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SD > SEC Filings for SD > Form 10-Q on 7-Nov-2011All Recent SEC Filings

Show all filings for SANDRIDGE ENERGY INC

Form 10-Q for SANDRIDGE ENERGY INC


7-Nov-2011

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion and analysis is intended to help the reader understand the Company's business, financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the Company's unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report, as well as the Company's audited consolidated financial statements and the accompanying notes included in the 2010 Form 10-K. The Company's discussion and analysis includes the following subjects:

Overview of the Company

Recent Developments

Recent Accounting Pronouncements

Results by Segment

Consolidated Results of Operations

Liquidity and Capital Resources

The financial information with respect to the three and nine-month periods ended September 30, 2011 and September 30, 2010, discussed below, is unaudited. In the opinion of management, this information contains all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the unaudited condensed consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full fiscal year.

Overview of the Company

SandRidge is an independent oil and natural gas company concentrating on development and production activities related to the exploitation of the Company's significant holdings in West Texas and the Mid-Continent area of Oklahoma and Kansas. The Company's primary areas of focus are the Permian Basin in West Texas and the Mississippian formation in the Mid-Continent. The Company also owns and operates other interests in the Mid-Continent, WTO, Gulf Coast and Gulf of Mexico. During 2010 and 2011, the Company has continued the expansion of its oil property base through the Arena Acquisition in July 2010, which added significantly to the Company's holdings in the Permian Basin, and through the growth and development of its property base in the Mid-Continent area of Oklahoma and Kansas. The Company consolidates the activities of the Mississippian Trust and the Permian Trust, two publicly traded royalty trusts described below and in Note 8 to the Company's unaudited condensed consolidated financial statements.

The Company operates businesses that are complementary to its development and production activities. The Company owns related gas gathering and treating facilities, a gas marketing business and an oil field services business. The extent to which each of these supplemental businesses contributes to the Company's consolidated results of operations largely is determined by the amount of work each performs for third parties. Revenues and costs related to work performed by these businesses for the Company's own account are eliminated in consolidation and, therefore, do not directly contribute to the Company's consolidated results of operations.

The Company currently generates the majority of its consolidated revenues and cash flow from the production and sale of oil and natural gas. The Company's revenues, profitability and future growth depend substantially on prevailing prices for oil and natural gas and on the Company's ability to find and economically develop and produce oil and natural gas reserves. Prices for oil and natural gas fluctuate widely. In order to reduce the Company's exposure to these fluctuations, the Company enters into commodity derivative contracts for a portion of its anticipated future oil and natural gas production. Reducing the Company's exposure to price volatility helps ensure that it has adequate funds available for its capital expenditure programs.

SandRidge Mississippian Trust I. On April 12, 2011, the Mississippian Trust completed its initial public offering of 17,250,000 common units representing a 61.6% beneficial interest in the Mississippian Trust. Net proceeds to the Mississippian Trust, after certain offering expenses, were approximately $336.9 million. Concurrent with the closing, the Company conveyed certain royalty interests to the Mississippian Trust in exchange for the net proceeds of the Mississippian Trust's initial public offering and 10,750,000 units representing approximately 38.4% of the beneficial interest in the Mississippian Trust. The Company used the net proceeds it received from the Mississippian Trust's offering to repay borrowings under the Company's senior credit facility and for general corporate purposes.

SandRidge Permian Trust. On August 16, 2011, the Permian Trust completed its initial public offering of 34,500,000 common units representing a 65.7% beneficial interest in the Permian Trust. Net proceeds to the Permian Trust, after certain offering expenses, were approximately $580.6 million. Concurrent with the closing, the Company conveyed certain royalty interests to the Permian Trust


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in exchange for the net proceeds of the Permian Trust's initial public offering and 18,000,000 units representing approximately 34.3% of the beneficial interest in the Permian Trust. The Company used the net proceeds it received from the Permian Trust's initial public offering to repay borrowings under the Company's senior credit facility and plans to use remaining proceeds for general corporate purposes.

