XFRA:SA2B SandRidge Energy Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number: 001-33784

 

 

SANDRIDGE ENERGY, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   20-8084793

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

123 Robert S. Kerr Avenue

Oklahoma City, Oklahoma

  73102
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code:

(405) 429-5500

Former name, former address and former fiscal year, if changed since last report: Not applicable

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of the close of business on April 30, 2012, was 489,429,991.

 

 

 


Table of Contents

SANDRIDGE ENERGY, INC.

FORM 10-Q

Quarter Ended March 31, 2012

INDEX

 

PART I. FINANCIAL INFORMATION   

ITEM 1.

  

Financial Statements (Unaudited)

     4   
  

Condensed Consolidated Balance Sheets

     4   
  

Condensed Consolidated Statements of Operations

     5   
  

Condensed Consolidated Statements of Changes in Equity

     6   
  

Condensed Consolidated Statements of Cash Flows

     7   
  

Notes to Condensed Consolidated Financial Statements

     8   

ITEM 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     36   

ITEM 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     46   

ITEM 4.

  

Controls and Procedures

     47   
PART II. OTHER INFORMATION   

ITEM 1.

  

Legal Proceedings

     48   

ITEM 1A.

  

Risk Factors

     48   

ITEM 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     48   

ITEM 6.

  

Exhibits

     49   


Table of Contents

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements express a belief, expectation or intention and generally are accompanied by words that convey projected future events or outcomes. These forward-looking statements may include projections and estimates concerning capital expenditures, the Company’s liquidity and capital resources, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, elements of the Company’s business strategy, effects of the acquisition of Dynamic Offshore Resources, LLC (“Dynamic”) on the Company’s financial condition and financial results and other statements concerning the Company’s operations, economic performance and financial condition. Forward-looking statements are generally accompanied by words such as “estimate,” “assume,” “target,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “goal,” “should,” “intend” or other words that convey the uncertainty of future events or outcomes. The Company has based these forward-looking statements on its current expectations and assumptions about future events. These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors the Company believes are appropriate under the circumstances. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on the Company’s business or operations. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. The forward-looking statements in this respect speak only as of the date hereof. The Company disclaims any obligation to update or revise any forward-looking statements, unless required by law, and it cautions readers not to rely on them unduly. While the Company’s management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties relating to, among other matters, the risks discussed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011

Form 10-K”).


Table of Contents

PART I. Financial Information

ITEM 1. Financial Statements

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

     March 31,
2012
    December 31,
2011
 
     (Unaudited)        
ASSETS     

Current assets

    

Cash and cash equivalents

   $ 127,842      $ 207,681   

Accounts receivable, net

     240,636        206,336   

Derivative contracts

     7,526        4,066   

Inventories

     9,491        6,903   

Costs in excess of billings

     1,621        —     

Other current assets

     32,324        16,854   
  

 

 

   

 

 

 

Total current assets

     419,440        441,840   
  

 

 

   

 

 

 

Oil and natural gas properties, using full cost method of accounting

    

Proved

     9,159,518        8,969,296   

Unproved

     748,953        689,393   

Less: accumulated depreciation, depletion and impairment

     (4,874,325     (4,791,534
  

 

 

   

 

 

 
     5,034,146        4,867,155   
  

 

 

   

 

 

 

Other property, plant and equipment, net

     576,668        522,269   

Restricted deposits

     27,904        27,912   

Derivative contracts

     1,109        26,415   

Goodwill

     235,396        235,396   

Other assets

     83,436        98,622   
  

 

 

   

 

 

 

Total assets

   $ 6,378,099      $ 6,219,609   
  

 

 

   

 

 

 
LIABILITIES AND EQUITY     

Current liabilities

    

Current maturities of long-term debt

   $ 1,070      $ 1,051   

Accounts payable and accrued expenses

     601,785        506,784   

Billings and estimated contract loss in excess of costs incurred

     34,310        43,320   

Derivative contracts

     97,462        115,435   

Asset retirement obligation

     32,906        32,906   
  

 

 

   

 

 

 

Total current liabilities

     767,533        699,496   

Long-term debt

     2,813,484        2,813,125   

Derivative contracts

     292,110        49,695   

Asset retirement obligation

     100,126        95,210   

Other long-term obligations

     13,787        13,133   
  

 

 

   

 

 

 

Total liabilities

     3,987,040        3,670,659   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Equity

    

SandRidge Energy, Inc. stockholders’ equity

    

Preferred stock, $0.001 par value, 50,000 shares authorized

    

8.5% Convertible perpetual preferred stock; 2,650 shares issued and outstanding at March 31, 2012 and December 31, 2011; aggregate liquidation preference of $265,000

     3        3   

6.0% Convertible perpetual preferred stock; 2,000 shares issued and outstanding at March 31, 2012 and December 31, 2011; aggregate liquidation preference of $200,000

     2        2   

7.0% Convertible perpetual preferred stock; 3,000 shares issued and outstanding at March 31, 2012 and December 31, 2011; aggregate liquidation preference of $300,000

     3        3   

Common stock, $0.001 par value, 800,000 shares authorized; 416,478 issued and 415,544 outstanding at March 31, 2012 and 412,827 issued and 411,953 outstanding at December 31, 2011

     401        399   

Additional paid-in capital

     4,632,544        4,568,856   

Treasury stock, at cost

     (6,617     (6,158

Accumulated deficit

     (3,169,153     (2,937,094
  

 

 

   

 

 

 

Total SandRidge Energy, Inc. stockholders’ equity

     1,457,183        1,626,011   

Noncontrolling interest

     933,876        922,939   
  

 

 

   

 

 

 

Total equity

     2,391,059        2,548,950   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 6,378,099      $ 6,219,609   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Table of Contents

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

 

     Three Months Ended March 31,  
     2012     2011  
     (Unaudited)  

Revenues

    

Oil and natural gas

   $ 341,365      $ 266,942   

Drilling and services

     29,309        21,034   

Midstream and marketing

     8,306        22,258   

Other

     2,655        2,614   
  

 

 

   

 

 

 

Total revenues

     381,635        312,848   
  

 

 

   

 

 

 

Expenses

    

Production

     83,310        73,957   

Production taxes

     12,254        10,575   

Drilling and services

     17,560        15,041   

Midstream and marketing

     7,954        22,283   

Depreciation and depletion — oil and natural gas

     87,066        71,460   

Depreciation and amortization — other

     14,513        13,093   

Accretion of asset retirement obligation

     2,607        2,426   

General and administrative

     50,301        34,414   

Loss on derivative contracts

     254,646        277,628   

Loss (gain) on sale of assets

     3,080        (201
  

 

 

   

 

 

 

Total expenses

     533,291        520,676   
  

 

 

   

 

 

 

Loss from operations

     (151,656     (207,828
  

 

 

   

 

 

 

Other income (expense)

    

Interest expense

     (66,965     (59,438

Loss on extinguishment of debt

     —          (36,181

Other income, net

     2,468        1,197   
  

 

 

   

 

 

 

Total other expense

     (64,497     (94,422
  

 

 

   

 

 

 

Loss before income taxes

     (216,153     (302,250

Income tax expense

     71        88   
  

 

 

   

 

 

 

Net loss

     (216,224     (302,338

Less: net income attributable to noncontrolling interest

     1,954        6   
  

 

 

   

 

 

 

Net loss attributable to SandRidge Energy, Inc.

     (218,178     (302,344

Preferred stock dividends

     13,881        13,940   
  

 

 

   

 

 

 

Loss applicable to SandRidge Energy, Inc. common stockholders

   $ (232,059   $ (316,284
  

 

 

   

 

 

 

Loss per share

    

Basic

   $ (0.58   $ (0.79
  

 

 

   

 

 

 

Diluted

   $ (0.58   $ (0.79
  

 

 

   

 

 

 

Weighted average number of common shares outstanding

    

Basic

     400,597        398,251   
  

 

 

   

 

 

 

Diluted

     400,597        398,251   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

5


Table of Contents

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

 

     SandRidge Energy, Inc. Stockholders              
     Convertible
Perpetual
Preferred
Stock
    Common Stock     Additional
Paid-In
    Treasury     Accumulated     Noncontrolling        
     Shares     Amount     Shares     Amount     Capital     Stock     Deficit     Interest     Total  
                             (Unaudited)                    

Three months ended March 31, 2011

                  

Balance, December 31, 2010

     7,650      $ 8        406,360      $ 398      $ 4,528,912      $ (3,547   $ (2,989,576   $ 11,288      $ 1,547,483   

Distributions to noncontrolling interest owners

     —          —          —          —          —          —          —          (1     (1

Stock issuance expense

     —          —          —          —          (143     —          —          —          (143

Purchase of treasury stock

     —          —          —          —          —          (4,809     —          —          (4,809

Retirement of treasury stock

     —          —          —          —          (4,809     4,809        —          —          —     

Stock purchases — retirement plans, net of distributions

     —          —          (81     —          1,389        (598     —          —          791   

Stock-based compensation

     —          —          —          —          14,206        —          —          —          14,206   

Stock-based compensation excess tax benefit

     —          —          —          —          10        —          —          —          10   

Issuance of restricted stock awards, net of cancellations

     —          —          3,819        —          —          —          —          —          —     

Net (loss) income

     —          —          —          —          —          —          (302,344     6        (302,338

Convertible perpetual preferred stock dividends

     —          —          —          —          —          —          (13,940     —          (13,940
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2011

     7,650      $ 8        410,098      $ 398      $ 4,539,565      $ (4,145   $ (3,305,860   $ 11,293      $ 1,241,259   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three months ended March 31, 2012

                  

Balance, December 31, 2011

     7,650      $ 8        411,953      $ 399      $ 4,568,856      $ (6,158   $ (2,937,094   $ 922,939      $ 2,548,950   

Sale of royalty trust units

     —          —          —          —          57,126        —          —          41,723        98,849   

Distributions to royalty trust unitholders

     —          —          —          —          —          —          —          (32,740     (32,740

Purchase of treasury stock

     —          —          —          —          —          (6,391     —          —          (6,391

Retirement of treasury stock

     —          —          —          —          (6,391     6,391        —          —          —     

Stock purchases — retirement plans, net of distributions

     —          —          (59     —          553        (459     —          —          94   

Stock-based compensation

     —          —          —          —          12,395        —          —          —          12,395   

Stock-based compensation excess tax benefit

     —          —          —          —          7        —          —          —          7   

Issuance of restricted stock awards, net of cancellations

     —          —          3,650        2        (2     —          —          —          —     

Net (loss) income

     —          —          —          —          —          —          (218,178     1,954        (216,224

Convertible perpetual preferred stock dividends

     —          —          —          —          —          —          (13,881     —          (13,881
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

     7,650      $ 8        415,544      $ 401      $ 4,632,544      $ (6,617   $ (3,169,153   $ 933,876      $ 2,391,059   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


Table of Contents

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Three Months Ended
March 31,
 
     2012     2011  
     (Unaudited)  

CASH FLOWS FROM OPERATING ACTIVITIES

    

Net loss

   $ (216,224   $ (302,338

Adjustments to reconcile net loss to net cash provided by operating activities

    

Depreciation, depletion and amortization

     101,579        84,553   

Accretion of asset retirement obligation

     2,607        2,426   

Debt issuance costs amortization

     2,538        2,873   

Discount amortization on long-term debt

     635        575   

Loss on extinguishment of debt

     —          36,181   

Unrealized loss on derivative contracts

     127,836        267,254   

Realized loss on amended derivative contracts

     117,108        —     

Realized loss on financing derivatives

     2,978        2,348   

Loss (gain) on sale of assets

     3,080        (201

Investment income

     (568     (150

Stock-based compensation

     11,371        8,806   

Changes in operating assets and liabilities

     77,970        (22,665
  

 

 

   

 

 

 

Net cash provided by operating activities

     230,910        79,662   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

    

Capital expenditures for property, plant and equipment

     (601,841     (427,391

Acquisition of assets

     (10,511     (1,548

Proceeds from sale of assets

     269,008        159,536   
  

 

 

   

 

 

 

Net cash used in investing activities

     (343,344     (269,403
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

    

Proceeds from borrowings

     —          1,493,000   

Repayments of borrowings

     (257     (1,230,272

Premium on debt redemption

     —          (28,795

Debt issuance costs

     (7,223     (19,099

Proceeds from the sale of royalty trust units

     98,849        —     

Distributions to royalty trust unitholders

     (32,740     —     

Noncontrolling interest distributions

     —          (1

Stock issuance expense

     —          (143

Stock-based compensation excess tax benefit

     7        10   

Purchase of treasury stock

     (7,144     (5,469

Dividends paid — preferred

     (17,263     (18,130

Cash (paid) received on settlement of financing derivatives

     (1,634     1,314   
  

 

 

   

 

 

 

Net cash provided by financing activities

     32,595        192,415   
  

 

 

   

 

 

 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

     (79,839     2,674   

CASH AND CASH EQUIVALENTS, beginning of year

     207,681        5,863   
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS, end of period

   $ 127,842      $ 8,537   
  

 

 

   

 

 

 

Supplemental Disclosure of Noncash Investing and Financing Activities

    

Change in accrued capital expenditures

   $ (32,183   $ (11,222

Change in convertible perpetual preferred stock dividends payable

   $ (3,382   $ (4,190

Adjustment to oil and natural gas properties for estimated contract loss

   $ 10,000      $ 19,000   

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

7


Table of Contents

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

Nature of Business. SandRidge Energy, Inc. (the “Company” or “SandRidge”) is an independent oil and natural gas company concentrating on development and production activities related to the exploitation of its significant holdings in the Mid-Continent area of Oklahoma and Kansas, west Texas and the Gulf of Mexico. The Company’s primary areas of focus are the Mississippian formation in the Mid-Continent and the Permian Basin in west Texas. The Company also owns and operates other interests in the Mid-Continent, West Texas Overthrust (“WTO”) and Gulf Coast. The Company also operates businesses that are complementary to its primary development and production activities, including gas gathering and processing facilities, an oil and gas marketing business, an oil field services business, including a drilling rig business, and tertiary oil recovery operations.

