SandRidge - August 24th - Investor Presentation

[ourkid8]

http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9Mzk0MDcyfENoaWxkSUQ9Mzk5NDAyfFR5cGU9MQ==&t=1

[Guest]

Probably an iditoic question on my end, but is this company connected to Fairfax? Did they purchase a stake or something? Thanks for the insight! :)

[Zorrofan]

Both FFH and Prem himself own a stake in SD. It is - IIRC - the first time Prem has bought a stake in a company FFH has invested in!

 

cheers

Zorro

[alertmeipp]

Not sure why they keep changing the presentation without much new info. The market needs to see cash flow projections and how the debt will be paid off...

 

 

[Myth465]

This new presentation has some nice updates.

 

Q3 and tomorrows presentation should be interesting. I knew they would ramp up fast but man these guys can move.

[T-bone1]

The new play gives very significant new info.  They have given details on their Horizontal Mississippian play in Okalahoma.

 

1) they have 250k acres (we knew this)

 

2) they have drilled 19 wells and are drilling 4 more right now (new)

 

3) wells cost $2.5 million and produce 200-400k BOEs, 53% oil and probably some NGLs (new)

 

4) this play has better rates of return than the permian (new, and as suggested by point 3)

 

5) "this is a core area for us" - moving 4 permian rigs there right now, 2 more by Q1 (new)

 

Looking at other oil plays, especially frac'ed horizontal plays (they say this is a highly permiable limestone resevoir, not a source-rock or shale, but they still frac most of the wells), I think its safe to assume 20% of all production will come in year 1.

 

If the BOE (53% oil at $70, 47% gas and NGLs at $30) is worth $50, and they are getting 20% of 200-400k bbls in year one, that is between $2 - $4 million in revenue in year one for each well (which only cost $2.5 million). If each well is on 100 acres (my best conservative guess), then you could easily afford to pay $1 million to lease the land for these wells and still make a very attractive rate of return . . . suggesting that 250k acres is worth $2.5 billion.

 

I know $2.5 billion is a large number, but Tom did say "this is a better rate of return play than our permian properties" (which they paid billions for and are smaller), and they are moving rigs their immediately.

 

I think they value could be more than $2.5 billion, but just being conservative, lets assume that only 100k acres of this new play are what they say it is, and the rest is worthless . . . that's still $1 billion in value, or more than $2 per share.

 

 

[Myth465]

Very interesting and it still under $5  ;)

 

I need to listen to a replay and get some more cash.

[T-bone1]

I would expect a sell-side analyst report to mention this later today/tommorow. It is just too big of news, in my opinion, to ignore.

 

Tom said this rock is 300 times more permiable than the Eagle Ford shale, which makes completions much cheaper and improves the economics. I read the original academic research on this play and permiability was an issue, not sure if SD found a better area or has just solved in through frac'ing (they are doing simple 8 stage fracs now in most wells, just acid frac'ing some others) or acid.

 

oil plays like the Eagle Ford Shale oil window sell for $14,000 per acre.  I really think this sounds like a reasonable number for this new Sandridge play . . .  IF it is contiguous over all their acreage and IF production at their wells declines as expected (while there isn't a lot of info on this specific play, thousands of wells have been drilled in the Mississippian carbonate, so there is enough info to make a good guess.  This reminds me a lot of discoveries like the Haynesville (CHK) and Eagle Ford (HK), which panned out as expected. I'm not aware of any major announcements like this by a major company - that has already put 19 wells in the play and is moving rigs there - that didn't pan out.

 

$14k per acre is as big number, but I think realistic. There is a still risk and this should be discounted until there is more information on the wells (which takes time to see how each well declines) and the geography (which takes more wells in different parts of their acreage), but this is really important in my opinion. At $14k per acre this would be worth $3.5 billion or 8.04 per share.

 

I have seen sell-side analysts approach a discovery like this by "risking" it . . . i.e. they might "risk" something like this by assuming 80% of it is worthless (my best guess of what they would do), until it is "de-risked" by further drilling and information. If an analyst "risks" this play at 80% and adds the resultant value (probably still $2.00 per share) to their NAV, I would expect an upgrade.

 

Then again . . . the analysts and I have never seen eye-to-eye

[rogermunibond]

CHK has been talking about the Cleveland, Tonkawa, Mississippian plays for a while now.  At least since early 2010.

[T-bone1]

My mistake Roger, I see it was disclosed at least as early at their June investor meeting

[Myth465]

This seems like a no brainier. Even if you are only half right that is $1 billion in additional value. I think people are having trouble modeling cash flow and production due to all the moving pieces and that is why the price is low.