Recent Developments

Sale of Working Interest in Mississippian Properties. In September 2011, the Company sold to Atinum 13.2% of its working interest in approximately 860,000 acres the Company has leased in the Mississippian formation in the Mid-Continent. As consideration for the working interest, Atinum paid the Company approximately $270.7 million in cash (including approximately $4.9 million attributable to the Atinum drilling carry and approximately $7.7 million not attributable to the Atinum drilling carry, but to be applied against the Company's future capital expenditures on the properties) and committed to pay 13.2% of SandRidge's share of drilling and completion costs for wells drilled within an area of mutual interest until an additional $250.0 million has been paid, which is expected to occur over a three-year period. The Company plans to use the proceeds to fund a portion of its drilling program and for general corporate purposes.

Sale of East Texas Properties. In September 2011, the Company agreed to sell its East Texas natural gas properties in Gregg, Harrison, Rusk and Panola counties for $231.0 million, subject to post closing adjustments. The Company expects the transaction to close in the fourth quarter of 2011 and intends to use the cash proceeds to fund a portion of its drilling program and for general corporate purposes.

7.5% Senior Notes Registered Exchange Offer. In conjunction with the issuance of the Company's 7.5% Senior Notes, the Company entered into a Registration Rights Agreement requiring the Company to conduct a registered exchange offer for or register the resale of these notes before March 14, 2012. On October 17, 2011, the Company commenced a registered exchange offer for the 7.5% Senior Notes. See further discussion in Note 11 to the Company's unaudited condensed consolidated financial statements included in this Quarterly Report.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 2 to the Company's condensed consolidated financial statements included in Item 1 of this Quarterly Report.

Results by Segment

The Company operates in three business segments: exploration and production, drilling and oil field services and midstream gas services. The All Other column in the tables below includes items not related to the Company's reportable segments, including its CO2gathering and sales operations and corporate operations. 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 and amortization. Results of these measurements provide important information to the Company about the activity and profitability of the Company's lines of business. Set forth in the tables below is financial information regarding the Company's business segments for the three and nine-month periods ended September 30, 2011 and 2010 (in thousands).

                                         Exploration  and        Drilling and Oil         Midstream  Gas                          Consolidated
                                            Production            Field Services             Services           All Other            Total
Three Months Ended September 30, 2011
Revenues                                 $         321,456       $         108,595       $         44,111       $    2,420       $      476,582
Inter-segment revenue                                  (67 )               (83,048 )              (29,457 )           (257 )           (112,829 )

Total revenues                           $         321,389       $          25,547       $         14,654       $    2,163       $      363,753

Operating income (loss)(1)               $         717,327       $           2,507       $         (2,016 )     $  (21,236 )     $      696,582
Interest income (expense), net                         163                       7                   (144 )        (58,978 )            (58,952 )
Other income (expense), net                             11                      -                      -              (683 )               (672 )

Income (loss) before income taxes        $         717,501       $           2,514       $         (2,160 )     $  (80,897 )     $      636,958

Three Months Ended September 30, 2010
Revenues                                 $         210,484       $          60,370       $         65,470       $    8,965       $      345,289
Inter-segment revenue                                  (63 )               (55,096 )              (42,545 )         (2,352 )           (100,056 )

Total revenues                           $         210,421       $           5,274       $         22,925       $    6,613       $      245,233

Operating (loss) income                  $         (65,642 )     $          (1,826 )     $          1,196       $  (21,158 )     $      (87,430 )
Interest income (expense), net                         137                    (201 )                 (175 )        (63,333 )            (63,572 )
Other income, net                                      459                      -                     388              509                1,356

(Loss) income before income taxes        $         (65,046 )     $          (2,027 )     $          1,409       $  (83,982 )     $     (149,646 )


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                                        Exploration  and         Drilling and Oil         Midstream  Gas                          Consolidated
                                           Production             Field Services             Services           All Other            Total
Nine Months Ended September 30, 2011
Revenues                                $         906,461       $          272,587       $        148,367       $    8,525       $    1,335,940
Inter-segment revenue                                (200 )               (197,469 )              (95,968 )           (928 )           (294,565 )

Total revenues                          $         906,261       $           75,118       $         52,399       $    7,597       $    1,041,375