Interim Financial Statements. The accompanying condensed consolidated financial statements as of December 31, 2011 have been derived from the audited financial statements contained in the Company’s 2011 Form 10-K. The unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with the accounting policies stated in the audited consolidated financial statements contained in the 2011 Form 10-K. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the information in the Company’s unaudited condensed consolidated financial statements have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the 2011 Form 10-K.

Reclassifications. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation. These reclassifications had no effect on the Company’s previously reported results of operations.

Use of Estimates. The preparation of the unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The more significant areas requiring the use of assumptions, judgments and estimates include: oil and natural gas reserves; cash flow estimates used in impairment tests of goodwill and other long-lived assets; depreciation, depletion and amortization; asset retirement obligations; assigning fair value and allocating purchase price in connection with business combinations; income taxes; valuation of derivative instruments; and accrued revenue and related receivables. Although management believes these estimates are reasonable, actual results could differ significantly from these estimates.

Risks and Uncertainties. The Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, each of which depends on numerous factors beyond the Company’s control such as economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil and natural gas prices historically have been volatile, and may be subject to significant fluctuations in the future. The Company’s derivative arrangements serve to mitigate a portion of the effect of this price volatility on the Company’s cash flows. See Note 9 for the Company’s open oil and natural gas commodity derivative contracts.

The Company has incurred, and will have to continue to incur, capital expenditures to achieve production targets contained in certain gathering and treating arrangements. Additionally, the Company has a drilling obligation to each of SandRidge Mississippian Trust I (the “Mississippian Trust I”) and SandRidge Permian Trust (the “Permian Trust”). See Note 3 for discussion of these drilling obligations. In addition, during April 2012, the Company entered into a development agreement with and incurred a drilling obligation to SandRidge Mississippian Trust II (the “Mississippian Trust II”). See Note 18 for discussion of this drilling obligation. The Company depends on the availability of borrowings under its senior secured revolving credit facility (the “senior credit facility”), along with cash flows from operating activities, to fund such capital expenditures. Based on current cash balances, anticipated oil and natural gas prices and production and availability under the senior credit facility, the Company expects to be able to fund its planned capital expenditures budget, debt service requirements and working capital needs for 2012. However, a substantial or extended decline in oil or natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil and natural gas reserves that may be economically produced, which could adversely impact the Company’s ability to comply with the financial covenants under its senior credit facility, which in turn would limit further borrowings to fund capital expenditures. See Note 8 for discussion of the financial covenants in the senior credit facility.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

Recently Adopted Accounting Pronouncements. In May 2011, the FASB issued Accounting Standards Update 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS” (“ASU 2011-04”), which clarifies the FASB’s intent regarding the application of existing fair value measurements and requires additional disclosure information regarding valuation processes and inputs used. The new disclosure requirements, which are effective for interim and annual reporting periods beginning after December 15, 2011, were implemented by the Company in the first quarter of 2012. The implementation of ASU 2011-04 had no impact on the Company’s financial position or results of operations. See Note 4.

Recent Accounting Pronouncements Not Yet Adopted. In September 2011, the FASB issued Accounting Standards Update 2011-08, “Testing Goodwill for Impairment” (“ASU 2011-08”), which allows an entity the option of performing a qualitative assessment to determine whether it is necessary to perform the current two-step annual impairment test. If an entity determines, on the basis of qualitative factors, that the fair value of the reporting unit more-likely-than-not exceeds the carrying amount, the two-step impairment test is not required. ASU 2011-08 does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment or amend the requirement to test goodwill for impairment between annual tests if events or circumstances warrant. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company will implement ASU 2011-08 for its 2012 goodwill impairment test and does not expect this pronouncement to have any impact on the value of its goodwill.

For a description of the Company’s significant accounting policies, refer to Note 1 of the consolidated financial statements included in the 2011 Form 10-K.

2. Acquisitions and Divestitures

2011 Divestitures

The Company completed the following divestitures in 2011, all of which were accounted for as adjustments to the full cost pool with no gain or loss recognized:

 

   

In July 2011, the Company sold its Wolfberry assets in the Permian Basin for $151.6 million, net of fees and post-closing adjustments.

 

   

In August 2011, the Company sold certain oil and natural gas properties in Lea County and Eddy County, New Mexico, for $199.0 million, net of fees and post-closing adjustments.

 

   

In November 2011, the Company sold its east Texas natural gas properties in Gregg, Harrison, Rusk and Panola counties for $225.8 million, net of fees and post-closing adjustments.

Sale of Working Interests and Associated Drilling Carry Commitments

During 2011 and 2012, the Company entered into two transactions whereby the Company sold non-operated working interests in the Mississippian formation. In these transactions, the Company received aggregate cash proceeds of $500.0 million for the sale of working interests and received drilling carry commitments to fund a portion of its future drilling and completion costs totaling $1.0 billion. For accounting purposes, initial cash proceeds from these transactions were reflected as a reduction of oil and natural gas properties with no gain or loss recognized, and amounts received during 2011 and 2012 attributable to the drilling carry reduced the Company’s capital expenditures. These transactions, as well as drilling carry amounts received and remaining as of March 31, 2012 are as follows:

 

Partner

   Closing Date      Proceeds
Received
At Closing (1)
     Drilling Carry
Received or
Billed
     Drilling  Carry
Remaining
 
            (in millions)  

Atinum MidCon I, LLC

     September 2011       $ 287.0       $ 41.8       $ 208.2   

Repsol E&P USA, Inc.

     January 2012         272.5         10.8         739.2   
     

 

 

    

 

 

    

 

 

 
      $ 559.5       $ 52.6       $ 947.4   
     

 

 

    

 

 

    

 

 

 

 

(1) Includes amounts related to the drilling carry

 

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In September 2011, the Company sold to Atinum MidCon I, LLC (“Atinum”) non-operated working interests equal to approximately 113,000 net acres in the Mississippian formation in northern Oklahoma and southern Kansas for approximately $250.0 million. In addition, Atinum agreed to pay the development costs related to its working interest, as well as a portion of the Company’s development costs equal to Atinum’s working interest for wells within an area of mutual interest up to $250.0 million. The Company expects Atinum’s funding of the Company’s development cost for wells within the area of mutual interest to occur over a three-year period.

In January 2012, the Company sold (i) non-operated working interests equal to approximately 250,000 net acres, in the Mississippian formation in western Kansas and (ii) non-operated working interest equal to approximately 114,000 net acres, and a proportionate share of existing salt water disposal facilities in the Mississippian formation in northern Oklahoma and southern Kansas to Repsol E&P USA Inc. (“Repsol”) for approximately $250.0 million. In addition, Repsol agreed to pay the development costs related to its working interest, as well as a portion of the Company’s development costs equal to 200% of Repsol’s working interest for wells within an area of mutual interest up to $750.0 million. The Company expects Repsol’s funding of the Company’s development cost for wells within the area of mutual interest to occur over a three-year period.

During the three-month period ended March 31, 2012, the Company received or billed approximately $33.7 million of drilling carry from Atinum and Repsol, which reduced the Company’s capital expenditures for the period.

3. Variable Interest Entities

The Company consolidates the activities of variable interest entities (“VIEs”) of which it is the primary beneficiary. The primary beneficiary of a VIE is that variable interest holder possessing a controlling financial interest through (i) its power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) its obligation to absorb losses or its right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whether the Company owns a variable interest in a VIE, the company performs a qualitative analysis of the entity’s design, organizational structure, primary decision makers and related financial agreements.

The Company’s significant associated VIEs, including those for which the Company has determined it is the primary beneficiary and those for which it has determined it is not, are described below.

Grey Ranch Plant, L.P. Primarily engaged in treating and transportation of natural gas, Grey Ranch Plant, L.P. (“GRLP”) is a limited partnership that operates the Company’s Grey Ranch plant (the “Plant”) located in Pecos County, Texas. The Company has long-term operating and gathering agreements with GRLP and also owns a 50% interest in GRLP, which represents a variable interest. Income or losses of GRLP are allocated to the partners based on ownership percentage and any operating or cash shortfalls require contributions from the partners. The Company has determined that GRLP qualifies as a VIE due to certain equity holders lacking the ability to participate in decisions impacting GRLP. Agreements related to the ownership and operation of GRLP provide for GRLP to pay management fees to the Company to operate the Plant and lease payments for the Plant. Under the operating agreements, lease payments are reduced if throughput volumes are below those expected. As a result of amendments to certain agreements related to the ownership and operation of GRLP in October 2009, the Company determined that it is the primary beneficiary of GRLP as it has both (i) the power to direct the activities of GRLP that most significantly impact its economic performance as operator of the Plant and (ii) the obligation to absorb losses, as a result of the operating and gathering agreements, that could potentially be significant to GRLP. The Company began consolidating the activity of GRLP in its consolidated financial statements prospectively on October 1, 2009, the effective date of the amendments. The 50% ownership interest not held by the Company is presented as noncontrolling interest in the consolidated financial statements.

GRLP’s assets can only be used to settle its own obligations and not other obligations of the Company. GRLP’s creditors have no recourse to the general credit of the Company. Although GRLP is included in the Company’s consolidated financial statements, the Company’s legal interest in GRLP’s assets is limited to its 50% ownership. At March 31, 2012 and December 31, 2011, $8.0 million and $8.2 million, respectively, of noncontrolling interest in the accompanying unaudited condensed consolidated balance sheets were related to GRLP. GRLP’s assets and liabilities, after considering the effects of intercompany eliminations, included in the accompanying condensed unaudited consolidated balance sheets at March 31, 2012 and December 31, 2011 consisted of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Cash and cash equivalents

   $ 989       $ 1,702   

Accounts receivable, net

     23         24   

Inventory

     109         109   

Other current assets

     117         176   
  

 

 

    

 

 

 

Total current assets

     1,238         2,011   

Other property, plant and equipment, net

     14,696         14,985   
  

 

 

    

 

 

 

Total assets

   $ 15,934       $ 16,996   
  

 

 

    

 

 

 

Accounts payable and accrued expenses

   $ 209       $ 280   
  

 

 

    

 

 

 

Total liabilities

   $ 209       $ 280   
  

 

 

    

 

 

 

 

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Grey Ranch Plant Genpar, LLC. The Company owns a 50% interest in Grey Ranch Plant Genpar, LLC (“Genpar”), the managing partner and 1% owner of GRLP. Additionally, the Company serves as Genpar’s administrative manager. Genpar’s ownership interest in GRLP is its only asset. As managing partner of GRLP, Genpar has the sole right to manage, control and conduct the business of GRLP. However, Genpar is restricted from making certain major decisions, including the decision to remove the Company as operator of the Plant. The rights afforded the Company under the Plant operating agreement and the restrictions on Genpar limit Genpar’s ability to make decisions on behalf of GRLP. Therefore, Genpar is considered a VIE. Although both the Company and Genpar’s other equity owner share equally in Genpar’s economic losses and benefits and also have agreements that may be considered variable interests, the Company determined it was the primary beneficiary of Genpar due to (i) its ability, as administrative manager and operator of the Plant, to direct the activities of Genpar that most significantly impact its economic performance and (ii) its obligation or right, as operator of the Plant, to absorb the losses of or receive benefits from Genpar that could potentially be significant to Genpar. As the primary beneficiary, the Company consolidates Genpar’s activity. However, its sole asset, the investment in GRLP, is eliminated in consolidation. Genpar has no liabilities.

SandRidge Mississippian Trust I. On April 12, 2011, the Mississippian Trust I completed its initial public offering of 17,250,000 common units representing beneficial interests in the Mississippian Trust I. Net proceeds to the Mississippian Trust I, after offering expenses, were approximately $336.9 million. Concurrent with the closing, the Company conveyed certain royalty interests to the Mississippian Trust I in exchange for the net proceeds of the offering and 10,750,000 units representing approximately 38.4% of the beneficial interest in the Mississippian Trust I. The royalty interests conveyed to the Mississippian Trust I are in certain existing wells and wells to be drilled on oil and natural gas properties leased by the Company in the Mississippian formation in northern Oklahoma. The conveyance of the royalty interests to the Mississippian Trust I was recorded in April 2011 at the historical cost to the Company, or $309.0 million. The Mississippian Trust I will dissolve and begin to liquidate on December 31, 2030 and will soon thereafter wind up its affairs and terminate. At the time the Mississippian Trust I terminates, 50% of the conveyed royalty interests will automatically revert to the Company.

On February 27, 2012, the Company sold 1,583,937 of its Mississippian Trust I common units in a transaction exempt from registration under Rule 144 under the Securities Act for proceeds of $52.3 million. As a result of the sale, the Company’s beneficial interest in the Mississippian Trust I decreased from 38.4% to 32.7%.

The Mississippian Trust I makes quarterly cash distributions to its unitholders based on its calculated distributable income. In order to provide support for cash distributions on the Mississippian Trust I’s common units, the Company agreed to subordinate a portion of the Mississippian Trust I units it owns (the “Mississippian Trust I subordinated units”), which constitute 25% of the total outstanding Mississippian Trust I units. The Mississippian Trust I subordinated units are entitled to receive pro rata distributions from the Mississippian Trust I each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is no less than the applicable quarterly subordination threshold. If there is not sufficient cash to fund such a distribution on all common units, the distribution to be made with respect to the Mississippian Trust I subordinated units will be reduced or eliminated for such quarter in order to make a distribution, to the extent possible, of up to the subordination threshold amount on all common units, including common units held by the Company. In February 2012, the Mississippian Trust I declared and paid quarterly distributions for the three-month period ended December 31, 2011 of $22.1 million, or $0.79 per unit. Of the total distribution, $13.6 million was distributed to third-party unitholders. See Note 18 for discussion of a distribution declaration by the Mississippian Trust I in April 2012.

Pursuant to a trust agreement, SandRidge has a loan commitment to the Mississippian Trust I, whereby SandRidge will loan funds to the Mississippian Trust I on an unsecured basis, with terms substantially the same as would be obtained in an arm’s length transaction between SandRidge and an unaffiliated party, if at any time the Mississippian Trust I’s cash is not sufficient to pay ordinary course administrative expenses as they become due. There were no amounts outstanding under the loan commitment at March 31, 2012 or December 31, 2011.

