr. Ward. Current board members
have little experience as directors of major companies and several
have extensive personal and business ties to Mr. Ward. They must be
replaced with directors with proven records of strong corporate
governance, and true independence from the company. Without dramatic
changes at the top, we do not believe the company can restore the
confidence of capital markets (necessary to reduce cost of capital) or
seriously address profligacy in expenses.
-
Drastically reduce overhead and waste: The company should
dramatically reduce the extravagance and waste that has led to
extraordinary levels of overhead for the company. We believe it is
necessary to reduce overhead significantly (perhaps by as much as
75%). Unless this is done, the ‘tax’ on shareholders will simply be
too great over time, and value will continue to be destroyed.
Compensation for remaining employees should be reduced to sensible
levels. Extraneous assets (planes, buildings, etc.) should be sold.
Extraneous expenses should be terminated (personal services payments,
advertising, luxury suites, etc.). Overall, the company should seek to
emerge as one of the leanest and most efficient companies in the
industry, in keeping with the focused and concentrated nature of its
assets.
-
Sell extraneous assets: The Company should both unlock value,
and improve balance sheet and funding needs, by further selling
non-core assets. The first priority should be to sell the offshore
assets. We believe the Dynamic Offshore assets were a mistake to have
acquired, and make little sense for the company to keep. Sadly, while
we do not believe the company can recover what it paid for the assets,
it is best to recover what is possible from these assets, and move on.
-
Reduce future funding needs: The primary remaining assets would
be the Mississippian producing wells, vast amounts (1.8 million acres)
of Mississippian acreage, and the significant amount of infrastructure
(particularly water disposal) that the company has built in the
Mississippian. Overall, we believe the Mississippian acreage the
company controls is simply too vast for the company to develop by
itself, even factoring in the joint venture deals the company has
already struck (Repsol and Atinum). We believe the company should seek
to monetize (either through a sale or additional joint ventures) a
significant portion (1/2 or more) of the undeveloped Mississippian
acreage, and the company’s infrastructure investment, so that the
remaining interest will be of a size that the company can develop
economically and efficiently using its own balance sheet and cashflow.
-
Consider a full sale of the company: While we do not believe a
sale of the company is required to create significant value for
shareholders, we believe it is an option that the board should
carefully consider. Ultimately, the value of the Mississippian assets
is extraordinary, but so is the investment and time required to
develop those assets. As a result, there is a compelling argument that
the assets will be worth the most to a company with the cheapest cost
of capital, and the most need for reserve replacement in coming years.
It may be that a joint venture could address this issue, but we
believe the board should consider the full range of options for the
company. Ultimately, it is likely that value will be maximized if in
fact there is a buyer who wants (and can extract synergies from) all
of the SandRidge assets. Fortunately, there are a number of companies
that have assets and operations adjacent to all of SandRidge’s assets
– Offshore, the Permian, and the Mississippian – and therefore might
be willing to acquire all of the assets. This would simplify the
process, minimize transaction costs and ‘leakage’ of value, and
maximize overall value. In addition, most buyers of the overall
company would be able to eliminate almost all overhead expenses, and
achieve operational cost savings as well. Therefore, value achieved in
a full sale could be well in excess of stand-alone values.
|
|
|
|
|
What has the company response been to our proposals? They urge
you to support existing directors, and make the following
arguments:
|
-
In its consent revocation statement, the company highlights the
increase in value of the Permian assets and the Mississippian
assets as an example of value creation by management. If so, a
reasonable person might ask why the stock has continued to
underperform (its peer group average and various energy stock
indices) in recent years? One reason is that this purported
profit realization and value creation has been heavily offset by
financing costs and overhead spending, which has totaled $2.3
billion (an amount equal to over 2/3 of the entire current
market capitalization of the company) over the past five years.
The company cites positive data points, yet neglects to mention
the heavy, and self-imposed, cost burdens that have persisted,
or the significant losses from other activities. Ultimately, the
facts are clear. Since the IPO in 2007 (and through the most
recent reported quarterly earnings), net income available to
stockholders has been a massive loss of $2.6 billion. Despite
management claims, recent activities have not resulted in
significant profit for stockholders, net of costs and losses.
