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Analysis: TPG-Axon won't find quick fixes for SandRidge

Specialist trader Frank Massiello works at the post that trades SandRidge Energy stock on the floor of the New York Stock Exchange January 1
Specialist trader Frank Massiello works at the post that trades SandRidge Energy stock on the floor of the New York Stock Exchange January 1

By Anna Driver and Michael Erman

(Reuters) - Hedge fund TPG-Axon Capital has won nearly half the seats on SandRidge Energy Corp's board but faces an uphill battle to reverse the oil and gas company's slumping stock price.

SandRidge shares have tumbled 20 percent this year to around $5 on disappointing forecasts for its wells in Oklahoma and Kansas, as well as investor uncertainty over its strategic direction.

While natural gas prices have risen from last year's 10-year lows, they remain depressed, adding pressure to SandRidge and peers like Chesapeake Energy Corp and Hess Corp to cut costs and improve well efficiency.

SandRidge faces additional uncertainties over the future of Chief Executive Officer Tom Ward, who TPG-Axon has accused of making strategic mistakes and self-dealing at the expense of shareholders. Under a deal reached in March, the board has to let go of Ward by June 30 or give TPG-Axon a controlling number of seats.

Some shareholders fear Ward's departure will lead to an exodus of other managers who have the expertise SandRidge needs to improve.

"We are concerned that the reconstituted board may be drawn to focus on short-term change to the detriment of long-term shareholder gain," said Paul Rivett, vice president of operations at Canada's Fairfax Financial, SandRidge's largest shareholder.

Fairfax, which is run by investment guru Prem Watsa and owns 12.7 percent stake in SandRidge, had supported Ward in his battle against TPG-Axon, which has a 7.3 percent stake.

TPG-Axon and Mount Kellett Capital Management, which owns 5 percent of the company, originally called for SandRidge to consider selling itself, but that is now seen unlikely in the near term because of the falling share price.

SandRidge's 10-member board, which now includes four TPG-Axon-backed directors, is in the process of reviewing strategy, but no major decisions have been announced. The company is due to report earnings on May 7, when more details may emerge.

Ward has not responded to repeated requests for comment about his or his family's land deals. SandRidge declined to comment and has previously said that its board found no wrongdoing by Ward in the land deals.

Analysts said that with a sale off the table, SandRidge's future rests on its 2 million acres in the Mississippian, an oil and gas formation in Oklahoma and Kansas. SandRidge is the largest operator there and plans to spend most of its $1.5 billion drilling budget in the area this year.

The value of SandRidge's acreage suffered a blow in February when Chesapeake sold some of its stake in the Mississippian to China's Sinopec Group for roughly $2,400 an acre, significantly below what many analysts had projected for the region.

SandRidge itself has twice cut its forecast for the amount of oil it expects to recover from its Mississippian wells, causing a sell-off in the company's shares and sparking debate about its valuation.

"The downward revision of the Mississippian type curve at the end of February was a pretty big deal," said Mark Hanson, oil and gas analyst for Morningstar in Chicago.

SLIDING VALUE

Still, Dinakar Singh, the former Goldman Sachs trader who runs TPG-Axon, said SandRidge should streamline by focusing drilling on only its best assets in the Mississippian.

"Not every one of those acres is good," Singh said, noting that he believes there are at least 700,000 acres that look very good. "One has to make sure that you're being very efficient in spending CapEx only in areas where the data is good."

Since TPG-Axon won its board seats in March, SandRidge has seen the departure of several key employees. Chief Operating Officer Matthew Grubb left that month. Last week, two high-profile exploration and production executives announced their exits.

"The one thing that I fear the most is that some of the second-tier people, the engineers, might leave," said Mike Breard, analyst at Hodges Capital Management in Dallas. "I'm sure they've got their resumes out there."

Halting SandRidge's stock slide will be crucial if TPG-Axon wants to make any return on its investment. The hedge fund has not disclosed how much money it has lost in total, but it has said that one third of its 36.2 million shares have lost around a quarter of their value.

TPG has said SandRidge is worth as much as $14 a share, while Mount Kellett has suggested $20 a share.

Others take a more pessimistic view. Morningstar's Hanson believes SandRidge's stock is fully valued at $8 per share, citing underperformance by the company's wells. The stock had traded above $60 in June 2008.

Although some investors are disappointed by the results so far, the company can change the way it drills and operates wells in a bid to improve productivity. Every shale formation is different, so it often takes time for a company to "crack the code" and perfect its drilling, Breard said.

"The upside potential is a lot greater than the downside risk. It's worth something no matter who is running it," he said.

(Reporting By Anna Driver in Houston and Mike Erman in New York; Editing by Patricia Kranz, Tiffany Wu and Leslie Gevirtz)

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