When looking at the actions of Sandridge Energy’s (NYSE: SD) CEO Tom Ward, the phrase “heads I win, tails you lose,” comes to mind.

He’s overseen an 80% plunge in his company’s stock since Sandridge’s 2007 IPO, yet has been rewarded with roughly $150 million in compensation since then. Adding insult, he has been given a free hand to buy up key parcels of real estate that are adjacent to company-owned acreage, and sell this land to company rivals, without the need to disclose such transactions to shareholders. (A practice that should be quite illegal, or at least quite discouraged.)#-ad_banner-#

Dissident shareholders have had enough. A pair of hedge funds, each owning more than 5% of the company have asked other investors to support their proxy efforts to oust the board and management, in a vote to be held on March 15. These hedge funds contend that shares are quite undervalued in the context of Sandridge’s asset base and would likely rise in value if a new board and management team were put into place.

In light of recently announced quarterly results that show Sandridge’s real estate holdings to have a much greater bias toward low-priced natural gas and much smaller exposure to pricier crude oil, it’s not clear whether these activist investors are even on the mark when looking for upside.

In a very cogent analysis, the author of this article makes a strong case that shares are indeed fully valued or overvalued in the context of recent industry real estate transactions.

Yet there is an even better reason for this management team and board directors to hand over the keys to new leadership: On its current course, Sandridge may burn through almost all of its cash, so shares may head to just $1.

At least that’s the view Canaccord’s John Gerdes holds.

A ticking time bomb
Sandridge made the same mistake as many energy drillers: overpaying for shale-focused real estate a few years ago, only to see plunging gas prices create much weaker cash flows once the oil and gas started flowing. Like its peers, Sandridge has been forced to unload various assets (targeting $2 billion worth of assets in the process), but the company will still carry more than $3 billion in debt on its balance sheet when those asset sales are complete.

And as far as Gerdes is concerned, this debt load will create real trouble.

As he sees it, Sandridge’s capital spending plans, which have not been reduced despite the company’s weak balance sheet, are foolhardy. “The company now outspends cash flow by $1.3 billion per annum.” (Not just this year, but every year until 2017.) He adds that while net debt seems manageable now, at around three times projected EBITDA, he expects “this critical leverage statistic to rise to over 4x at year end ’14, and an untenable 5x by year-end ’15.” This math even comes with the assumption that Sandridge will realize full value for the assets it has recently put on the block.

How does Gerdes arrive at that $1 price target? That price equates to a market value of $600 million, which is what he says the company’s asset base and cash flow generation potential will be worth after the company’s debts are accounted for.

CEO Ward acknowledges the projected cash flow deficits that will accrue from his spending plans, but he appears to be counting on an eventual strong rebound in natural gas prices to sharply improve the economics of Sandridge’s major shale plays. To be sure, gas prices have nearly doubled since hitting bottom a year ago — recently hitting $3.58 per thousand cubic feet (MCF) — though it seems foolish to simply bank on further gains to rescue this business model.

Other views
To be sure, Gerdes is the most bearish analyst following the company. Other analysts take a somewhat brighter view and see shares closer to fair value at a recent $5.80.

• UBS rates the stock as “neutral” with a $6 price target, noting that “SD offers investors meaningful unbooked resource potential from the Horizontal Mississippi but is burdened with continuing high financial leverage and a significant FCF deficit over the next few years. In addition to the high financial leverage and organic FCF deficits, investors have a new concern: Its crown jewel asset in the Horizontal Mississippi is performing below type curve expectations and appears to be more gassy than initially expected.”

• Goldman Sachs also has a $6 price target but rates it a “sell,” noting that they trade for 6.5 times projected 2014 EBITDA. The company’s peers trade at a multiple of 4.6.

• BMO recently downgraded the stock to “underperform,” with a $4 price target. They suggest that “the stock remains significantly overvalued as rates of return in the horizontal Mississippian play aren’t strong enough to support the current equity value.”

Risks to Consider: As an upside risk, firming natural gas prices, more robust real estate transaction valuations, or a change in management could help boost shares.

Action to Take –> Though the activist hedge funds correctly note that this is a company headed for deeper trouble under current management, they appear to be overestimating any potential upside, even if they can bring in new leadership. This company has been boxed in by a string of bad investments, so a sharp reduction in capital spending appears inevitable. Yet this would make it harder to generate the cash flows required by the company’s debt covenants.

Short sellers also spot more downside ahead. They currently hold 13% of the float, or 50 million shares, in short accounts. This stock has been a slow motion train wreck for several years, and the train isn’t slowing down.

P.S. — The abundance of natural gas in the U.S. could lead to a third industrial revolution. One analyst is predicting a stock could rise 1,566%. Another stock has already jumped over 1,000% and is expected to keep going. To learn more about investing in the natural gas boom, click here.