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.
- 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.
- 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.
- 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:|
TPG-Axon CapitalAbout 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.