Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SDT > SEC Filings for SDT > Form 10-Q on 14-Nov-2011All Recent SEC Filings

Show all filings for SANDRIDGE MISSISSIPPIAN TRUST I

Form 10-Q for SANDRIDGE MISSISSIPPIAN TRUST I


14-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 Trust's financial condition and results of operations. This discussion and analysis should be read in conjunction with the Trust's unaudited interim financial statements and the accompanying notes included in this Quarterly Report, the Trust's audited financial statement and the accompanying notes included in the Prospectus and the Discussion and Analysis of Historical Results from the Initial Wells contained in the Prospectus.

Overview

The Trust is a statutory trust created on December 30, 2010 under the Delaware Statutory Trust Act. The business and affairs of the Trust are managed by the Trustee and, as necessary, the Delaware Trustee. The Trust's purpose is to hold the Royalty Interests, to distribute to the Trust unitholders cash that the Trust receives in respect of the Royalty Interests and the derivatives agreement (described in Note 6 to the financial statements contained in Part I, Item 1 of this Quarterly Report) and to perform certain administrative functions in respect of the Royalty Interests and the Trust units. Other than the foregoing activities, the Trust does not conduct any operations or activities. The Trust derives all or substantially all of its income and cash flow from the Royalty Interests and the derivatives agreement. The Trust is treated as a partnership for federal income tax purposes.

During April 2011, the Trust completed an initial public offering of its common units, the net proceeds of which were remitted to SandRidge as partial consideration for its conveyance to the Trust of Royalty Interests in the Underlying Properties as described below.

Concurrent with the initial public offering, SandRidge conveyed to the Trust, effective January 1, 2011, the Royalty Interests, which at September 30, 2011 included interests in (a) 37 Initial Wells, (b) 37 Additional Drilled Wells (equivalent of approximately 42 development wells under the development agreement) and (c) approximately 81 Remaining Development Wells within an AMI in which SandRidge holds approximately 64,200 gross acres (42,200 net acres). SandRidge is obligated to drill, or cause to be drilled, the equivalent of 123 horizontal oil and natural gas development wells on the leased acreage in the AMI on or before December 31, 2014. In the event of delays, SandRidge will have until December 31, 2015 to fulfill its drilling obligation to the Trust. As specified in the development agreement executed by the Trust with SandRidge, SandRidge will be credited for having drilled one full Development Well if a well is drilled and perforated for completion with a minimum perforated length of 2,500 feet within a specified target formation and SandRidge's net revenue interest in the well is equal to 57.0%. The Trust is not responsible for any costs related to the drilling of the Development Wells or any other operating or capital costs and SandRidge will not be permitted to drill and complete any well in the Mississippian formation on lease acreage included within the AMI for its own account until it has satisfied its drilling obligation to the Trust. A wholly owned subsidiary of SandRidge has granted to the Trust a lien covering its interest in the AMI (except its interest in the Drilled Wells) in order to secure the estimated amount of the drilling costs for the Trust's interests in the undeveloped Underlying Properties. The amount recoverable under the lien is reduced and the properties subject to the lien are released, in each case, as SandRidge fulfills its drilling obligation under the development agreement. As of September 30, 2011, SandRidge had drilled and perforated for completion approximately 42 Development Wells, and, accordingly, the maximum amount recoverable under the Drilling Support Lien had been reduced to approximately $109.6 million. As of September 30, 2011, there were 72 producing wells subject to the Royalty Interests and three wells awaiting completion. SandRidge anticipates drilling 15 of the Remaining Development Wells by December 31, 2011. However, there can be no assurance that this estimate will be realized.

The Royalty Interests entitle the Trust to receive 90% of the proceeds (after deducting post-production costs and any applicable taxes) from the sale of oil and natural gas production attributable to SandRidge's net revenue interest in the Initial Wells and 50% of the proceeds (after deducting post-production costs and any applicable taxes) from the sale of oil and natural gas production attributable to SandRidge's net revenue interest in the Development Wells. Pursuant to a derivatives agreement between the Trust and SandRidge, a portion of the sales associated with oil and natural gas production attributable to the Royalty Interests has been economically hedged with a combination of fixed price swaps and collars from April 1, 2011 to December 31, 2015. The Trust's distributable income includes net settlements under this derivatives agreement.

