The ongoing SandRidge shareholder vote could have significant effects on both the energy company and Oklahoma City, according to local industry observers.
Tulsa money manager Jake Dollarhide said the effort is driven by out-of-state investors focused only on the stock price.
“These big industry players don't care about any effect on Oklahoma City or Tulsa,” said Dollarhide, CEO of Tulsa-based Longbow Asset Management Co., which owns SandRidge Stock.
“They don't care about contributions to the community or feeding the hungry here. This is all to help their returns. They want to maximize the value for their clients. They want to make sure they can feed their families and that they can worry about feeding the hungry and supporting the arts community in their towns.”
New York-based TPG-Axon has asked SandRidge shareholders to replace the company's directors with a slate of its choosing. The shareholder claims that CEO Tom Ward and the SandRidge directors have destroyed shareholder value by allowing the stock price to tumble 80 percent from its initial public offering in 2007.
“The destruction of stockholder value has been caused by poor and erratic strategic decisions, reckless spending, and a culture of cronyism and waste that has drained value from the company,” the shareholder said in December.
TPG-Axon also has pointed out that Ward has received one of the highest compensation packages in the industry and has accused Ward and his family of improperly competing with SandRidge for oil and natural gas leases.
SandRidge has dismissed the claims, saying Ward has done nothing improper and calling TPG-Axon a “opportunistic, short-term investor.” The company also has questioned TPG-Axon's proposed new directors.
“The TPG-Axon Group has not identified proposed directors or a management team with expertise in oil and gas exploration and development generally, and the proposed TPG-Axon Group nominees have no experience in the Mississippi Lime play, one of the company's principle assets,” the current directors said in December.
SandRidge also had said that if successful, TPG-Axon's effort would constitute a “change of control” that could force the company to buy back all of its senior notes in a move that could cost the company $4.3 billion.
However, the company said Friday that the charge likely will not occur because the buyback price would be lower than current price.
TPG-Axon also contends entities affiliated with Ward have been “flipping” leases to SandRidge.
The shareholder group last month released a 32-page filing that includes six examples of how WCT Resources LLC — a trust owned by Tom Ward's adult children — and another Ward-related entity leased mineral rights and then sold them to SandRidge.
TPG-Axon also documented 15 instances when the entities acquired acreage adjacent to SandRidge's holdings. None of the “adjacent acquisitions” were disclosed in regulatory filings, according to the hedge fund's presentation.
Until last year, WCT Resources' address was listed as SandRidge's headquarters.
SandRidge's board said last month WCT Resources is independent of the company, with no nonpublic access to information about its land and mineral acquisition programs, even though one of its managers is Ward's son. Ward is not involved in the company, which was created by trusts established to benefit his adult children, according to the board.
“Thus, contrary to TPG-Axon's assertions, neither the company nor Mr. Ward has the power to ‘allow' WCT Resources to engage in any business regardless of whether it competes with the company,” the board said. “As an ongoing business not controlled by the company or Mr. Ward, WCT Resources is free to engage in whatever commerce it deems suitable wherever it chooses.”
The board also dismissed TPG-Axon's concerns about WCT leasing acreage adjacent to SandRidge's holdings in the Mississippian oil play.
“Given the company's vast acreage holdings in the Mississippian play, which include interests in over 7,500 sections covering nearly five million acres in 30 counties through out an area that encompasses approximately 17 million acres, this is an entirely unremarkable fact,” according to the board's statement. “Virtually all companies active in the play are likely to have some interests that could be characterized as adjacent to the company's holdings.”
The board said its dealings with TLW Land and Cattle LP, another company Ward has a stake in, involve acreage acquired well before SandRidge was formed in 2006.
Edmond investment adviser Greg Womack said he hopes SandRidge is able to withstand the shareholder fight.
“My hope is that it won't succeed and that the Oklahoma business will continue to be run by Oklahomans who know the business and are invested in the community,” said Womack, president of Womack Investment Advisers Inc. “Naturally, you have to do what's best for shareholders in the long term, but I think there's a way to do that without coming in and totally changing everything.”
A wake-up call
While Womack supports the existing board in the vote, he said at least some of TPG-Axon's efforts have been helpful. Womack's firm holds SandRidge stock.
“This is a wake-up call, and SandRidge is taking some steps in the right direction to address some of the issues and concerns they have raised,” Womack said. “I would rather have the company run by Mr. Ward and the board, but that doesn't mean there can't be changes within the board and with compensation and other areas.”
Womack said he is not satisfied with the company's response to the questions its shareholders have posed.
“It does raise concerns,” he said. “There doesn't appear to be anything illegally done, but I think some changes are needed to assure shareholders that they're righting the ship and putting in tighter controls.”
Over the past three months, TPG-Axon and Mount Kellett combined have released five letters to SandRidge and its shareholders and have made repeated filings with government regulators.
Over that time, SandRidge has released only two public statements and repeatedly has declined to comment to The Oklahoman and other news outlets.
“I think communication is important, especially during a difficult time,” Womack said. “You're seeing the other side spewing and throwing things around. I think communication is key. They've done some of that, but they have not gotten into the details of some of the issues that have been raised.”
