UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
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 þ No o¨
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 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o¨
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” inRule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | þ | Accelerated filer | ¨ | ||||
| Non-accelerated filer | Smaller reporting company | ¨ | |||||
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o¨ No þ
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of the close of business on July 31,October 30, 2009, was 183,546,780.
2
This quarterly reportQuarterly Report onForm 10-Q (“Quarterly Report”) includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”).amended. Various statements contained in this Quarterly Report, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, areforward-looking statements. The forward-looking statements include projections and estimates concerning, among other things, 2009 and 2010 capital expenditures, our liquidity and capital resources the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, and elements of our business strategy. Our forward-looking statements are generally accompanied by words such as “estimate,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “goal” or other words that convey the uncertainty of future events or outcomes. We have based these forward-looking statements on our current expectations and assumptions about future events. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties, including the risk factors discussed in Item 1A of this Quarterly Report and of our Annual Report onForm 10-K for the fiscal year ended December 31, 2008 (the “2008Form 10-K”), the opportunities that may be pursued by us, competitive actions by other companies, changes in laws or regulations and other factors, many of which are beyond our control. 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 our company, or our business or operations. The forward-looking statements contained herein are not guarantees of future performance and actual results or developments may differ materially from those projected in thesuch forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements.
3
| ITEM 1. | Financial Statements |
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)In thousands, except per share data)
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 621 | $ | 636 | ||||
| Accounts receivable, net: | ||||||||
| Trade | 73,125 | 102,746 | ||||||
| Related parties | 201 | 6,327 | ||||||
| Derivative contracts | 207,342 | 201,111 | ||||||
| Inventories | 3,556 | 3,686 | ||||||
| Costs in excess of billings | 16,449 | — | ||||||
| Other current assets | 20,164 | 41,407 | ||||||
| Total current assets | 321,458 | 355,913 | ||||||
| Natural gas and crude oil properties, using full cost method of accounting | ||||||||
| Proved | 4,996,188 | 4,676,072 | ||||||
| Unproved | 225,369 | 215,698 | ||||||
| Less: accumulated depreciation, depletion and impairment | (3,765,118 | ) | (2,369,840 | ) | ||||
| 1,456,439 | 2,521,930 | |||||||
| Other property, plant and equipment, net | 464,463 | 653,629 | ||||||
| Derivative contracts | 35,709 | 45,537 | ||||||
| Investments | 7,588 | 6,088 | ||||||
| Restricted deposits | 32,860 | 32,843 | ||||||
| Other assets | 45,799 | 39,118 | ||||||
| Total assets | $ | 2,364,316 | $ | 3,655,058 | ||||
LIABILITIES AND EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 15,380 | $ | 16,532 | ||||
| Accounts payable and accrued expenses: | ||||||||
| Trade | 185,452 | 366,337 | ||||||
| Related parties | 176 | 230 | ||||||
| Derivative contracts | 6,238 | 5,106 | ||||||
| Asset retirement obligation | 128 | 275 | ||||||
| Billings in excess of costs incurred | — | 14,144 | ||||||
| Total current liabilities | 207,374 | 402,624 | ||||||
| Long-term debt | 2,146,615 | 2,358,784 | ||||||
| Other long-term obligations | 11,967 | 11,963 | ||||||
| Derivative contracts | 733 | 3,639 | ||||||
| Asset retirement obligation | 89,421 | 84,497 | ||||||
| Total liabilities | 2,456,110 | 2,861,507 | ||||||
| Commitments and contingencies (Note 13) | ||||||||
| 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 June 30, 2009 and no shares issued and outstanding in 2008; aggregate liquidation preference of $265,000 at June 30, 2009 | 3 | — | ||||||
| Common stock, $0.001 par value, 400,000 shares authorized; 183,254 issued and 181,856 outstanding at June 30, 2009 and 167,372 issued and 166,046 outstanding at December 31, 2008 | 178 | 163 | ||||||
| Additional paid-in capital | 2,532,180 | 2,170,986 | ||||||
| Treasury stock, at cost | (19,854 | ) | (19,332 | ) | ||||
| Accumulated deficit | (2,604,327 | ) | (1,358,296 | ) | ||||
| Total SandRidge Energy, Inc. stockholders’ (deficit) equity | (91,820 | ) | 793,521 | |||||
