Saturday, October 18, 2008

Natural Gas President's Spanked by Margin Calls

Oct. 17 (Bloomberg) -- Tom Ward, chairman of SandRidge Energy Inc., faced the same type of borrowing squeeze that has wiped out shareholdings of other natural gas executives -- until his board of directors stepped in last week to help.

SandRidge announced Oct. 10 that its board had approved the purchase of Ward's interest in some of its natural gas wells for $60 million in cash. Ward, who is also chief executive, faced potential margin calls at the time because 25 million SandRidge shares he'd pledged as collateral for a loan had lost more than two-thirds of their value since the beginning of September.

At least 18 other chairmen and chief executive officers, including Ward's former partner, Chesapeake Energy Corp. Chairman Aubrey McClendon, had to sell their company stakes this month after getting caught in a similar bind. Tom Orr, director of research for Weeden & Co., a brokerage in Greenwich, Connecticut, said it was a bad time for Ward to sell his interests in natural gas properties unless he was in need of cash.

``In the last week or so, anything you sold would have been distressed,'' said Orr, whose firm specializes in the energy industry. ``It's basically a fire sale.''

Amid this month's stock market crash -- the Standard & Poor's 500 Index has dropped 19 percent in October -- energy executives such as McClendon and Bruce Smith, the head of San Antonio-based Tesoro Corp., have reported they were forced to sell company shares after getting margin calls from lenders. Howard Lester, CEO of the San Francisco-based home furnishings retailer Williams-Sonoma Inc., disclosed on Oct. 15 that he sold $13 million of company stock to pay down a margin loan.

New Loan Limits

In past downturns, companies sometimes lent executives money to meet margin calls, a practice exemplified by the $408 million that WorldCom Inc. provided then CEO Bernard Ebbers between 2000 and 2002, primarily to help settle debts secured by company shares. Since Congress barred most types of corporate lending to top brass in the Sarbanes-Oxley Act of 2002, companies must find alternative ways to help executives or watch them sell shares.

``It puts the company between a rock and a hard place,'' said Keith Higgins, a securities attorney at Ropes & Gray LLP in Boston. ``On the one hand, you don't want your CEO to be financially decimated. But, on the other hand, you have a fiduciary duty to shareholders not to imprudently use their money.''

Neither Ward nor Dirk Van Doren, SandRidge's chief financial officer, returned telephone calls for comment. General Counsel Richard Gognat declined to comment. Oklahoma City-based SandRidge, an explorer and producer of natural gas and crude oil in Texas and the Gulf of Mexico, said Oct. 10 that the transaction with Ward was unanimously approved by disinterested directors who engaged an independent financial adviser to review the fairness of the $60 million price.

Well Rights

Under a program adopted in June 2006, Ward had the right to sign up for a working interest of up to 3 percent in certain wells drilled by or on behalf of SandRidge over the ensuing decade. During 2007, he was invoiced $23.5 million for his share of well-drilling costs and received oil and gas revenue totaling $2.3 million, according to an April 23 filing with the U.S. Securities and Exchange Commission.

The deal with Ward will increase SandRidge's net proved reserves by about 43 billion cubic feet of natural gas equivalent, according to the company's Oct. 10 release. That works out to a price of about $1.40 per thousand cubic feet of natural gas equivalent, which is lower than the $3 to $4 that rival XTO Energy Inc. paid for proved reserves earlier this year, analysts such as Fadel Gheit at Oppenheimer & Co. said.

`Attractive Price'

``It was a very attractive price to the company for what was purchased,'' said Roy Oliver, a private investor and founder of U.S. Rig and Equipment Inc. who now serves on SandRidge's board. ``It was less than our finding costs for drilling,'' Oliver said, adding that the company obtained its fairness opinion from the investment bank Houlihan Lokey.

In his 2007 letter to shareholders, Ward said SandRidge's finding costs for the year were $1.99 per thousand cubic feet of natural gas equivalent. Natural gas prices are down 11 percent from a year ago, 21.6 percent in the last two months and touched a one-year low of $6.535 per million Btu on Oct. 10.

Oliver declined to comment on whether Ward used the $60 million in proceeds he received from SandRidge to pay down loans secured by company stock. The timing of the sale, the sharp decline in SandRidge's share price and Ward's use of his stock to secure loans, has led analysts to question whether the transaction was designed to help Ward weather a cash crunch.

``Just putting the pieces together, it's a theory that he needed liquidity on his end,'' said Ben Silverman, director of research for, which cited Ward's deal with the company in an October 13 report sent to clients.

SandRidge History

Ward, 49, came to SandRidge after working for about 17 years as the president and chief operating officer of Chesapeake, a company he co-founded with McClendon in 1989. As chief executive, McClendon built Chesapeake into the third-largest producer of natural gas in the U.S., with estimated proved reserves of almost 12.2 trillion cubic feet of natural gas equivalent at June 30.

The two executives still have ties. Both companies are based in Oklahoma City. Ronnie Ward, Tom's brother, remains a vice president at Chesapeake, and Ward himself still held a 4.7 percent stake in McClendon's company as recently as February, according to a March 27 SEC filing. Moreover, Ward and McClendon both built stakes in their respective companies by purchasing shares while taking out loans secured by their existing holdings.

After joining SandRidge, Ward bought stock from founder Noah Malone Mitchell, then purchased another 4.17 million company shares for about $108 million, or $26 each, in conjunction with its November 2007 initial public offering, according to documents he filed with the SEC on Nov. 19, 2007.

Shares Pledged

In May of this year, Ward filed SEC documents showing he spent another $101 million to buy 1.95 million shares at an average price of $51.69 each, raising his company stake to 23.7 percent of outstanding common stock.

As of July 25, Ward had pledged 25 million of his 37.8 million shares to secure a revolving credit line provided by a group of lenders led by Wachovia Bank N.A., according to an August 7 SEC filing. As of February 2008, Ward also had pledged 23.8 million Chesapeake shares -- acquired during his earlier career at the company -- as collateral for credit agreements with Deutsche Bank AG, his SEC filings show.

Vince Scanlon, a spokesman for Wachovia, and Michele Allison, a spokeswoman for Deutsche Bank, both declined to comment on whether their companies issued margin calls to Ward.

July Peak

From March 2007 through July 2008, McClendon bought almost 5 million Chesapeake shares on the open market at prices ranging from $30.55 to $59.75 each, according to SEC data compiled by the Washington Service. As of April 14, he had pledged 29.3 million company shares with a market value of $1.43 billion to secure borrowings, the company's annual proxy statement shows.

Both stocks peaked on July 2 -- SandRidge at $69.41 and Chesapeake at $74.00 -- and then began falling along with other energy company shares. By Oct. 10, SandRidge and Chesapeake shares were down almost 83 percent and 78 percent respectively from their record highs in July.

Chesapeake rose $2.76 to $21.11 each at 12:12 p.m. in composite trading on the New York Stock Exchange. SandRidge rose $1.07 or 10 percent to $11.64 each.

Chesapeake announced on Oct. 10 that McClendon had been forced to sell ``substantially all'' of his company stock during the week to meet margin calls. On the same day, less than two miles away, SandRidge was announcing that it would buy Ward's working interest in its wells. The company didn't disclose Ward's reason for selling.

``Aubrey McClendon had to sell most of his stock and Tom Ward was in a similar predicament,'' said Orr, the director of research at Weeden & Co. ``He just opted to take $60 million in cash for the carry he had in lieu of selling stock.''

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