For example, actual profit (net income available to
stockholders) has been just $4 million over the last 12 months.
Even if one excludes the massive losses incurred in late 2008
and early 2009, aggregate profit since then has still been
negative – a loss of $31 million.
-
In addition, management argues that the company is ‘booby
trapped’ in two ways: (1) massive ‘golden parachutes’ will
accrue to existing management in the event of a change of
control and (2) the company is obligated to offer to repurchased
all senior notes outstanding under its indenture in the event of
a change of control. We believe this argument is
reprehensible – after all the damage done to stockholders, it is
astonishing that a primary argument in their defense would be
that they will inflict even more damage upon us in leaving.
We would further note that the company could and should explore
if grounds exist to terminate Mr. Ward for cause, in which case
he would not be entitled to any payments. Sadly, given the
outrageous levels of compensation still being paid to Mr. Ward
and other senior management, the golden parachutes may well be
the best investment the company has made. Furthermore, the
current board could choose to approve the election of our
nominees as directors of the company, if they determined in good
faith that the election of one or more of our nominees would not
be materially adverse to the interests of the company or its
stockholders, which would not trigger the change of control
repurchase obligation in the company’s indenture. At this time,
the current board has stated that it has not made a
determination with respect to the approval of any of our
nominees. Again, we believe it is reprehensible that current
leadership is threatening a ‘scorched earth’ strategy to protect
themselves. Nevertheless, given that the company’s debt is
trading above the call price, we believe refinancing outstanding
debt would not be difficult.
-
Management also argues that we (TPG-Axon) are a short-term
opportunistic investor. In fact, we make focused, long-term
investments in companies after exhaustive fundamental analysis.
We often make investments that we own for many years, including
private investments in companies and assets. We would also
note that we have steadily increased our investment in SandRidge
every quarter of the past year; in contrast, Tom Ward has
sold 21 million shares over the past four years. Despite the
$150 million in payments (including the $67 million to
repurchase Mr. Ward's interests in oil and gas wells in 2008)
made to Mr. Ward since the IPO, he has aggressively reduced
his percentage ownership of the company from 24% in 2007 to
approximately 5% today. We believe Mr. Ward’s actions leave him
in no position to criticize others as being short-term.
-
Lastly, current management argues that our board is less
qualified than existing directors. We find such an assertion to
be remarkable in light of the disastrous performance of the
current board. All of our directors are truly independent of the
Company, and none (other than Dinakar Singh) have ties or
ongoing obligations to TPG-Axon. They were nominated because
they all have exemplary backgrounds as strong corporate leaders,
with a diverse and complementary set of strengths – investment
background, corporate governance leadership, financial and
accounting leadership, and deep knowledge and experience in the
energy sector. We believe all of these skills are important, and
the candidates we have nominated together provide the skills and
experience to oversee the company with wisdom, integrity and
focus. In contrast, a number of existing directors have long
standing personal and business ties to Mr. Ward, and the current
board has clearly failed stockholders.
|
|
|
Overall, we have great enthusiasm for, and conviction in, the long-term
value of SandRidge’s assets, as they are configured today. However, if
appropriate steps are not taken to commit to a coherent strategy,
restore investor confidence, drastically reduce overhead costs and lower
cost of capital, we believe the value of the assets will be squandered. It
is time for change.
We can no longer allow the current Board to continue at the expense
of stockholders. Our interests are aligned with yours and our
independent director nominees (six of whom are wholly independent of
TPG-Axon) are committed to protecting your interests and maximizing
stockholder value. We urge you to submit your GREEN
consent card as soon as possible.