 

I think with 50% returns per well, and 30 - 40 rigs running drilling horizontal wells its easy to say cash flow will grow quite a bit. SD for a while was selling for a market cap right about the value of the Arena purchase. Once cash flow and market cap goes up. The debt will look a bit more reasonable, and they can retire some.

 

This new core land is a nice kicker.

[FFHWatcher]

I didn't think my comments justified a new SD topic but I just wanted to vent a little on how CEOs use company's as their personal piggybank.  It is a sad state of affairs where corporate America has deteriorated and shareholders and regulatory bodies have allowed certain compensation practices to occur.  

 

Prem and FFH set the bar so high, that it puts most other CEO's at the other end of the spectrum.  I know Prem likely gets lots of personal perks from FFH but it is a fraction of others, when you compare the value that Prem brings to the table each year and then you see what he gets, it is hard to say that it is lopsided in his favour.  In fact, I am going to start a rumour that Prem uses he own personal long distance calling card to make long distance calls from the office  ;D.   That can not be said about other CEOs, which brings me to Tom Ward, CEO of SandRidge a major holding of FFH.  

 

I have been reading the SD proxy statement and have included a few of the notable excerpts, keeping in mind the following historical information,

 

1/ Tom Ward was one of the original founders of Chesapeake Energy and was their COO until about 2006.

2/ Ward is or was worth in excess of $1-2B, yes, Billion, dollars.

3/ Left CHK in early 2006 and in May 2006 purchased a controlling stake in Riata Energy from Mitchell Malone (the founder) that represented approx. $500M purchase for 29M shares @ $17.25.  It would seem that he used debt to finance that purchase and used his new shares as collateral, and perhaps used his CHK shares as collateral as well.  Mr. Mitchell will retain 22M shares after the transaction.

4/ After taking over Riata, he changed the name, changed the directors, cleaned house, changed the strategic direction of the company and began a very large acquisition spree that issued hundreds of millions of shares and billions of debt.   Also started an executive management well participation program, similar to CHK where the executives are allowed to buy into and share costs in the working interests of wells with the company they work for.

5/ Dec 2007 IPO @ $26/share and T Ward purchased another 4.1M shares

6/ March 2008 T Ward announces his intention to purchase up to $100M shares in the open market. Price was about $39. in March 2008.

7/ By May 2008, T Ward was still purchasing at $48 and up to $56 or so now holding close to 37M shares (personal + trust shares, I believe).

8/ Oct 2008, SD cancels management well participation program and pays out $60M to T. Ward (and others ?) for their portion.

9/ Dec 31, 2008 - T Ward had to sell $50M worth of shares at $5.62 (8.9M shares).

10/ April 2009 - T Ward sold 3M shares from an entity he controls at $7.46 (now back down to about 27-28M shares in total)

11/ Dec. 2009 - T Ward sold 2M shares @ $8.85 (down to about 25M shares)

12/ Jan 2010 - T Ward sold about 100k shares at $10 to raise about $1M

13/ July and Oct 2010, sold another 6M shares at under $6. to bring his total holdings down to about 21M shares.

* I may be mistaken, but I believe that all share sales are related to margin calls/using SD shares as collateral for loans that were originally used to purchase SD shares.  

 

Summary of Wards Total Comp.

 

2009 $13.7M

2008 $19.3M

2007 $15.5M

 

Interesting Notes in the SEC Filing...

 

Perquisites and Other Personal Benefits. We believe that the total mix of compensation and benefits

provided to our executive officers is competitive and generally, perquisites should not play a large role in our

executive officers’ total compensation. As a result, the perquisites and other personal benefits we provide to our

executive officers are limited. Under the terms of each named executive officer’s employment agreement, we

will pay the fees and expenses related to one membership in a club in the Oklahoma City, Oklahoma area. The

terms of Mr. Ward’s employment agreement provide for accounting support from certain Company employees

for his personal investments. Mr. Ward reimburses us for half of each such accounting support employee’s

annual salary and cash bonus. We have also agreed to provide access to an aircraft at our expense for the personal

travel of Mr. Ward and his family and guests who accompany him or them. Mr. Ward pays all personal income

taxes accruing as a result of aircraft use for personal travel. In addition, from time to time, the Company provides

personal security to Mr. Ward and his family.