Operating income (loss)(1)              $         834,317       $            6,496       $         (7,115 )     $  (65,228 )     $      768,470
Interest income (expense), net                        283                      (94 )                 (456 )       (179,810 )           (180,077 )
Loss on extinguishment of debt                         -                        -                      -           (38,232 )            (38,232 )
Other income (expense), net                         1,690                       -                    (485 )           (543 )                662

Income (loss) before income taxes       $         836,290       $            6,402       $         (8,056 )     $ (283,813 )     $      550,823

Nine Months Ended September 30, 2010
Revenues                                $         531,239       $          202,419       $        214,386       $   28,162       $      976,206
Inter-segment revenue                                (194 )               (187,473 )             (141,778 )         (8,094 )           (337,539 )

Total revenues                          $         531,045       $           14,946       $         72,608       $   20,068       $      638,667

Operating income (loss)                 $         180,846       $           (6,421 )     $          3,352       $  (56,585 )     $      121,192
Interest income (expense), net                        337                     (768 )                 (474 )       (188,848 )           (189,753 )
Other income, net                                   1,240                       -                     444              378                2,062

Income (loss) before income taxes       $         182,423       $           (7,189 )     $          3,322       $ (245,055 )     $      (66,499 )

(1) Exploration and production segment operating income includes net gains of $596.7 million and $489.1 million on commodity derivative contracts for the three and nine-month periods ended September 30, 2011, respectively.

Exploration and Production Segment

The primary factors affecting the financial results of the Company's exploration and production segment are the prices the Company receives for its oil and natural gas production, the quantity of oil and natural gas it produces and changes in the fair value of commodity derivative contracts used to reduce the volatility of the prices received for its oil and natural gas production. Quarterly comparisons of production and price data are presented in the tables below. Changes in the Company's results for these periods reflect, in part, the acquisition of oil properties in the Arena Acquisition in July 2010, which increased oil production volumes and revenues attributable to the Company's exploration and production segment.

                                                  Three Months Ended
                                                    September 30,                    Change
                                                  2011           2010         Amount        Percent
Production data
Oil (MBbl)(1)                                       3,192         2,219           973           43.8 %
Natural gas (MMcf)                                 17,935        19,100        (1,165 )         (6.1 )%
Combined equivalent volumes (MBoe)                  6,181         5,402           779           14.4 %
Average daily combined equivalent volumes
(MBoe/d)                                               67            59             8           13.6 %

Average prices - as reported(2)
Oil (per Bbl)(1)                               $    79.31      $  63.90      $  15.41           24.1 %
Natural gas (per Mcf)                          $     3.64      $   3.57      $   0.07            2.0 %
Combined equivalent (per Boe)                  $    51.52      $  38.87      $  12.65           32.5 %

Average prices - including impact of
derivative contract settlements
Oil (per Bbl)(1)                               $    76.94      $  64.74      $  12.20           18.8 %
Natural gas (per Mcf)                          $     3.08      $   5.02      $  (1.94 )        (38.6 )%
Combined equivalent (per Boe)                  $    48.66      $  44.33      $   4.33            9.8 %

                                                  Nine Months Ended
                                                    September 30,                    Change
                                                  2011           2010         Amount        Percent
Production data
Oil (MBbl)(1)                                       8,540         4,774         3,766           78.9 %
Natural gas (MMcf)                                 52,440        57,473        (5,033 )         (8.8 )%
Combined equivalent volumes (MBoe)                 17,280        14,353         2,927           20.4 %
Average daily combined equivalent volumes
(MBoe/d)                                               63            53            10           18.9 %
Average prices - as reported(2)
Oil (per Bbl)(1)                               $    82.61      $  64.18      $  18.43           28.7 %
Natural gas (per Mcf)                          $     3.66      $   3.88      $  (0.22 )         (5.7 )%
Combined equivalent (per Boe)                  $    51.94      $  36.90      $  15.04           40.8 %

Average prices - including impact of
derivative contract settlements
Oil (per Bbl)(1)                               $    75.30      $  67.12      $   8.18           12.2 %
Natural gas (per Mcf)                          $     3.41      $   6.30      $  (2.89 )        (45.9 )%
Combined equivalent (per Boe)                  $    47.56      $  47.55      $   0.01            0.0 %

(1) Includes natural gas liquids.

