SD - SandRidge Energy

[txlaw]

Cardboard, what you just articulated is what makes me most wary of TW. 

 

I have invested in SD based purely on NAV, but frankly in the past I've been reluctant to invest in the company because of TW's involvement (the analogies to Aubrey McClendon at CHK are apparent).  And some of TPG-Axon's allegations about WCT Resources are pretty serious -- it smells like Ward's family is usurping a corporate opportunity from SD and its public shareholders.  Or at the very least it seems a lot like the Sokol affair.

 

The following presentation is quite disturbing:

http://www.shareholdersforsandridge.com/wp-content/uploads/2013/02/SandRidge-Related-Party-Transactions-Presentation-2.pdf

 

However, as I'm not an O&G expert, I confess I'm not aware if there are any legitimate reasons for why those transactions would have been completed as such.  Can anyone come up with any good explanations for these transactions?

[stylized_fact]

Do any board members have an opinion on the SandRidge trusts relative to the common? 

[Parsad]

Well Sanjeev, I have to disagree. If he bought land adjacent to SD for next to nothing, then let SD take all the risks of proving reserves on their own land and developing infrastructure that Tom's land could eventually benefit from knowing and making all the decisions about such effort then it sounds to me like a major conflict of interest and highly unethical.

 

On top of that, some parcels apparently have been bought then resold quickly to SD at much higher prices. Smells pretty bad to me. Not the kind of guy that is willing to eat the same returns offered to SD shareholders. There is CEO compensation, but this is something totally different. Even worst than insider trading if there is some truth to it.

 

Cardboard

 

The parcels were bought within an entity that Tom is not directly associated with, even though one of his children is.  The properties were sold to SD...should the board not have stopped this?  You have three layers of oversight at every corporation...the CEO, then the board, then the shareholders.  This isn't all on Tom's shoulders, even though he's bright enough to have known that this was straddling the line.  As Buffett says to his managers, if you think you are close to the line, then you obviously should not act on it.  Now the third line of oversight is acting.  Cheers! 

[oldye]

mobile.bloomberg.com/news/2013-02-25/sinopec-to-buy-chesapeake-oil-and-gas-assets-for-1-02-billion

 

Seems kinda cheap

[bmichaud]

$2,400 per acre - I'd say so...

[Guest hellsten]

According to page 3 of Chesapeake's most recent investor presentation the company believes that the Mississippi Lime acreage is worth $7,000 to $8,000 per acre. If you assume that Chesapeake sells 25% of its two million acres that would imply monetization proceeds of 500,000 x $7,500 = $3.75 billion.

 

Source:

http://seekingalpha.com/article/655341-a-look-at-a-potential-chesapeake-mississippi-lime-joint-venture

http://www.scribd.com/doc/96735489/Chk-June-2012-Presentation

[berkshiremystery]

Have you guys noticed, there was a huge block trade of 10,000 contracts on the Jan2014 leaps @ $3.

I personally think it seems compelling to write 2014/15 puts for $0.95 or 1.40 @ the $5 strike to lower costs and to earn some income on the sidelines. Only disadvantage, some capital would be tied up as collateral.

[plato1976]

In the TPG valuation of SandRidge

They put 4.5B valuation to the current production.

I think SinoPec also acquired some current production, and therefore their 1B acquisition may indicate that they pay almost zero for land itself. Correct me if I am wrong.

 

Anyway, we all know CHK is on fire sale. So this is the floor instead of the ceil

 

/plato1977

 

$2,400 per acre - I'd say so...

[BargainValueHunter]

http://www.bloomberg.com/news/2013-02-25/sinopec-to-buy-chesapeake-oil-and-gas-assets-for-1-02-billion.html

 

The transaction includes wells that were pumping the equivalent of 34,000 barrels of crude a day during the final three months of 2012, according to Chesapeake’s statement. The per-acre price lags the $4,425 and $2,750 SandRidge Energy Inc. (SD) received in successive Mississippi Lime deals in 2011, said Michael Kelly, an analyst at Global Hunter Securities LLC in Houston. Neither of the SandRidge sales included producing wells, he said.

 

“Our reaction to this is pretty negative,” Kelly said in a telephone interview today. “This suggests liquidity is trumping everything for the company.”

