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SDT > SEC Filings for SDT > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for SANDRIDGE MISSISSIPPIAN TRUST I | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SANDRIDGE MISSISSIPPIAN TRUST I


8-Nov-2013

Quarterly Report


ITEM 2. Trustee'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, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the Trust's unaudited financial statements and the accompanying notes included in this Quarterly Report and the Trust's audited financial statements and the accompanying notes included in the 2012 Form 10-K.

Overview

The Trust is a statutory trust created under the Delaware Statutory Trust Act. The business and affairs of the Trust are administered 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 5 to the unaudited 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 Trustee has no involvement with, control or authority over, or responsibility for, any aspect of the operations on or relating to the properties in which the Trust has an interest. 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.

Properties. As of September 30, 2013, the Trust's properties consisted of Royalty Interests in (a) the Initial Wells and (b) 121 additional wells (equivalent to approximately 124 Trust Development Wells under the development agreement as described below) that were drilled and perforated for completion between January 1, 2011, the effective date of the Royalty Interests conveyance, and June 2013 within an AMI located in Alfalfa, Garfield, Grant, Major and Woods counties in Oklahoma.

SandRidge was obligated to drill, or cause to be drilled, the Trust Development Wells on or before December 31, 2015, and was not permitted to drill and complete any well within the AMI for its own account until it had satisfied the drilling obligation to the Trust. As of September 30, 2013, SandRidge had fulfilled its drilling obligation to the Trust.

The Trust was not responsible for any costs related to the drilling of the Trust Development Wells and is not responsible for any other operating or capital costs related to the Underlying Properties. The following table presents the number of Initial Wells, Trust Development Wells drilled and Trust Development Wells to be drilled as of September 30, 2013 and December 31, 2012.

                                                           Trust
                                          Trust         Development
                                       Development      Wells To Be
                     Initial Wells   Wells Drilled(1)     Drilled     Total
September 30, 2013              37                124             -     161
December 31, 2012               37                107            16     160



(1) SandRidge was credited for having drilled one full Trust Development Well if a well was drilled and perforated for completion with a minimum perforated length of 2,500 feet and SandRidge's net revenue interest in the well was equal to 57.0%. For wells with a perforated length of less than 2,500 feet and for wells in which SandRidge had a net revenue interest greater or less than 57.0%, SandRidge received proportionate credit for such well.

Distributions. The Trust makes 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. The Trust's 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. 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 is 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. However, there is no minimum distribution. If the cash available for distribution on all of the Trust units in any quarter exceeds the Incentive Threshold for the corresponding quarter, SandRidge, as holder of the Trust's subordinated units, is entitled to 50% of the amount by which the cash available for distribution exceeds the Incentive Threshold. On June 30, 2014, which is the end of the fourth full calendar quarter following SandRidge's fulfillment of its drilling obligation with respect to the Trust 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 in respect of subsequent periods will terminate. After such time, the common units will no longer have the protection of the Subordination Threshold in respect of subsequent periods, and all Trust unitholders will share on a pro rata basis in the Trust's distributions.


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The following table sets forth the Subordination Threshold and Incentive Threshold for each remaining calendar quarter through the end of the subordination period, as set out in the trust agreement.

                     Subordination      Incentive
Period(1)            Threshold(2)      Threshold(2)

2013
Third quarter (3)   $         0.613   $        0.919
Fourth quarter                0.609            0.913

2014
First quarter                 0.621            0.932
Second quarter                0.659            0.988



(1) Due to the timing of the payment of production proceeds to the Trust, each distribution covers production from a three-month period consisting of the first two months of the most recently ended quarter and the final month of the quarter preceding it.

(2) Each of the Subordination Threshold (80% of quarterly target distribution) and Incentive Threshold (120% of quarterly target distribution) terminates after the fourth full calendar quarter following SandRidge's completion of its drilling obligation.

(3) A distribution of $0.6029 per common unit was declared on October 24, 2013 and is expected to be paid on or about November 29, 2013. Because income available for distribution on the Trust common units was $0.6029 per unit, which was below the Subordination Threshold of $0.6128 for the period, no distribution will be paid to the subordinated units for the period. See Note 7 to the financial statements contained in Item 1 of this report for further discussion.

Litigation. As described in more detail in Item 1 of Part II, Legal Proceedings, the Trust has been named as an additional defendant in a putative class action against SandRidge and others. Regardless of the outcome of the litigation, the Trust will incur expenses in defending the litigation, and the expenses may increase the Trust's administrative expenses significantly. Further, any costs incurred by the Trust in connection with any settlement of or judgments in the litigation could increase the Trust's administrative expenses significantly.