| Noncontrolling interest | 26 | 30 | ||||||
| Total (deficit) equity | (91,794 | ) | 793,551 | |||||
| Total liabilities and equity | $ | 2,364,316 | $ | 3,655,058 | ||||
| September 30, 2009 | December 31, 2008 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 14,642 | $ | 636 | ||||
Accounts receivable, net: | ||||||||
Trade | 80,328 | 102,746 | ||||||
Related parties | 257 | 6,327 | ||||||
Derivative contracts | 129,453 | 201,111 | ||||||
Inventories | 3,405 | 3,686 | ||||||
Other current assets | 32,358 | 41,407 | ||||||
Total current assets | 260,443 | 355,913 | ||||||
Natural gas and crude oil properties, using full cost method of accounting | ||||||||
Proved | 5,064,490 | 4,676,072 | ||||||
Unproved | 229,687 | 215,698 | ||||||
Less: accumulated depreciation, depletion and impairment | (3,792,437 | ) | (2,369,840 | ) | ||||
| 1,501,740 | 2,521,930 | |||||||
Other property, plant and equipment, net | 462,487 | 653,629 | ||||||
Derivative contracts | — | 45,537 | ||||||
Investments | 9,158 | 6,088 | ||||||
Restricted deposits | 32,872 | 32,843 | ||||||
Other assets | 44,268 | 39,118 | ||||||
Total assets | $ | 2,310,968 | $ | 3,655,058 | ||||
| LIABILITIES AND EQUITY | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 13,925 | $ | 16,532 | ||||
Accounts payable and accrued expenses: | ||||||||
Trade | 230,506 | 366,337 | ||||||
Related parties | 155 | 230 | ||||||
Derivative contracts | 7,223 | 5,106 | ||||||
Asset retirement obligation | 2,077 | 275 | ||||||
Billings in excess of costs incurred | 5,141 | 14,144 | ||||||
Total current liabilities | 259,027 | 402,624 | ||||||
Long-term debt | 2,126,286 | 2,358,784 | ||||||
Other long-term obligations | 6,967 | 11,963 | ||||||
Derivative contracts | 21,640 | 3,639 | ||||||
Asset retirement obligation | 88,033 | 84,497 | ||||||
Total liabilities | 2,501,953 | 2,861,507 | ||||||
Commitments and contingencies (Note 13) | ||||||||
Equity: | ||||||||
SandRidge Energy, Inc. stockholders’ equity: | ||||||||
Preferred stock, $0.001 par value, 50,000 shares authorized: | 3 | — | ||||||
Common stock, $0.001 par value, 400,000 shares authorized; 184,986 issued and 183,524 outstanding at September 30, 2009 and 167,372 issued and 166,046 outstanding at December 31, 2008 | 178 | 163 | ||||||
Additional paid-in capital | 2,537,690 | 2,170,986 | ||||||
Treasury stock, at cost | (20,427 | ) | (19,332 | ) | ||||
Accumulated deficit | (2,708,459 | ) | (1,358,296 | ) | ||||
Total SandRidge Energy, Inc. stockholders’ (deficit) equity | (191,015 | ) | 793,521 | |||||
Noncontrolling interest | 30 | 30 | ||||||
Total (deficit) equity | (190,985 | ) | 793,551 | |||||
Total liabilities and equity | $ | 2,310,968 | $ | 3,655,058 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)In thousands, except per share amounts)
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Unaudited) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Natural gas and crude oil | $ | 103,039 | $ | 292,134 | $ | 224,280 | $ | 497,621 | ||||||||
| Drilling and services | 5,176 | 11,957 | 11,571 | 24,291 | ||||||||||||
| Midstream and marketing | 19,642 | 69,488 | 45,598 | 115,897 | ||||||||||||
| Other | 6,242 | 4,471 | 11,663 | 9,327 | ||||||||||||
| Total revenues | 134,099 | 378,050 | 293,112 | 647,136 | ||||||||||||
| Expenses: | ||||||||||||||||
| Production | 41,450 | 40,254 | 87,029 | 74,442 | ||||||||||||
| Production taxes | 593 | 13,519 | 2,084 | 22,739 | ||||||||||||
| Drilling and services | 6,415 | 5,066 | 12,021 | 12,235 | ||||||||||||
| Midstream and marketing | 18,450 | 64,733 | 41,812 | 105,151 | ||||||||||||
| Depreciation, depletion and amortization — natural gas and crude oil | 34,350 | 72,256 | 94,443 | 137,332 | ||||||||||||
| Depreciation, depletion and amortization — other | 14,034 | 15,780 | 26,760 | 33,745 | ||||||||||||
| Impairment | — | — | 1,304,418 | — | ||||||||||||
| General and administrative | 23,632 | 26,203 | 52,117 | 47,197 | ||||||||||||
| Loss (gain) on derivative contracts | 18,992 | 159,768 | (187,655 | ) | 296,612 | |||||||||||
| Loss (gain) on sale of assets | 26,170 | (7,734 | ) | 26,350 | (7,711 | ) | ||||||||||
| Total expenses | 184,086 | 389,845 | 1,459,379 | 721,742 | ||||||||||||
| Loss from operations | (49,987 | ) | (11,795 | ) | (1,166,267 | ) | (74,606 | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 188 | 1,333 | 199 | 2,145 | ||||||||||||
| Interest expense | (42,419 | ) | (22,223 | ) | (83,167 | ) | (47,395 | ) | ||||||||
| Income from equity investments | 200 | 556 | 434 | 1,415 | ||||||||||||
| Other income, net | 483 | 955 | 1,243 | 939 | ||||||||||||
| Total other (expense) income | (41,548 | ) | (19,379 | ) | (81,291 | ) | (42,896 | ) | ||||||||
| Loss before income tax benefit | (91,535 | ) | (31,174 | ) | (1,247,558 | ) | (117,502 | ) | ||||||||
