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Shareholder letter calls for shake up in SandRidge management

SandRidge Energy’s (NYSE: SD) sixth largest shareholder, TPG-Axon Capital, sent a letter to the SandRidge board of directors requesting a shakeup in management in order to unlock shareholder value, said Stifel Nicolaus analysts in a note to investors today.

In its letter, TPG-Axon Capital requested that the Oklahoma City-based oil and natural gas company make management changes in the form of additional board representation from the largest shareholders and the resignation of SandRidge CEO Tom Ward. The letter also included a request for the company to begin the process of exploring strategic alternatives including the outright sale of the company.

Currently, SandRidge’s board is composed of Tom Ward (who previously served as Chesapeake Energy long-time president and COO), chairman and CEO, and six independent directors serving terms of three years.

Nearly 40% of SandRidge’s total shares outstanding are held by the top 10 shareholders, but SD has a number of convertible preferred outstanding that could increase the share count by over 100 million shares, noted the analysts. With 10%, The Carlyle Group is the largest shareholder, followed by SandRidge CEO Tom Ward with 5%. TPG-Axon owns nearly 3% according to FactSet.

Asset value
Since its IPO in 2007, shares of the company have dropped 76% and the company is “among the most discounted names to its underlying asset value (P/NAV of 30%) as high leverage (2.4x net debt+preferreds/EBITDA) and high cash flow outspends have weighed on the stock,” according to the analysts.

As one of the first to move on the emerging Mississippian, the company is now the leading operator in the oil-rich play that straddles Oklahoma and western Kansas. The shallower-than-most play may generate the highest rate of return for horizontal drilling in the US, and now, the company holds 900,000 acres in the area with plans to drill 380 wells in 2012.

As reported by WalickEnergy president Don Warlick, SandRidge has noted net asset value attributed to the region containing the Mississippian could come close to $15 billion. The company's typical completion has a "4,000-foot lateral with 8-10 frac stages and expected EURs of 456 MBOE per well based on 30-day average IPs of 275 boepd," said Warlick.

“In 2013, we project a cash flow outspend of $935mm or 27% of market cap and expect cash flow outspends to continue through 2015, albeit at a shrinking pace, with leverage slowly increasing to 2.6x by YE13,” they noted, saying that “the letter puts focus on the steep discount to NAV and could be the tipping point for further asset monetizations that could close the discount to NAV at a faster pace than what is reflected in our $10/sh target price. If investors begin to turn from EBITDA multiples to the discount to NAV, we believe that would be positive for the name and the realization of asset value could be accelerated as SD works through its leverage and negative FCF issues.”

Responding to the letter in a prepared statement, SandRidge Energy noted that the company is actively working with management to improve shareholder value.

"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 from TPG-Axon differ in many instances, we agree that SandRidge has valuable assets and that we need to focus on improving performance for shareholders."

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