The Longleaf Way

[T-bone1]

I think he bought almost all of his stake (at higher prices than here), and I believe he - like Aubrey McClendon - bought even more on margin and lost a fair amount in 2008:

 

""Oklahoma City-based SandRidge focuses on the exploration, development, and production of oil and gas in the West Texas Overthrust, East Texas, and Mid-Continent (Oklahoma) regions.

 

"President, and CEO Tom Ward purchased 460,000 shares at $48.95 on May 19th/20th, which increased his already substantial holdings to nearly 36.95 million shares, or a 25.27% stake.

 

"It was the first purchase for Ward since he announced in March his attention to buy up to $100 million in stock on the open market this year. His only other open-market purchase came in November 2007, when he took down 4.17 million shares at $26.00 in the company's initial public offering.

 

"Daniel Jordan, a SandRidge director, also bought 60,000 shares at $48.41 on May 16th/19th, which increased his holdings to 1.1 million shares. It was his third purchase. Several insiders bought into the company's IPO last fall and another director picked up $200,000 in stock in March.

 

"Ward, a self-made billionaire (and minotirty owner in the Seattle SuperSonics) has been the chairman and CEO of SandRidge since June 2006 and the president since December 2006. He made his billions as the co-founder, former president, and chief operating officer of Chesapeake Energy (NYSE: CHK), one of the largest independent natural gas producers in North America.

 

"When Ward retired from Chesapeake, he told the Oklahoma City Journal-Record earlier this year, because 'it was just time for me to move back to a smaller company, back to something I could get my arms around operationally.'

 

"Meanwhile, SandRidge got its start as Riata Energy in 1984 by Malone Mitchell, III. The company grew to become the largest privately held land driller in the U.S., and in early 2006, filed for an initial public offering."

[Zorrofan]

Thanks - it's good to see Ward has some significant "skin" in the game! (Is that the right slang?) Anyways, it seems like his interests are aligned with shareholders. He seems focused on building value, hopefully he will be successful.

 

cheers

Zorro

[txlaw]

South Eastern Asset Management is the largest shareholder of Chesapeake Energy as well as a large holder of Fairfax. In a recent interview with Morningstar, Stanely Cates commented on CHK and on Abbrey McClendon and addressed hisperspective on his pay package. The article makes mention of a "stamp collection" but I believe they are referring to Aubrey's map collection. The interview is linked below. In addition, I found the comments on Cemex(CX) of interest, especially as they are now trading around $8 and Cates' comments were when the stock was trading at $10. It looks as though CX has made a number of strides in cleaning up past mistakes and "right sizing" for the new normal in cement demnand. While debt is still a concern, they have no maturities until 2012 and significant free cash flow of $800M+. Does anybody have any additional insight on CX?

 

 

http://www.longleafpartners.com/pdfs/Morningstar_103492-OPP-ZCGP2_08.24.10.pdf

 

CX could potentially be a pretty darn good investment over the next 5 to 10 years, although I'm not sure how Longleaf will do, as I do not know what their cost basis is. 

 

Scale matters in the cement/aggregates/ready mix business, and it is a sort of oligopolistic market.  Cemex operates all over the world, which I like, and is supposed to be one of the best buildings materials companies in terms of its operations.  They're also quite good with disclosure, although I'm not sure how the Mexican GAAP thing should affect the way one digs into the financials.  They made a huge mistake loading up on debt to buy Rinker, though.

 

There is both operating leverage and financial leverage built into the investment.  Cemex could have owner earnings well over $2.00 per ADS in five years, and if CX uses all free cash to pay down debt and gets to refinance at better terms when its debt comes due, we're talking about a damn good return.

 

However, I don't own any CX yet -- it's on my watch list.  I feel like we should wait to see what the economy does and what Cemex's sales and margins look like before jumping in.  Lenders could be unwilling to refinance the debt that starts coming due in 2012 at decent terms if we don't get a nice recovery in construction and some large stimulus projects that require lots of building materials.  In fact, there are targets that CX has to meet by the end of the year (see http://www.reuters.com/article/idUSTRE68M3Z220100923), and if they don't meet the targets, they will be forced to take actions that reduce the value of the company (asset sales at low prices, for example). 

