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Exclusive: SandRidge gives CEO wide scope to cut his own land deals

By Michael Erman and Brian Grow and Anna Driver

NEW YORK (Reuters) - SandRidge Energy Corp is giving its chief executive wide latitude to profit from personal oil-and-gas deals in ways that pose potential conflicts of interest with the company, according to a review of employment contracts and recent transactions.

SandRidge has lifted most restrictions on CEO Tom Ward's ability to sell mineral rights or drill wells, through little-noticed changes to his employment agreement in 2011. (See Factbox.)

Before the changes, Ward was permitted to receive royalties from SandRidge, or jointly own wells with it, on land he had owned before joining the company in 2006. The 2011 agreement allows him to do deals with SandRidge competitors in the oil and gas business, and to do business with SandRidge on any land that he owns or acquires.

Ward started the independent energy producer in 2006 after leaving Chesapeake Energy Corp, which he co-founded with Chesapeake CEO Aubrey McClendon. At the two companies, both based in Oklahoma City, the CEOs have entwined their own finances with those of the publicly traded corporations they run. Last week, McClendon announced his resignation from Chesapeake after a year marked by a cash crunch and civil and criminal probes into his personal finances and other matters.

The new language in Ward's employment contract allows "participation in outside operated oil and gas drilling" in areas not being pursued by the company. It also allows his "participation as a working interest owner in properties operated by the company" on land owned by Ward-related entities.

Taken together, the two privileges give Ward greater leeway to profit on private dealings.

According to land records reviewed by Reuters, a Ward-linked entity named 192 Investments LLC acquired mineral rights on thousands of acres in late 2011 in the Mississippi Lime shale formation in Kansas. The Ward-related company bought those mineral rights just months before SandRidge leased property in adjacent plots, the Kansas land records show.

Such deals could pose a potential conflict of interest. Buying personal mineral rights in land adjacent to acreage later bought by SandRidge could allow Ward to profit if SandRidge's purchases help drive up values, for instance. SandRidge doesn't disclose when its chief executive acquires new mineral rights in areas where it drills.

In 2012, the year after the employment contract was revised, royalties paid by SandRidge to TLW Land & Cattle - an entity in which Ward holds an ownership stake - rose by some $500,000 from the previous year to $1.4 million. TLW stands for Tom L. Ward.

It is unclear why the TLW royalties rose last year. Energy production simply could have increased at wells on land owned by TLW, increasing the royalties as well. The 2011 changes in Ward's contract could also have enabled him to sell more mineral rights to the company.

The company declined to comment for this story. SandRidge said last month that its board of directors found no wrongdoing after a review of land deals involving entities controlled by Ward and his family.

"It's pretty clear the 2011 employment agreement makes the things he can do broader, explicitly," said Joshua Fershee, a professor of energy and corporate law at West Virginia University College of Law.

Giving an executive permission to generate personal income by partnering or competing with the public company he runs is unusual because it could reduce returns for shareholders and create the risk of conflicts of interest, said energy industry attorneys and corporate governance specialists.

Reuters reviewed the employment agreements of chief executives at eight of SandRidge's peers. Seven of the contracts didn't permit the CEOs to earn royalties from their employer or rivals, and many included strict non-compete requirements. The agreement for one CEO, Chesapeake's McClendon, does permit him to own "interests in oil and gas" on land which he acquires or already controlled.

The language in Ward's contract "doesn't pass the smell test," said Anne Sheehan, director of corporate governance for the California pension fund CalSTRS, which owns 880,000 SandRidge shares. "This board has sanctioned what Ward is doing."

Members of the board's governance committee didn't reply to a request for comment.

SandRidge's largest shareholder, Fairfax Financial Holdings, defended Ward's tenure.

"We continue to strongly support Tom and his leadership at SandRidge," said Paul Rivett, vice president of operations at Fairfax, which owns more than 11 percent of SandRidge's shares. "It seems to me that obviously Tom's done a lot of good and he's been transparent about his relationship with the company and the related-party transactions."

MARCH DEADLINE

Ward is under fire from two of the company's biggest shareholders, who are clamoring for his ouster.

Hedge funds TPG-Axon Capital Management and Mount Kellett Capital Management together own more than 11 percent of SandRidge. They accuse the company of poor performance and of allowing Ward to engage in land deals in which he stands to profit at the expense of SandRidge.

SandRidge shares are down more than 80 percent since the day of their November 2007 debut. The Dow Jones U.S. oil and gas producers index - of which SandRidge is a component - is up around 5 percent over that same period.

Governance problems have roiled Ward's previous company, Chesapeake. Long-time CEO McClendon announced January 29 that he would resign in April after a tumultuous year in which a series of Reuters reports triggered civil and criminal probes of the second-largest U.S. natural gas producer.