| Income tax benefit | (365 | ) | (10,847 | ) | (1,534 | ) | (41,385 | ) | ||||||||
| Net loss | (91,170 | ) | (20,327 | ) | (1,246,024 | ) | (76,117 | ) | ||||||||
| Less: net income attributable to noncontrolling interest | 4 | 16 | 7 | 851 | ||||||||||||
| Net loss attributable to SandRidge Energy, Inc. common stockholders | (91,174 | ) | (20,343 | ) | (1,246,031 | ) | (76,968 | ) | ||||||||
| Preferred stock dividends and accretion | — | 6,650 | — | 16,232 | ||||||||||||
| Loss applicable to SandRidge Energy, Inc. common stockholders | $ | (91,174 | ) | $ | (26,993 | ) | $ | (1,246,031 | ) | $ | (93,200 | ) | ||||
| Basic and diluted loss per share applicable to SandRidge Energy, Inc. common stockholders | $ | (0.52 | ) | $ | (0.17 | ) | $ | (7.38 | ) | $ | (0.63 | ) | ||||
| Weighted average number of SandRidge Energy, Inc. common shares outstanding: | ||||||||||||||||
| Basic | 174,154 | 155,204 | 168,767 | 148,124 | ||||||||||||
| Diluted | 174,154 | 155,204 | 168,767 | 148,124 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| (Unaudited) | ||||||||||||||||
Revenues: | ||||||||||||||||
Natural gas and crude oil | $ | 104,348 | $ | 259,141 | $ | 328,628 | $ | 756,762 | ||||||||
Drilling and services | 5,878 | 12,054 | 17,449 | 36,345 | ||||||||||||
Midstream and marketing | 16,453 | 58,343 | 62,051 | 174,240 | ||||||||||||
Other | 8,176 | 4,485 | 19,839 | 13,812 | ||||||||||||
Total revenues | 134,855 | 334,023 | 427,967 | 981,159 | ||||||||||||
Expenses: | ||||||||||||||||
Production | 41,350 | 41,070 | 128,379 | 115,512 | ||||||||||||
Production taxes | 1,069 | 6,717 | 3,153 | 29,456 | ||||||||||||
Drilling and services | 9,676 | 8,191 | 21,697 | 20,426 | ||||||||||||
Midstream and marketing | 14,889 | 51,908 | 56,702 | 157,059 | ||||||||||||
Depreciation, depletion and amortization — natural gas and crude oil | 33,060 | 71,964 | 127,503 | 209,296 | ||||||||||||
Depreciation, depletion and amortization — other | 12,092 | 17,597 | 38,851 | 51,342 | ||||||||||||
Impairment | — | — | 1,304,418 | — | ||||||||||||
General and administrative | 25,006 | 29,235 | 77,123 | 76,432 | ||||||||||||
Loss (gain) on derivative contracts | 47,933 | (292,526 | ) | (139,722 | ) | 4,086 | ||||||||||
Loss (gain) on sale of assets | 9 | (1,420 | ) | 26,359 | (9,131 | ) | ||||||||||
Total expenses | 185,084 | (67,264 | ) | 1,644,463 | 654,478 | |||||||||||
(Loss) income from operations | (50,229 | ) | 401,287 | (1,216,496 | ) | 326,681 | ||||||||||
Other income (expense): | ||||||||||||||||
Interest income | 89 | 923 | 287 | 3,068 | ||||||||||||
Interest expense | (53,201 | ) | (41,026 | ) | (136,368 | ) | (88,421 | ) | ||||||||
Income (loss) from equity investments | 593 | (60 | ) | 1,027 | 1,355 | |||||||||||
Other (expense) income, net | (1,144 | ) | (83 | ) | 100 | 856 | ||||||||||
Total other (expense) income | (53,663 | ) | (40,246 | ) | (134,954 | ) | (83,142 | ) | ||||||||
(Loss) income before income tax (benefit) expense | (103,892 | ) | 361,041 | (1,351,450 | ) | 243,539 | ||||||||||
Income tax (benefit) expense | (2,580 | ) | 130,693 | (4,114 | ) | 89,308 | ||||||||||
Net (loss) income | (101,312 | ) | 230,348 | (1,347,336 | ) | 154,231 | ||||||||||
Less: net income attributable to noncontrolling interest | 4 | 2 | 11 | 853 | ||||||||||||
Net (loss) income (applicable) attributable to SandRidge Energy, Inc. | (101,316 | ) | 230,346 | (1,347,347 | ) | 153,378 | ||||||||||
Preferred stock dividends and accretion | 2,816 | — | 2,816 | 16,232 | ||||||||||||
(Loss) income (applicable) available to SandRidge Energy, Inc. common stockholders | $ | (104,132 | ) | $ | 230,346 | $ | (1,350,163 | ) | $ | 137,146 | ||||||
(Loss) income per share (applicable) available to SandRidge Energy, Inc. common stockholders: | ||||||||||||||||
Basic | $ | (0.58 | ) | $ | 1.41 | $ | (7.85 | ) | $ | 0.90 | ||||||
Diluted | $ | (0.58 | ) | $ | 1.40 | $ | (7.85 | ) | $ | 0.89 | ||||||
Weighted average number of SandRidge Energy, Inc. common shares outstanding: | ||||||||||||||||
Basic | 178,069 | 163,020 | 171,902 | 153,125 | ||||||||||||
Diluted | 178,069 | 164,554 | 171,902 | 154,489 | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
(IN THOUSANDS)
| SandRidge Energy, Inc. Stockholders | ||||||||||||||||||||||||||||||||||||
| 8.5% Convertible | ||||||||||||||||||||||||||||||||||||
| Perpetual Preferred | Additional | |||||||||||||||||||||||||||||||||||
| Stock | Common Stock | Paid-In | Treasury | Accumulated | Noncontrolling | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Interest | Total | ||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||||||||
Six months ended June 30, 2009 | ||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2008 | — | $ | — | 166,046 | $ | 163 | $ | 2,170,986 | $ | (19,332 | ) | $ | (1,358,296 | ) | $ | 30 | $ | 793,551 | ||||||||||||||||||