[muscleman]

http://www.bloomberg.com/news/2013-02-25/sinopec-to-buy-chesapeake-oil-and-gas-assets-for-1-02-billion.html

 

The transaction includes wells that were pumping the equivalent of 34,000 barrels of crude a day during the final three months of 2012, according to Chesapeake’s statement. The per-acre price lags the $4,425 and $2,750 SandRidge Energy Inc. (SD) received in successive Mississippi Lime deals in 2011, said Michael Kelly, an analyst at Global Hunter Securities LLC in Houston. Neither of the SandRidge sales included producing wells, he said.

 

“Our reaction to this is pretty negative,” Kelly said in a telephone interview today. “This suggests liquidity is trumping everything for the company.”

 

So this immediately place TPG's plan to sell the company at $10-12 per share in jeopardy, no?

However, I think it is still a good idea to replace TW and then just drill Missisipian Lime for the long term, isn't it?

[nestorius]

UBS commentary around deal metrics (underline mine), Canaccord quotes similar implied $400 - $800/acre for undeveloped. It does put a bit of a damper on the possibility that TPG will be able to sell SD at an attractive valuation within 2013.

 

CHK monetized Horizontal Miss for $1.02 billion

CHK has agreed to sell a 50% interest in its core Horizontal Mississippi Lime

position to Sinopec for $1.02 billion. CHK will be divesting 425,000 net acres, 23

MBoed net, and 70 MMBoe of net proved reserves. While CHK disclosed 4Q

production averaged 34 MBoed (45% oil, 9% NGLs), Sinopec noted the

production on the acreage had climbed to 46 MBoed at YE12.

No change to CHK est but long road ahead to meet disposition target

This deal enables $1 billion of CHK’s targeted 2013 asset sales of $4-7 billion.

Assuming a 2Q close, CHK is divesting 28 Bcfe of the 35 Bcfe of production

(80%) associated with planned asset sales. Thus, the remaining $3-$6 billion of

asset sales will have to come largely from undeveloped acreage at a time the

market seems to be paying less for acreage deals, e.g., note the disappointing CHK

Permian deal prices, PXD’s failed Barnett deal, and lengthy time MRO, HES, and

MHR have had Eagle Ford packages on the market.

CHK’s Horiz Miss deal valuation a negative read through for SD

Valuing 23 MBoed of net production at $50,000/Boed implies no value for the

undeveloped acreage. Assuming 17 MBoed of net production, it implies just $400

per undeveloped acre. This is well below the $1,320/acre assumed in our SD NAV.

Applying these metrics values SD’s NAV at ~$3.45-$6 per share.

[Packer16]

I guess the question is this sale a distressed sale and does TPG have a team to operate SD if can't be sold right away.  Also, I have seen some of the analyst lower theie NAV even before the sale to closer to $6.00 per share based upon the latest well tests (quite a change as the higher SD was predicated on a high NAV estimated to be in the high teens per share previously).  It would be interesting if FFH nominated its own board or put some of its principles on the ballot for election.  This would put more balance on the board.

 

 

Packer

[ASTA]

Bought 95% of my allotment of 7% of the portfolio yesterday and today at 5.57.

33% cash now what else to buy :D

[Parsad]

Sandridge closes $2.6B Permian sale, and is retiring over $1.1B in debt.  Love it!  Cheers!

 

http://finance.yahoo.com/news/sandridge-energy-inc-closes-sale-210500000.html

[muscleman]

Sandridge closes $2.6B Permian sale, and is retiring over $1.1B in debt.  Love it!  Cheers!

 

http://finance.yahoo.com/news/sandridge-energy-inc-closes-sale-210500000.html

 

Prasad, due to the recently CHK's Missisipian sale, I don't think TPG's original plan to sell SD for $10-12 a share would work anymore. However I still think the board should be removed.

Suppose the consent fails, TPG can always do another round of consent with more nominees who has oil and gas experience, right?

I see current nominees have minimum oil and gas experience because TPG wants to sell the company, but I think that is a fixable issue if TPG decides to develop the company for the longer term. What do you think?

[Parsad]

Sandridge closes $2.6B Permian sale, and is retiring over $1.1B in debt.  Love it!  Cheers!

 

http://finance.yahoo.com/news/sandridge-energy-inc-closes-sale-210500000.html

 

Prasad, due to the recently CHK's Missisipian sale, I don't think TPG's original plan to sell SD for $10-12 a share would work anymore. However I still think the board should be removed.

Suppose the consent fails, TPG can always do another round of consent with more nominees who has oil and gas experience, right?

I see current nominees have minimum oil and gas experience because TPG wants to sell the company, but I think that is a fixable issue if TPG decides to develop the company for the longer term. What do you think?

