Mount Kellett Sends Letter to The Board of SandRidge Energy
NEW YORK, Nov. 15, 2012 /PRNewswire/ -- Mount Kellett Capital Management LP ("Mount Kellett") today sent a letter to SandRidge Energy, Inc.'s (NYSE: SD) ("SandRidge") Board of Directors outlining issues related to the company's management and strategic direction. Full text of the letter follows:
November 15, 2012
SandRidge Energy Inc.
123 Robert S. Kerr Avenue
Oklahoma City, OK 73102
Attn: Board of Directors
Mount Kellett Capital Management LP ("Mount Kellett" or "we") is a multi-strategy private investment firm focused on global value, special situations and opportunistic investing. Mount Kellett and funds and accounts under common control collectively have beneficial ownership in SandRidge Energy Inc. ("SandRidge" or the "Company") of 22.2 million shares (the "Shares"), or approximately 4.5% of the Company's outstanding common stock.
Mount Kellett originally invested in the Company's common stock in 2009 because we believed the Company was undervalued and possessed very valuable oil and gas assets that would generate tremendous future value if developed properly in a strategically consistent, systematic manner. Even today, as outlined in more detail below, we believe that – properly managed – the Company's assets are worth approximately $20 per share. Unfortunately, all we see now are critical failures of management and Board oversight. SandRidge has not merely failed to even remotely maximize the potential of its assets, but it has destroyed stockholder value. Just this year alone, the Company's stock price has plunged, down almost 40%.
Like other stockholders, we read with interest TPG-Axon's November 8th letter to you. Lest the Board believe that TPG-Axon's concerns are isolated ones, we are writing to add our views and be crystal clear that management and the Board cannot ignore the interests of the Company's stockholders any longer.
We strongly believe that Tom Ward should be replaced as Chairman and CEO with a seasoned executive who can restore the Company's credibility. In addition, we believe the Board should be strengthened by the addition of new, truly independent directors selected in consultation with the Company's largest stockholders. In the interim, we urge the Board not to take any hasty strategic actions, such as the precipitous sale of the Permian assets, which will permanently impair stockholder value. The Company has no immediate financing needs and there is no need to sell assets at fire-sale prices. The future direction of the Company should be properly and fully evaluated by a reconstituted Board and management team. All options should be explored, including a potential sale of the entire Company or a more limited divestiture of ill-fitting assets, such as Dynamic Offshore.
Our valuation of the Company of at least $20 per share is supported by the following:
In the Company's Mississippian play, we believe the Company's original 750,000 acres to be worth approximately $6,800/acre on a developed basis. Further, we believe the 1,000,000 excess acres in the extension of the Mississippian play into Kansas to be worth approximately $2,500/acre based on comparable transactions. In total, the Company's Mississippian assets could represent an approximate $8 billion asset.
The Company's Permian assets, pre-royalty trust interests, are worth up to $4 billion, based on Apache's purchase of BP's Permian assets in 2010, at approximately $22/boe when oil was at $75-$80 per barrel. The Company's own reported PV-10 of its Permian assets is approximately $4 billion. Additionally, we believe that if the Company were to continue to monetize portions of its Permian assets through a royalty trust structure, such as the SandRidge Permian Trust ("PER") or a Master Limited Partnership ("MLP") structure, the Company would continue to realize premium valuations for these assets.
We estimate the Company's other production, undeveloped proved reserves, undeveloped acreage and Gulf of Mexico assets are worth $3.6 billion. In addition, the Company has other assets that have not been properly highlighted.
- Mississippian Infrastructure - The Company has invested huge amounts of capital to develop the water disposal and electrical infrastructure necessary for future Mississippian development. This front loading of infrastructure has increased the value of the Company's Mississippian assets, providing the Company with a competitive advantage on its acreage and should enable the Company to accelerate development over the coming years. We commend the Company's operations team for successfully managing such a large and complex project. We estimate that the Company has spent approximately $500 million in mid-stream infrastructure, gathering system and salt water disposal wells in this area. We believe these assets could ultimately have tremendous value to an MLP buyer who would be willing to pay a multiple of in-place cost, especially with the prospect of attracting third party volumes as the play continues to develop.
- Mississippian Drilling Carry - By our calculations, at year-end the Company will have approximately $650 million of drilling carry remaining in the Mississippian.
- Pinon Field - The Company's Pinon field in the West Texas Overthrust, while of little value today, should have tremendous value in a higher natural gas environment or in the hands of the right buyer.
Overall, we believe SandRidge's Net Asset Value to be approximately $16.5 billion (assuming the mid-stream assets at cost), prior to net debt and royalty trust minority interest.
So, given these values, why is the stock trading at $5.19 per share on November 14, 2012?
The answer is clear. The Company's fundamental problems stem from the failure of management and the Board to adhere to some of the most basic tenets of managing a publicly traded company:
- Follow a consistent strategy – Instead, the Company has shifted its strategy with alarming frequency, sometimes seemingly on a quarter-by-quarter basis;
- Allocate capital properly – Poor capital allocation decisions have led not only to stockholder dilution but diversion of management time and resources from the development of core assets;
- Insure management credibility – To the contrary, the management team has consistently overpromised and underperformed; and
- Align management compensation with stockholder success – As the stockholders have suffered, the CEO, other top executives and Board members have been richly rewarded through restricted stock grants that have significant value even if the Company's stock fails to appreciate in value.
In conclusion, SandRidge has great assets and should be a great company, but it is clear that it will not be without changes at the top. We would prefer that the Board take the initiative and work in consultation with major stockholders to make the necessary changes. Of course, if that does not happen, the stockholders will have no choice but to take the necessary actions to protect their investment.
We are hopeful that the Board understands the gravity of the situation and that the Board can and will do the right thing. As always, we are available to discuss issues relevant to SandRidge at your convenience.
Very truly yours,
MOUNT KELLETT CAPITAL
Name: Jonathan Fiorello
Title: Chief Operating Officer
About Mount Kellett Capital Management LP
Mount Kellett is a multi-strategy private investment firm focused on global value, special situations and opportunistic investing. The firm has approximately 115 employees with offices in New York, Dallas, Hong Kong, London, and Mumbai. The firm currently has in excess of $7 billion in assets under management.
SOURCE Mount Kellett Capital Management LP
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