 

 

And it goes on to state;

 

(b) The amount reported in this column for Mr. Ward in 2009 includes (i) $764,767 for costs related to accounting support from our

employees for Mr. Ward’s personal investments; (ii) $194,169 for costs related to aircraft usage; (iii) $102,245 for personal security

provided to Mr. Ward and his family; and (iv) $12,246 for club membership dues and fees. Accounting support costs include 50%

of the salaries and bonuses paid to the employees primarily engaged in providing these services and 100% of the costs of the

benefits the Company provides to these employees. The amounts attributable to aircraft usage and personal security are based on the

incremental cost to the Company. Incremental cost for aircraft usage is based solely on direct operating costs, including fuel, airport

fees and incremental pilot costs, of Company owned aircraft (excluding capital costs of the aircraft) and costs attributable to leasing

aircraft not owned by the Company (based on hourly fees), and incremental cost for Mr. Ward’s personal security includes the cost

of equipment installation and maintenance and salaries and fees for security personnel. The amounts reported in this column for

2008 and 2007 include $759,611 and $463,973 for accounting support costs, $193,184 and $144,039 for airplane usage costs, and

$3,387 and $5,906 for club membership dues and fees.

 

Summary:

 

I am not making a judgement as to whether Tom has added more or less value than what he is receiving from SD.  I guess my comment is regarding why he has (other than the obvious answer...'because he can') set up SD to give himself the compensation that it does?  He controls the board, the executive, etc. and let's face it, he controls the compensation, just as Prem does.  What Tom says, goes.  What Prem says, goes.  Yes, Prem does have multiple voting shares but it has never come down to that.  T. Ward only owns about 5% of the shares of SD now, but I gotta think, what Tom says, goes.  

 

How do these CEO's get away with this?

I am also not suggesting that it is just T. Ward.  I don't think he is abnormally compensated, especially put in the context of the rest of the Nat Gas CEO's from Oklahoma and Texas.  I am just saying, he is a significant shareholder and takes an excess amount from the company.  Why not accept the fact that he is fairly paid at a few million dollars per year as the CEO and why not accept that the remainder of his compensation should come in the form as the rest of his shareholders do, which is in the form of an increased share price or dividends?

 

Why let the company pay all those personal expenses when he makes millions per year and is or was a billionaire? $100k for personal security?  $764k for accounting support for his personal investments?  $194k for personal aircraft usage?  That is over $1M in perks from a company that can't even pay a dividend and that has gone from over $50 to $5 ?   He may end up adding a lot of value to shareholders in the long run but why not participate like his fellow shareholders?  Why does he have to get paid today for something that may or may not end up helping the company?  In previous years, Ward states that executives should be paid their bonuses and restricted shares in full because they were able to raise $1.5B.  Ok, what if that debt ends up bankrupting the company?  My point is, why get paid today for results that have not occurred?  

 

In the end, a lot more compensation should be significantly deferred after fully weighing the true economic impact of managements decisions.  What is better than basic share ownership?  Those 1.5M shares that Prem started off with at something like $5 or $10. has served him well over the long run.  

[Myth465]

I am just as annoyed but it has become the norm, not much I can do. Buy cheap, sell high.

[Grenville]

Thanks for the post FFHWatcher.

 

It makes me feel better that Fairfax switched out of the common into the prefs.

[FFHWatcher]

Shareholders can always vote with their feet and just walk away/sell their shares.  Let's see how that works.

 

Frank Stronach has historically taken absolutely huge compensation from Magna.  Earlier this year he agreed to eliminate his dual class share structure in return for a token payment of $800-900M.  Price before announcement was $65.  If you didn't like it and thought it was yet another rip off and sold your shares to show your displeasure, you would have lost...large.  Current price 5 months later is over $90 for a cool 40% gain.  Ooops.  (I think Stronach got a bunch of shares too, so he is likely up over $1B on that move... not bad).

 

Selling or simply not investing in these types of companies feels like the right thing to do but it may not be in an investors financial best interest.  Dilemma not solved.

[Myth465]

Shareholders can always vote with their feet and just walk away/sell their shares.  Let's see how that works.

 

Frank Stronach has historically taken absolutely huge compensation from Magna.  Earlier this year he agreed to eliminate his dual class share structure in return for a token payment of $800-900M.  Price before announcement was $65.  If you didn't like it and thought it was yet another rip off and sold your shares to show your displeasure, you would have lost...large.  Current price 5 months later is over $90 for a cool 40% gain.  Ooops.  (I think Stronach got a bunch of shares too, so he is likely up over $1B on that move... not bad).

 

Selling or simply not investing in these types of companies feels like the right thing to do but it may not be in an investors financial best interest.  Dilemma not solved.

 

Very good point. I look at FCF after compensation, and will adjust for options if they are significant. We cant all be so high minded. For me if the company is not an Owner Manager type company with reasonable compensation / ethics, then it will not be a buy and hold longer term holding. Simple as that. Buy cheap, and sell near / at fair value.