 

There is no reason to sell SD if the pricing is not good due to the CHK sale.  With the $2.6B in cash, and a reduction in capital expenditures, they can remain profitable for years with a solid balance sheet.  CHK needs the money...SD does not. 

 

With prudent management, be it TPG or the right guidance with Ward still under control, there is no reason why this cannot be a profitable business.  They have good assets, good cash flows, and now a pretty solid balance sheet with maturities not due for a few years.  They also have a shareholder with very deep pockets if the need ever arrived.  Cheers! 

[tombgrt]

Interesting developments here. Thanks for all the great posts these last few months.

 

I'm getting interested. Possible downside is getting smaller, better liquidity and the potential cataylsts are plentiful (TW, more asset sales, ...). Even if TW stays, Prem is surely putting pressure on him to get his act straight. Activists can always go for round two if this try fails.

 

[Parsad]

Interesting developments here. Thanks for all the great posts these last few months.

 

I'm getting interested. Possible downside is getting smaller, better liquidity and the potential cataylsts are plentiful (TW, more asset sales, ...). Even if TW stays, Prem is surely putting pressure on him to get his act straight. Activists can always go for round two if this try fails.

 

It will be very interesting in Toronto this year.  I think for those attending, you could get some hear very good Q&A, both at the AGM and our dinner.  With RIMM, SD, FBK, OSTK, end of the lawsuit, all the cash and market highs, lots to talk about with Prem!  Cheers!

[racemize]

Interesting developments here. Thanks for all the great posts these last few months.

 

I'm getting interested. Possible downside is getting smaller, better liquidity and the potential cataylsts are plentiful (TW, more asset sales, ...). Even if TW stays, Prem is surely putting pressure on him to get his act straight. Activists can always go for round two if this try fails.

 

It will be very interesting in Toronto this year.  I think for those attending, you could get some hear very good Q&A, both at the AGM and our dinner.  With RIMM, SD, FBK, OSTK, end of the lawsuit, all the cash and market highs, lots to talk about with Prem!  Cheers!

 

I'm missing it this year to attend Berkshire's for the first time--you guys better post some good notes!  ;)

[bmichaud]

I challenge anyone to post a cash flow-based valuation model that gets anywhere near what tpg says sd is worth...

 

Tpg assumes a heroic debt-paydown plan and a "growth company" multiple of 8x operating cash flow. Wtf would sd ever be worth 8x operating cash flow? I'm not even sure it is worth 8x normalized fcf.

 

This is fantasy-based valuation, imo.

[ShahKhezri]

Yeah but that debt payment is a what-if...there's absolutely no way SD would paydown all debt considering the early debt/redemption costs associated with that.  I dont think the valuation is 200-300% higher...but I do think 40-50% is about right.

[Parsad]

Yeah but that debt payment is a what-if...there's absolutely no way SD would paydown all debt considering the early debt/redemption costs associated with that.  I dont think the valuation is 200-300% higher...but I do think 40-50% is about right.

 

I don't think 200-300% either, but I think it is feasible to see 100-150% based on the values assigned to the Permian sale.  Obviously those values won't happen at this point with the prices that CHK let property go for, but as long as SD is in no need of liquidity, they can wait till valuations are better.  Cheers! 

[muscleman]

Yeah but that debt payment is a what-if...there's absolutely no way SD would paydown all debt considering the early debt/redemption costs associated with that.  I dont think the valuation is 200-300% higher...but I do think 40-50% is about right.

 

I don't think 200-300% either, but I think it is feasible to see 100-150% based on the values assigned to the Permian sale.  Obviously those values won't happen at this point with the prices that CHK let property go for, but as long as SD is in no need of liquidity, they can wait till valuations are better.  Cheers!

 

Agree. Especially if gas prices goes up in 2 years. How about litigation? Maybe TPG will help current shareholders sue WCT resources and TW, and get some money back? ;D

[bmichaud]

The permian sale was mature acreage with 80% oil. Miss Lime is highly undeveloped and less than 50% oil. And if SD waits, according to Deutsche Bank, they face the prospect of declining domestic oil prices down to marginal cost of $80...

[nwoodman]

The permian sale was mature acreage with 80% oil. Miss Lime is highly undeveloped and less than 50% oil. And if SD waits, according to Deutsche Bank, they face the prospect of declining domestic oil prices down to marginal cost of $80...

 

Good point.  Can you provide a link or post the DB report?