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SandRidge Should Replace CEO, Consider Sale: TPG-Axon

SandRidge Energy Inc., the energy company that has declined 77 percent since it began trading in 2007, should replace Chairman and Chief Executive Officer Tom Ward and consider selling itself after a “disastrous” performance, hedge fund TPG-Axon Capital Management LP said.

SandRidge has overpaid its CEO and is an “insatiable spender” with an incoherent strategy, Dinakar Singh, CEO of New York-based TPG-Axon, wrote in a letter to the seven-member board today. SandRidge should replace some board members with independent directors and representatives of large shareholders, according to Singh, who said his fund owns more than a 4.5 percent stake in the company.

“To the investment community, SandRidge often appeared to behave in a reckless and unpredictable manner,” he wrote. Singh said the company’s stock, which closed yesterday at $6, is worth $12 to $14. It’s trading at the greatest discount to current net asset value of any U.S. energy company, Singh wrote.

Singh also attacked “egregious” compensation for Ward, 53, who founded SandRidge in 2006 after leaving Chesapeake Energy Corp., a company he co-founded with Aubrey McClendon. Ward has made about $150 million during the past five years, “astonishing, given the $3 billion market capitalization of the company,” Singh wrote.

SandRidge rose 1.7 percent to close at $6.10 in New York. The shares sold for $26 in their November 2007 debut.

‘Improving Performance’

“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,” the Oklahoma City-based company said in a statement.

Ward declined to comment beyond the statement. The company has a conference call with analysts scheduled for tomorrow at 9 a.m. New York time.

SandRidge reported adjusted earnings today that exceeded analysts’ estimates. Excluding one-time costs, third-quarter profit was 5 cents more than the average of 26 estimates compiled by Bloomberg.

The company also announced plans to sell property in the Permian Basin that produces the equivalent of about 24,500 barrels of oil a day. Proceeds will be used to pay down debt and fund 2013 drilling, SandRidge said in a statement today.

Largest Shareholders

Ward is the third-largest shareholder in SandRidge, with a 5.2 percent stake as of Oct. 1, according to data compiled by Bloomberg. Riverstone Holdings LLC and Carlyle Group LP each owned 10.5 percent stakes as of June 30.

“It seems like Tom does run the company as he sees fit,” Jason Wangler, an analyst at Wunderlich Securities Inc. in San Francisco, said in an interview. Some investors share TPG-Axon’s frustration with the company’s performance, he said.

SandRidge has been a “plausible” candidate for a takeover before, Duane Grubert, an analyst at Susquehanna Financial Group, wrote in an e-mail. “TPG-Axon’s letter may have more suitors consider that scenario sooner.”

As gas prices have dropped from a 2008 high, SandRidge has been seeking ways to expand its oil production. It amassed 1.7 million acres in the Mississippi Lime oil-shale formation in Kansas and Oklahoma. In February, it announced the purchase of Dynamic Offshore Resources, owner of mature offshore oil fields, for $1.275 billion in cash and stock.

“This acquisition was massively dilutive, and most importantly, strategically incoherent,” Singh wrote.

‘Insatiable Spender’

“Separate from major strategic missteps, the company has also developed a reputation as an insatiable spender,” Singh wrote. While the company’s Mississippi Lime assets are valuable, “past behavior suggests that management cannot be trusted to stay focused on developing value in a steady and consistent manner.”

The company has also engaged in “self-dealing that has transferred significant value to Mr. Ward at the expense of shareholders,” Singh wrote. SandRidge’s board in 2008 paid Ward $67 million to end a program that allowed him to to invest personally in wells that the company drilled. McClendon, the CEO of Chesapeake, had a similar perk until he agreed to give it up amid shareholder complaints and government investigations.

In addition, SandRidge pays Ward for oil and gas development on some of the land he owns and pays advertising and promotional costs to the Oklahoma City Thunder, a basketball team in which Ward is part owner, Singh wrote.

Ward addressed criticism about his compensation in a May 4 conference call with analysts. He said his knowledge of the Mississippi Lime helped SandRidge capture a dominant position in the area.

“That’s a question on whether the company would be better off with or without me, basically,” Ward said, according to a transcript. “I’m here at the discretion of the board and the shareholders, and if I believe that I pull my weight.”

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