The Trust is required to make quarterly cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust's administrative expenses and cash reserves withheld by the Trustee, on or about 60 days following the completion of each quarter through (and including) the quarter ending December 31, 2030. The amount of the quarterly distributions will fluctuate from quarter to quarter depending on several factors, including:

timing of initial production from the Development Wells;


Table of Contents
oil and natural gas prices received;

volumes of oil and natural gas produced and sold;

post-production costs and any applicable taxes;

amounts realized and paid under derivative agreements; and

the Trust's general and administrative expenses.

Subordination Threshold. In order to provide support for cash distributions on the common units, 7,000,000 units (65% of the Trust units SandRidge owns and 25% of Trust units outstanding) are subordinated units. The subordinated units are entitled to receive pro rata distributions from the Trust each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is at least equal to the Subordination Threshold for the corresponding quarter as set forth in the Trust Agreement and Prospectus and as shown below. If there is not sufficient cash to fund such a distribution on all of the common units (including the common units SandRidge owns), the distribution to be made with respect to the subordinated units will be reduced or eliminated for such quarter in order to make a distribution, to the extent possible, to all of the common units (including the common units held by SandRidge), up to the Subordination Threshold amounts.

Incentive Threshold. In exchange for agreeing to subordinate a portion of its Trust units, and in order to provide additional financial incentive to SandRidge to satisfy its drilling obligation and perform operations on the Underlying Properties in an efficient and cost-effective manner, SandRidge is entitled to receive incentive distributions equal to 50% of the amount by which the cash available for distribution on all of the Trust units in any quarter exceeds the Incentive Threshold for the corresponding quarter as set forth in the Trust Agreement and Prospectus and as shown below.

At the end of the fourth full calendar quarter following SandRidge's satisfaction of its drilling obligation with respect to the Development Wells, the subordinated units will automatically convert into common units on a one-for-one basis and SandRidge's right to receive incentive distributions will terminate. After such time, the common units will no longer have the protection of the Subordination Threshold, and all Trust unitholders will share on a pro rata basis in the Trust's distributions. There is no assurance of any minimum distribution at any time.

The following table sets forth the Subordination Threshold and Incentive Threshold for each remaining calendar quarter through the fourth quarter of 2016, as set out in the Trust Agreement and as included in the Prospectus.

                                   Subordination        Incentive
                 Period            Threshold(1)        Threshold(1)

                 2011
                 Third quarter    $          0.53     $         0.80
                 Fourth quarter              0.51               0.76

                 2012
                 First quarter               0.52               0.78
                 Second quarter              0.56               0.84
                 Third quarter               0.59               0.88
                 Fourth quarter              0.58               0.87

                 2013
                 First quarter               0.59               0.89
                 Second quarter              0.61               0.92
                 Third quarter               0.61               0.92
                 Fourth quarter              0.61               0.91

                 2014
                 First quarter               0.62               0.93
                 Second quarter              0.66               0.99
                 Third quarter               0.70               1.04
                 Fourth quarter              0.72               1.07

                 2015
                 First quarter               0.67               1.01
                 Second quarter              0.62               0.93
                 Third quarter               0.58               0.86
                 Fourth quarter              0.54               0.81


Table of Contents
                          2016
                          First quarter      0.52       0.78
                          Second quarter     0.50       0.75
                          Third quarter      0.48       0.72
                          Fourth quarter     0.46       0.69

(1) Each of the Subordination Threshold and Incentive Threshold terminates after the fourth full calendar quarter following SandRidge's completion of its drilling obligation.