SANDRIDGE POSSESSES SIGNIFICANT UNREALIZED VALUE, IT’S TIME FOR CHANGE
- VOTE THE GREEN CONSENT CARD TODAY -
We urge you to VOTE THE GREEN CONSENT CARD
to help us deliver the necessary change to strengthen SandRidge for the
future. Holders of more than 50% of SandRidge stock must consent to our
proposals in order to capture what we believe to be dramatic upside for
stockholders. It is important that you submit your GREEN
consent card AS SOON AS POSSIBLE. If you do not vote your shares, your
shares will count as a vote FOR management.
Importantly, if you receive a white consent card from SandRidge DO
NOT return it.
If your shares are registered in your own name, please submit your
consent by signing, dating and returning the enclosed GREEN
consent card in the postage-paid envelope provided. If you hold your
shares in "street" name with a bank, broker firm or other nominee, it is
critical that you instruct the institution that holds your shares to
execute a consent in favor of our proposals. If you have any questions
regarding your GREEN consent card or
need assistance in executing your consent, please contact MacKenzie
Partners, Inc. at (212) 929-5500 or Toll-Free (800) 322-2885.
Sincerely,
TPG-Axon Capital
About TPG-Axon Capital
TPG-Axon Capital is a leading global investment firm. Through offices in
New York, London, Hong Kong and Tokyo, TPG-Axon invests across global
markets and asset classes.
TPG-AXON MANAGEMENT LP, TPG-AXON PARTNERS GP, L.P., TPG-AXON GP, LLC,
TPG-AXON PARTNERS, LP, TPG-AXON INTERNATIONAL, L.P., TPG-AXON
INTERNATIONAL GP, LLC, DINAKAR SINGH LLC AND DINAKAR SINGH
(COLLECTIVELY, “TPG-AXON”) HAS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION (THE “SEC”) A DEFINITIVE CONSENT STATEMENT AND ACCOMPANYING
CONSENT CARD TO BE USED TO SOLICIT WRITTEN CONSENTS FROM THE
STOCKHOLDERS OF SANDRIDGE ENERGY, INC. IN CONNECTION WITH TPG-AXON'S
INTENT TO TAKE CORPORATE ACTION BY WRITTEN CONSENT. ALL STOCKHOLDERS OF
SANDRIDGE ENERGY, INC. ARE ADVISED TO READ THE DEFINITIVE CONSENT
STATEMENT AND OTHER DOCUMENTS RELATED TO THE SOLICITATION OF WRITTEN
CONSENTS BY TPG-AXON, STEPHEN C. BEASLEY, EDWARD W. MONEYPENNY, FREDRIC
G. REYNOLDS, PETER H. ROTHSCHILD, ALAN J. WEBER AND DAN A. WESTBROOK
(COLLECTIVELY, THE "PARTICIPANTS") FROM THE STOCKHOLDERS OF SANDRIDGE
ENERGY, INC. BECAUSE THEY CONTAIN IMPORTANT INFORMATION, INCLUDING
ADDITIONAL INFORMATION RELATED TO THE PARTICIPANTS. THE DEFINITIVE
CONSENT STATEMENT AND FORM OF WRITTEN CONSENT WILL BE FURNISHED TO SOME
OR ALL OF THE STOCKHOLDERS OF SANDRIDGE ENERGY, INC. AND WILL, ALONG
WITH OTHER RELEVANT DOCUMENTS, BE AVAILABLE AT NO CHARGE ON THE SEC'S
WEB SITE AT HTTP://WWW.SEC.GOV.
IN ADDITION, TPG-AXON WILL PROVIDE COPIES OF THE DEFINITIVE CONSENT
STATEMENT AND ACCOMPANYING CONSENT CARD WITHOUT CHARGE UPON REQUEST.
INFORMATION ABOUT THE PARTICIPANTS AND A DESCRIPTION OF THEIR DIRECT OR
INDIRECT INTERESTS BY SECURITY HOLDINGS IS CONTAINED IN THE DEFINITIVE
CONSENT STATEMENT ON SCHEDULE 14A FILED BY TPG-AXON WITH THE SEC ON
JANUARY 18, 2013. THIS DOCUMENT CAN BE OBTAINED FREE OF CHARGE FROM THE
SOURCES INDICATED ABOVE.
