Fresh from toppling SandRidge Energy Inc.’s (NYSE: SD) $746 million merger with Bonanza Creek Energy Inc. (NYSE: BCEI), activist investor Carl Icahn appears bent on torpedoing SandRidge’s leadership as well.

SandRidge and Bonanza said Dec. 28 that they would terminate the merger after it became clear SandRidge could not overcome opposition from Icahn and other investor groups. Icahn called the deal “value-destroying.”

The merger would have purchased Bonanza’s assets, including 67,000 net acres in the Denver-Julesburg (D-J) Basin’s Wattenberg Field; 11,500 in the Cotton Valley; and 15,800 barrels of oil equivalent per day. Analysts generally viewed the deal favorably and said it would add visibility to a company largely ignored by investors.

On Jan. 9, after a brief respite from the merger turmoil, Icahn sent the board a fiery letter criticizing SandRidge’s leadership and tactics and demanding a shakeup of the company’s board of directors.

Icahn appears particularly aggrieved by steps the board took to limit outsider control by capping the acquisition of SandRidge stock.

In the letter, Icahn blasted the boards’ hubris toward the company’s owners as tantamount to the “medieval belief in the divine right of kings.” Icahn also singled out CEO James Bennett’s compensation, leadership during the merger and stewardship before and after the company’s October 2016 emergence from bankruptcy.

In mid-December, SandRidge’s board disputed claims about the merger made by Icahn and other opponents, addressing them as “myths.” The company also noted that the board isn’t entrenched and has been in place for roughly a year since SandRidge’s 2016 restructuring.

On Jan. 9, SandRidge’s board and management responded to Icahn in a news release, saying that they value constructive shareholder dialogue and are engaged in discussions shareholders including Icahn.

“SandRidge’s independent board members are scheduled to meet with several major shareholders next week, including Mr. Icahn,” the company said.

Unplacated, Icahn is calling for the resignation and replacement of two of SandRidge’s five directors. Bennett is a director.

“The board of directors cannot be trusted to oversee management to ensure that the sins of the past are not repeated,” he said.

New Directors Demanded

Citing grave concerns about directors’ motives and behavior, Icahn said the board tried to “ram through a dilutive, overpriced and value-destroying acquisition” without reaching out to shareholders.

As SandRidge's largest shareholder, Icahn said he expects to designate one of the new directors to the board.

Icahn holds about 13.5% of the company’s outstanding shares. Other investor groups that were opposed to the merger own about 14% of shares.

The appointment of another director should be offered to the other four or five largest shareholders—or by Icahn if “none are willing” to make a selection, he said.

Icahn also continued to rail against SandRidge’s enactment of a “rights plan” to stop investors from buying more than a 10% stake in the company and deter existing shareholders increasing their holdings.

“Your attempt to entrench yourselves by adopting an unorthodox poison pill intended to prevent large shareholders from talking with one another to oppose the Bonanza acquisition would make a totalitarian dictator blush,” Icahn wrote.

SandRidge disputed that investors could not talk to each other. The company said it confirmed in private correspondence to Icahn and through regulatory filings that the rights plan does not prevent shareholders from speaking as long as they do not form a group and comply with securities laws.

SandRidge also said the rights plan was designed to deter a third-party from gaining control of the company without compensating shareholders for a change in control.

Bennett Under Fire

Icahn also took aim at Bennett’s leadership, including the company’s bankruptcy and this compensation as CEO since his appointment in June 2013.

From 2013 through 2016, SandRidge regulatory filings show Bennett’s compensation totaled about $39 million. That includes $18.8 million in 2016—the year the company emerged from bankruptcy.

Bennett’s base salary in 2015 and 2016 was about $918,000. The remainder of his compensation is tied to bonuses, stock awards, non-equity incentives and other compensation. In the past, that has included incentives tied to the company’s relative total stockholder return measured against its peer group.

Icahn said that Bennett has been paid $50 million in compensation “all while the shareholders suffered.”

Bennett also led the company on an “acquisition binge,” Icahn said.

Excluding the now terminated Bonanza deal, Bennett has overseen more sales than acquisitions since becoming CEO. In total, he has led SandRidge through $364.6 million in purchases and $718.6 million in divestitures.

In 2017, SandRidge purchased about 13,000 net acres in Woodward County, Okla. for $47.7 million. The company also sold noncore assets for $16 million.

In 2015, the company additionally purchased:

In October 2014, the company sold Gulf of Mexico and U.S. Gulf coast assets to Fieldwood Energy LLC for $702.6 million.

Some analysts saw the Bonanza deal as accretive and important to SandRidge. The merger would have added Bonanza’s D-J Basin Niobrara assets and provided needed visibility to the company.

Analysts have said the company has struggled to gain “mindshare” among energy investors, leaving its market valuation below the worth of its assets.

“We believe investors were more concerned with SandRidge maintaining its cheap valuation, as opposed to paying up to acquire a more delineated inventory footprint,” said Mike Kelly, a senior analyst at Seaport Global Securities, in a Dec. 29 report. “A cursory update of our model shows SandRidge trading at about 3.3x EV/EBITDA without the BCEI deal versus about 4.6x with BCEI, and the industry at 6.3x.”

Due to the merger termination, SandRidge will pay Bonanza up to $3.7 million for transaction-related expenses.

“We expect SandRidge’s operational focus will shift back toward delineating its relatively immature North Park Niobrara and Northwest Stack assets in an effort to replace the development visibility that would have been added from the Bonanza acquisition,” Kelly said.

Kelly noted that SandRidge has exciting potential in the northwestern Stack, an area where private E&Ps have quietly posted steadily improving results.

Darren Barbee can be reached at dbarbee@hartenergy.com.

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