Insight: How SandRidge Energy's CEO adapted the Chesapeake playbook

New York, Jan 25 : For 17 years, Tom Ward and Aubrey McClendon teamed up to build Chesapeake Energy Corp into the second-largest natural gas producer in the United States.

The two Oklahoma City energy men were a study in contrasts. CEO McClendon was brash and aggressive; company president Ward came across as steady and soft-spoken.

When Ward left in 2006 to start his own natural-gas company a few miles away, however, he borrowed from the Chesapeake playbook. At SandRidge Energy Inc, Ward adopted some of the same idiosyncratic business practices deployed by McClendon.

At Chesapeake, McClendon intertwined his personal financial deals with the company he runs.

Similarly, Ward has melded his own financial interests with those of publicly traded SandRidge more than many of the company's shareholders may know, an examination of court documents, Oklahoma state records and Securities and Exchange Commission filings shows.

Like McClendon, Ward has faced criticism from shareholders and others for running a public company like a private firm, drawing large paychecks and bonuses even during periods when his company struggled.

In 2008, Ward received personal loans from the chairman of Bank of Oklahoma - one of SandRidge's key lenders. He also took the unusual step of opening the company's books for the lender's review of that personal deal. The mixing of personal and corporate roles posed a potential conflict of interest for the CEO, analysts say.

Now, the question is whether Ward will be forced to change his ways as McClendon was earlier this year, when shareholders shook up Chesapeake's board and stripped him of his job as chairman following a series of reports. Chesapeake said it was not awarding McClendon, who remains CEO, a bonus for 2012.

Two large SandRidge shareholders - hedge fund TPG-Axon Capital and investment firm Mount Kellett Capital - have been pressing to replace Ward and the board and to put the company up for sale.

"There is constant intermingling of the personal and the private" between the CEO and SandRidge's business, said Dinakar Singh, founder of TPG-Axon, which owns 6.7 percent of SandRidge.

Greg Dewey, a spokesman for SandRidge, declined to respond to questions on Ward's transactions or on any similarities between SandRidge and Chesapeake. But he stressed that "in each case, we have followed our own internal guidelines and we know the (Securities and Exchange Commission) rules very well and have followed those."

In addition to borrowing $75 million from Bank of Oklahoma's chairman, Ward also collected $67 million from SandRidge by selling back his personal interests in a controversial corporate perk: stakes in the company's wells. McClendon, too, had a similar incentive at Chesapeake.

SandRidge has also paid nearly $28 million more to Ward or firms linked to him or his family, according to SEC filings. (SEE FACTBOX)

Those payments are in addition to the more than $116 million Ward has received in compensation as CEO since 2007. Between 2007 and 2011, Ward made more than $7 million more than the two men who served as CEO of Chevron, a company more than 60 times the size of SandRidge by market capitalization. (Compensation data for 2012 is not yet available for Chevron.) Ward's pay included $4.2 million for accounting services related to his personal and family finances.

In each case, SandRidge disclosed the benefits that Ward has drawn, and nothing is illegal about the compensation packages. But some analysts and shareholders question why Ward earns so much, given the company's size and stock price. As natural gas prices plummeted, SandRidge shares fell from a high of $69 in July 2008 to about $7 today.

Some corporate-governance experts don't see a problem. "As long as it's disclosed, I think it's fine," said David Larcker, an accounting professor at Stanford University's Graduate School of Business.

Others say Ward's transactions raise questions about how SandRidge is being run and create the risk he is putting his own interests ahead of the company's.

"The number of related-party transactions (SandRidge) reports is out of proportion to the size of the company," says Paul Hodgson, an independent corporate-governance consultant.

Ward's compensation has drawn the attention of California pension fund CalSTRs, which owns 880,000 SandRidge shares and is in talks with the company over executive pay.

"We believe that compensation at this point is too high relative to the stock performance," said CalSTRS spokesman Ricardo Duran. "Our standard throughout our portfolio is to, wherever possible, link executive compensation to performance. We feel that standard's not being met."

Ward and McClendon, who began working together in their 20s, co-founded Chesapeake in 1989 with 10 employees and $50,000 in cash. The two Oklahoma natives were "land men," traveling back roads to lease promising acreage for drilling.

Ward, 53, grew up in the tiny town of Seiling, Oklahoma. He became Chesapeake's operational brain. McClendon, born into the state's wealthy Kerr family, became its financial wizard.

Chesapeake prospered by being first to snap up acreage in emerging oil and gas plays.

For years at Chesapeake, Ward and McClendon enjoyed an unusual corporate incentive. They received up to a 2.5 percent stake in the profits of every well the company drilled, as long as they paid 2.5 percent of the costs.

