SandRidge Energy Inc. (SD:US) will add four directors named by TPG-Axon Capital Management LP and agreed to give the activist shareholder control of the board if Tom Ward is still running the company in four months.
The board is slashing director pay by a third to $250,000 a year from $375,000, Oklahoma City-based SandRidge said in a statement yesterday. President and Chief Operating Officer Matthew Grubb is resigning after seven years at the oil and natural gas producer, the company said.
TPG-Axon, which owns 7.33 percent of SandRidge shares, blamed the seven-member board and Chairman and Chief Executive Officer Ward for “strategic blunders, extraordinary spending and poor governance” that caused the stock to drop. SandRidge has fallen (SD:US) 78 percent since it began selling for $26 a share in 2007.
The settlement with TPG-Axon, led by former Goldman Sachs Group Inc. banker Dinakar Singh, is another successful shareholder action in a series of campaigns that have shaken up the industry in the past year. Chesapeake Energy Corp. (CHK:US) co- founder Aubrey McClendon submitted his resignation after investors pushed for changes. Murphy Oil Corp. (MUR:US) and Hess Corp. (HES:US) have also been subject to shareholder criticism.
“We believe these actions open a new chapter for SandRidge,” board member Jeffrey Serota said in the statement.
TPG-Axon has questioned land transactions between SandRidge and companies associated with Ward or his family members, and pushed for a new CEO and board. After an initial review absolved Ward of wrongdoing, SandRidge said yesterday the board is completing an independent review of the related-party transactions questioned by TPG-Axon. The results of that audit are expected by June 15.
TPG-Axon nominees Stephen C. Beasley, Edward W. Moneypenny, Alan J. Weber and Dan A. Westbrook are being added to the board immediately. The agreement gives the board until June 30 to decide whether to fire Ward, who founded the company in 2006. If he isn’t terminated, three existing board members will exit and an additional director will be named by TPG-Axon, giving the activist shareholder a majority.
Ward’s employment agreement gives him as much as $97.4 million if he’s fired because of a change of control on the board. The four new members being added to the board now don’t qualify as a change in control, Greg Dewey, a SandRidge spokesman, said in an e-mail.
TPG-Axon may be gambling that the investigation will turn up enough information to fire Ward for cause, avoiding the need to make a big payout, said Jason Wangler, an analyst with Wunderlich Securities Inc. in Houston.
“They’re certainly feeling comfortable that they can move him out without having to pay him that money,” Wangler said in an interview. Wangler has a hold rating on SandRidge and doesn’t own any of the stock.
Ward, 53, wasn’t available to comment on the settlement, according to Dewey. Singh declined to comment.
The company elevated Chief Financial Officer James Bennett to president, and said he will serve as interim CEO if Ward leaves and until the board finds a successor. Serota would become interim chairman for six months after Ward’s departure.
Investors already persuaded a Delaware judge to bar SandRidge from using provisions in its debt agreements to coerce shareholders in the proxy fight. The covenants for $4.3 billion of SandRidge’s debt allow for accelerated payment if there’s a change in control on the board.
Delaware Chancery Court Judge Leo Strine sided Friday with shareholders who said that SandRidge’s board could have disabled those provisions. Its refusal to do so “is redolent more of the pursuit of an incremental advantage in a close contest,” Strine said in a ruling that granted an injunction against SandRidge.
“We are pleased that there is a resolution that we hope will lead to enhanced shareholder value in this company,” Stuart Grant, a lawyer for the SandRidge investors, said in a telephone interview yesterday.
SandRidge’s board will “conduct a comprehensive review of the company’s strategy and costs,” the company said in its statement yesterday. TPG-Axon had pressed SandRidge to reduce debt and sell assets, including as much as half of SandRidge’s undeveloped acreage in the Mississippian Lime, an oil and gas area in Oklahoma and Kansas.
SandRidge fell 2.4 percent to $5.71 at the close in New York.
The company’s options to increase its value are limited, Amir Arif, a Washington-based analyst with Stifel Nicolaus & Co., wrote in a note to clients. While SandRidge’s overhead costs are high, they only account for 11 percent of its expenses.
The board may be “hamstrung” by lower output in the Mississippian, Sandridge’s core oil field, Arif wrote. SandRidge said March 1 that oil accounted for 29 percent of its production in the field, down from a November estimate of 35 percent. The remaining output was gas and petroleum liquids, which are less valuable.
“The only new approach we see is reduced capex,” Arif wrote. That approach would lower the value of Sandridge’s assets by reducing production.
SandRidge had said the New York-based fund was running a “false and misleading campaign” to take control of the company without paying a premium. SandRidge has moved away from gas production in favor of higher-priced oil and is in the best financial position in its six-year history, Ward said at a March 5 analyst meeting.
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