The Company and one of its wholly owned subsidiaries entered into a development agreement with the Mississippian Trust I that obligates the Company to drill, or cause to be drilled, a specified number of wells, within an area of mutual interest, which are

 

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also subject to the royalty interest granted to the Mississippian Trust I, by December 31, 2014. In the event of delays, the Company will have until December 31, 2015 to fulfill its drilling obligation. At the end of the fourth full calendar quarter following satisfaction of the Company’s drilling obligation (the “Mississippian Trust I subordination period”), the Company’s Mississippian Trust I subordinated units will automatically convert into common units on a one-for-one basis and the Company’s right to receive incentive distributions will terminate. Incentive distributions are equal to 50% of the amount by which the cash available for distribution on all of the Mississippian Trust I units for any quarter exceeds 20% of the target distribution for such quarter. One of the Company’s wholly owned subsidiaries also granted to the Mississippian Trust I a lien on the Company’s interests in the properties where the development wells will be drilled in order to secure the estimated amount of the drilling costs for the wells. As the Company fulfills its drilling obligation, wells that have been drilled and perforated for completion are released from the lien and the total amount that may be recovered by the Mississippian Trust I is proportionately reduced. As of March 31, 2012, the maximum amount recoverable by the Mississippian Trust I under the lien had been reduced to approximately $77.3 million. Additionally, the Company and the Mississippian Trust I entered into an administrative services agreement, pursuant to which the Company provides certain administrative services to the Mississippian Trust I, and a derivatives agreement, pursuant to which the Company provides to the Mississippian Trust I the economic effects of certain of the Company’s derivative contracts. The tables below present open oil and natural gas commodity derivative contracts at March 31, 2012, the economic effects of which will be provided to the Mississippian Trust I under the derivatives agreement. See Note 9 for further discussion of the derivatives agreement between the Company and the Mississippian Trust I.

Oil Price Swaps

 

      Notional
(MBbl)
     Weighted Avg.
Fixed Price
 

April 2012 — December 2012

     341       $ 104.15   

January 2013 — December 2013

     488       $ 102.07   

January 2014 — December 2014

     541       $ 100.94   

January 2015 — December 2015

     468       $ 101.07   

Natural Gas Price Swaps

 

      Notional
(MMBtu)
     Weighted Avg.
Fixed Price
 

April 2012 — June 2012

     1,126       $ 4.90   

Natural Gas Collars

 

      Notional
(MMBtu)
     Collar Range  

July 2012 — December 2012

     402       $ 4.00 - 6.20   

January 2013 — December 2013

     858       $ 4.00 - 7.15   

January 2014 — December 2014

     937       $ 4.00 - 7.78   

January 2015 — December 2015

     1,010       $ 4.00 - 8.55   

The Company’s ownership in the Mississippian Trust I and the loan commitment constitute variable interests. The Mississippian Trust I is considered a VIE due to the lack of voting or similar decision-making rights by its equity holders regarding activities that have a significant effect on the economic success of the Mississippian Trust I. The Company has determined it is the primary beneficiary of the Mississippian Trust I as it has (a) the power to direct the activities that most significantly impact the economic performance of the Mississippian Trust I through (i) its participation in the creation and structure of the Mississippian Trust I, (ii) the manner in which it fulfills its drilling obligation to the Mississippian Trust I and (iii) the manner in which it operates the oil and natural gas properties that are subject to the conveyed royalty interests, and (b) through the end of the Mississippian Trust I subordination period, the obligation to absorb losses and right to receive residual returns, through its ownership of the Mississippian Trust I subordinated units, that could potentially be significant to the Mississippian Trust I. As a result, the Company began consolidating the activities of the Mississippian Trust I into its results of operations in April 2011. In consolidation, the common units of the Mississippian Trust I owned by third parties are reflected as noncontrolling interest in the consolidated financial statements. As discussed above, the Company’s Mississippian Trust I subordinated units will automatically convert to common units at the end of the Mississippian Trust I subordination period.

The Mississippian Trust I’s assets can only be used to settle its own obligations and not other obligations of the Company. The Mississippian Trust I’s creditors have no contractual recourse to the general credit of the Company. Although the Mississippian Trust I is included in the Company’s consolidated financial statements, the Company’s legal interest in the Mississippian Trust I’s assets is limited to its ownership of the Mississippian Trust I units. At March 31, 2012 and December 31, 2011, $356.2 million and $348.9 million, respectively, of noncontrolling interest in the accompanying unaudited condensed consolidated balance sheets were attributable to the

 

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(Unaudited)

 

Mississippian Trust I. The Mississippian Trust I’s assets and liabilities, after considering the effects of intercompany eliminations, included in the accompanying unaudited condensed consolidated balance sheets at March 31, 2012 and December 31, 2011 consisted of the following (in thousands):

 

     March 31,     December 31,  
     2012     2011  

Cash and cash equivalents(1)

   $ 1,162      $ 1,336   

Accounts receivable

     6,901        7,471   
  

 

 

   

 

 

 

Total current assets

     8,063        8,807   

Investment in royalty interests(2)

     308,964        308,964   

Less: accumulated depletion

     (22,822     (16,844
  

 

 

   

 

 

 
     286,142        292,120   
  

 

 

   

 

 

 

Total assets

   $ 294,205      $ 300,927   
  

 

 

   

 

 

 

Accounts payable and accrued expenses

   $ 403      $ 276   
  

 

 

   

 

 

 

Total liabilities

   $ 403      $ 276   
  

 

 

   

 

 

 

 

(1) Includes $1.0 million held by the trustee as reserves for future general and administrative expenses.
(2) Included in oil and natural gas properties on the accompanying unaudited condensed consolidated balance sheets.

SandRidge Permian Trust. On August 16, 2011, the Permian Trust completed its initial public offering of 34,500,000 common units representing beneficial interests in the Permian Trust. Net proceeds to the Permian Trust, after offering expenses, were approximately $580.6 million. Concurrent with the closing, the Company conveyed certain royalty interests to the Permian Trust in exchange for the net proceeds of the offering and 18,000,000 units representing approximately 34.3% of the beneficial interest in the Permian Trust. The royalty interests conveyed to the Permian Trust are in certain existing wells and wells to be drilled on oil and natural gas properties leased by the Company in the Central Basin Platform of the Permian Basin in Andrews County, Texas. The conveyance of the royalty interests to the Permian Trust was recorded in August 2011 at the historical cost to the Company, or $549.8 million. The Permian Trust will dissolve and begin to liquidate on March 31, 2031 and will soon thereafter wind up its affairs and terminate. At the time the Permian Trust terminates, 50% of the conveyed royalty interests will automatically revert to the Company.

On March 14, 2012, the Company sold 2,000,000 of its Permian Trust common units in a transaction exempt from registration under Rule 144 under the Securities Act for proceeds of $46.5 million. As a result of the sale, the Company’s beneficial interest in the Permian Trust decreased from 34.3% to 30.5%.

The Permian Trust makes quarterly cash distributions to its unitholders based on its calculated distributable income. In order to provide support for cash distributions on the Permian Trust’s common units, the Company agreed to subordinate a portion of the Permian Trust units it owns (the “Permian Trust subordinated units”), which constitute 25% of the total outstanding Permian Trust units. The Permian Trust subordinated units are entitled to receive pro rata distributions from the Permian Trust each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is no less than the applicable quarterly subordination threshold. If there is not sufficient cash to fund such a distribution on all common units, the distribution to be made with respect to the Permian Trust subordinated units will be reduced or eliminated for such quarter in order to make a distribution, to the extent possible, of up to the subordination threshold amount on all common units, including common units held by the Company. In February 2012, the Permian Trust declared and paid quarterly distributions for the three-month period ended December 31, 2011 of $29.1 million, or $0.55 per unit. Of the total distribution, $19.1 million was distributed to third-party unitholders. See Note 18 for discussion of a distribution declaration by the Permian Trust in April 2012.

Pursuant to a trust agreement, SandRidge has a loan commitment to the Permian Trust, whereby SandRidge will loan funds to the Permian Trust on an unsecured basis, with terms substantially the same as would be obtained in an arm’s length transaction between SandRidge and an unaffiliated third party, if at any time the Permian Trust’s cash is not sufficient to pay ordinary course administrative expenses as they become due. There were no amounts outstanding under the loan commitment at March 31, 2012 or December 31, 2011.

The Company and one of its wholly owned subsidiaries entered into a development agreement with the Permian Trust that obligates the Company to drill, or cause to be drilled, a specified number of wells, within an area of mutual interest, which are also subject to the royalty interest granted to the Permian Trust, by March 31, 2015. In the event of delays, the Company will have until March 31, 2016 to fulfill its drilling obligation. At the end of the fourth full calendar quarter following satisfaction of the Company’s drilling obligation (the “Permian Trust subordination period”), the Company’s Permian Trust subordinated units will automatically convert into common units on a one-for-one basis and the Company’s right to receive incentive distributions will terminate. Incentive distributions are equal to 50% of the amount by which the cash available for distribution on all of the Permian Trust units for any quarter exceeds 20% of the target distribution for such quarter. One of the Company’s wholly owned subsidiaries also granted to the

 

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Permian Trust a lien on the Company’s interests in the properties where the development wells will be drilled, in order to secure the estimated amount of the drilling costs for the wells. As the Company fulfills its drilling obligation, wells that have been drilled and perforated for completion are released from the lien and the total amount that may be recovered by the Permian Trust is proportionately reduced. As of March 31, 2012, the maximum amount recoverable by the Permian Trust under the lien had been reduced to approximately $206.1 million. The Company and the Permian Trust also entered into an administrative services agreement, pursuant to which the Company provides certain administrative services to the Permian Trust, including hedge management services, and a derivatives agreement, pursuant to which the Company provides to the Permian Trust the economic effects of certain of the Company’s derivative contracts. Substantially concurrent with the execution of the derivatives agreement, the Company novated certain of the derivative contracts underlying the derivatives agreement to the Permian Trust. The tables below present the open contracts at March 31, 2012 underlying the derivatives agreement, including the contracts novated to the Permian Trust, as of March 31, 2012. The combined volume in the tables below reflects the total volume of the Permian Trust’s oil derivative contracts. See Note 9 for further discussion of the derivatives agreement between the Company and the Permian Trust.

Oil Price Swaps Underlying the Derivatives Agreement

 

      Notional
(MBbl)
     Weighted Avg.
Fixed Price
 

April 2012 — December 2012

     516       $ 102.20   

January 2013 — December 2013

     921       $ 102.84   

January 2014 — December 2014

     1,100       $ 101.75   

January 2015 — March 2015

     232       $ 100.90   

Oil Price Swaps Underlying the Derivatives Agreement and Novated to the Permian Trust

 

      Notional
(MBbl)
     Weighted Avg.
Fixed Price
 

April 2012 — December 2012

     350       $ 102.20   

January 2013 — December 2013

     368       $ 102.84   

January 2014 — December 2014

     311       $ 101.75   

January 2015 — March 2015

     71       $ 100.90   

The Company’s ownership in the Permian Trust and the loan commitment constitute variable interests. The Permian Trust is considered a VIE due to the lack of voting or similar decision-making rights of its equity holders regarding activities that have a significant effect on the economic success of the Permian Trust. The Company has determined it is the primary beneficiary of the Permian Trust as it has (a) the power to direct the activities that most significantly impact the economic performance of the Permian Trust through (i) its participation in the creation and structure of the Permian Trust, (ii) the manner in which it fulfills its drilling obligation to the Permian Trust, (iii) the manner in which it operates the oil and natural gas properties that are subject to the conveyed royalty interests, and (iv) its role as the Permian Trust’s hedge manager, and (b) through the end of the Permian Trust subordination period, the obligation to absorb losses and right to receive residual returns, through its ownership of the Permian Trust subordinated units, that could potentially be significant to the Permian Trust. As a result, the Company began consolidating the activities of the Permian Trust into its results of operations in August 2011. In consolidation, the common units of the Permian Trust owned by third parties are reflected as noncontrolling interest in the consolidated financial statements. As discussed above, the Company’s Permian Trust subordinated units will automatically convert to common units at the end of the Permian Trust subordination period.

 

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The Permian Trust’s assets can only be used to settle its own obligations and not other obligations of the Company. The Permian Trust’s creditors have no contractual recourse to the general credit of the Company. Although the Permian Trust is included in the Company’s consolidated financial statements, the Company’s legal interest in the Permian Trust’s assets is limited to its ownership of the Permian Trust units. At March 31, 2012 and December 31, 2011, $569.7 million and $565.8 million, respectively, of noncontrolling interest in the accompanying unaudited condensed consolidated balance sheets were attributable to the Permian Trust. The Permian Trust’s assets and liabilities, after considering the effects of intercompany eliminations, included in the accompanying unaudited condensed consolidated balance sheets at March 31, 2012 and December 31, 2011 consisted of the following (in thousands):

 

     March 31,     December 31,  
     2012     2011  

Cash and cash equivalents(1)

   $ 1,565      $ 1,815   

Accounts receivable

     10,954        10,886   

Derivative contracts

     —          1,499   
  

 

 

   

 

 

 

Total current assets

     12,519        14,200   

Investment in royalty interests(2)

     549,831        549,831   

Less: accumulated depletion

     (12,899     (7,560
  

 

 

   

 

 

 
     536,932        542,271   

Derivative contracts

     1,085        5,668   
  

 

 

   

 

 

 

Total assets

   $ 550,536      $ 562,139   
  

 

 

   

 

 

 

Accounts payable and accrued expenses

   $ 704      $ 210   

Derivative contracts

     1,018        —     
  

 

 

   

 

 

 

Total liabilities

   $ 1,722      $ 210   
  

 

 

   

 

 

 

 

(1) Includes $1.0 million held by the trustee as reserves for future general and administrative expenses.
(2) Included in oil and natural gas properties on the accompanying unaudited condensed consolidated balance sheets.