 

Better to wait and see what happens.

 

I'm also interested in TXI, which has some of the same dynamics as CX, except that it is unlikely that TXI will perform to potential in 5 years without some shareholder activism.  To that end, it's interesting to see Longleaf and Nassef Sawiris, the Orascom guy, loading up on shares.  TXI just put out an interesting presentation that details the potential operating income they could earn, but that's under a rosy return to normal scenario.  Additionally, I have no confidence that current management would be able to achieve those aspirational goals. 

 

I feel like CX and TXI are ones to watch and jump into when we get more information, especially since there are companies out there that are even better values.

[Myth465]

T Bone thanks alot for the analysis and Zorro thanks for the link. It pretty much echos what T said.

 

Very interesting. I may look at 2013s on CHK as a small speculative position. 2.5 years should hopefully be long enough. I also viewed some of there presentations and I think you are right the CEO's style is a huge turn off but may be a great asset. I still worry about the commodity and will spend sometime looking into natural gas.

 

T Bone what do you read? How do you get to the level of detail you have for the land drilling equipment and other related bottle necks? I have picked up on the decline rates and the drill to hold / hedging factors, but dont have a great grasp on the equipment. With deep water its a bit easier. You can easily see that a 400 ft rig cant drill a deep water well. You can tell that HERO and HAWK have crappy rigs that wont be working unless its plug and a abandon work or other more high quality rigs are already put to work. With land it seems like there are a bit more variables, I know PTEN and Nabors tend to have older rigs and PDS and HP have newer better equipment but am not sure whats required for shale wells and what the specs / supply demand ratios on those are.

 

Anyway thanks alot for the best, there are definately plenty of things to think about.

 

In the oil space my favorite ides are ATPG, and SD. I am looking into Petrobank after the barrons and gurufocus write ups. For gas it seems like no one is as knee deep in it as CHK. I also like Ensco as a driller, but feel that cash flow will continue declining for some time. What are your picks? 

[Zorrofan]

T-bone, Myth

 

thanks for the "extra push" I needed to get into SD. It has had quite the nice run the last week. Maybe people are figuring out SD is now into oil in a big way (or just reading this board!!) Now Ward just needs to execute the plan......

 

cheers

Zorro

[T-bone1]

Myth, sorry to just see your message now. I read periodicals like oil & gas investor, oil & gas weekly etc. Sell side research, and company presentations (drillers like HP, service like HAL, and almost all the E&Ps, along with 10Qs and 10Ks). My viewpoint is largely based on what I see the smart money (IOCs, CHK, MCF in my viewpoint) doing with their money, not on what they say. Total said that shale was in a bubble, then went ahead and gave CHK a few billion for a piece of their Barnett acreage. CHK says that gas will stay low for a long time, but they have only sold calls on 10% of their production and they aren't actively selling gas assets or hedging. XOM hasn't said a word, but they bought XTO, etc. I think the smart money is betting that gas gets tight in N.A. again, otherwise you would probably see a much larger and more accelerated push to build LNG export capacity (instead of the small amount being built over the next 5 years off LA and BC). In short, I think Ken Peak has it right, but I think CHK will be the big winner.

 

Zorro, welcome to the club (and to owning the only stock we know Prem has in his personal account)! Lets see what this stock can do over the next few years.

[Myth465]

Thanks T Bone, I am guessing we get a few of those at the company I work for and will have to check them out. I will have a read and poke around CHK, but will likely end up buying the 2013 Leaps towards the end of the year. I figure that should be more then enough time. I think you are right, Ken Peaks seems so confident despite all the fundamentals going the other way, and everyone seems excited about the XTO deal.