| Distributions to noncontrolling interest owners | — | — | — | — | — | — | — | (11 | ) | (11 | ) | |||||||||||||||||||||||||
| Issuance of 8.5% convertible perpetual preferred stock | 2,650 | 3 | — | — | 243,286 | — | — | — | 243,289 | |||||||||||||||||||||||||||
| Issuance of common stock | — | — | 14,480 | 15 | 107,684 | — | — | — | 107,699 | |||||||||||||||||||||||||||
| Purchase of treasury stock | — | — | — | — | — | (522 | ) | — | — | (522 | ) | |||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | 12,389 | — | — | — | 12,389 | |||||||||||||||||||||||||||
| Stock-based compensation excess tax benefit | — | — | — | — | (2,165 | ) | — | — | — | (2,165 | ) | |||||||||||||||||||||||||
| Issuance of restricted stock awards, net of cancellations | — | — | 1,330 | — | — | — | — | — | — | |||||||||||||||||||||||||||
| Net (loss) income | — | — | — | — | — | — | (1,246,031 | ) | 7 | (1,246,024 | ) | |||||||||||||||||||||||||
| Balance, June 30, 2009 | 2,650 | $ | 3 | 181,856 | $ | 178 | $ | 2,532,180 | $ | (19,854 | ) | $ | (2,604,327 | ) | $ | 26 | $ | (91,794 | ) | |||||||||||||||||
| SandRidge Energy, Inc. Stockholders | Noncontrolling Interest | Total | ||||||||||||||||||||||||||||
| 8.5% Convertible Perpetual Preferred Stock | Common Stock | Additional Paid-In Capital | Treasury Stock | Accumulated Deficit | ||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
Nine months ended September 30, 2009 | ||||||||||||||||||||||||||||||
Balance, December 31, 2008 | — | $ | — | 166,046 | $ | 163 | $ | 2,170,986 | $ | (19,332 | ) | $ | (1,358,296 | ) | $ | 30 | $ | 793,551 | ||||||||||||
Distributions to noncontrolling interest owners | — | — | — | — | — | — | — | (11 | ) | (11 | ) | |||||||||||||||||||
Issuance of 8.5% convertible perpetual preferred stock | 2,650 | 3 | — | — | 243,286 | — | — | — | 243,289 | |||||||||||||||||||||
Issuance of common stock | — | — | 14,480 | 15 | 107,588 | — | — | — | 107,603 | |||||||||||||||||||||
Purchase of treasury stock | — | — | — | — | — | (1,095 | ) | — | — | (1,095 | ) | |||||||||||||||||||
Stock-based compensation | — | — | — | — | 19,694 | — | — | — | 19,694 | |||||||||||||||||||||
Stock-based compensation excess tax benefit | — | — | — | — | (3,864 | ) | — | — | — | (3,864 | ) | |||||||||||||||||||
Issuance of restricted stock awards, net of cancellations | — | — | 2,998 | — | — | — | — | — | — | |||||||||||||||||||||
8.5% Convertible perpetual preferred stock dividends | — | — | — | — | — | — | (2,816 | ) | — | (2,816 | ) | |||||||||||||||||||
Net (loss) income | — | — | — | — | — | — | (1,347,347 | ) | 11 | (1,347,336 | ) | |||||||||||||||||||
Balance, September 30, 2009 | 2,650 | $ | 3 | 183,524 | $ | 178 | $ | 2,537,690 | $ | (20,427 | ) | $ | (2,708,459 | ) | $ | 30 | $ | (190,985 | ) | |||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)In thousands)
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
| (Unaudited) | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | (1,246,024 | ) | $ | (76,117 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Provision for doubtful accounts | 62 | — | ||||||
| Depreciation, depletion and amortization | 121,203 | 171,077 | ||||||
| Impairment | 1,304,418 | — | ||||||
| Debt costs amortization | 3,677 | 2,445 | ||||||
| Deferred income taxes | 4 | (42,338 | ) | |||||
| Unrealized loss on derivative contracts | 1,823 | 235,489 | ||||||
| Loss (gain) on sale of assets | 26,350 | (7,711 | ) | |||||
| Investment income — restricted deposits | (17 | ) | (243 | ) | ||||
| Income from equity investments | (434 | ) | (1,415 | ) | ||||
| Stock-based compensation | 10,368 | 7,260 | ||||||
| Stock-based compensation excess tax benefit | (2,165 | ) | — | |||||
| Changes in operating assets and liabilities | (77,283 | ) | 8,387 | |||||
| Net cash provided by operating activities | 141,982 | 296,834 | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Capital expenditures for property, plant and equipment | (524,266 | ) | (934,301 | ) | ||||
| Proceeds from sale of assets | 253,968 | 153,191 | ||||||
| Loans to unconsolidated investees | — | (4,000 | ) | |||||
| Fundings of restricted deposits | — | (781 | ) | |||||
| Net cash used in investing activities | (270,298 | ) | (785,891 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from borrowings | 1,431,765 | 1,408,000 | ||||||
| Repayments of borrowings | (1,645,278 | ) | (665,615 | ) | ||||
| Dividends paid — preferred | — | (17,552 | ) | |||||
| Noncontrolling interest distributions | (11 | ) | (4,059 | ) | ||||
| Proceeds from issuance of 8.5% convertible perpetual preferred stock | 243,289 | — | ||||||
| Proceeds from issuance of common stock | 107,699 | — | ||||||
| Purchase of treasury stock | (522 | ) | (1,908 | ) | ||||