Piñon Gathering Company, LLC. The Company has a gas gathering and operations and maintenance agreement with Piñon Gathering Company, LLC (“PGC”) through June 30, 2029. Under the gas gathering agreement, the Company is required to compensate PGC for any throughput shortfalls below a required minimum volume. By guaranteeing a minimum throughput, the Company absorbs the risk that lower than projected volumes will be gathered by the gathering system. Therefore, PGC is a VIE. Other than as required under the gas gathering and operations and maintenance agreements, the Company has not provided any support to PGC. While the Company operates the assets of PGC as directed under the operations and management agreement, the member and managers of PGC have the authority to directly control PGC and make substantive decisions regarding PGC’s activities including terminating the Company as operator without cause. As the Company does not have the ability to control the activities of PGC that most significantly impact PGC’s economic performance, the Company is not the primary beneficiary of PGC. Therefore, the results of PGC’s activities are not consolidated into the Company’s financial statements. The Company had accounts receivable due from PGC of $3.2 million as of March 31, 2012 and December 31, 2011 included in the accompanying unaudited condensed consolidated balance sheets. The Company had accounts payable due to PGC of $6.4 million and $4.6 million as of March 31, 2012 and December 31, 2011, respectively, included in the accompanying unaudited condensed consolidated balance sheets.

4. Fair Value Measurements

The Company measures and reports certain assets and liabilities on a fair value basis and has classified and disclosed its fair value measurements using the following levels of the fair value hierarchy:

 

Level 1    Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2    Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3    Measurement based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., supported by little or no market activity).

Assets and liabilities that are measured at fair value are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, stated below, considers the market for the Company’s financial assets and liabilities, the associated credit risk and other factors. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. The Company has assets and liabilities classified as Level 1, Level 2 and Level 3, as described below.

Level 1 Fair Value Measurements

Restricted deposits. The fair value of restricted deposits invested in mutual funds or municipal bonds is based on quoted market prices. For restricted deposits held in savings accounts, carrying value is deemed to approximate fair value.

Other assets. The fair value of other long-term assets, consisting of assets attributable to the Company’s deferred compensation plan, is based on quoted market prices.

Level 2 Fair Value Measurements

Derivative contracts. The fair values of the Company’s oil and natural gas fixed price swaps, natural gas collars and interest rate swap are based upon inputs that are either readily available in the public market, such as oil and natural gas futures prices, interest

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

rates and discount rates, or can be corroborated from active markets. The Company applies a weighted average credit default risk rating factor for its counterparties or gives effect to its credit default risk rating, as applicable, in determining the fair value of these derivative contracts. Credit default risk ratings are based on current published credit default swap rates.

Level 3 Fair Value Measurements

Derivative contracts. The fair values of the Company’s diesel fixed price swaps and natural gas basis swaps are based upon quotes obtained from counterparties to the derivative contracts. These values are reviewed internally for reasonableness through the use of a discounted cash flow model using non-exchange traded regional pricing information. Additionally, the Company applies a weighted average credit default risk rating factor for its counterparties or gives effect to its credit risk, as applicable, in determining the fair value of these derivative contracts. The significant unobservable input used in the fair value measurement of the Company’s diesel fixed price swaps is the estimate of diesel prices. Significant increases (decreases) in diesel prices could result in a significantly higher (lower) fair value measurement. The estimated fair value of the Company’s diesel fixed price swaps was $2.3 million at March 31, 2012 based upon diesel price forward curve inputs with a range of $3.24 – $3.40. The significant unobservable input used in the fair value measurement of the Company’s natural gas basis swaps is the estimate of future natural gas basis differentials. Significant increases (decreases) in natural gas basis differentials could result in a significantly higher (lower) fair value measurement. The estimated fair value of the Company’s natural gas basis swaps was ($4.9) million at March 31, 2012 based upon natural gas basis differential forward curve inputs with a range of $0.07 - $0.13.

The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis by the fair value hierarchy (in thousands):

March 31, 2012

 

     Fair Value Measurements            Assets/
Liabilities at
 
     Level 1      Level 2      Level 3      Netting(1)     Fair Value  

Assets

             

Restricted deposits

   $ 27,904       $ —         $ —         $ —        $ 27,904   

Commodity derivative contracts

     —           24,461         2,273         (18,099     8,635   

Other assets

     8,293         —           —           —          8,293   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 36,197       $ 24,461       $ 2,273       $ (18,099   $ 44,832   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

             

Commodity derivative contracts

   $ —         $ 393,629       $ 4,948       $ (18,099   $ 380,478   

Interest rate swaps

     —           9,094         —           —          9,094   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ —         $ 402,723       $ 4,948       $ (18,099   $ 389,572   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011

 

     Fair Value Measurements            Assets/
Liabilities at
 
     Level 1      Level 2      Level 3      Netting(1)     Fair Value  

Assets

             

Restricted deposits

   $ 27,912       $ —         $ —         $ —        $ 27,912   

Commodity derivative contracts

     —           62,746         397         (32,662     30,481   

Other assets

     7,138         —           —           —          7,138   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ 35,050       $ 62,746       $ 397       $ (32,662   $ 65,531   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

             

Commodity derivative contracts

   $ —         $ 182,694       $ 4,650       $ (32,662   $ 154,682   

Interest rate swaps

     —           10,448         —           —          10,448   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
   $ —         $ 193,142       $ 4,650       $ (32,662   $ 165,130   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Represents the impact of netting assets and liabilities with counterparties with which the right of offset exists.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

Fair values related to the Company’s oil and natural gas fixed price swaps, natural gas collars and interest rate swap were transferred from Level 3 to Level 2 in the fourth quarter of 2011 due to enhancements to the Company’s internal valuation process, including the use of observable inputs to assess the fair value. During the three-month periods ended March 31, 2012 and 2011, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements. The Company’s policy is to recognize transfers in and/or out of fair value hierarchy levels as of the end of the quarterly reporting period in which the event or change in circumstances causing the transfer occurred. The tables below set forth a reconciliation of the Company’s financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three-month periods ended March 31, 2012 and 2011 (in thousands):

 

Three Months Ended March 31, 2012

   Commodity
Derivative
Contracts
 

Balance of Level 3, December 31

   $ (4,253

Total gain or losses (realized/unrealized)

     2,032   

Purchases

     —     

Settlements

     (454
  

 

 

 

Balance of Level 3, March 31

   $ (2,675
  

 

 

 

 

Three Months Ended March 31, 2011

   Commodity
Derivative
Contracts
    Interest
Rate
Swaps
    Total  

Balance of Level 3, December 31

   $ (205,860   $ (16,694   $ (222,554

Total gain or losses (realized/unrealized)

     (277,628     (278     (277,906

Purchases

     —          —          —     

Settlements

     4,947        2,043        6,990   
  

 

 

   

 

 

   

 

 

 

Balance of Level 3, March 31

   $ (478,541   $ (14,929   $ (493,470
  

 

 

   

 

 

   

 

 

 

See Note 9 for further discussion of the Company’s derivative contracts.

Fair Value of Debt

The Company measures the fair value of its senior notes based on inputs that are readily available in the public market as all of the Company’s senior notes outstanding as of March 31, 2012 are freely tradable. The Company classifies these inputs as Level 2 in the fair value hierarchy. The estimated fair values and carrying values of the Company’s senior notes at March 31, 2012 and December 31, 2011 were as follows (in thousands):

 

     March 31, 2012      December 31, 2011  
     Fair Value      Carrying Value      Fair Value      Carrying Value  

Senior Floating Rate Notes due 2014

   $ 346,980       $ 350,000       $ 339,381       $ 350,000   

9.875% Senior Notes due 2016(1)

     396,568         355,078         396,568         354,579   

8.0% Senior Notes due 2018

     765,000         750,000         765,000         750,000   

8.75% Senior Notes due 2020(2)

     465,750         443,704         475,875         443,568   

7.5% Senior Notes due 2021

     886,500         900,000         909,000         900,000   

 

(1) Carrying value is net of $10,422 and $10,921 discount at March 31, 2012 and December 31, 2011, respectively.
(2) Carrying value is net of $6,296 and $6,432 discount at March 31, 2012 and December 31, 2011, respectively.

The carrying values of the Company’s senior credit facility and remaining fixed rate debt instruments approximate fair value based on current rates applicable to similar instruments. See Note 8 for discussion of the Company’s long-term debt.

5. Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands):

 

     March 31,
2012
    December 31,
2011
 

Oil and natural gas properties

    

Proved

   $ 9,159,518      $ 8,969,296   

Unproved

     748,953        689,393   
  

 

 

   

 

 

 

Total oil and natural gas properties

     9,908,471        9,658,689   

Less accumulated depreciation, depletion and impairment

     (4,874,325     (4,791,534
  

 

 

   

 

 

 

Net oil and natural gas properties capitalized costs

     5,034,146        4,867,155   
  

 

 

   

 

 

 

Land

     15,723        14,196   

Non oil and natural gas equipment(1)

     705,202        668,391   

Buildings and structures

     152,237        133,147   
  

 

 

   

 

 

 

Total

     873,162        815,734   

Less accumulated depreciation and amortization

     (296,494     (293,465
  

 

 

   

 

 

 

Net capitalized costs

     576,668        522,269   
  

 

 

   

 

 

 

Total property, plant and equipment, net

   $ 5,610,814      $ 5,389,424   
  

 

 

   

 

 

 

 

(1) Includes cumulative capitalized interest of approximately $7.6 million and $6.7 million at March 31, 2012 and December 31, 2011, respectively.

 

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(Unaudited)

 

There were no full cost ceiling impairments during the three-month periods ended March 31, 2012 or 2011. Cumulative full cost ceiling limitation impairment charges of $3,548.3 million at both March 31, 2012 and December 31, 2011 were included in accumulated depreciation, depletion and impairment for oil and natural gas properties in the table above.

6. Other Assets

Other assets consist of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Debt issuance costs, net of amortization

   $ 56,409       $ 51,724   

Lease broker advances

     7,330         13,086   

Production tax credit receivable

     7,665         7,665   

Investments

     8,293         7,138   

Development advance

     —           16,777   

Other

     3,739         2,232   
  

 

 

    

 

 

 

Total other assets

   $ 83,436       $ 98,622   
  

 

 

    

 

 

 

7. Construction Contracts

The Company accounts for its two construction contracts using the completed-contract method, under which contract revenues and costs are recognized when work under both phases of the contract is completed and assets have been transferred. In the interim, costs incurred on and billings related to contracts in process are accumulated on the balance sheet. Contract gains or losses will be recorded, as development costs within the Company’s oil and natural gas properties as part of the full cost pool, when it is determined that a loss will be incurred. Contract gains, if any, are recorded at the end of the project.

Century Plant. The Company is constructing the Century Plant, a CO2 treatment plant in Pecos County, Texas (the “Century Plant”), and associated compression and pipeline facilities pursuant to an agreement with Occidental Petroleum Corporation (“Occidental”). Under the terms of the agreement, the Company will construct the Century Plant and Occidental will pay the Company a minimum of 100% of the contract price, or $800.0 million, plus any subsequently agreed-upon revisions, through periodic cost reimbursements based upon the percentage of the project completed by the Company. The Company expects to complete the Century Plant in two phases. Upon completion of each phase of the Century Plant, Occidental will take ownership of the related assets and will operate the Century Plant for the purpose of separating and removing CO2 from delivered natural gas. Phase I is in the commissioning process with completion and transfer of title to Occidental expected in mid-2012, and Phase II is under construction and expected to be completed in 2012. The Company has recorded an addition of $140.0 million ($10.0 million in the first quarter of 2012) to its oil and natural gas properties for the estimated loss identified based on current projections of the costs to be incurred in excess of contract amounts. Billings and estimated contract loss in excess of costs incurred of $34.3 million and $43.3 million at March 31, 2012 and December 31, 2011, respectively, are reported as current liabilities in the accompanying unaudited condensed consolidated balance sheets.

Pursuant to a 30-year treating agreement executed simultaneously with the construction agreement, Occidental will remove CO2 from the Company’s delivered natural gas production volumes. Under this agreement, the Company will be required to deliver certain minimum CO2 volumes annually once Occidental takes title, and will have to compensate Occidental to the extent such requirements are not met. See Note 11 for additional discussion of this volume requirement. The Company will retain all methane gas from the natural gas it delivers to the Century Plant.

Transmission Expansion Projects. The Company entered into a construction services agreement in November 2011 to manage the design, engineering and construction of a series of transmission expansion and upgrade projects in northern Oklahoma. Under the terms of the agreement, the Company will be reimbursed for costs incurred on these projects up to approximately $22.0 million. Construction on these projects began in 2012 and is expected to be completed by the end of the year. Costs in excess of billings on these projects of $1.6 million at March 31, 2012 is reported as a current asset in the accompanying unaudited condensed consolidated balance sheets.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

8. Long-Term Debt

Long-term debt consists of the following (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Senior Floating Rate Notes due 2014

   $ 350,000       $ 350,000   

Senior credit facility

     —           —     

9.875% Senior Notes due 2016, net of $10,422 and $10,921 discount, respectively

     355,078         354,579   

8.0% Senior Notes due 2018

     750,000         750,000   

8.75% Senior Notes due 2020, net of $6,296 and $6,432 discount, respectively

     443,704         443,568   

7.5% Senior Notes due 2021

     900,000         900,000   

Mortgage

     15,772         16,029   
  

 

 

    

 

 

 

Total debt

     2,814,554         2,814,176   

Less: current maturities of long-term debt

     1,070         1,051   
  

 

 

    

 

 

 

Long-term debt

   $ 2,813,484       $ 2,813,125   
  

 

 

    

 

 

 

For the three-month periods ended March 31, 2012 and 2011, interest payments, excluding amounts capitalized, were approximately $57.2 million and $53.2 million, respectively. Interest payments for the three months ended March 31, 2011 included $24.1 million of accrued interest paid in connection with the partial redemption of the 8.625% Senior Notes due 2015, discussed further below.

Senior Floating Rate Notes Due 2014. The Company’s Senior Floating Rate Notes due 2014 (the “Senior Floating Rate Notes”) were issued in May 2008. The Senior Floating Rate Notes are jointly and severally guaranteed unconditionally, in full, on an unsecured basis by certain of the Company’s wholly owned subsidiaries and are freely tradable. See Note 17 for condensed financial information of the subsidiary guarantors.

The Senior Floating Rate Notes bear interest at LIBOR plus 3.625%. Interest is payable quarterly with the principal due on April 1, 2014. The average interest rate paid on the outstanding Senior Floating Rate Notes for the three-month periods ended March 31, 2012 and 2011 was 4.21% and 3.93%, respectively, without consideration of the interest rate swap discussed below. The Company may redeem, at specified redemption prices, some or all of the Senior Floating Rate Notes at any time.