Chesapeake had disclosed the existence of this perk. But last year, media reported significant facts that Chesapeake hadn't divulged: McClendon had arranged to borrow more than $1 billion to finance his acquisition of these well stakes, used the stakes themselves as collateral, and obtained most of the financing from a company that was also an investor in Chesapeake. In response to the resulting outcry, the company cut short the perk.

Ward left Chesapeake in early 2006 to begin his own firm, buying into a private energy company in Texas. He renamed that company SandRidge Energy and took it public the following year.

At SandRidge, Ward initiated a more-lucrative version of the perk, raising the maximum stake to 3 percent, as disclosed in SEC filings.

A review of SEC filings and court documents shows Ward's well perk at SandRidge provided a safety net when he faced a severe personal financial crunch.

By 2008, Ward had borrowed heavily from Wachovia and other lenders. He had pledged holdings of SandRidge stock as collateral for those loans. When the global financial crisis struck, those shares plunged in value. According to documents filed in 2010 shareholder lawsuit against SandRidge, Ward's lenders issued a so-called margin call, which typically requires a borrower to put up more cash or face the liquidation of his collateral.

In October 2008, Ward raised cash by selling his stakes in SandRidge wells back to the company for $67 million, according to SEC filings. A media analysis of costs incurred by Ward between 2006 and 2008 for the well program show he made an estimated $19 million on the deal.

The payout to the CEO came at a time when SandRidge was itself in financial distress. By the end of 2008, the company had just $636,000 in cash on hand, according to the company's annual report.

Despite the big payout, Ward wasn't out of the woods. The same month, he did another deal that potentially mingled his personal and corporate interests, this time with George Kaiser, chairman and majority shareholder of BOK Financial, parent company of Bank of Oklahoma.

Kaiser's Bank of Oklahoma has been a lender to SandRidge and was recently among a group that entered into a $1.75 billion credit agreement with the energy company, according to an SEC filing.

Kaiser did not respond to several requests for comment for this story.

In a suit filed in federal court in Oklahoma in December 2010, a SandRidge shareholder alleged that Ward improperly profited from a series of transactions with Kaiser.

Those transactions, Ward's attorneys wrote in response to the suit, came at a time when the SandRidge chief "was facing unexpected economic difficulties." This crunch, they wrote, involved "an upcoming repayment obligation on a credit line with Wachovia Bank and other creditors that was secured, in part, by Mr. Ward's SandRidge stock."

At the time, Ward had pledged at least 25 million SandRidge shares as collateral for a personal credit line from Wachovia and others, according to an SEC filing. The filing did not say how large the loan was, or what it was needed for. But the SandRidge shares were worth about $45 apiece, or some $1.1 billion in total when he pledged them to the banks in August 2008. By late October, the shares had fallen to less than $10, or around $240 million in total.

As the shares plunged in value, the lenders called on Ward to post more collateral. That same October, he turned to Kaiser, borrowing $75 million from him and a charitable trust Kaiser controlled. The deal gave Kaiser warrants granting him the right to buy a substantial interest in SandRidge, using shares then owned by Ward, according to an SEC filing.

SandRidge stock continued to fall between October and December 2008. Ward realized he would need to renegotiate the terms of the $75 million loan from Kaiser, according to a court document filed by Ward's attorneys.

The revised deal, renegotiated on Christmas Eve in Tulsa, was complex. It included the payment to Kaiser of 8.9 million SandRidge shares, worth some $50 million at the time, and a warrant giving Kaiser the right to buy more shares in the future.

It also came with an unusual condition. Ward agreed to open SandRidge's financial records to Kaiser, to "facilitate (Kaiser's) due diligence investigation of the issuer for a limited period of time following the sale," according to the deal's agreement.

James Cox, a law professor at Duke University, said he has never come across another situation in which a public company's books and records were opened as part of a private deal.

"Access is being provided for no apparent corporate purpose," Cox said.

The shareholder and SandRidge agreed to dismiss the suit on November 9, 2012, court documents show. The company later disclosed that Ward agreed the same day to pay SandRidge $5 million to settle a lawsuit. It declined to say whether the payment was related to the Kaiser suit.

Lingering anger over SandRidge's big 2008 payout to Ward is one reason some shareholders say they have recently called for the CEO's ouster.

Ward and SandRidge are fighting back. On November 19, the company's board unanimously approved resolutions that make it more difficult for the company to be taken over.

Now, hedge fund TPG-Axon is soliciting support from other shareholders to replace the board. No deadline has been set for that solicitation. TPG-Axon hasn't said how much support it has garnered so far.

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