 

Zorro you added quite a bit of commentary in the SD trade and pushed me to look a bit deeper as well. It looks like SD and ATPG are both moving a bit, though I am unsure whats kicking up SD. Hopefully its just value being its own catalyst.

[T-bone1]

Myth, I own the 2013 LEAPS as well . . . I think the potential appreciation justifies buying some LEAPS.

 

Sandridge put out a new presentation today with well results from their horizontal Mississippian play in Oklahoma. As I said before, I don't see any way that this is worth less than $1 Billion based on transactions for leases with similar potential. I spoke to a sell side analyst when they first disclosed their type-curves two weeks ago and he said that they would need to prove the play to the street as the company doesn't have a ton of credibility right now due to their constantly changing plan. I think this new information should go a long way towards that and is the reason the stock is up 5% right now.

[Myth465]

Thank you sir, I am a happy camper just opened up the PC, and we are up 6%. I am reviewing the presentation now, with a big smile on my face. I have a big chunk of $5 leaps. I probably should have went out of the money but was unsure where things were going or how long we would be under $4. I think for CHK I will go deep out of the money. Either gas is $7 - $10 and I make a significant return or its at $4 in 3 years and my premium is worked off. I think its a good speculation for a 3 - 4% position. What do you think?

[T-bone1]

I agree, all of my CHK LEAPS are out of the money, and I think they are attractively priced

[Zorrofan]

This has been a very informative - and profitable! - thread. The SD presentation was great. Production from the OK play seems steady at an average of 200 BOED per well, and SD has added 2167 BOED since July 1 from this play alone. They also upped the acerage to over 300,000.

 

You guys are going to force me to check out CHK (nice pun). i know very little about the company so I guess I have some homework to do....

 

cheers

Zorro

[Stove]

This might deserve its own post, but here goes anyway.  Contango Oil & Gas (MCF) is spinning off its minerals exploration subsidiary.  The new company is prospecting for rare earth minerals in Alaska.  Lots of news lately about the concentration of rare earth element supply and its effect on the U.S. national security (upwards of 95% of current world output is out of China).  Press release:

 

http://www.businesswire.com/news/home/20100930005480/en/Contango-Oil-Gas-Company-Announces-Distribution-Contango

[T-bone1]

CHK has sold 33% of their Eagle Ford shale to CNOOC for $2.16 Billion (half now, the rest over the next 24 months to fund drilling). They leased this land over the last year for less than $2 Billion total . . . so looks like a quick $4 billion in value created along with adding more liquidity.

[Zorrofan]

Looks like Ward sold over 6m shares of SD. Curious as to why, given that SD releases 3q results in about 4 weeks. One would think that he would wait for that...if they are going to be as good as i hope!

 

cheers

Zorro

[T-bone1]

It is dissapointing to see Tom sell . . .

 

I don't anticipate especially good results from SD in Q3 (although after the last two quarters anything short of disaster is probably good). However, CHK has their annual analyst day on Wednesday, where they will discuss their shale plays - including the Mississippian play in Oklahoma. I would think this could be a significant positive catalyst for SD . . . having another company confirm the quality of the play.

 

Maybe this was a pre-arranged sale by Tom, I didn't read through the filing yet, but I doubt he could actively sell shares between the end of Q and reporting (I know 144 plans can be cancelled so its basically active, but the timing just seems a little strange)

[Zorrofan]

T-Bone

 

CHK does seem to have the knack for unlocking value....SD may require a few more quarters to execute and for the results to start to show.  Is the CHK event going to be webcast?

 

cheers

Zorro

[Myth465]

Looks like SD is reacting to the sale (at least I hope thats the case). It also looks like ATPG is starting to play out.

 

With regard to CHK, it looks like his vision is playing out. I reviewed the calls and presentations but, thought I had a bit longer on this one, due to gas prices. I also didnt like the forward sale transaction they did last week or so. But Canadian value makes a good point, its hard to believe that every major oil and gas company is completely out of their mind. Interesting day - http://www.gurufocus.com/news.php?id=109134

[T-bone1]

Zorrofan, it will be webcast. there'll be a link on their webpage.