| Debt issuance costs | (8,641 | ) | (17,056 | ) | ||||
| Net cash provided by financing activities | 128,301 | 701,810 | ||||||
| NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | (15 | ) | 212,753 | |||||
| CASH AND CASH EQUIVALENTS, beginning of period | 636 | 63,135 | ||||||
| CASH AND CASH EQUIVALENTS, end of period | $ | 621 | $ | 275,888 | ||||
| Supplemental Disclosure of Noncash Investing and Financing Activities: | ||||||||
| Change in accrued capital expenditures | $ | (79,782 | ) | $ | — | |||
| Accretion on redeemable convertible preferred stock | $ | — | $ | 7,636 | ||||
| Nine Months Ended September 30, | ||||||||
| 2009 | 2008 | |||||||
| (Unaudited) | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net (loss) income | $ | (1,347,336 | ) | $ | 154,231 | |||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | ||||||||
Provision for doubtful accounts | 62 | 1,623 | ||||||
Depreciation, depletion and amortization | 166,354 | 260,638 | ||||||
Impairment | 1,304,418 | — | ||||||
Debt costs amortization | 6,037 | 4,026 | ||||||
Deferred income taxes | 4 | 83,225 | ||||||
Unrealized loss (gain) on derivative contracts | 137,313 | (81,603 | ) | |||||
Loss (gain) on sale of assets | 26,359 | (9,131 | ) | |||||
Investment income — restricted deposits | (29 | ) | (304 | ) | ||||
Income from equity investments | (1,027 | ) | (1,355 | ) | ||||
Stock-based compensation | 16,526 | 14,283 | ||||||
Stock-based compensation excess tax benefit | (3,864 | ) | — | |||||
Changes in operating assets and liabilities | (31,597 | ) | 108,735 | |||||
Net cash provided by operating activities | 273,220 | 534,368 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Capital expenditures for property, plant and equipment | (628,153 | ) | (1,609,355 | ) | ||||
Proceeds from sale of assets | 263,630 | 158,534 | ||||||
Loans to unconsolidated investees | — | (5,500 | ) | |||||
Fundings of restricted deposits | — | (781 | ) | |||||
Net cash used in investing activities | (364,523 | ) | (1,457,102 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from borrowings | 1,638,365 | 1,768,722 | ||||||
Repayments of borrowings | (1,874,046 | ) | (864,100 | ) | ||||
Dividends paid — preferred | — | (17,552 | ) | |||||
Noncontrolling interest distributions | (11 | ) | (5,497 | ) | ||||
Proceeds from issuance of 8.5% convertible perpetual preferred stock | 243,289 | — | ||||||
Proceeds from issuance of common stock | 107,603 | — | ||||||
Purchase of treasury stock | (1,095 | ) | (3,536 | ) | ||||
Debt issuance costs | (8,796 | ) | (17,540 | ) | ||||
Net cash provided by financing activities | 105,309 | 860,497 | ||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 14,006 | (62,237 | ) | |||||
CASH AND CASH EQUIVALENTS, beginning of period | 636 | 63,135 | ||||||
CASH AND CASH EQUIVALENTS, end of period | $ | 14,642 | $ | 898 | ||||
Supplemental Disclosure of Noncash Investing and Financing Activities: | ||||||||
Change in accrued capital expenditures | $ | (85,952 | ) | $ | — | |||
8.5% Convertible perpetual preferred stock dividends payable | $ | 2,816 | $ | — | ||||
Accretion on redeemable convertible preferred stock | $ | — | $ | 7,636 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
(Unaudited)
1. Basis of Presentation
|
Interim Financial Statements. The accompanying condensed consolidated financial statements as of December 31, 2008 have been derived from the audited financial statements contained in the 2008Form 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 2008Form 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, consisting only of normal recurring adjustments, necessary to state fairly the information in the Company’s unaudited condensed consolidated financial statements have been included. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the 2008Form 10-K.
2. Significant Accounting Policies
For a description of the Company’s significant accounting policies, refer to Note 1 of the consolidated financial statements included in the 2008Form 10-K.
Reclassifications. Certain reclassifications have been made to prior period financial statements to conform to the current period presentation.
Recent Accounting Pronouncements. Effective January 1, 2009,In December 2007, the Company implemented Statement of Financial Accounting Standards Board (“SFAS”FASB”) No. 157, “Fair Value Measurements,” for certain of its nonfinancial liabilities, in accordance with Staff PositionFAS 157-2, “Effective Date of FASB Statement No. 157”(“FSP 157-2”), which delayed the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities except those recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually. This implementation did not have a material impact on the Company’s financial position or results of operations.