(2) Prices represent actual average prices for the periods presented and do not give effect to derivative transactions.


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Exploration and Production Segment - Three months ended September 30, 2011 compared to the three months ended September 30, 2010

Exploration and production segment revenues increased $111.0 million, or 52.7%, to $321.4 million in the three months ended September 30, 2011 from $210.4 million in the three months ended September 30, 2010, as a result of a 43.8% increase in oil production and a 24.1% increase in the average price the Company received for its oil production. These increases were slightly offset by a 6.1% decrease in natural gas production. The increase in oil production was due to the continued development of Permian Basin properties acquired from Arena, and a focus on increased oil drilling in the Permian Basin and Mid-Continent throughout 2010 and 2011. Properties acquired and developed from Arena produced 1,122 MBbls of oil for the three-month period ended September 30, 2011, compared to 680 MBbls in the 2010 period. The decrease in natural gas production was a result of natural production declines in existing natural gas wells.

The average price received for the Company's oil production increased 24.1%, or $15.41 per barrel, to $79.31 per barrel during the three months ended September 30, 2011 from $63.90 per barrel during the same period in 2010. The average price received for the Company's natural gas production for the three-month period ended September 30, 2011 increased 2.0%, or $0.07 per Mcf, to $3.64 per Mcf from $3.57 per Mcf in the comparable period in 2010. Including the impact of derivative contract settlements, the effective price received for oil for the three-month period ended September 30, 2011 was $76.94 per Bbl compared to $64.74 per Bbl during the same period in 2010. Including the impact of derivative contract settlements, the effective price received for natural gas for the three-month period ended September 30, 2011 was $3.08 per Mcf compared to $5.02 per Mcf during the same period in 2010. The Company's derivative contracts are not designated as hedges and, as a result, realized and unrealized gains or losses on commodity derivative contracts are recorded as a component of operating expenses. Internally, management views the settlement of such derivative contracts as adjustments to the price received for oil and natural gas production to determine "effective prices." Realized gains or losses from the settlement of derivative contracts with contractual maturities outside of the reporting period are not considered in the calculation of "effective prices."

During the three-month period ended September 30, 2011, the exploration and production segment reported a $596.7 million net gain on its commodity derivative positions ($7.8 million realized loss and $604.5 million unrealized gain) compared to a $67.2 million net loss on its commodity derivative positions ($77.7 million realized gain and $144.9 million unrealized loss) in the same period in 2010. Net realized gains totaling $9.9 million ($72.8 million realized gains and $62.9 million realized losses) on out-of-period settlements were included in the net realized loss for the three months ended September 30, 2011. Realized gains totaling $48.2 million on out-of-period settlements were included in the net realized gain for the three-month period ended September 30, 2010. Realized gains or losses on derivative contracts represent the difference in the settlement price compared to the contract price. Unrealized gains or losses on derivative contracts represent the change in fair value of open derivative contracts during the period. The unrealized gain on the Company's commodity derivative contracts recorded during the three months ended September 30, 2011 was primarily attributable to a decrease in average oil prices at September 30, 2011 compared to the average oil prices at June 30, 2011 or the contract price for contracts entered into during the third quarter of 2011. The unrealized loss on the Company's commodity contracts recorded during the three months ended September 30, 2010 was primarily attributable to an increase in average oil prices at September 30, 2010 compared to the average oil prices at June 30, 2010.

For the three months ended September 30, 2011, the Company had operating income of $717.3 million in its exploration and production segment compared to an operating loss of $65.6 million for the same period in 2010. An increase of $108.5 million in oil and natural gas revenues was partially offset by an increase of $20.5 million in production expense during the three months ended September 30, 2011. Additionally, the Company recorded a $596.7 million net gain on commodity derivative contracts for the three months ended September 30, 2011 compared to a $67.2 million net loss for the same period in 2010. See further discussion of these changes under "Consolidated Results of Operations."


