Why the CEO Had to Go at SandRidge Energy

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On first thought, the announcement of the resignation of the CEO at SandRidge Energy (NYSE: SD) appears nothing to get excited about. Even if the market can blame Tom Ward for the stock weakness over the last few years, losing the founder of the company can’t be a good thing. The interesting part of this news is that the market has another prime example to follow. Not only did cross-town energy rival Chesapeake Energy (NYSE: CHK) recently force its CEO out, but also both CEOs started that energy firm together.

Though seen as more conservative than the wheeling and dealing Aubrey McClendon as the previous CEO of Chesapeake, Ward has come under fire for his drastic shifts in assets from buying the Gulf of Mexico assets to the sudden selling of the Permian basin assets. Whether the fault of these executives or not, the market has been in no mood for constantly shifting assets that are confusing to value. This can be seen in the better returns for steady natural gas producer Southwestern Energy (NYSE: SWN).

Horrible returns

When reviewing the stock charts over the last two years, one can see that both the stocks of Chesapeake and SandRidge traded mostly in tandem until the pattern broke down starting in February. That period correlates when it became apparent that the CEO of Chesapeake would be forced out. SandRidge has drastically underperformed during that time period while Southwestern has outshined the group.

<img alt="" src="http://media.ycharts.com/charts/986b63455f0f548ae1d43eeba2487384.png" />

CHK data by YCharts

Buying and selling assets

Whether SandRidge under Tom Ward was increasing the value of assets, the constant buying and selling of assets has been out of favor for years. Especially considering the company utilized substantial debt loads in order to fund operations. What typically happens is that investors lose interest if they can’t understand the complex transactions taking place.

While focusing on onshore oil plays, the company famously purchased the offshore assets from Dynamic Offshore Resources for $1.275 billion in cash and stock in a shocking move to investors. The deal confused investors even though the company made a good case for the strong EBITDA generation from these assets that could fund onshore production. Further, the release in November that Permian assets were for sale and eventual agreement in December to sell them for $2.6 billion probably lost any shareholders left in the stock.

Whether the swapping of assets generated value on the balance sheet, it didn’t generate value for shareholders as investors questioned why the company bought a non-core asset to only end up selling a previously identified core asset.

Absurd severance package

Considering that Tom Ward was forced out at SandRidge due to a lack of performance in creating shareholder value, it has to be shocking that he gets a staggering severance package.

Tom gets 6.3 million shares of previously granted restricted stock immediately vested or a value of nearly $32 million based on the current price of around $5. Imagine if the stock goes up $2 or $3 due to him leaving the company. He also gets a lump sum cash payment of $53.5. The payment is comprised of the value of future restricted stock, three times his last three annual bonuses, and his base salary for the next three years.

So basically he walks out the door with over $80 million in cash and stock that could gain value based on his departure. Investors should absolutely not accept these pay packages anymore.

Slow and steady wins the race

Over the last several years, the slow and steady stocks focused on turning assets into production have won the race. As an example, slow and steady Southwestern Energy has turned a focus on the weak natural gas market into a more successful stock in the last couple of years. Sure, the stock is still down 9% during that time period, but it vastly exceeds the losses of Chesapeake and SandRidge.

Southwestern continues to increase production in the Fayetteville Shale while ramping up production in the Marcellus Shale to grow total production in Q1 by 11% over last year. In addition, the company recently bought $93 million worth of assets from Chesapeake in the Marcellus Shale. Analysts expect revenue to grow roughly 10% yearly over the next couple of years. More importantly, the company is very profitable compared to the continuous losses at SandRidge.

On the other hand, analysts expect Chesapeake to report flat revenue growth in 2014 due to cut backs in drilling and asset sales. Analysts do see earnings rising as the company is more focused on profits.

Bottom line

While the changes in the founding CEOs may or may not create long-term value, it appears that short-term gains could occur as SandRidge benefits attracting back investors unwilling to participate in the perplexing asset shifts. The results at Chesapeake suggest SandRidge could be an intriguing investment over the next six months.

If you are unsure about SandRidge and the future of this emerging oil and gas junior and are looking to find out more about its strengths and weaknesses, then check out The Motley Fool's premium research report detailing SandRidge's game plan and what to expect from the company going forward. To get started, simply click here now!

Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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