The $9.4 million of debt issuance costs associated with the Senior Floating Rate Notes is included in other assets in the accompanying unaudited condensed consolidated balance sheets and is being amortized to interest expense over the term of the notes.

As of March 31, 2012, the Company had a $350.0 million notional interest rate swap agreement to effectively fix the variable interest rate on the Senior Floating Rate Notes to an annual rate of 6.69% through April 1, 2013. This swap has not been designated as a hedge.

Senior Credit Facility. The senior credit facility is available to be drawn on subject to limitations based on its terms and certain financial covenants, as described below. The senior credit facility matures on March 29, 2017, unless neither the Company’s Senior Floating Rate Notes nor the Company’s 9.875% Senior Notes due 2016 have been repaid or refinanced by September 30, 2015 with a source of funds other than the senior credit facility, in which case the senior credit facility will mature on November 15, 2015.

On March 29, 2012, the senior credit facility was amended and restated to, among other things, (a) increase the borrowing base to $1.0 billion from $790.0 million, (b) allow for the incurrence or issuance of additional debt (including up to $750.0 million of unsecured debt to finance the cash portion of the Dynamic purchase price and related costs and expenses), (c) permit the Company to designate certain of its subsidiaries as unrestricted subsidiaries, and (d) effective on and after June 30, 2012, establish the financial covenants as maintaining agreed upon levels for (i) ratio of total funded debt to EBITDA, which may not exceed 4.5:1.0 at each quarter end, calculated using the last four completed fiscal quarters and (ii) ratio of current assets to current liabilities, which must be at least 1.0:1.0 at each quarter end. If no amounts are drawn under the senior credit facility when calculating the ratio of total funded debt to EBITDA, the Company’s debt is reduced by its cash balance in excess of $10.0 million. In the current ratio calculation, any amounts available to be drawn under the senior credit facility are included in current assets, and unrealized assets and liabilities resulting from mark-to-market adjustments on the Company’s derivative contracts are disregarded.

 

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(Unaudited)

 

Additionally, the senior credit facility contains various covenants that limit the ability of the Company and certain of its subsidiaries to grant certain liens; make certain loans and investments; make distributions; redeem stock; redeem or prepay debt; merge or consolidate with or into a third party; or engage in certain asset dispositions, including a sale of all or substantially all of the Company’s assets. Additionally, the senior credit facility limits the ability of the Company and certain of its subsidiaries to incur additional indebtedness with certain exceptions. As of and during the three-month period ended March 31, 2012, the Company was in compliance with all applicable financial covenants under the senior credit facility.

The obligations under the senior credit facility are guaranteed by certain Company subsidiaries and are secured by first priority liens on all shares of capital stock of certain of the Company’s material present and future subsidiaries; certain intercompany debt of the Company; and substantially all of the Company’s assets, including proved oil and natural gas reserves representing at least 80% of the discounted present value (as defined in the senior credit facility) of proved oil and natural gas reserves considered by the lenders in determining the borrowing base for the senior credit facility.

At the Company’s election, interest under the senior credit facility is determined by reference to (a) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.75% and 2.75% per annum or (b) the “base rate,” which is the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate published by Bank of America or (iii) the Eurodollar rate (as defined in the senior credit facility) plus 1.00% per annum, plus, in each case under scenario (b), an applicable margin between 0.75% and 1.75% per annum. Interest is payable quarterly for base rate loans and at the applicable maturity date for LIBOR loans, except that if the interest period for a LIBOR loan is six months, interest is paid at the end of each three-month period. The Company made no interest payments during the three-month period ended March 31, 2012 as there were no amounts outstanding under the senior credit facility during the period. The average annual interest rate paid on amounts outstanding under the senior credit facility was 2.73% for the three-month period ended March 31, 2011.

Borrowings under the senior credit facility may not exceed the lower of the borrowing base or the committed amount. The Company’s borrowing base is redetermined in April and October of each year. As a result of the amendment and restatement of the senior credit facility in March 2012, the next borrowing base redetermination will be in October 2012. With respect to each redetermination, the administrative agent and the lenders under the senior credit facility consider several factors, including the Company’s proved reserves and projected cash requirements, and make assumptions regarding, among other things, oil and natural gas prices and production. Because the value of the Company’s proved reserves is a key factor in determining the amount of the borrowing base, changing commodity prices and the Company’s success in developing reserves may affect the borrowing base. The Company at times incurs additional costs related to the senior credit facility as a result of amendments to the credit agreement and changes to the borrowing base. During the three-month period ended March 31, 2012, additional costs of approximately $7.2 million were incurred. These costs have been deferred, are included in other assets in the accompanying unaudited condensed consolidated balance sheets and are being amortized to interest expense over the term of the senior credit facility.

At March 31, 2012, the Company had no amount outstanding under the senior credit facility and $28.7 million in outstanding letters of credit, which reduce the availability under the senior credit facility on a dollar-for-dollar basis.

8.625% Senior Notes Due 2015. The Company’s 8.625% Senior Notes due 2015 (the “8.625% Senior Notes”) were issued in May 2008. On March 1, 2011, the Company announced a cash tender offer to purchase any and all of the outstanding $650.0 million aggregate principal amount of its 8.625% Senior Notes for total consideration of $1,046.88 per $1,000 principal amount of such notes tendered by March 14, 2011. Holders tendering after March 14, 2011 were eligible to receive $1,016.88 per $1,000 principal amount of notes tendered. The Company purchased approximately 94.5%, or $614.2 million, of the aggregate principal amount of its 8.625% Senior Notes pursuant to the tender offer, which expired on March 28, 2011. The premium paid to purchase these notes and the unamortized debt issuance costs associated with the notes, totaling $36.2 million, were recorded as a loss on extinguishment of debt in the accompanying unaudited condensed consolidated statement of operations for the three-month period ended March 31, 2011. On April 1, 2011, the Company redeemed the remaining outstanding $35.8 million aggregate principal amount of its 8.625% Senior Notes for $1,043.13 per $1,000 principal amount outstanding, plus accrued interest. All holders whose notes were purchased or redeemed received accrued and unpaid interest from October 1, 2010.

9.875% Senior Notes Due 2016. The Company’s unsecured 9.875% Senior Notes due 2016 (the “9.875% Senior Notes”) were issued in May 2009 and bear interest at a fixed rate of 9.875% per annum, payable semi-annually, with the principal due on May 15, 2016. The 9.875% Senior Notes were issued at a discount, which is amortized to interest expense over the term of the notes. The 9.875% Senior Notes are redeemable, in whole or in part, prior to their maturity at specified redemption prices and are jointly and severally guaranteed unconditionally, in full, on an unsecured basis by certain of the Company’s wholly owned subsidiaries and are freely tradable.

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

Debt issuance costs of $7.9 million incurred in connection with the offering of the 9.875% Senior Notes are included in other assets in the accompanying unaudited condensed consolidated balance sheets and are being amortized to interest expense over the term of the notes.

8.0% Senior Notes Due 2018. The Company’s unsecured 8.0% Senior Notes due 2018 (the “8.0% Senior Notes”) were issued in May 2008 and bear interest at a fixed rate of 8.0% per annum, payable semi-annually, with the principal due on June 1, 2018. The notes are redeemable, in whole or in part, prior to their maturity at specified redemption prices and are jointly and severally guaranteed unconditionally, in full, on an unsecured basis by certain of the Company’s wholly owned subsidiaries and are freely tradable.

The Company incurred $16.0 million of debt issuance costs in connection with the offering of the 8.0% Senior Notes. These costs are included in other assets in the accompanying unaudited condensed consolidated balance sheets and are being amortized to interest expense over the term of the notes.

8.75% Senior Notes Due 2020. The Company’s unsecured 8.75% Senior Notes due 2020 (the “8.75% Senior Notes”) were issued in December 2009 and bear interest at a fixed rate of 8.75% per annum, payable semi-annually, with the principal due on January 15, 2020. The 8.75% Senior Notes were issued at a discount, which is being amortized to interest expense over the term of the notes. The 8.75% Senior Notes are redeemable, in whole or in part, prior to their maturity at specified redemption prices and are jointly and severally guaranteed unconditionally, in full, on an unsecured basis by certain of the Company’s wholly owned subsidiaries and are freely tradable. See Note 17 for condensed financial information of the subsidiary guarantors.

Debt issuance costs of $9.7 million incurred in connection with the offering and subsequent registered exchange of the 8.75% Senior Notes are included in other assets in the accompanying unaudited condensed consolidated balance sheets and are being amortized to interest expense over the term of the notes.

7.5% Senior Notes Due 2021. In March 2011, the Company issued $900.0 million of unsecured 7.5% Senior Notes due 2021 (the “7.5% Senior Notes”) to qualified institutional buyers eligible under Rule 144A of the Securities Act and to persons outside the United States under Regulation S under the Securities Act. Net proceeds from the offering were used to fund the tender offer for the 8.625% Senior Notes, including any accrued and unpaid interest, the redemption of the 8.625% Senior Notes that remained outstanding following the conclusion of the tender offer, including accrued and unpaid interest (each as described above) and to repay borrowings under the Company’s senior credit facility. The 7.5% Senior Notes bear interest at a fixed rate of 7.5% per annum, payable semi-annually, with the principal due on March 15, 2021. Prior to March 15, 2016, the 7.5% Senior Notes are redeemable, in whole or in part, at a specified redemption price plus accrued and unpaid interest. On or after March 15, 2016, the 7.5% Senior Notes are redeemable, in whole or in part, prior to their maturity at other various specified redemption prices. The notes are jointly and severally guaranteed unconditionally, in full, on an unsecured basis by certain of the Company’s wholly owned subsidiaries. See Note 17 for condensed financial information of the subsidiary guarantors.

In November 2011, pursuant to an exchange offer, the Company replaced a substantial majority of the 7.5% Senior Notes, which were issued under Rule 144A and Regulation S under the Securities Act, with 7.5% Senior Notes registered under the Securities Act. The exchange offer did not result in the incurrence of any additional indebtedness.

Debt issuance costs of $19.4 million incurred in connection with the offering and subsequent exchange of the 7.5% Senior Notes are included in other assets in the accompanying unaudited condensed consolidated balance sheets and are being amortized to interest expense over the term of the notes.

Indentures. The indentures governing the Company’s senior notes contain limitations on the incurrence of indebtedness, payment of dividends, investments, asset sales, certain asset purchases, transactions with related parties and consolidations or mergers. As of and during the three-month period ended March 31, 2012, the Company was in compliance with all of the covenants contained in the indentures governing the senior notes.

Other Notes Payable. The Company financed a portion of its drilling rig fleet and related oil field services equipment through the issuance of notes secured by such equipment. In March 2011, the Company paid the outstanding $4.3 million principal balance on these notes.

 

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The debt incurred to purchase the downtown Oklahoma City property that serves as the Company’s corporate headquarters is fully secured by a mortgage on one of the buildings located on the property. The note underlying the mortgage bears interest at 6.08% annually and matures on November 15, 2022. Payments of principal and interest of $0.5 million are due on a quarterly basis through the maturity date.

9. Derivatives

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts, which include commodity derivatives and an interest rate swap, at fair value. Changes in derivative contract fair values are recognized in earnings. Cash settlements and valuation gains and losses are included in (gain) loss on derivative contracts for the commodity derivative contracts and in interest expense for interest rate swaps in the consolidated statements of operations. Commodity derivative contracts are settled on a monthly or quarterly basis. Settlements on interest rate swaps occur quarterly. Derivative assets and liabilities arising from the Company’s derivative contracts with the same counterparty that provide for net settlement are reported on a net basis in the consolidated balance sheets.

Commodity Derivatives. The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil and natural gas. The Company seeks to manage this risk through the use of commodity derivative contracts. These derivative contracts allow the Company to limit its exposure to commodity price volatility on a portion of its projected oil and natural gas sales. Additionally, the Company uses derivative contracts to manage commodity price risk associated with diesel fuel used in its operations. None of the Company’s derivative contracts may be terminated early as a result of a party to the contract having its credit rating downgraded. At March 31, 2012, the Company’s commodity derivative contracts consisted of fixed price swaps, collars and basis swaps, which are described below:

 

Fixed price swaps    The Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.
Collars    Collars contain a fixed floor price (put) and a fixed ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.
Basis swaps    The Company receives a payment from the counterparty if the settled price differential is greater than the stated terms of the contract and pays the counterparty if the settled price differential is less than the stated terms of the contract, which guarantees the Company a price differential for natural gas from a specified delivery point.

Interest Rate Swaps. The Company is exposed to interest rate risk on its long-term fixed and variable interest rate borrowings. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the Company to (i) changes in market interest rates reflected in the fair value of the debt and (ii) the risk that the Company may need to refinance maturing debt with new debt at a higher rate. Variable rate debt, where the interest rate fluctuates, exposes the Company to short-term changes in market interest rates as the Company’s interest obligations on these instruments are periodically redetermined based on prevailing market interest rates, primarily LIBOR and the federal funds rate.

The Company has an interest rate swap agreement that effectively converts the variable interest rate on its Senior Floating Rate Notes to a fixed rate through April 1, 2013. See Note 8 for further discussion of the Company’s interest rate swap.

Royalty Trust Derivatives Agreements. Effective April 1, 2011, the Company entered into a derivatives agreement with the Mississippian Trust I. The agreement provides the Mississippian Trust I with the economic effect of certain oil and natural gas derivative contracts previously entered into by the Company with third parties. The underlying commodity derivative contracts cover volumes of oil and natural gas production through December 31, 2015. Under this arrangement, the Company will pay the Mississippian Trust I amounts it receives from its counterparties in accordance with the underlying contracts, and the Mississippian Trust I will pay the Company any amounts that the Company is required to pay its counterparties under such contracts.