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Exploration and Production Segment - Nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

Exploration and production segment revenues increased $375.2 million, or 70.7%, to $906.3 million in the nine months ended September 30, 2011 from $531.0 million in the nine months ended September 30, 2010, as a result of a 78.9% increase in oil production and a 28.7% increase in the average price the Company received for its oil production. These increases were slightly offset by an 8.8% decrease in natural gas production and a 5.7% decrease in the average price received for natural gas production. The increase in oil production was due to the addition of Permian Basin properties acquired from Arena in July 2010, and the continued focus on increased oil drilling throughout 2010 and 2011. Properties acquired and developed from Arena produced 2,973 MBbls of oil for the nine-month period ended September 30, 2011 compared to 680 MBbls in the 2010 period after the acquisition. The decrease in natural gas production was a result of natural production declines in existing natural gas wells.

The average price received for the Company's oil production increased 28.7%, or $18.43 per barrel, to $82.61 per barrel during the nine months ended September 30, 2011 from $64.18 per barrel during the same period in 2010. The average price received for the Company's natural gas production for the nine-month period ended September 30, 2011 decreased 5.7%, or $0.22 per Mcf, to $3.66 per Mcf from $3.88 per Mcf in the comparable period in 2010. Including the impact of derivative contract settlements, the effective price received for oil for the nine-month period ended September 30, 2011 was $75.30 per Bbl compared to $67.12 per Bbl during the same period in 2010. Including the impact of derivative contract settlements, the effective price received for natural gas for the nine-month period ended September 30, 2011 was $3.41 per Mcf compared to $6.30 per Mcf during the same period in 2010.

During the nine-month period ended September 30, 2011, the exploration and production segment reported a $489.1 million net gain on its commodity derivative positions ($34.7 million realized loss and $523.8 million unrealized gain) compared to a $114.4 million net gain on its commodity derivative positions ($238.2 million realized gain and $123.8 million unrealized loss) in the same period in 2010. Net realized gains totaling $48.1 million ($111.0 million realized gains and $62.9 million realized losses) on out-of-period settlements were included in the net realized loss for the nine months ended September 30, 2011. Realized gains on out-of-period settlements totaling $110.6 million were included in the net realized gain for the nine months ended September 30, 2010. The unrealized gain on the Company's commodity derivative contracts recorded during the nine months ended September 30, 2011 was primarily attributable to a decrease in average oil prices at September 30, 2011 compared to the average oil prices at December 31, 2010 or the contract price for contracts entered into during 2011. The unrealized loss on commodity contracts recorded during the nine months ended September 30, 2010 was attributable to an increase in average oil prices and decreases in the price differentials on the Company's natural gas basis swaps at September 30, 2010 compared to the average oil prices and price differentials at December 31, 2009 or the contract price for contracts entered into during 2010.

For the nine months ended September 30, 2011, the Company had operating income of $834.3 million in its exploration and production segment compared to operating income of $180.8 million for the same period in 2010. Increases of $367.9 million in oil and natural gas revenues and $374.7 million in gain on derivative contracts were slightly offset by increases of $70.0 million in production expense, $14.5 million in production taxes and $39.0 million in depreciation and depletion on oil and natural gas properties during the nine months ended September 30, 2011. See further discussion of these changes under "Consolidated Results of Operations."

Drilling and Oil Field Services Segment

The financial results of the Company's drilling and oil field services segment depend primarily on demand and prices that can be charged for its services. In addition to providing drilling services, the Company's oil field services business also conducts operations that complement its exploration and production segment such as providing pulling units, trucking, rental tools, location and road construction and roustabout services. On a consolidated basis, drilling and oil field service revenues earned and expenses incurred in performing services for third parties, including third party working interests in wells the Company operates, are included in drilling and services revenues and expenses while drilling and oil field service revenues earned and expenses incurred in performing services for the Company's own account are eliminated in consolidation.

As of September 30, 2011, the Company owned 31 drilling rigs. The table below presents a summary of the Company's rigs as of September 30, 2011 and 2010:

                                                     September 30,
                                                   2011         2010
                 Rigs working for SandRidge            21          21
                 Rigs working for third parties        10           3
                 Idle rigs                             -            4

                 Total operational                     31          28
                 Non-operational rigs(1)               -            7
. . .
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