Reuters found that while Ward was at Chesapeake, McClendon and Ward had run a $200 million hedge fund from inside headquarters, trading in the same commodities that their listed company produced.

A separate Reuters report showed that Ward agreed to the unusual step of opening up SandRidge's books to a personal lender when he was facing a margin call in late 2008. [ID:nL1E9C95GI] For that story, spokesman Greg Dewey said that SandRidge had followed internal rules and Securities and Exchange guidelines.

Investor pressure on SandRidge is increasing. TPG-Axon has launched a campaign to replace SandRidge's board. Shareholders have until March 15 to vote on the matter.

"The change in 2011 we think is absolutely inappropriate and unethical in terms of its impact on shareholders," TPG-Axon founder Dinakar Singh said of Ward's employment contract. "Shareholders ought not to be worrying about competition with the CEO and his family."

NEW PROGRAM?

SandRidge has paid around $5 million since 2008 to buy leases from, and pay out well revenue to, WCT Resources. WCT is an oil and gas company formed from trusts benefiting Ward's three adult children and run by his eldest son, Trent. WCT once operated from SandRidge headquarters in Oklahoma City, according to state incorporation records and court documents.

The company has also paid Tom Ward's TLW Land & Cattle - an arm of Ward's cattle operations - $3.9 million in royalties over that same period, according to Securities and Exchange Commission filings.

WCT and Trent Ward did not respond to requests for comment.

On January 25, SandRidge responded to shareholder allegations that Ward and his family improperly sold acreage to SandRidge. The company said it found no wrongdoing in the transactions. Impartial members of its board review all related-party transactions, the company added.

"TPG-Axon goes to great lengths to establish that WCT Resources owns leasehold acreage adjacent to acreage held by the company," SandRidge said, noting that it owns interests in nearly 5 million of the 17 million acres in the Mississippi Lime region. "Virtually all companies active in the play are likely to have some interests that could be characterized as adjacent to the company's holdings."

The company also said TLW Land & Cattle acquired its property for ranch land or other surface uses "over a long period beginning well before the formation of SandRidge.

In allowing Ward to use his own land to partner with SandRidge on wells, Ward's 2011 contract echoes a prior perk for the CEO, called the Well Participation Program. Under that arrangement, SandRidge gave Ward an interest of up to 3 percent in every well it drilled between 2006 and 2008, provided he pay an equivalent share of the costs.

The company halted the program and bought out Ward's interests in company wells for $67 million in 2008, at a time when the financial crisis had left both Ward and SandRidge strapped for cash.

PROPERTY NEXT DOOR

192 Investments is named in Tom Ward's 2011 employment contract as a firm through which he is permitted to drill wells with, and earn royalties from, SandRidge.

As of October 2012, son Trent Ward was listed as the manager of 192 Investments LLC, according to corporate filings with the Oklahoma secretary of state. Those filings show that 192 Investments uses the same address as SandRidge - 123 Robert S. Kerr Avenue in Oklahoma City. An individual listed as a contact person uses a SandRidge email address.

In recent weeks, SandRidge has sought to distance itself from Trent Ward and WCT Resources, which Trent also runs, describing him in a recent statement as "independent from" SandRidge.

Both entities have been actively acquiring land and mineral rights in some of the same areas as SandRidge, according to county property records obtained by shareholder TPG-Axon and reviewed by Reuters.

Between November 2011 and February 2012, the Ward vehicles 192 Investments and WCT Resources acquired mineral rights on hundreds of acres in Thomas County, Kansas. Between April and July 2012, SandRidge attained mineral rights on plots next to the land controlled by 192 and WCT.

TPG-Axon alleges nearly identical transactions - with Ward family entities acquiring acreage shortly before SandRidge obtained nearby plots - occurred in Kansas seven more times in 2011 and 2012.

SandRidge declined to comment. WCT Resources and Trent Ward did not respond to requests for comment.

Beyond the liberal royalty provisions, Ward's contract also provides that he will be paid $97 million in the event of a "change of control" at the helm of the company.

In materials prepared for shareholders in response to TPG-Axon's attempt to oust Ward and the board, the company says the $97 million pay-out is one reason to vote to retain the SandRidge's current directors. The payment would only be due if Ward were terminated without cause.

"We believe this argument is reprehensible - after all the damage done to stockholders, it is astonishing that a primary argument in their defense would be that they will inflict even more damage upon us in leaving," TPG-Axon's Singh wrote in a recent letter to investors.

(Reporting By Michael Erman, Anna Driver and Brian Grow; Editing by Patricia Kranz and Michael Williams)

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