Effective August 1, 2011, the Company entered into a derivatives agreement with the Permian Trust. The agreement provides the Permian Trust with the economic effect of certain oil derivative contracts previously entered into by the Company with third parties. The underlying commodity derivative contracts cover volumes of oil production through March 31, 2015. Under this arrangement, the Company will pay the Permian Trust amounts it receives from its counterparty in accordance with the underlying contracts, and the Permian Trust will pay the Company any amounts that the Company is required to pay its counterparty undersuch contracts. Substantially concurrent with the execution of the derivatives agreement, the Company novated certain of the derivatives contracts underlying the derivatives agreement to the Permian Trust. As a party to these contracts, the Permian Trust will receive payment

 

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directly from the counterparty, and be required to pay any amounts owed directly to the counterparty. To secure the Permian Trust’s obligations under these novated contracts, the Permian Trust has given the counterparty a lien on its royalty interests in certain oil and natural gas properties. Under the derivatives agreement, as development wells are drilled for the benefit of the Permian Trust, the Company will have the right, under certain circumstances, to assign or novate to the Permian Trust additional derivative contracts.

All contracts underlying the derivatives agreements with the Mississippian Trust I and Permian Trust, including those novated to the Permian Trust, have been included in the Company’s consolidated derivative disclosures. See Note 3 for further discussion of the Mississippian Trust I and the Permian Trust.

Fair Value of Derivatives. The following table presents the fair value of the Company’s derivative contracts as of March 31, 2012 and December 31, 2011 on a gross basis without regard to same-counterparty netting (in thousands):

 

Type of Contract

  

Balance Sheet Classification

   March 31,
2012
    December 31,
2011
 
Derivative assets        

Oil price swaps

   Derivative contracts-current    $ 1,836      $ 6,095   

Natural gas price swaps

   Derivative contracts-current      4,886        6,585   

Natural gas collars

   Derivative contracts-current      735        313   

Diesel price swaps

   Derivative contracts-current      2,273        397   

Oil price swaps

   Derivative contracts-noncurrent      15,485        48,718   

Natural gas collars

   Derivative contracts-noncurrent      1,519        1,035   

Derivative liabilities

       

Oil price swaps

   Derivative contracts-current      (89,408     (116,243

Natural gas basis swaps

   Derivative contracts-current      (1,164     —     

Diesel price swaps

   Derivative contracts-current      —          (41

Interest rate swaps

   Derivative contracts-current      (9,094     (8,475

Oil price swaps

   Derivative contracts-noncurrent      (304,221     (66,451

Natural gas basis swaps

   Derivative contracts-noncurrent      (3,784     (4,609

Interest rate swaps

   Derivative contracts-noncurrent      —          (1,973
     

 

 

   

 

 

 

Total net derivative contracts

   $ (380,937   $ (134,649
     

 

 

   

 

 

 

Refer to Note 4 for additional discussion on the fair value measurement of the Company’s derivative contracts.

The following table summarizes the effect of the Company’s derivative contracts on the accompanying unaudited condensed consolidated statements of operations for the three-month periods ended March 31, 2012 and 2011 (in thousands):

 

          Three Months Ended  
    

Location of Loss

Recognized in Income

   March 31,  

Type of Contract

      2012      2011  

Commodity derivatives

   Loss on derivative contracts    $ 254,646       $ 277,628   

Interest rate swaps

   Interest expense      846         278   
     

 

 

    

 

 

 

Total

   $ 255,492       $ 277,906   
     

 

 

    

 

 

 

The following tables summarize the cash settlements and valuation gains and losses on the Company’s commodity derivative contracts and interest rate swaps for the three-month periods ended March 31, 2012 and 2011 (in thousands):

 

     Three Months Ended
March 31,
 
     2012     2011  

Commodity Derivatives

    

Realized loss(1)

   $ 125,456      $ 8,609   

Unrealized loss

     129,190        269,019   
  

 

 

   

 

 

 

Loss on commodity derivative contracts

   $ 254,646      $ 277,628   
  

 

 

   

 

 

 

Interest Rate Swaps

    

Realized loss

   $ 2,200      $ 2,043   

Unrealized gain

     (1,354     (1,765
  

 

 

   

 

 

 

Loss on interest rate swaps

   $ 846      $ 278   
  

 

 

   

 

 

 

 

(1) The three-month period ended March 31, 2012 includes $117.1 million non-cash realized losses on derivative contracts amended in January 2012. The three-month period ended March 31, 2011 includes $12.4 million of realized gains related to settlements of commodity derivative contracts with contractual maturities after March 31, 2011.

 

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At March 31, 2012, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps

 

      Notional
(MBbl)
     Weighted Avg.
Fixed Price
 

April 2012 — December 2012

     11,597       $ 100.40   

January 2013 — December 2013

     16,320       $ 95.95   

January 2014 — December 2014

     13,914       $ 89.95   

January 2015 — December 2015

     7,635       $ 84.77   

Natural Gas Price Swaps

 

      Notional
(MMBtu)
    Weighted Avg.
Fixed Price
 

April 2012 — June 2012

     1,820      $ 4.90   

Natural Gas Basis Swaps

 

      Notional
(MMBtu)
    Weighted Avg.
Fixed Price
 

January 2013 — December 2013

     14,600      $ (0.46

Natural Gas Collars

 

      Notional
(MMBtu)
     Collar Range  

July 2012 — December 2012

     402       $ 4.00 – 6.20   

January 2013 — December 2013

     858       $ 4.00 – 7.15   

January 2014 — December 2014

     937       $ 4.00 – 7.78   

January 2015 — December 2015

     1,010       $  4.00 – 8.55   

Diesel Price Swaps

 

      Notional
(Thousands
of Gallons)
    Weighted Avg.
Fixed Price
 

April 2012 — December 2012

     4,536      $ 2.82   

10. Asset Retirement Obligation

A reconciliation of the beginning and ending aggregate carrying amounts of the asset retirement obligation for the period from December 31, 2011 to March 31, 2012 is as follows (in thousands):

 

Asset retirement obligation, December 31, 2011

   $  128,116   

Liability incurred upon acquiring and drilling wells

     1,377   

Revisions in estimated cash flows

     1,308   

Liability settled or disposed in current period

     (376

Accretion of discount expense

     2,607   
  

 

 

 

Asset retirement obligation, March 31, 2012

     133,032   

Less: current portion

     32,906   
  

 

 

 

Asset retirement obligation, net of current

   $ 100,126   
  

 

 

 

11. Commitments and Contingencies

Legal Proceedings

The Company is a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated results of operations, financial position, cash flows or liquidity.

On or about June 27, 2008 and November 6, 2008, there were fires at the Company’s Grey Ranch Plant and a nearby compressor station. The Company, as owner of the Plant and compressor station, recovered approximately $24.5 million from its insurance carriers for damages caused by the fires. At the time of the Plant fire, the Plant was operated by Southern Union Gas Services, Ltd. (“Southern Union Gas”). On June 4, 2010, November 10, 2010, and March 15, 2011, the Company’s insurance carriers filed lawsuits against Southern Union Gas and its parent, Southern Union Company (together with Southern Union Gas, “Southern

 

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Union”) seeking recovery for amounts paid under the Company’s insurance policies. Southern Union, in turn, has tendered indemnity requests to GRLP, of which the Company is a 50% owner. GRLP has not accepted or acknowledged any responsibility to indemnify Southern Union. To the extent the Company, as a 50% owner of GRLP, is required to fund any indemnification of Southern Union, it will pursue coverage for such liability under its general liability insurance policy. An estimate of reasonably possible losses associated with these claims is approximately $12.3 million. As the loss is not probable, the Company has not established any reserves relating to these claims.

On February 14, 2011, Aspen Pipeline, II, L.P. (“Aspen”) filed a complaint in the District Court of Harris County, Texas, against Arena Resources, Inc. and SandRidge Energy, Inc. claiming damages based upon alleged representations by Arena in connection with Aspen’s construction of a natural gas pipeline in west Texas. On October 14, 2011, the complaint was amended to add Odessa Fuels, LLC, Odessa Fuels Marketing, LLC and Odessa Field Services and Compression, LLC as plaintiffs. The plaintiffs’ amended claims seek damages relating to the construction of the pipeline and performance under a related gas purchase agreement, which damages are alleged to approach $100.0 million. The Company intends to defend this lawsuit vigorously and believes the plaintiff’s claims are without merit. This case is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this claim, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the Company’s defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this claim.

On April 5, 2011, Wesley West Minerals, Ltd. and Longfellow Ranch Partners, LP filed suit against SandRidge Energy, Inc. and SandRidge Exploration and Production, LLC (collectively, the “SandRidge Entities”) in the 83rd District Court of Pecos County, Texas. The plaintiffs, who have leased mineral rights to the SandRidge Entities in Pecos County, allege that the SandRidge Entities have not properly paid royalties on all volumes of natural gas (including carbon dioxide, or “CO2”) produced from the acreage leased from the plaintiffs. The plaintiffs also allege that the SandRidge Entities have inappropriately failed to pay royalties on CO2 produced from the plaintiffs’ acreage that results from the treatment of natural gas at the Century Plant. The plaintiffs seek unspecified actual damages, punitive damages and a declaration that the SandRidge Entities must pay royalties on CO2 produced from plaintiffs’ acreage that results from treatment of natural gas at the Century Plant. The Commissioner of the General Land Office of the State of Texas (“GLO”) is named as an additional defendant in the lawsuit as some of the affected oil and natural gas leases described in the plaintiffs’ allegations cover mineral classified lands in which the GLO is entitled to one-half of the royalties attributable to such leases. The GLO has filed a cross-claim against the SandRidge Entities asserting the same claims as the plaintiffs with respect to the leases covering mineral classified lands. The Company intends to defend this lawsuit vigorously. This case is in the early stages and, accordingly, an estimate of reasonably possible losses associated with these claims, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the Company’s defenses are fully disclosed and analyzed. The Company has not established any reserves relating to these claims.

SandRidge acquired certain oil and natural gas leases in Loving County, Texas, from mineral owners in April 2010, which it subsequently sold to Energen Resources Corporation (“Energen”) in December 2010 for an allocated value of approximately $4.0 million. Subsequent to the acquisition by SandRidge of the leases and prior to their disposition to Energen, the mineral owners executed oil and natural gas leases conveying the same mineral estates to Cimarex Energy Co. (“Cimarex”). SandRidge has requested a declaratory judgment resolving all disputes between it and Cimarex regarding the validity of the leases insofar as they purport to cover the same mineral interests. In connection with that action, Cimarex has filed a third-party petition naming Energen as a third-party defendant, and is asserting quiet title and trespass to try title claims against Energen. Energen has tendered to SandRidge a demand for indemnity, and SandRidge has assumed Energen’s defense and any potential loss suffered by it. An estimate of reasonably possible losses associated with the demand for indemnity is approximately $4.0 million. As the loss is not probable, the Company has not established any reserves relating to the demand.

On August 4, 2011, Patriot Exploration, LLC, Jonathan Feldman, Redwing Drilling Partners, Mapleleaf Drilling Partners, Avalanche Drilling Partners, Penguin Drilling Partners and Gramax Insurance Company Ltd. filed a lawsuit against SandRidge Energy, Inc., SandRidge Exploration and Production, LLC (“SandRidge E&P”) and certain directors and senior executive officers of SandRidge Energy, Inc. (collectively, the “defendants”) in the U.S. District Court for the District of Connecticut. The plaintiffs allege that the defendants made false and misleading statements to U.S. Drilling Capital Management LLC and the plaintiffs prior to the entry into a participation agreement among Patriot Exploration LLC, U.S. Drilling Capital Management LLC and SandRidge E&P, which provided for the investment by the plaintiffs in certain of SandRidge E&P’s oil and natural gas properties. To date, the plaintiffs have invested approximately $15.0 million under the participation agreement. The plaintiffs seek compensatory and punitive damages and rescission of the participation agreement. The Company intends to defend this lawsuit vigorously and believes the plaintiffs’ claims are without merit. This case is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this claim, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the Company’s defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this claim.

 

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Treating Agreement Commitment

In conjunction with the Century Plant construction agreement, the Company entered into a 30-year treating agreement with Occidental for CO2 to be removed from the Company’s delivered production volumes. The Company is required to deliver a total of approximately 3,200 Bcf of CO2 volumes during the agreement period. If the Company does not meet the CO2 volume requirements, the Company will have to pay a fee for any volume shortfalls. Based upon current natural gas production levels, the Company expects to accrue between approximately $15.5 million and $19.0 million during the year ending December 31, 2012 for amounts related to the Company’s shortfall in meeting its delivery obligations based on the projected completion date of Phase I. Due to the sensitivity of natural gas production to prevailing market prices, the Company is unable to estimate additional amounts it may be required to pay under this agreement in subsequent periods.

12. Equity

Preferred Stock. The following table presents information regarding the Company’s preferred stock (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Shares authorized

     50,000         50,000   

Shares outstanding at end of period

     

8.5% Convertible perpetual preferred stock

     2,650         2,650   

6.0% Convertible perpetual preferred stock

     2,000         2,000   

7.0% Convertible perpetual preferred stock

     3,000         3,000   

The Company is authorized to issue 50,000,000 shares of preferred stock, $0.001 par value, of which 7,650,000 shares are designated as convertible perpetual preferred stock at March 31, 2012. All of the outstanding shares of the Company’s convertible perpetual preferred stock were issued in private transactions and none of these shares is listed on a stock exchange. However, all of the outstanding shares of convertible perpetual preferred stock are freely tradable.

8.5% Convertible perpetual preferred stock. The Company’s 8.5% convertible perpetual preferred stock was issued in January 2009. Each share of 8.5% convertible perpetual preferred stock has a liquidation preference of $100.00 and is convertible at the holder’s option at any time initially into approximately 12.4805 shares of the Company’s common stock, subject to customary adjustments in certain circumstances. Each holder of the convertible perpetual preferred stock is entitled to an annual dividend of $8.50 per share to be paid semi-annually in cash, common stock or a combination thereof, at the Company’s election. All dividend payments to date have been paid in cash. Approximately $5.6 million ($2.8 million paid and $2.8 million unpaid) and $5.6 million ($3.7 million paid and $1.9 million unpaid) in dividends on the 8.5% convertible perpetual preferred stock have been included in the calculation of loss applicable to the Company’s common stockholders and the Company’s basic loss per share calculation for the three-month periods ended March 31, 2012 and 2011, respectively, as presented in the accompanying unaudited condensed consolidated statements of operations. The 8.5% convertible perpetual preferred stock is not redeemable by the Company at any time. After February 20, 2014, the Company may cause all outstanding shares of the convertible perpetual preferred stock to convert automatically into common stock at the then-prevailing conversion rate if certain conditions are met.

