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Prem Watsa Surges in SandRidge Stake, Amidst Company Management Shake Up

November 19, 2012 | About:
As of Nov. 16, Chairman of Toronto-based Fairfax Financial Holdings Ltd., Prem Watsa, reported to increasing his stake of Oklahoma City oil and natural gas producer SandRidge Energy (SD) by 1,152 percent, according to GuruFocus Real Time Picks.

This transaction boosts Watsa’s ownership to 10.5 percent. He currently has 54,551,646 shares of the company, compared to his last reporting of only 4,354,000 shares.

Watsa first acquired SandRidge in the third quarter of 2008, starting off with 280,000 shares at an average price of $38.42 per share. Since then, the company’s market price deflated down to $5.58, with its stock currently up a little over 5 percent per today’s afternoon trading.

With a market cap of $2.62 billion, SandRidge’s primary focus is exploration and production, mainly in the following locations: the Mid-Continent, Permian Basin, Gulf of Mexico, West Texas over thrust and Gulf Coast according to its website.

In recent weeks, SandRidge has flooded media headlines due to shareholders urging the company CEO, Tom Ward and SandRidge’s board of directors to be “reconfigured,” addressing several problems they have with how the company is run.

On Nov. 8, hedge fund TPG-Axon Capital Management, 4.5 percent owner of SandRidge, released a 13-page public letter expressing its growing lack of confidence in SandRidge’s management.

In the letter, TPG-AXON writes: “SandRidge stock performance has been nothing short of disastrous, on both an absolute and relative basis, since the company’s IPO in 2007. Obviously, the financial crisis and subsequent collapse in natural gas prices were factors that negatively affected SandRidge, just as they impacted many energy companies. However, in the case of SandRidge, many of the wounds have been self-inflicted and caused damage in recent years.”

Additionally, TPG-Axon expresses detailed descriptions for its reasons to feel that SandRidge’s management strategy has been “incoherent, unpredictable and volatile;” that its “perceived reckless spending” has caused “massive dilution, soaring capital costs and unnecessary risk for shareholders;” and lastly, that its “corporate governance has been appalling.”

Days after the release of the letter, a second shareholder, Mount Kellett Capital Management LP also disclosed a public letter to SandRidge, directly stating that its board believes “Tom Ward should be replaced with a seasoned executive who can restore the company’s credibility.” Mount Kellett is also 4.5% owner.

Mount Kellett writes: “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%... 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.”

Upon the time the first shareholder letter was released, SandRidge Energy quickly responded saying: “The Board and management value the opinions of our shareholders and are always open to constructive engagement with them. While our perspectives on various points made in the letter differ in many instances, we agree that SandRidge has valuable assets and that we need to focus on improving performance for shareholders. The Board continues to actively work with management in taking steps to improve shareholder performance.”

In SandRidge’s third quarter fiscal results, the company reported increases in adjusted EBITDA, operating cash flow, and adjusted net income. The company also elaborated on its exploration of its sale of assets in the Permian Basin, which Tom Ward says (in the report) would help gain proceeds to fund the company’s capital expenditure program in the Mississippian play and repay debt and strengthen SandRidge’s balance sheet to fully fund capital expenditures through 2014.







Ward said something similar in August at an interview with energy company news site, Oil & Gas 360.

In the video, the host asked: People say [SandRidge] is undervalued. Others have expressed concern about the balance sheet. These opinions can be polarizing. What are you doing to address both, short-term and long-term?

Ward responded: “We set out a goal in 2011 to have a three-year plan and in that three-year plan, we were to triple our EBITDA, double our oil production in the company and have our credit metrics come down below three times. We’re well on our way now a year and a half later to achieve all of those goals. Our oil production has increased dramatically in the last year, our debt EBITDA has gone down three times, and we’ve already fully funded all of our drilling through 2013. And today, we have the best liquidity that the company’s ever had. We have $1.9 billion of liquidity today. So financially, we’re at the strongest position that the company’s ever been in."



Source: http://media.oilandgas360.com/

Despite the recent controversy, Guru investor Watsa has obtained more shares of SandRidge, making this recent holding his largest one of the company, yet.

Besides Watsa, T. Boone Pickens, Wallace Weitz, Jim Simons and John Burbank are several other Gurus who have purchased shares of SandRidge as of the quarter ending Sept. 30. (View SandRidge’s holding history with other Gurus at SD: Holding History.)

GuruFocus labels SandRidge with four Severe Warning signs indicating an Altman Z-Score in the distress zone, a declining per share revenue and a consistent issuance of new debt for the past three years.

Additionally, SandRidge’s four Medium Warning signs reveal low interest coverage, a P/E ratio close to its three-year high and a loss in operating income.



SandRidge is also trading close to its two-year low price, as well as a two-year low P/B ratio.

1353359136535.pngSD data by GuruFocus.com

View more of SandRidge's data on 10-Year Financials. Also view the rest of Prem Watsa's latest portfolio picks here.

To read more on related topics, re-visit the following articles and submissions on GuruFocus:

Prem Watsa/Fairfax File 10% Ownership Position on SandRidge

SandRidge Energy Has Had Corporate Governance for Years

More from Activist Investor TPG-Axon on SandRidge Energy

Full Detail of Activist TPG-Axon’s Demands for SandRidge Energy

Hedge Fund Activits Target – SandRidge Energy

Prem Watsa Reduces Holdings in SandRidge Energy

SandRidge Permian Trust’s Quarterly Disbursements Looking to Exceed Estimates



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About the author:

Dianne Tordillo
Dianne Tordillo is staff writer for GuruFocus.com. She reports on a variety of financial news, primarily dealing with investor portfolios and stock trades. Her articles also highlight insider trades, as well as the many useful features of GuruFocus.

Visit Dianne Tordillo's Website


Rating: 3.8/5 (13 votes)

Comments

kfh227
Kfh227 premium member - 1 year ago
SD is probably 20% of my portfolio.

Prem adding is good news ;-)
vgm
Vgm - 1 year ago
Kfh - what's your take on the shareholder rights issue?

Please leave your comment:


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