In February 2008, the FASB issued guidance that delayed the effective date of certain requirements under the Fair Value Measurements and Disclosures Topic of the ASC to fiscal years beginning after November 15, 2008 for all nonfinancial assets and liabilities except those recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually. Effective January 1, 2009, the Company implemented SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which changed disclosure requirements for derivative instruments and
8began following the
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
(Unaudited)
Fair Value Measurements and Disclosures Topic of the ASC for all nonfinancial assets and liabilities. This implementation did not have a material impact on the Company’s financial position or results of operations.
In March 2008, the FASB issued new guidance regarding disclosures in the Derivatives and Hedging Topic of the ASC (“Derivative and Hedging Topic”), which requires enhancedexpanded disclosure includingto provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under the Derivatives and Hedging Topic, and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows. The Derivative and Hedging Topic requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-relatedcredit risk-related contingent features in derivative agreements. The implementation of SFAS No. 161new guidance regarding disclosures in the Derivative and Hedging Topic became effective for the Company on January 1, 2009 and did not have a material impact on its financial position or results of operations. See Note 10.
In April 2009, the FASB amended the Financial Instruments Topic of the ASC (“Fair Value Disclosure Amendment”) to require publicly traded companies to provide disclosures about fair value of financial instruments in interim financial information as well as in annual financial statements. Under the Fair Value Disclosure Amendment, entities must disclose, in the body or in the accompanying notes of its summarized financial information for interim reporting periods and in its financial statements for annual reporting periods, the fair value of all financial instruments for which it is practicable to estimate the value, whether or not recognized in the statement of financial position. The Fair Value Disclosure Amendment became effective for the Company in the quarter ended June 30, 2009 and had no impact on the Company’s financial position or results of operations. See Note 10.
In May 2009, the Company implemented Financial Accounting Standards Board (“FASB”) Staff PositionFAS 107-1 and APB28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSPFAS 107-1 and APB28-1”), which amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” and Accounting Principles Board Opinion 28, “Interim Financial Reporting,”FASB issued guidance to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. The implementation of FSPFAS 107-1 and APB28-1 resulted in additional disclosure about the fair value of the Company’s financial instruments and did not have an impact on the Company’s financial position or results of operations. See Note 3.
In June 2009, the FASB issued SFAS No. 168,Accounting Standards Update 2009-01, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles.” SFASPrinciples—a replacement of FASB Statement No. 168 replaces SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the162” (“ASU 2009-01”). The FASB Accounting Standards Codification asASC is intended to be the source of authoritative accounting principles recognizedGAAP and reporting standards as issued by the FASB. The primary purpose of the FASB ASC is to be appliedimprove clarity and use of existing standards by non-governmental entities in the preparation ofgrouping authoritative literature under common topics. ASU 2009-01 is effective for financial statements in conformity with GAAP. SFAS No. 168 is effectiveissued for interim and annual periods ending after September 15, 2009. The Company plans to implement this standard in its September 30, 2009 financial statements.Codification does not change or alter existing GAAP. The implementation of SFAS No. 168 is not expectedASU 2009-01 had no impact to have a material impact on the Company’s financial position or results of operations.
In September 2009, the FASB issued its proposed updates to oil and gas accounting rules to align the oil and gas reserve estimation and disclosure requirements of Extractive Industries—Oil and Gas Topic of the ASC with the requirements in the Securities and Exchange Commission’s final rule,Modernization of the Oil and Gas Reporting Requirements, which was issued on December 31, 2008 and is effective for the year ending December 31, 2009. The public comment period for the FASB’s proposed updates ended October 15, 2009; however, no final guidance has been issued by the FASB. The Company implemented SFAS No. 157 foris currently evaluating the potential impact on its depreciation, depletion and amortization rates, full cost ceiling limitation calculation and
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
disclosures of any updates to the oil and gas accounting rules and will comply with any new accounting and disclosure requirements once they become effective.
3. Fair Value Measurements
The Company applies the guidance provided under the Fair Value Measurements and Disclosures Topic of the ASC to its financial assets and liabilities measured on a recurring basis. SFAS No. 157 applies to all assets and nonfinancial liabilities that are measured and reported on a fair value basis. Effective January 1, 2009,Pursuant to this guidance, the Company implemented SFAS No. 157 for certain nonfinancial liabilities based onFSP 157-2, which delayed the effective date of SFAS No. 157 by one year for certain nonfinancial assetshas classified and liabilities, with no material impact to the Company’s financial position or results of operations as a result of this implementation.
9
| 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.levels as described in the Fair Value Measurements and Disclosures Topic of the ASC. The determination of the fair values, stated below, takes into account the market for the Company’s financial assets and liabilities, the associated credit risk and other factors as required under SFAS No. 157.by the Fair Value Measurements and Disclosures Topic of the ASC. 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.
Fair Value of Derivative Contracts
The Company has classified its derivative contracts into one of the three levels of the fair value hierarchy based upon the data relied upon to determine the fair value. The fair values of the Company’s natural gas and crude oil swaps and interest rate swaps are based upon quotes obtained from counterparties to the derivative contracts. The Company reviews other readily available market prices for its derivative contracts as there is an active market for these contracts. However, the Company does not have access to the specific valuation models used by its counterparties or other market participants. Included in these models are discount factors that the Company must estimate in its calculation. Additionally, the Company applies a value weighted average credit default risk rating factor for its counterparties in determining the fair value of its derivative contracts. Based on the inputs for the fair value measurement, the Company classified its derivative contract assets and liabilities as Level 3.