Pursuant to Internal Revenue Code ("IRC") Section 1446, withholding tax on income effectively connected to a United States trade or business allocated to foreign partners should be made at the highest marginal rate. Under IRC
Section 1441, withholding tax on fixed, determinable, annual, periodic income from United States sources allocated to foreign partners should be made at 30% of gross income unless the rate is reduced by treaty. This is intended to be a qualified notice to nominees and brokers as provided for under Treasury Regulation Section 1.1446-4(b) by the Trust, and while specific relief is not specified for IRC Section 1441 income, this disclosure is intended to suffice. Nominees and brokers should withhold at the highest marginal rate, currently 39.6% for individuals, on the distribution made to foreign partners.

Results of Trust Operations

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 expenses, 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, 2013 and 2012 is presented below.


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                                           Three Months Ended          Nine Months Ended
                                             September 30,               September 30,
                                          2013(1)       2012(2)      2013(3)       2012(4)
Production Data
Oil (MBbls)(5)                                  137          157           411          511
Natural gas (MMcf)                            1,337        1,322         4,389        4,351
Combined equivalent volumes (MBoe)              360          377         1,143        1,236
Average daily combined equivalent
volumes (MBoe/d)                                3.9          4.1           4.2          4.5

Well Data
Initial and Trust Development Wells
producing - average                             156          105           145           93

Revenues (in thousands)
Royalty income                          $    17,136    $  18,317    $   51,339    $  61,446
Derivative settlements                        1,133        3,270         4,172        8,104
Total revenue                           $    18,269    $  21,587    $   55,511    $  69,550

Expenses (in thousands)
Post-production expenses                $       712    $     743    $    2,434    $   2,427
Production taxes                                223          184           572          628
Trust administrative expenses                   310          265         1,030        1,176
Cash reserves withheld (used) for
current Trust expenses, net of
amounts (used) withheld                         104           20           426         (159 )
Total expenses                          $     1,349    $   1,212    $    4,462    $   4,072
Income available for distribution
prior to incentive calculation               16,920       20,375        51,049       65,478
Less: Incentive distribution to
SandRidge                                         -            -             -          920
Distributable income available to
unitholders                             $    16,920    $  20,375    $   51,049    $  64,558

Average Prices
Oil (per Bbl)(5)                        $     85.87    $   96.17    $    86.21    $   91.94
Natural gas (per Mcf)                   $      4.04    $    2.44    $     3.62    $    3.32
Combined equivalent (per Boe)           $     47.67    $   48.55    $    44.93    $   49.69

Average Prices - including impact of
derivative settlements and
post-production expenses
Oil (per Bbl)(5)                        $     93.78    $   98.17    $    95.48    $   96.61
Natural gas (per Mcf)                   $      3.55    $    4.11    $     3.15    $    4.08
Combined equivalent (per Boe)           $     48.84    $   55.25    $    46.45    $   54.29

Expenses (per Boe)
Post-production                         $      1.98    $    1.97    $     2.13    $    1.96
Production taxes                        $      0.62    $    0.49    $     0.50    $    0.51



(1) Oil and natural gas volumes and related revenues and expenses for the three-month period ended September 30, 2013 (included in SandRidge's August 2013 net revenue distribution to the Trust) represent oil and natural gas production from March 1, 2013 to May 31, 2013.

(2) Oil and natural gas volumes and related revenues and expenses for the three-month period ended September 30, 2012 (included in SandRidge's August 2012 net revenue distribution to the Trust) represent oil and natural gas production from March 1, 2012 to May 31, 2012.

(3) Oil and natural gas volumes and related revenues and expenses for the nine-month period ended September 30, 2013 (included in SandRidge's March 2013, May 2013 and August 2013 net revenue distributions to the Trust) represent oil and natural gas production from September 1, 2012 to May 31, 2013.

(4) Oil and natural gas volumes and related revenues and expenses for the nine-month period ended September 30, 2012 (included in SandRidge's February 2012, May 2012 and August 2012 net revenue distributions to the Trust) represent oil and natural gas production from September 1, 2011 to May 31, 2012.

(5) Includes natural gas liquids.

Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012

Revenues

Royalty Income. Royalty income received during the three-month period ended September 30, 2013 totaled $17.1 million compared to $18.3 million received during the three-month period ended September 30, 2012. Royalty income is a function of production volumes sold attributable to the Royalty Interests and associated prices received. The decrease in royalty income was primarily attributable to the decrease in combined equivalent volumes produced as production from Trust Development Wells completed and brought on production during the second half of 2012 and the first half of 2013 was more than offset by natural declines in production from the Initial Wells and older Trust Development Wells. The net revenue distribution from SandRidge received by the Trust during the three-month period ended September 30, 2013 included royalty income attributable to production for the three-month period from March 1, 2013 to May 31, 2013 of 137 MBbls of oil and 1,337 MMcf of natural gas, or 360 MBoe of combined production. The net revenue distribution from SandRidge received by the Trust during the three-month period ended September 30, 2012 included royalty income attributable to production for the three-month period from March 1, 2012 to May 31, 2012 of 157 MBbls of oil and 1,322 MMcf of natural gas, or 377 MBoe of combined production. Also contributing to the decrease in royalty income was a decrease in the average price received for oil production, excluding the impact of derivative settlements and post-production expenses, to $85.87 per Bbl during the three-month period ended September 30, 2013 from $96.17 per Bbl during the same period in 2012. The decreases in total production and the average price received for oil production were slightly offset by an increase in the average price received for natural gas production, excluding the impact of derivative settlements and post-production expenses, to $4.04 per Mcf during the three-month period ended September 30, 2013 from $2.44 per Mcf during the same period in 2012.


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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 by the use of oil fixed price swaps and natural gas collars. Net cash settlements under the derivatives agreement for the three-month period ended September 30, 2013 for production from March 1, 2013 to May 31, 2013 were approximately $1.1 million, which effectively increased the average price received for oil by $7.91 per Bbl to $93.78 per Bbl and increased the average price received for natural gas by $0.04 per Mcf to $4.08 per Mcf ($3.55 per Mcf including the impact of post-production expenses). Net cash settlements received during the 2013 period were comprised of gains on oil fixed price swaps and natural gas collars due to lower average commodity prices at the time of settlement compared to contract prices. Net cash settlements under the derivatives agreement for the three-month period ended September 30, 2012 for production from March 1, 2012 to May 31, 2012 were approximately $3.3 million, which effectively increased the average price received for oil by $2.00 per Bbl to $98.17 per Bbl and increased the average price received for natural gas by $2.23 per Mcf to $4.67 per Mcf ($4.11 per Mcf including the impact of post-production expenses). Net cash settlements received during the 2012 period were comprised mainly of gains on natural gas collars due to lower average natural gas prices at the time of settlement compared to contract prices.

Expenses

Post-Production Expenses. The Trust bears post-production expenses attributable to production from the Royalty Interests. Post-production expenses generally consist of costs incurred to gather, store, compress, transport, process, treat, dehydrate and market the oil and natural gas produced. Post-production expenses totaled approximately $0.7 million for each of the three-month periods ended September 30, 2013 and 2012.

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-month period ended September 30, 2013 totaled approximately $0.2 million, or $0.62 per Boe, and were approximately 1.3% of royalty income. Production taxes for the three-month period ended September 30, 2012 totaled approximately $0.2 million, or $0.49 per Boe, and were approximately 1.0% of royalty income.

Trust Administrative Expenses. Trust administrative expenses generally consist of fees paid to the Trustee and the Delaware Trustee, administrative services fees paid to SandRidge, tax return and related form preparation fees, legal and accounting fees, and other expenses incurred as a result of being a publicly traded entity. Trust administrative expenses totaled approximately $0.3 million for each of the three-month periods ended September 30, 2013 and 2012.

Distributable Income

Distributable income for the three-month period ended September 30, 2013 was $16.9 million, which included a net addition to the cash reserve for payment of future Trust expenses of approximately $104,000 (approximately $414,000 withheld from the August 2013 cash distribution to unitholders partially offset by approximately $310,000 used to pay Trust expenses during the period). Distributable income for the three-month period ended September 30, 2012 was $20.4 million, which included a net addition to the cash reserve for payment of future Trust expenses of approximately $20,000 (approximately $285,000 withheld from the August 2012 cash distribution to unitholders partially offset by approximately $265,000 used to pay Trust expenses during the period ).

Nine Months Ended September 30, 2013 Compared to the Nine Months Ended September 30, 2012

Revenues

Royalty Income. Royalty income received during the nine-month period ended September 30, 2013 totaled $51.3 million compared to $61.4 million received during the nine-month period ended September 30, 2012. The decrease in royalty income was primarily attributable to the decrease in combined equivalent volumes produced as production from Trust Development Wells completed and brought on production during the second half of 2012 and the first half of 2013 was more than offset by natural declines in production from the Initial Wells and older Trust Development Wells. The net revenue distributions from SandRidge received by the Trust during the nine-month period ended September 30, 2013 included royalty income attributable to production for the nine-month period from September 1, 2012 to May 31, 2013 of 411 MBbls of oil and 4,389 MMcf of natural gas, or 1,143 MBoe of combined production. The net revenue distributions from SandRidge received by the Trust during the nine-month period ended September 30, 2012 included royalty income attributable to production for the nine-month period from September 1, 2011 to May 31, 2012 of 511 MBbls of oil and 4,351 MMcf of natural gas, or 1,236 MBoe of combined production. Also contributing to the decrease in royalty income was a decrease in the average price received for oil production. Average prices received for oil production, excluding the impact of derivative settlements and post-production expenses, during the nine-month period ended September 30, 2013 were $86.21 per Bbl of oil compared to $91.94 per Bbl of oil during the nine-month period ended September 30, 2012. The decreases in total production and the average price received for oil production were slightly offset by an increase in the average price received