 

Myth . . . considering CHK paid less than $2 billion for the Eagle Ford and its now valued at $6 billion . . . I think they've created $6+ per share in value this year alone on just this one deal, so I don't think you have missed the boat just yet with the sub $1 price movement today

[Zorrofan]

T-bone, Myth

 

It appears the sale may have been as follows:

 

"In a related transaction, existing rights held by a charitable income trust established by Kaiser were amended and restated as five-year warrants to purchase about 6.67 million shares from Ward for $5.62 per share, subject to certain adjustments."

 

I would have thought Ward would have done some sort of a press release about this, wild action today! Anyone pick up some more?

 

cheers

Zorro

[Myth465]

Thanks for the update Zorro, hopefully this is what pushed the shares down.

 

Good point. I just wise he would sell more acreage and pay down debt. But I think you were on to something. You dont get a guy this ballsy making calm rationale calculated decisions. If thats what you want buy XOM.

 

I dont really have a good reason not to buy, I questioned his numbers in the presentation, but the majors are paying up. Its hard  to believe that the Chinese and majors are all idiots. What do you make of the forward sales though?

[alertmeipp]

CHK: I just went through the latest presentation. It's a 180 pages presentation, have lots of good information on it. The last few pages were the goodies.

I now agree if you believe the NG story, CHK is THE stock to own.

 

They do have lots of valuable assets to cover their debts and I don't see them having any near to medium term problem with it anyway.

 

I know the margin call story about the CEO, but what else did he do to justify such a low pps? Is it mainly the NG price? But the market seems to give more value to other NG plays than this.

[Myth465]

CHK has had a nice run. Too bad I was sitting on my hands when I should have just bought the Leaps. Oh well. SD has done amazingly well, while ATPG has sucked wind mostly.

 

Time will tell.

 

CHK - seems to have a great plan.

ATPG needs a permit.

SD - should be very interesting. By Ward's count they can only hold 250,000 and they have 650 or so if not more. Will be interesting to see what comes out of that. Either we buy / contract more rigs, sell, or do a JV.

[Zorrofan]

Myth, don't quote me but I thought Ward had said something about leasing more rigs (possibly when when at the Credit Suisse conference?). With the royalty trust plan SD may hope to hold more acerage through the use of either more trusts or selling more acerage into the one trust......gives Ward more cash to lease rigs and drill more wells.

 

Cheers

Zorro

 

PS What are your thoughts on Lou Simpson joining the CHK board?

 

 

 

[Myth465]

I think its a good move. CHK has the assets and has skilled Management. I notice when they come up the first thing someone does is recall the margin story. There is no way around it but that looks bad to value folks and you need value folks to step in and buy before the growth guys come in.

 

I think Icahn and Simpson both bring alot to the story. Icahn has marked the bottom and tells you that its cheap, Lou tells you someone will be on the board watching over Management. Its a good move by Longleaf and CHK. I am guessing your leaps are close to in the money now.

 

---

 

Ward said the logistics become too much with more than 10 rigs or so. The trust gives them cash, but I dont know if they have the personal / ability to do much more than 10 - 12 rigs. I would love for them to keep selling trust units and try to hold it all but that would be a hell of a lot of drilling. I like the way it was done because we get the cash upfront. They can use that cash to pay down a bit of debt, drill, and most likely buy more acreage (based on what I have seen of these guys).

 

I am happy either way. A JV with a major / mid level or massive drilling with 30-40 rigs. Seems like a win win for us. It would be tough to hold all that acreage though, and knowing them they may get to 1 million. Im really looking forward to the conference. We had 15 presentations with no change and then have to wait 2 months for real updates after block buster news.

 

---

 

Interesting and timely post. Highlights some of my issues with CHK but much more articulately. I like the JIT description of natural gas.

 

http://www.gurufocus.com/news.php?id=120817