6.0% Convertible perpetual preferred stock. The Company’s 6.0% convertible perpetual preferred stock was issued in December 2009. Each share of the 6.0% convertible perpetual preferred stock has a liquidation preference of $100.00 and is entitled to an annual dividend of $6.00 payable semi-annually in cash, common stock or any combination thereof, at the Company’s election. All dividend payments to date have been paid in cash. Approximately $3.0 million ($0.5 million paid and $2.5 million unpaid) and $3.0 million ($1.0 million paid and $2.0 million unpaid) in dividends on the 6.0% convertible perpetual preferred stock have been included in the calculation of loss applicable to the Company’s common stockholders and the Company’s basic loss per share calculation for the three-month periods ended March 31, 2012 and 2011, respectively, as presented in the accompanying unaudited condensed consolidated statements of operations. The 6.0% convertible perpetual preferred stock is not redeemable by the Company at any time. Each share is initially convertible into approximately 9.2115 shares of the Company’s common stock, at the holder’s option, subject to customary adjustments in certain circumstances. After December 21, 2014, the Company may cause all outstanding shares of the 6.0% convertible preferred stock to convert automatically into shares of the Company’s common stock at the then-prevailing conversion price as long as all dividends accrued at that time have been paid.

7.0% Convertible perpetual preferred stock. The Company’s 7.0% convertible perpetual preferred stock was issued in November 2010. Each share of the 7.0% convertible preferred stock has a liquidation preference of $100.00 per share and became convertible at the holder’s option on February 15, 2011, initially into approximately 12.8791 shares of the Company’s common stock, subject to customary adjustments in certain circumstances. The annual dividend on each share of the 7.0% convertible preferred stock is $7.00 payable semi-annually, in cash, common stock or a combination thereof, at the Company’s election beginning on May 15, 2011. All dividend payments to date have been paid in cash. Approximately $5.3 million in dividends (all unpaid) on the 7.0% convertible perpetual preferred stock have been included in the calculation of loss applicable to the Company’s common stockholders and the Company’s basic

 

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loss per share calculation for both of the three-month periods ended March 31, 2012 and 2011 as presented in the accompanying unaudited condensed consolidated statements of operations. The 7.0% convertible perpetual preferred stock is not redeemable by the Company at any time. After November 20, 2015, the Company may cause all outstanding shares of the 7.0% convertible perpetual preferred stock to convert automatically into common stock at the then-prevailing conversion rate if certain conditions are met.

Common Stock. The following table presents information regarding the Company’s common stock (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Shares authorized

     800,000         800,000   

Shares outstanding at end of period

     415,544         411,953   

Shares held in treasury

     934         874   

Treasury Stock. The Company makes required statutory tax payments on behalf of employees when their restricted stock awards vest and then withholds a number of vested shares of common stock having a value on the date of vesting equal to the tax obligation. As a result of such transactions, the Company withheld approximately 777,000 shares having a total value of $6.4 million and 603,000 shares having a total value of $4.8 million during the three-month periods ended March 31, 2012 and 2011, respectively. These shares were accounted for as treasury stock when withheld, and subsequently retired.

Any shares of Company common stock held as assets in a trust for the Company’s non-qualified deferred compensation plan are accounted for as treasury shares. These shares are not included as outstanding shares of common stock in this report. For corporate purposes and for purposes of voting at Company stockholder meetings, these shares are considered outstanding and have voting rights, which are exercised by the Company.

Equity Compensation. The Company awards restricted common stock under incentive compensation plans that vest over specified periods of time, subject to certain conditions and are valued based upon the market value of common stock on the date of grant. Awards issued prior to 2006 had vesting periods of one, four or seven years. Awards issued during and after 2006 generally have four-year vesting periods. Shares of restricted common stock are subject to restriction on transfer. Unvested restricted stock awards are included in the Company’s outstanding shares of common stock.

Equity compensation provided to employees directly involved in oil and natural gas exploration and development activities is capitalized to the Company’s oil and natural gas properties. Equity compensation not capitalized is reflected in general and administrative expenses, production expenses, midstream and marketing expenses and drilling and services expenses in the consolidated statements of operations. For the three-month periods ended March 31, 2012 and 2011, the Company recognized equity compensation expense of $10.5 million and $8.2 million, net of $1.9 million and $1.8 million capitalized, respectively, related to restricted common stock.

Noncontrolling Interest. Noncontrolling interests in the Company’s subsidiaries and four VIEs of which the Company was the primary beneficiary as of and for the three-month period ended March 31, 2012 (see Note 3), represent third-party ownership interests in the consolidated entity and are included as a component of equity in the unaudited condensed consolidated balance sheet and unaudited condensed consolidated statements of changes in equity.

13. Income Taxes

The Company estimates for each interim reporting period the effective tax rate expected for the full fiscal year and uses that estimated rate in providing for income taxes on a current year-to-date basis. The (benefit) provision for income taxes consisted of the following components for the three-month periods ended March 31, 2012 and 2011 (in thousands):

 

     Three Months Ended
March 31,
 
     2012     2011  

Current

    

Federal

   $ (83   $ 21   

State

     154        67   
  

 

 

   

 

 

 
     71        88   
  

 

 

   

 

 

 

Deferred

    

Federal

     —          —     

State

     —          —     
  

 

 

   

 

 

 
     —          —     
  

 

 

   

 

 

 

Total provision

     71        88   

Less: income tax provision attributable to noncontrolling interest

     90        2   
  

 

 

   

 

 

 

Total (benefit) provision attributable to SandRidge Energy, Inc.

   $ (19   $ 86   
  

 

 

   

 

 

 

 

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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

Deferred income taxes are provided to reflect the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Deferred tax assets are reduced by a valuation allowance when a determination is made that it is more likely than not that some or all of the deferred assets will not be realized based on the weight of all available evidence. As of December 31, 2008, the Company determined it was appropriate to record a full valuation allowance against its net deferred tax asset. The Company continued to have a full valuation allowance against its net deferred tax asset at March 31, 2012.

Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company experienced an ownership change within the meaning of IRC Section 382 on December 31, 2008. The ownership change subjected certain of the Company’s tax attributes, including $298.4 million of federal net operating loss carryforwards, to the IRC Section 382 limitation. The Company experienced a subsequent ownership change within the meaning of IRC Section 382 on July 16, 2010 as a result of the acquisition of Arena Resources, Inc. (“Arena”). The subsequent ownership change resulted in a more restrictive limitation on certain of the Company’s tax attributes than with the December 31, 2008 ownership change. The more restrictive limitation applies not only to the $298.4 million of federal net operating loss carryforwards and certain other tax attributes existing at December 31, 2008, but also to net operating losses of approximately $554.3 million and certain other tax attributes generated in periods following the December 31, 2008 ownership change. The subsequent limitation could result in a material amount of existing loss carryforwards expiring unused. Arena also experienced an ownership change on July 16, 2010 as a result of its acquisition by the Company. This ownership change resulted in a limitation on Arena’s net operating loss carryforwards of $119.9 million available to the Company. None of the limitations discussed above resulted in a current federal tax liability at March 31, 2012 or December 31, 2011.

At March 31, 2012 and December 31, 2011, the Company had a liability of approximately $1.8 million for unrecognized tax benefits. If recognized, approximately $1.2 million, net of federal tax expense, would be recorded as a reduction of income tax expense and would affect the effective tax rate.

Consistent with the Company’s policy to record interest and penalties on income taxes as a component of the income tax provision, the Company has included $0.02 million and $0.05 million of accrued gross interest with respect to unrecognized tax benefits in the accompanying unaudited condensed consolidated statements of operations during the three-month periods ended March 31, 2012 and 2011, respectively. The Company had a corresponding accrued liability of $0.2 million for interest and penalties relating to uncertain tax positions at March 31, 2012 and December 31, 2011.

The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2008 to present remain open for federal examination. Additionally, various tax years remain open beginning with tax year 2003 due to federal net operating loss carryforwards. The number of years open for state tax audits varies, depending on the state, but are generally from three to five years. Currently, several examinations are in progress. The Company does not anticipate that any federal or state audits will have a significant impact on the Company’s results of operations or financial position. As a result of ongoing negotiations pertaining to the Company’s current state audits, it is reasonably possible that the Company’s gross unrecognized tax benefits balance may decrease within the next twelve months by approximately $1.6 million.

For the three-month period ended March 31, 2012, income tax refunds were approximately $0.1 million. Income tax payments, net of refunds, were approximately $1.0 million for the corresponding period in 2011.

14. Earnings Per Share

Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average shares outstanding during the period, but also include the dilutive effect of awards of restricted stock, using the treasury stock method, and outstanding convertible preferred stock. Under the treasury stock method, the amount of unrecognized compensation expense related to unvested stock-based compensation grants are assumed to be used to repurchase shares. The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted earnings per share, for the three-month periods ended March 31, 2012 and 2011 (in thousands):

 

     Three Months Ended
March 31,
 
     2012      2011  

Weighted average basic common shares outstanding

     400,597         398,251   

Effect of dilutive securities

     

Restricted stock

     —           —     

Convertible preferred stock

     —           —     
  

 

 

    

 

 

 

Weighted average diluted common and potential common shares outstanding

     400,597         398,251   
  

 

 

    

 

 

 

 

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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

For the three-month periods ended March 31, 2012 and 2011, restricted stock awards covering 9.4 million shares and 7.2 million shares, respectively, were excluded from the computation of loss per share because their effect would have been antidilutive.

In computing diluted earnings per share, the Company evaluated the if-converted method with respect to its outstanding 8.5% convertible perpetual preferred stock, 6.0% convertible perpetual preferred stock and 7.0% convertible perpetual preferred stock for the three-month periods ended March 31, 2012 and 2011. Under the if-converted method, the Company assumes the conversion of the preferred stock to common stock and determines if this is more dilutive than including the preferred stock dividends (paid and unpaid) in the computation of income available (loss applicable) to common stockholders. For the three-month periods ended March 31, 2012 and 2011, the Company determined the if-converted method was not more dilutive and included the 8.5%, 6.0% and 7.0% preferred stock dividends in the determination of loss applicable to common stockholders.

15. Related Party Transactions

The Company enters into transactions in the ordinary course of business with certain related parties. These transactions primarily consist of purchases related to drilling and completion activities, gas treating services and drilling equipment and sales of oil field services, equipment and natural gas. During the three-month periods ended March 31, 2012 and 2011, the Company had sales to related parties of $3.7 million and $4.8 million, respectively. At March 31, 2012 and December 31, 2011, the Company had accounts receivable due from related parties of $1.9 million and $1.6 million, respectively. These amounts primarily relate to sales of natural gas to Southern Union, the Company’s partner in GRLP.

Oklahoma City Thunder Agreements. The Company’s Chairman and Chief Executive Officer owns a minority interest in a limited liability company that owns and operates the Oklahoma City Thunder basketball team. The Company is party to a sponsorship agreement, through the 2013 season, whereby it pays approximately $3.3 million per year for advertising and promotional activities related to the Oklahoma City Thunder. Additionally, the Company entered into an agreement to license a suite at the arena where the Oklahoma City Thunder plays its home games. Under this four-year agreement, the Company pays an annual license fee of $0.2 million through 2013. At March 31, 2012 and December 31, 2011, the Company had no amounts due under these agreements.

16. Business Segment Information

The Company has three business segments: exploration and production, drilling and oil field services and midstream gas services. These segments represent the Company’s three main business units, each offering different products and services. The exploration and production segment is engaged in the acquisition, development and production of oil and natural gas properties and includes the activities of the Mississippian Trust I and the Permian Trust. The drilling and oil field services segment is engaged in the contract drilling of oil and natural gas wells. The midstream gas services segment is engaged in the purchasing, gathering, treating and selling of natural gas. The All Other column in the tables below includes items not related to the Company’s reportable segments, including the Company’s CO2 gathering and sales operations and corporate operations.

 

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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

Management evaluates the performance of the Company’s business segments based on operating income (loss), which is defined as segment operating revenues less operating expenses and depreciation, depletion, amortization and accretion. Summarized financial information concerning the Company’s segments is shown in the following table (in thousands):

 

     Exploration  and
Production
    Drilling and Oil
Field Services
    Midstream  Gas
Services
    All Other     Consolidated
Total
 

Three Months Ended March 31, 2012

          

Revenues

   $ 343,120      $ 98,332      $ 26,162      $ 1,406      $ 469,020   

Inter-segment revenue

     (77     (69,023     (18,295     10        (87,385
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 343,043      $ 29,309      $ 7,867      $ 1,416      $ 381,635   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

   $ (123,836   $ 3,479      $ (2,727   $ (28,572   $ (151,656

Interest income (expense), net

     143        —          (156     (66,952     (66,965

Other income, net

     1,768        —          —          700        2,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

   $ (121,925   $ 3,479      $ (2,883   $ (94,824   $ (216,153
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures(1)

   $ 491,905      $ 7,916      $ 23,975      $ 45,862      $ 569,658   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation, depletion, amortization and accretion

   $ 90,052      $ 8,550      $ 1,411      $ 4,173      $ 104,186   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At March 31, 2012

          

Total assets

   $ 5,516,169      $ 226,233      $ 161,095      $ 474,602      $ 6,378,099   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2011

          

Revenues

   $ 267,237      $ 67,549      $ 55,978      $ 3,220      $ 393,984   

Inter-segment revenue

     (67     (46,515     (34,038     (516     (81,136
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 267,170      $ 21,034      $ 21,940      $ 2,704      $ 312,848   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations(2)

   $ (184,207   $ (108   $ (2,528   $ (20,985   $ (207,828

Interest income (expense), net

     105        (105     (172     (59,266     (59,438

Loss on extinguishment of debt

     —          —          —          (36,181     (36,181

Other income (expense), net

     1,676        —          (701     222        1,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

   $ (182,426   $ (213   $ (3,401   $ (116,210   $ (302,250
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures(1)

   $ 399,096      $ 6,763      $ 4,172      $ 6,138      $ 416,169   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation, depletion, amortization and accretion

   $ 74,472      $ 7,730      $ 1,097      $ 3,680      $ 86,979   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

At December 31, 2011

          

Total assets

   $ 5,345,527      $ 219,101      $ 138,844      $ 516,137      $ 6,219,609   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) On an accrual basis.
(2) Exploration and production segment (loss) income from operations includes net losses of $254.6 million and $277.6 million on commodity derivative contracts for the three-month periods ended March 31, 2012 and 2011, respectively.