While TPG-Axon and Mount Kellett have claimed specific failings in SandRidge's leadership, Dollarhide said the biggest problem facing the company is the broader natural gas market.
“At the end of the day, the biggest tripping point for both Chesapeake and SandRidge had less to do with possible conflict of interest or personal dealings of the CEO and had a heck of a lot more to do with the ultra bear market for natural gas prices and the slow reaction to diversifying into more oil plays,” he said.
TPG-Axon, however, has pointed out that SandRidge's stock price has suffered more over the past five years than other energy producers.
“SandRidge stock has declined almost 80 percent from its IPO (initial public offering) level in 2007 and is the single worst performing energy stock over that period in the Russell 1000 index,” TPG-Axon CEO Dinakar Singh wrote in November.
A growing trend
The efforts by Mount Kellett and TPG-Axon against the SandRidge directors come at a time when a growing number of companies throughout the country are facing confrontation from active shareholders.
“There's been a resurgence of this kind of activity where large, seemingly passive, institutional players are seeing value in throwing their weight around,” Dollarhide said.“So there is a trend now, but this is nothing new. The pioneers of this effort were the likes of Boone Pickens and Carl Icahn. They've been doing this for years.”
Activist shareholders launched 219 such campaigns last year, the most since 2008, according to data from FactSet Research Systems.
Oppenheimer energy analyst Fadel Gheit said activist investors are turning the tables on entrepreneurs, claiming they can do a better job in creating value at the companies.
“This is going to be contagious,” he said.
He said activists are bringing in a completely different way of looking at things.
“These guys now are very bold and very methodical at how they look at things. They really, really analyze the company very thoroughly. No analyst will have the time or the resources to do that. They bring a different angle, a totally different ingredient into the mix.”
An uphill fight
About 61 percent of SandRidge's shares are controlled by institutional and mutual fund owners.
The largest SandRidge shareholder is Fairfax Financial Holdings. The Canadian investment firm has bought shares aggressively over the past quarter. It now controls about 12.7 percent of SandRidge's outstanding shares.
Fairfax is considered a passive SandRidge investor. Spokesman Paul Rivett told Reuters this week that the group supports Tom Ward and the current SandRidge directors.
Fairfax CEO V. Prim Watsa — sometimes referred to as Canada's Warren Buffett — has invested the company in 43 others throughout numerous industries including Berkshire Hathaway, Bristol-Myers Squibb, Citigroup, Dell, Intel, Johnson and Johnson, The New York Times Co., U.S. Bancorp, Walmart and Wells Fargo.
Though usually a quiet investor, Fairfax doesn't shy away from taking an active position. The company controls a 5.12 percent stake in BlackBerry, and Watsa in January was named to the board after a shareholder effort led to a new CEO.
Fairfax reported that on Sept. 30, 2012, it controlled 22.2 million SandRidge shares, up from 21.9 million Sept. 30, 2011.
But over the past three months, the company has nearly tripled its stake to 62.5 million shares.
The largest individual SandRidge investor is CEO Tom Ward, with about 5.5 percent of the company's shares.
While shareholder initiatives have been successful at other companies, TPG-Axon and Mount Kellett still must have help from other SandRidge shareholders if they hope to force the Oklahoma City company to make changes.
For the current consent solicitation effort to pass, holders of a majority of SandRidge's more than 491 million shares must mail in the proper voting card. Any shares not cast in favor of the activist shareholders will be considered votes for the existing directors.
Voting is scheduled to close March 15.
SandRidge and TPG-Axon both have set up websites, where they present their arguments to shareholders. The company's argument can be found at SupportSandRidge.com. TPG-Axon's site is shareholdersforSandRidge.com.
TPG-Axon controls 6.7 percent of SandRidge stock and has invested in the Oklahoma City energy company for about a year. The company spent $27 million in November and December buying 4.6 million shares, increasing its stake from 4.7 percent.
The shareholder has a position in 23 companies in a wide variety of industries, including Halliburton Co., Dollar General Corp., Time Warner Cable, former Oklahoma City-based Tronox Inc., Sirius XM Radio and Wyndham Worldwide Corp.
TPG-Axon usually is a passive investor, but in November it notified the U.S. Securities and Exchange Commission that it had become an active investor in SandRidge, meaning it planned to have more contact with the company and attempt to exert more influence on corporate decisions.
“Most often, we are ‘involved' shareholders, not ‘activist' shareholders,” TPG-Axon CEO Dinakar Singh wrote in the first of three letters sent to SandRidge. “However, in instances where we come to believe that management is acting in a manner that is destructive of value, we believe it is important to actively engage.”
A week after TPG-Axon sent its first letter to SandRidge, Mount Kellett wrote the Oklahoma City company's directors, echoing many of the same points.
Mount Kellett controls 4.5 percent of SandRidge stock and has been a passive investor in the company since 2009.
CONTRIBUTING: Business Writer Jay F. Marks
My hope is that it won't succeed and that the Oklahoma business will continue to be run by Oklahomans who know the business and are invested in the community.”
President, Womack Investment Advisers Inc.