The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis by SFAS No. 157 pricing levelsthe fair value hierarchy as of JuneSeptember 30, 2009:
| Assets/ | ||||||||||||||||
| Fair Value Measurements Using: | Liabilities at | |||||||||||||||
Description | Level 1 | Level 2 | Level 3 | Fair Value | ||||||||||||
| (In thousands) | ||||||||||||||||
| Derivative assets | $ | — | $ | — | $ | 243,051 | $ | 243,051 | ||||||||
| Derivative liabilities | — | — | (6,971 | ) | (6,971 | ) | ||||||||||
| $ | — | $ | — | $ | 236,080 | $ | 236,080 | |||||||||
10
| Fair Value Measurements | Assets/ Liabilities at Fair Value | |||||||||||||
Description | Level 1 | Level 2 | Level 3 | |||||||||||
Derivative assets | $ | — | $ | — | $ | 129,453 | $ | 129,453 | ||||||
Derivative liabilities | — | — | (28,863 | ) | (28,863 | ) | ||||||||
| $ | — | $ | — | $ | 100,590 | $ | 100,590 | |||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
(Unaudited)
The tables below set forth a reconciliation of the Company’s derivative contracts measured at fair value using significant unobservable inputs (Level 3) during the three and six monthsnine-month periods ended JuneSeptember 30, 2009 (in thousands):
| Three Months Ended June 30, 2009 | ||||
| Balance at March 31, 2009 | $ | 345,913 | ||
| Total gains or losses (realized/unrealized) | (16,351 | ) | ||
| Purchases, issuances and settlements | (93,482 | ) | ||
| Transfers in and/or out of Level 3 | — | |||
| Balance at June 30, 2009 | $ | 236,080 | ||
| Six Months Ended June 30, 2009 | ||||
| Balance at December 31, 2008 | $ | 237,903 | ||
| Total gains or losses (realized/unrealized) | 189,009 | |||
| Purchases, issuances and settlements | (190,832 | ) | ||
| Transfers in and/or out of Level 3 | — | |||
| Balance at June 30, 2009 | $ | 236,080 | ||
| Changes in unrealized gains (losses) on derivative contracts held as of June 30, 2009 | $ | 1,823 | ||
Three Months Ended September 30, 2009 | ||||
Balance at June 30, 2009 | $ | 236,080 | ||
Total gains or losses (realized/unrealized) | (54,278 | ) | ||
Purchases, issuances and settlements | (81,212 | ) | ||
Transfers in and/or out of Level 3 | — | |||
Balance at September 30, 2009 | $ | 100,590 | ||
Nine Months Ended September 30, 2009 | ||||
Balance at December 31, 2008 | $ | 237,903 | ||
Total gains or losses (realized/unrealized) | 134,731 | |||
Purchases, issuances and settlements | (272,044 | ) | ||
Transfers in and/or out of Level 3 | — | |||
Balance at September 30, 2009 | $ | 100,590 | ||
Changes in unrealized gains (losses) on derivative contracts held as of September 30, 2009 | $ | (137,313 | ) | |
See Note 10 for further discussion of the Company’s derivative contracts.
Fair Value of Debt
The Company measures fair value of its long-term debt in accordance with SFAS No. 157,the Fair Value Measurements and Disclosures Topic of the ASC, giving consideration to the effect of the Company’s credit risk. The estimated fair value of the Company’s senior notes, based on quoted market prices, and the carrying value at JuneSeptember 30, 2009 were as follows (in thousands):
| Fair Value | Carrying Value | |||||||
| Senior Floating Rate Notes due 2014 | $ | 277,304 | $ | 350,000 | ||||
| 8.625% Senior Notes due 2015 | 583,011 | 650,000 | ||||||
| 9.875% Senior Notes due 2016, net of discount | 355,918 | 350,242 | ||||||
| 8.0% Senior Notes due 2018 | 646,934 | 750,000 | ||||||
| Fair Value | Carrying Value | |||||
Senior Floating Rate Notes due 2014 | $ | 309,016 | $ | 350,000 | ||
8.625% Senior Notes due 2015 | 650,515 | 650,000 | ||||
9.875% Senior Notes due 2016(1) | 388,766 | 350,627 | ||||
8.0% Senior Notes due 2018 | 730,337 | 750,000 | ||||
| (1) | Carrying value is net of a $14,873 discount. |
The Company’s carrying value for itsthe 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 further discussion of the Company’s long-term debt.
