Recently, Chairman and CEO Tom Ward of SandRidge Energy Inc. (NYSE:SD) was fired from the company he founded. The CEO position was taken over by James Bennett, the company’s CFO, and the Director Jeffrey Serota was the interim chairman. Since the beginning of the year, SandRidge Energy’s share price has dropped significantly, from $6.35 per share to around $4.80 per share. Is the recent CEO’s exit a good signal for the company’s upside potential? Let’s find out.
SandRidge should be worth $12-$14 per share
SandRidge has been the target of shareholder activism from one of its biggest shareholders, the hedge fund TPG-Axon Capital. In a letter to SandRidge Energy Inc. (NYSE:SD)’s Board of Directors in November 2012, TPG-Axon pointed out that the poor performance of the company was due mainly to three reasons. First was the incoherent, volatile and unpredictable management strategy. Second was the irresponsible spending and poor strategic planning, leading to the high cost of capital and massive dilution for the company’s shareholders. Third was the poor corporate government, which did not match the interests of management and shareholders.
TPG-Axon said that the current share price underestimated the company’s intrinsic value. It estimated the fair value of the company to stay in the range of $12 to $14 per share, around three times higher than the current trading price. In order to unlock the potential hidden value of the company, TPG-Axon would like to have its people on SandRidge’s board. Moreover, it urged the company to replace CEO Tom Ward and bring in new management. It also suggested SandRidge Energy Inc. (NYSE:SD) to explore all strategic alternatives including asset sales.
It is quite cheap on the EBITDA multiple basis
In March, SandRidge Energy Inc. (NYSE:SD) reached a deal with TPG-Axon, agreeing that the board had to either remove Tom Ward from the CEO position by June 30 or TPG-Axon would have the controlling number of seats in the company’s board. At the current moment, TPG-Axon already has four directors on the 10-member SandRidge’s board. Interestingly, Fairfax, with a 12.7% stake in the company, had supported Tom Ward to fight against TPG-Axon.
SandRidge had around 367 million BOE in proved reserves, with oil representing around 46% of its total proved reserves. In the full year 2013, the company expected to spend $1.45 billion on capital expenditure, including $970 million in drilling and completion, $185 million in infrastructure and work-overs, and more than $200 million in land and seismic and oil field services. Most of the capital expenditure, more than $1 billion, will be spent in the Mississippi region. SandRidge Energy Inc. (NYSE:SD) is trading at $4.80 per share, with a total market cap of nearly $2.3 billion. The market values SandRidge at only 2.62 times its trailing EBITDA.