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for natural gas production, excluding the impact of derivative settlements and post-production expenses, to $3.62 per Mcf during the nine-month period ended September 30, 2013 from $3.32 per Mcf during the same period in 2012.

Derivative Settlements. Net cash settlements under the derivatives agreement for the nine-month period ended September 30, 2013 for production from September 1, 2012 to May 31, 2013 were approximately $4.2 million, which effectively increased the average price received for oil by $9.27 per Bbl to $95.48 per Bbl and increased the average price received for natural gas by $0.08 per Mcf to $3.70 per Mcf ($3.15 per Mcf including the impact of post-production expenses). Net cash settlements under the derivatives agreement for the nine-month period ended September 30, 2012 for production from September 1, 2011 to May 31, 2012 were approximately $8.1 million, which effectively increased the average price received for oil by $4.67 per Bbl to $96.61 per Bbl and increased the average price received for natural gas by $1.31 per Mcf to $4.63 per Mcf ($4.08 per Mcf including the impact of post-production expenses). Net cash settlements received during both periods were comprised mainly of gains on oil fixed price swaps and natural gas collars due to lower average commodity prices at the time of settlement compared to contract prices.

Expenses

Post-Production Expenses. Post-production expenses totaled approximately $2.4 million for each of the nine-month periods ended September 30, 2013 and 2012. Post-production costs per Boe increased approximately 9% for the nine-month period ended September 30, 2013 from the comparable period of 2012 as natural gas production comprised a larger portion of total production during the 2013 period.

Production Taxes. Production taxes for the nine-month period ended September 30, 2013 totaled approximately $0.6 million, or $0.50 per Boe, and were approximately 1.1% of royalty income. Production taxes for the nine-month period ended September 30, 2012 totaled approximately $0.6 million, or $0.51 per Boe, and were approximately 1.0% of royalty income.

Trust Administrative Expenses. Trust administrative expenses for the nine-month period ended September 30, 2013 totaled approximately $1.0 million compared to approximately $1.2 million for the nine-month period ended September 30, 2012.

Incentive Distribution to SandRidge

Cash available for distribution during the nine-month period ended September 30, 2012 prior to incentive calculations exceeded Incentive Thresholds for the applicable distribution periods by approximately $1.8 million ($1.7 million for the February 2012 distribution and $0.1 million for the May 2012 distribution). As the holder of the Trust's subordinated units, SandRidge received 50% of the amount by which the cash available for distribution exceeded the Incentive Threshold for each distribution, or approximately $0.9 million total. No incentive distributions were made during the nine-month period ended September 30, 2013.

Distributable Income

Distributable income for the nine-month period ended September 30, 2013 was $51.0 million, which included a net addition to the cash reserve for payment of future Trust expenses of approximately $0.4 million (approximately $1.4 million withheld from the March 2013, May 2013 and August 2013 cash distributions to unitholders partially offset by approximately $1.0 million used to pay Trust expenses during the period). Distributable income for the nine-month period ended September 30, 2012 was $64.6 million, which included a net reduction to the cash reserve for payment of future Trust expenses of approximately $0.2 million (approximately $1.2 million used to pay Trust expenses during the period partially offset by approximately $1.0 million withheld from the February 2012, May 2012 and August 2012 cash distributions to unitholders).

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. 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. Under the conveyances granting the Royalty Interests, the Trust does not have any capital requirements related to drilling wells or any other operating and capital costs related to the wells.

Administrative expenses include payments to the Trustee and the Delaware Trustee as well as a quarterly fee 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 for the quarter, over the Trust's expenses for the quarter, subject in all cases to the subordination and incentive provisions previously described. If at any time the Trust's cash on hand (including available cash reserves) is not sufficient to pay the


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Trust's ordinary course administrative expenses as they become due, the Trust may borrow funds from the Trustee or other lenders, including SandRidge, to pay such expenses. The Trustee does not intend to lend funds to the Trust. 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. There was no such loan outstanding at September 30, 2013 or December 31, 2012.

Under the derivatives agreement, SandRidge pays the Trust amounts it receives from its counterparties and the Trust pays SandRidge any amounts that SandRidge is required to pay such counterparties. Significant payments by the Trust to . . .

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