The Trust will dissolve and begin to liquidate on the Termination Date and will soon thereafter wind up its affairs and terminate. At the Termination Date, 50% of the Royalty Interests will revert automatically to SandRidge. The remaining 50% will be retained by the Trust at the Termination Date and thereafter sold, and the net proceeds of the sale, as well as any remaining Trust cash reserves, will be distributed to the unitholders on a pro rata basis. SandRidge will have a right of first refusal to purchase the Royalty Interests retained by the Trust at the Termination Date.

Results of Trust Operations

Trust Operations for the Three and Nine Months Ended September 30, 2011

The primary factors affecting the Trust's revenues and costs are the quantity of oil and natural gas production attributable to the Royalty Interests, the prices received for such production and amounts paid or received as net settlements under the derivatives agreement. Royalty income, post-production costs, production taxes and derivative settlements are recorded on a cash basis when net revenue distributions are received by the Trust from SandRidge. Information regarding the Trust's production, pricing and costs for the three and nine-month periods ended September 30, 2011, consisting of the August net revenue distribution and net derivative settlement from SandRidge, is presented below.

                                                                   Three and Nine
                                                                    Months Ended
                                                                September 30, 2011(1)
Production data
Oil (MBbl)                                                                         264
Natural gas (MMcf)                                                               1,830
Combined equivalent volumes (MBoe)                                                 569

Average prices
Oil (per Bbl)                                                  $                 92.01
Natural gas (per Mcf)                                          $                  4.66
Combined equivalent (per Boe)                                  $                 57.67

Average prices - including impact of derivative
settlements and post-production expenses
Oil (per Bbl)                                                  $                 91.40
Natural gas (per Mcf)                                          $                  4.24
Combined equivalent (per Boe)                                  $                 56.03

Production taxes (per Boe)                                     $                  0.59

(1) Oil and natural gas volumes and related revenues and expenses for the three and nine-month periods ended September 30, 2011 (included in SandRidge's August net revenue distribution to the Trust) represent oil and natural gas production from January 1, 2011 to May 31, 2011.

Royalty Income. Royalty income received during the three and nine-month periods ended September 30, 2011 totaled $32.8 million based upon production attributable to the Royalty Interests of 264 MBbls of oil and 1,830 MMcf of natural gas. Average prices received for oil and natural gas production, excluding the impact of derivative settlements and post-production expenses, during the three and nine-month periods ended September 30, 2011 were $92.01 per barrel of oil and $4.66 per Mcf of natural gas.


Table of Contents

Derivative Settlements. The Trust's derivatives agreement with SandRidge reduces the Trust's exposure to commodity price volatility attributable to a portion of production from the Royalty Interests through December 31, 2015 through the use of oil and natural gas fixed price swaps and natural gas collars. Net cash settlements under the derivatives agreement for the three and nine-month periods ended September 30, 2011 were approximately $56,000, which effectively decreased the average price received for oil by $0.61 per Bbl to $91.40 per Bbl and increased the average price received for natural gas by $0.12 per Mcf to $4.78 per Mcf.

Post-Production Costs. The Trust bears post-production costs attributable to production from the Royalty Interests. Post-production costs generally consist of costs incurred to gather, store, compress, transport, process, treat, dehydrate and market the oil and natural gas produced. Post-production costs for the three and nine-month periods ended September 30, 2011 totaled $1.0 million.

Production Taxes. Production taxes are calculated as a percentage of oil and natural gas revenues, excluding the effects of derivative settlements and net of any applicable tax credits. Production taxes for the three and nine-month periods ended September 30, 2011 totaled $0.3 million, or $0.59 per Boe, and were approximately 1.0% of royalty income.

Distributable Income. Distributable income for the three and nine-month periods ended September 30, 2011 was $29.9 million, which reflected a $1.6 million reduction to establish a cash reserve for the payment of future Trust administrative expenses. The amount of the cash reserve was equivalent to the sum of the Trust's estimated annual administrative expenses, or approximately $1.0 million, and the Trust administrative expenses expected to be incurred and paid before the quarterly distribution in May 2012, or approximately $0.6 million.

