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Re: Sandridge Permian Trust (PER) Interesting?Here are some further comments from my friend Plato and my response: Cheers, Sully I
remember looking at both of these trusts several months ago, and
deciding I was not impressed. I remember the structures of both were
complex, and that there were problems with incentives to the parent
company cutting into the upside should oil price escalate, but recall
little else. So I just took another look at PER.
Three things jump out at me. First is the subordination/incentive
program. Second is the wind-up of the trust in 2031. Third, there are
inconsistencies and ambiguities in the provisions stated
in the Prospectus, and between its terms and those in the 10-Q for the
quarter ending June 30, 2011. In some ways, the filings are also
obfuscatory and confusing, e.g., in the use of the descriptive term
69.3% to designate development wells. The subordination/incentive program (Prospectus
p. 48 ff.) sets up target distributions per unit for each quarter from
the trust's inception and the first quarter of 2017. If the
distribution is coming in at more than 20% below the target for that
quarter, then 25% of the units, retained by parent SandRidge Energy,
Inc. (SandRidge), have their distribution withheld sufficiently to make
up the difference, so that the other 75% of units pay out at least the
threshold, 20% below the target price. These units are among the total
of 40% of units in the original float (not including overage) retained
by SandRidge, and are called subordinated units, just as the amount 20%
below the target distribution is called the subordination threshold. Conversely,
if net trust income available provides for a distribution more than 20%
above the target price for the quarter, unitholders only receive 50% of
what they would above the 20% overage -- the other 50% goes to
SandRidge as an incentive reward. Above
I mentioned that there are inconsistencies in PER's filings. Here's
one. Annex B of the Prospectus (at the end) lists the target price out
to 2031, along with subordination and incentive thresholds out to the
first quarter 2017. (See also p. 50 Prospectus.)
Now, here's a table listing subordination and incentive thresholds out to first quarter 2017 from page 11 of the Second Quarter 2011 10-Q.
Obviously, the two tables don't match up. I
don't know what to make of this. I would opine that these documents
are essentially contracts of adhesion, where the buyer either accepts
the terms or not, but has no ability to negotiate terms. Contracts of adhesion are strictly construed against the
party offering the contract, so that any contradictions,
inconsistencies, or ambiguities are resolved against the contract
offerer. So, I am not a securities lawyer, but I would say in any
lawsuit the terms of these documents would be rendered accordingly. Contrary to Sully's assumption, at termination the trust is not worth nothing. It appears on page 2 and 17 of the Prospectus and elsewhere that on termination 50% of trust royalty interests
revert to SandRidge, and 50% will be sold and proceeds distributed to
unitholders, with Sandridge having first right of refusal on those
royalties. Then, on page 84 appears this apparently somewhat inconsistent statement.
A few more comments. Most
production from the underlying properties is apparently hedged through
June 2016, though figures regarding these hedges are nowhere divulged in the Prospectus.
See page 45-46 of the Prospectus. I now see that information is provided on page 9 of the Second Quarter 10-Q. Using
a ratio of 1 bbl oil:6mcf NG, reserves (and apparently present
production) are 87% oil, 9% NGLs, 4% NG (Prospectus p. 1, see also p.
12). The
subordination/incentive program is supposedly set up to encourage
SandRidge to drill additional "development" wells that are promised in
the Prospectus. It is supposed to drill 888 additional wells, of which
40 or more have already been drilled. The subordinated units will
convert to regular units when SandRidge completes its drilling
obligation. The Prospectus gives SandRidge until March 31, 2015 to
complete its drilling obligation, with an extension to March 31, 2016 in
case of delays (Prospectus p. 49). However, there is no provision so
far as I can see for what happens if SandRidge fails to satisfy its
obligation by that later date. Again, I believe the result would be
strict construction of the contract against the trust and drafter
SandRidge to construct a provision. But perhaps I've missed the
provision in my review. The target prices for each quarter were arrived at as follows (pp. 54-55 Prospectus).
Perhaps someone brighter than me (jduade?) can make sense of what I find confusing. Best regards,
Plato Thanks Plato, Perhaps JDuade or Tosca can make some comments on points you're confused about. Concerning your comments and my analysis:
All
in all PER continues to look interesting to me. I started a discussion
thread on PER on the Yahoo LINE board and Liza Huang, who appears to be a
knowledgeable investor, is fairly positive on PER and has invested in
it. FWIW. Cheers, Sully |
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