17. Condensed Consolidating Financial Information

The Company provides condensed consolidating financial information for its subsidiaries that are guarantors of its registered debt. The subsidiary guarantors are wholly owned and have jointly and severally guaranteed, on a full, unconditional and unsecured basis, the Company’s Senior Floating Rate Notes, 8.75% Senior Notes and 7.5% Senior Notes as of March 31, 2012. Prior to their purchase and redemption, the 8.625% Senior Notes were also jointly and severally guaranteed, on a full, unconditional and unsecured basis by the wholly owned subsidiary guarantors. The subsidiary guarantees (i) rank equally in right of payment with all of the existing and future senior debt of the subsidiary guarantors; (ii) rank senior to all of the existing and future subordinated debt of the subsidiary guarantors; (iii) are effectively subordinated in right of payment to any existing or future secured obligations of the subsidiary guarantors to the extent of the value of the assets securing such obligations; (iv) are structurally subordinated to all debt and other obligations of the subsidiaries of the guarantors who are not themselves guarantors; and (v) are only released under certain customary circumstances. The Company’s subsidiary guarantors guarantee payments of principal and interest under the Company’s registered notes.

The following unaudited condensed consolidating financial information represents the financial information of SandRidge Energy, Inc., its wholly owned subsidiary guarantors and its non-guarantor subsidiaries, prepared on the equity basis of accounting. The non-guarantor subsidiaries, including four variable interest entities, are included in the non-guarantors column in the tables below. The financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the subsidiary guarantors operated as independent entities.

 

 

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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

Condensed Consolidating Balance Sheets

 

     March 31, 2012  
     Parent      Guarantors      Non-Guarantors      Eliminations     Consolidated  
     (In thousands)  
ASSETS              

Current assets

             

Cash and cash equivalents

   $ 123,755       $ 289       $ 3,798       $ —        $ 127,842   

Accounts receivable, net

     1,270,409         263,679         606,870         (1,900,322     240,636   

Derivative contracts

     —           9,236         3,250         (4,960     7,526   

Other current assets

     —           32,178         11,258         —          43,436   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     1,394,164         305,382         625,176         (1,905,282     419,440   

Property, plant and equipment, net

     —           4,674,871         935,943         —          5,610,814   

Investment in subsidiaries

     3,514,717         27,482         —           (3,542,199     —     

Derivative contracts

     —           24         9,703         (8,618     1,109   

Goodwill

     —           235,396         —           —          235,396   

Other assets

     56,409         54,931         —           —          111,340   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 4,965,290       $ 5,298,086       $ 1,570,822       $ (5,456,099   $ 6,378,099   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY              

Current liabilities

             

Accounts payable and accrued expenses

   $ 696,324       $ 1,212,872       $ 590,779       $ (1,898,190   $ 601,785   

Derivative contracts

     9,094         90,600         2,728         (4,960     97,462   

Asset retirement obligation

     —           32,906         —           —          32,906   

Other current liabilities

     —           34,310         1,070         —          35,380   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     705,418         1,370,688         594,577         (1,903,150     767,533   

Long-term debt

     2,798,783         —           14,701         —          2,813,484   

Derivative contracts

     —           300,728         —           (8,618     292,110   

Asset retirement obligation

     —           99,941         185         —          100,126   

Other long-term obligations

     1,774         12,013         —           —          13,787   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     3,505,975         1,783,370         609,463         (1,911,768     3,987,040   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Equity

             

SandRidge Energy, Inc. stockholders’ equity

     1,459,315         3,514,716         961,359         (4,478,207     1,457,183   

Noncontrolling interest

     —           —           —           933,876        933,876   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     1,459,315         3,514,716         961,359         (3,544,331     2,391,059   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 4,965,290       $ 5,298,086       $ 1,570,822       $ (5,456,099   $ 6,378,099   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2011  
     Parent      Guarantors      Non-Guarantors      Eliminations     Consolidated  
     (In thousands)  
ASSETS              

Current assets

             

Cash and cash equivalents

   $ 204,015       $ 437       $ 3,229       $ —        $ 207,681   

Accounts receivable, net

     1,217,096         247,824         602,541         (1,861,125     206,336   

Derivative contracts

     —           2,567         10,368         (8,869     4,066   

Other current assets

     —           16,063         7,694         —          23,757   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     1,421,111         266,891         623,832         (1,869,994     441,840   

Property, plant and equipment, net

     —           4,462,846         926,578         —          5,389,424   

Investment in subsidiaries

     3,609,244         90,920         —           (3,700,164     —     

Derivative contracts

     —           20,746         35,774         (30,105     26,415   

Goodwill

     —           235,396         —           —          235,396   

Other assets

     51,724         74,760         50         —          126,534   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 5,082,079       $ 5,151,559       $ 1,586,234       $ (5,600,263   $ 6,219,609   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
LIABILITIES AND EQUITY              

Current liabilities

             

Accounts payable and accrued expenses

   $ 643,376       $ 1,166,029       $ 556,165       $ (1,858,786   $ 506,784   

Derivative contracts

     8,475         115,829         —           (8,869     115,435   

Asset retirement obligation

     —           32,906         —           —          32,906   

Other current liabilities

     —           43,320         1,051         —          44,371   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     651,851         1,358,084         557,216         (1,867,655     699,496   

Long-term debt

     2,798,147         —           14,978         —          2,813,125   

Derivative contracts

     1,973         77,827         —           (30,105     49,695   

Asset retirement obligation

     —           95,029         181         —          95,210   

Other long-term obligations

     1,758         11,375         —           —          13,133   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     3,453,729         1,542,315         572,375         (1,897,760     3,670,659   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Equity

             

SandRidge Energy, Inc. stockholders’ equity

     1,628,350         3,609,244         1,013,859         (4,625,442     1,626,011   

Noncontrolling interest

     —           —           —           922,939        922,939   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total equity

     1,628,350         3,609,244         1,013,859         (3,702,503     2,548,950   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and equity

   $ 5,082,079       $ 5,151,559       $ 1,586,234       $ (5,600,263   $ 6,219,609   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

Condensed Consolidating Statements of Operations

 

     Parent     Guarantors     Non-Guarantors     Eliminations     Consolidated  
     (In thousands)  

Three Months Ended March 31, 2012

          

Total revenues

   $ —        $ 322,226      $ 91,193      $ (31,784   $ 381,635   

Expenses

          

Direct operating expenses

     —          114,066        41,752        (31,660     124,158   

General and administrative

     86        48,113        2,433        (331     50,301   

Depreciation, depletion, amortization, accretion and impairment

     —          90,917        13,269        —          104,186   

Loss on derivative contracts

     —          220,935        33,711        —          254,646   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     86        474,031        91,165        (31,991     533,291   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from operations

     (86     (151,805     28        207        (151,656

Equity earnings from subsidiaries

     (94,527     (2,303     —          96,830        —     

Interest expense

     (66,706     (13     (246     —          (66,965

Other income, net

     —          59,594        —          (57,126     2,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (161,319     (94,527     (218     39,911        (216,153

Income tax (benefit) expense

     (60     —          131        —          71   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (161,259     (94,527     (349     39,911        (216,224

Less: net income attributable to noncontrolling interest

     —          —          —          1,954        1,954   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SandRidge Energy, Inc.

   $ (161,259   $ (94,527   $ (349   $ 37,957      $ (218,178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2011

          

Total revenues

   $ —        $ 309,296      $ 14,481      $ (10,929   $ 312,848   

Expenses

          

Direct operating expenses

     —          119,226        13,212        (10,783     121,655   

General and administrative

     85        33,734        741        (146     34,414   

Depreciation, depletion, amortization, accretion and impairment

     —          85,240        1,739        —          86,979   

Loss on derivative contracts

     —          277,628        —          —          277,628   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     85        515,828        15,692        (10,929     520,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (85     (206,532     (1,211     —          (207,828

Equity earnings from subsidiaries

     (206,987     (1,231     —          208,218        —     

Interest expense

     (59,007     (173     (258     —          (59,438

Loss on extinguishment of debt

     (36,181                          (36,181

Other income, net

     —          955        242        —          1,197   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (302,260     (206,981     (1,227     208,218        (302,250

Income tax expense

     84        —          4        —          88   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

     (302,344     (206,981     (1,231     208,218        (302,338

Less: net income attributable to noncontrolling interest

     —          —          —          6        6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to SandRidge Energy, Inc.

   $ (302,344   $ (206,981   $ (1,231   $ 208,212      $ (302,344
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statements of Cash Flows

 

     Parent     Guarantors     Non-Guarantors     Eliminations     Consolidated  
     (In thousands)  

Three Months Ended March 31, 2012

          

Net cash (used in) provided by operating activities

   $ (48,637   $ 202,554      $ 78,163      $ (1,170   $ 230,910   

Net cash used in investing activities

     —          (196,607     (79,567     (67,170     (343,344

Net cash (used in) provided by financing activities

     (31,623     (6,095     1,973        68,340        32,595   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (80,260     (148     569        —          (79,839

Cash and cash equivalents at beginning of year

     204,015        437        3,229        —          207,681   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 123,755      $ 289      $ 3,798      $ —        $ 127,842   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended March 31, 2011

          

Net cash (used in) provided by operating activities

   $ (198,288   $ 274,236      $ 3,714      $ —        $ 79,662   

Net cash used in investing activities

     —          (269,126     (278     1        (269,403

Net cash provided by (used in) financing activities

     197,649        (4,988     (245     (1     192,415   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (639     122        3,191        —          2,674   

Cash and cash equivalents at beginning of year

     1,441        564        3,858        —          5,863   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 802      $ 686      $ 7,049      $ —        $ 8,537   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

32


Table of Contents

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—CONTINUED

(Unaudited)

 

18. Subsequent Events

Dynamic Acquisition. On April 17, 2012, the Company completed its acquisition of Dynamic (“Dynamic Acquisition”) for approximately $1.2 billion, comprised of approximately $680.0 million in cash and approximately 74 million shares of the Company’s common stock. On April 18, 2012, the Company filed a shelf registration statement with the Securities and Exchange Commission to register the resale of the shares of common stock issued as consideration in the Dynamic Acquisition. Dynamic is an oil and natural gas exploration, development and production company with operations in the Gulf of Mexico.

The following allocation of the purchase price as of April 17, 2012, is preliminary and includes significant use of estimates. This preliminary allocation is based on information that was available to management at the time these unaudited condensed consolidated financial statements were prepared. Management has not yet had the opportunity to complete its assessment of the fair values of the assets acquired and liabilities assumed. Accordingly, the allocation will change as additional information becomes available and is assessed by the Company, and the impact of such changes may be significant. Additionally, the Company will monitor the need to adjust the Company’s valuation allowance on its deferred tax asset as the allocation is finalized and the full impact of the acquisition is determined.

The following table summarizes the estimated values of assets acquired, the liabilities assumed and the resulting bargain purchase gain based on the preliminary estimates of fair value (in thousands, except stock price):

 

Consideration(1)       

Shares of SandRidge common stock issued

     73,962   

SandRidge common stock price

   $ 7.33   
  

 

 

 

Fair value of common stock issued

     542,138   

Cash consideration(2)

     680,000   

Cash balance adjustment(3)

     13,091   
  

 

 

 

Total purchase price

   $ 1,235,229   
  

 

 

 

Estimated Fair Value of Liabilities Assumed

  

Current liabilities

   $ 136,494   

Asset retirement obligation(4)

     316,183   

Long-term deferred tax liability(5)

     71,706   

Other non-current liabilities

     3,627   
  

 

 

 

Amount attributable to liabilities assumed

     528,010   
  

 

 

 

Total purchase price plus liabilities assumed

     1,763,239   
  

 

 

 

Estimated Fair Value of Assets Acquired

  

Current assets

     125,568   

Oil and natural gas properties(6)

     1,685,836   

Other property, plant and equipment

     1,342   

Other non-current assets

     17,853   
  

 

 

 

Amount attributable to assets acquired

     1,830,599   
  

 

 

 

Bargain purchase gain(7)

   $ (67,360
  

 

 

 

 

(1) Consideration paid by SandRidge consists of 73,961,554 shares of SandRidge common stock and cash of approximately $680.0 million. The value of the stock consideration is based upon the closing price of $7.33 per share of SandRidge common stock on April 17, 2012 (the closing date of the acquisition). Under the acquisition method of accounting, the purchase price is determined based on the total cash paid and the fair value of SandRidge common stock issued on the acquisition date.

 

(2) Cash paid to Dynamic, including amounts paid to retire Dynamic’s long-term debt, was funded through a portion of the net proceeds from the Company’s issuance of $750.0 million of unsecured 8.125% Senior Notes due 2022 (the “8.125% Senior Notes”).

 

(3) In accordance with the Equity Purchase Agreement, the Company remitted to the seller a cash payment equal to the Dynamic average daily cash balance for the 30-day period ending on the second day prior to closing. This resulted in an additional cash payment by SandRidge of $13.1 million at closing.

 

(4) The estimated fair value of the acquired asset retirement obligation was determined using SandRidge’s applicable discount rate.

 

(5) The deferred tax liability is a result of the difference between the estimated fair value and the Company’s expected tax basis in the assets acquired and liabilities assumed.

 

(6) The fair value of oil and natural gas properties acquired was estimated using a discounted cash flow model, with future cash flows estimated based upon estimated oil and natural gas reserve quantities and forward strip oil and natural gas prices as of April 17, 2012, discounted to present value using SandRidge’s risk weighted assessments for proved, probable and possible reserves and a weighted average cost of capital. The actual fair value of oil and natural gas properties may differ from this estimate based upon the Company’s additional evaluation of Dynamic’s reserves.