Distributable income for the three and nine-month periods ended September 30, 2011 of $29.9 million was higher than the target of $28.4 million for the period primarily as a result of higher than anticipated oil and natural gas production. Actual production volumes of 264 MBbl of oil and 1,830 MMcf of natural gas for the period from January 1, 2011 to May 31, 2011 exceeded assumed production of 257 MBbl of oil and 1,624 MMcf of natural gas used in preparing the target distribution level for the period. The average price received for oil produced from January 1, 2011 to May 31, 2011, including the impact of derivative settlements, was $91.40 per Bbl compared to $92.02 per Bbl assumed in preparing the target distribution level for the period. The average price received for natural gas produced from January 1, 2011 to May 31, 2011, including the impact of derivative settlements and post-production expenses of approximately $1.0 million, was $4.24 per Mcf of natural gas compared to $4.16 per Mcf assumed in preparing the target distribution level for the period.

Liquidity and Capital Resources

The Trust's principal sources of liquidity and capital are cash flow generated from the Royalty Interests and derivative contracts under the derivatives agreement, and borrowings to fund administrative expenses, including amounts borrowed under SandRidge's loan commitment described in Note 5 to the financial statements contained in Part I, Item I of this Quarterly Report. The Trust's primary uses of cash are distributions to Trust unitholders, including, if applicable, incentive distributions to SandRidge, payment of amounts owed under the derivatives agreement, payment of Trust administrative expenses, including any reserves established by the Trustee for future liabilities, and payment of expense reimbursements to SandRidge for out-of-pocket expenses incurred on behalf of the Trust. Administrative expenses include payments to the Trustee and the Delaware Trustee as well as a quarterly fee of $50,000 to SandRidge pursuant to an administrative services agreement. Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the excess cash, if any, received by the Trust from the sale of oil and natural gas production attributable to the Royalty Interests that quarter, over the Trust's expenses for the quarter, subject in all cases to the subordination and incentive provisions described above. If at any time the Trust's cash on hand (including available cash reserves) is not sufficient to pay the Trust's ordinary course administrative expenses as they become due, the Trust may borrow funds to pay such expenses. If such funds are borrowed, no further distributions will be made to unitholders (except in respect of any previously determined quarterly distribution amount) until the borrowed funds have been repaid.

Trust Distributions to Unitholders. On July 22, 2011, the Trust declared a cash distribution of $1.068461 per unit covering production for the period from January 1, 2011 to May 31, 2011 for record holders as of August 15, 2011. The distribution, totaling $29.9 million, was made on August 30, 2011.

Future Trust Distributions to Unitholders. On October 28, 2011, the Trust declared a cash distribution of $0.816423 per unit covering production for the period from June 1, 2011 to August 31, 2011 for record holders as of November 15, 2011. The distribution will be paid on or about November 30, 2011 and was calculated as follows (in thousands, except for unit and per unit amounts):


Table of Contents
Revenues
Royalty income                                                               $   23,100
Derivative settlements, net                                                       1,521

Total revenues                                                                   24,621

Expenses
Post-production expenses                                                            760
Production taxes                                                                    236
Cash reserves withheld by Trustee(1)                                                324

Total expenses                                                                    1,320

Income available for distribution prior to incentive calculation                 23,301

Less: Incentive distribution to SandRidge                                           441

Distributable income available to unitholders                                $   22,860

Distributable income per unit (28,000,000 units issued and outstanding)      $ 0.816423

(1) Includes amounts withheld for annual Trust administrative expenses.

Quarterly cash available for distribution on all units of $23.3 million exceeded 120% of the target distribution for the period, resulting in a distribution to all unitholders equal to the Incentive Threshold plus 50% of the amount by which cash available for distribution exceeded the Incentive Threshold.

Critical Accounting Policies and Estimates

Refer to Note 2 to the financial statements contained in Part I, Item I of this Quarterly Report for a description of the Trust's accounting policies and use of estimates.

  Add SDT to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SDT - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.