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TPG-Axon, the beneficial owner of 6.7% of the outstanding shares of SandRidge
Energy, Inc.
(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
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