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
(Unaudited)
4. Property, Plant and Equipment
Property, plant and equipment consistsconsist of the following (in thousands):
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Natural gas and crude oil properties: | ||||||||
| Proved | $ | 4,996,188 | $ | 4,676,072 | ||||
| Unproved | 225,369 | 215,698 | ||||||
| Total natural gas and crude oil properties | 5,221,557 | 4,891,770 | ||||||
| Less accumulated depreciation, depletion and impairment(1) | (3,765,118 | ) | (2,369,840 | ) | ||||
| Net natural gas and crude oil properties capitalized costs | 1,456,439 | 2,521,930 | ||||||
| Land | 13,937 | 11,250 | ||||||
| Non natural gas and crude oil equipment(2) | 563,358 | 764,792 | ||||||
| Buildings and structures | 85,066 | 71,859 | ||||||
| Total | 662,361 | 847,901 | ||||||
| Less accumulated depreciation, depletion and amortization | (197,898 | ) | (194,272 | ) | ||||
| Net capitalized costs | 464,463 | 653,629 | ||||||
| Total property, plant and equipment, net | $ | 1,920,902 | $ | 3,175,559 | ||||
| September 30, 2009 | December 31, 2008 | |||||||
Natural gas and crude oil properties: | ||||||||
Proved | $ | 5,064,490 | $ | 4,676,072 | ||||
Unproved | 229,687 | 215,698 | ||||||
Total natural gas and crude oil properties | 5,294,177 | 4,891,770 | ||||||
Less accumulated depreciation, depletion and impairment(1) | (3,792,437 | ) | (2,369,840 | ) | ||||
Net natural gas and crude oil properties capitalized costs | 1,501,740 | 2,521,930 | ||||||
Land | 13,937 | 11,250 | ||||||
Non natural gas and crude oil equipment(2) | 581,436 | 764,792 | ||||||
Buildings and structures | 74,575 | 71,859 | ||||||
Total | 669,948 | 847,901 | ||||||
Less accumulated depreciation, depletion and amortization | (207,461 | ) | (194,272 | ) | ||||
Net capitalized costs | 462,487 | 653,629 | ||||||
Total property, plant and equipment, net | $ | 1,964,227 | $ | 3,175,559 | ||||
| (1) | Includes cumulative full cost ceiling limitation impairment charges of $3,159.4 million and $1,855.0 million at | |
| (2) |
In 2009, the estimate of asset lives of certain drilling, oil field services, midstream and other assets were changed to align with industry average lives for similar assets.
Sale of Midstream Assets. In June 2009, the Company completed the sale of its gathering and compression assets located in the Piñon Field, part of the West Texas Overthrust (“WTO”) located in Pecos and Terrell counties, Texas. Net proceeds to the Company were approximately $197.5 million. The sale resultedmillion, resulting in a loss of approximately $26.5 million. In conjunction with the sale, the Company entered into a gas gathering agreement and an operations and maintenance agreement. Under the gas gathering agreement, the Company has dedicated its Piñon Field acreage for priority gathering services for a period of twenty years and the Company will pay a fee that was negotiated at arms’ length for such services. Pursuant to the operations and maintenance agreement, the Company will operate and maintain the gathering system assets sold for a period of twenty years unless the Company or the buyer of the assets chooses to terminate the agreement.
Sale of East Texas Deep Rights. In June 2009, the Company completed the sale of its drilling rights in East Texas below the depth of the Cotton Valley formation for net proceeds of approximately $55.9 million, subject to certain post-closing adjustments. In October 2009, the Company received an additional $1.3 million in proceeds as a result of the post-closing adjustments. The sale of the deepdrilling rights was accounted for as an adjustment to the full cost pool with no gain or loss recognized.
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
5. Impairment
Under the full cost method of accounting, the net book value of natural gas and crude oil properties, less related deferred income taxes, may not exceed a calculated “ceiling.” The ceiling limitation is the discounted estimated after-tax future net revenue from proved natural gas and crude oil properties, excluding future cash outflows associated with settling asset retirement obligations included in the net book value of natural gas and crude oil
12
The net book value, less related deferred tax liabilities, is compared to the ceiling limitation on both a quarterly and annual basis. Any excess of the net book value, less related deferred taxes, is written off as an expense. An expense recorded in one period may not be reversed in a subsequent period even though higher natural gas and crude oil prices may have increased the ceiling limitation in the subsequent period.
6. Billings in Excess of Costs Incurred
|
The Company accounts for construction of the Century Plant using the completed-contract method, under which contract revenues and costs are recognized when work under the contract is completed or substantially completed. In the interim, costs incurred on and billings related to contracts in process are accumulated on the balance sheet. Provisions for a contract loss are recognizedwill be recorded, as appropriate, when it is determined that a loss will be incurred. Costs in excess of billings (billingsBillings in excess of costs incurred)incurred were $16.4$5.1 million and ($14.1)$14.1 million and were reported as a current asset and current liability in the accompanying condensed consolidated balance sheets at JuneSeptember 30, 2009 and December 31, 2008, respectively.
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
7. Asset Retirement Obligation
The table below provides a reconciliation of the beginning and ending aggregate carrying amounts of the asset retirement obligation for the period from December 31, 2008 to JuneSeptember 30, 2009 is as follows (in thousands):
| Asset retirement obligation, December 31, 2008 | $ | 84,772 | ||
| Liability incurred upon acquiring and drilling wells | 1,409 | |||
| Revisions in estimated cash flows | (162 | ) | ||
| Liability settled in current period | — | |||
| Accretion of discount expense | 3,530 | |||
| Asset retirement obligation, June 30, 2009 | 89,549 | |||
| Less: Current portion | 128 | |||
| Asset retirement obligation, net of current | $ | 89,421 | ||
13
Asset retirement obligation, December 31, 2008 | $ | 84,772 | ||
Liability incurred in current period | 2,689 | |||
Revisions in estimated cash flows | (162 | ) | ||
Liability settled in current period | (2,505 | ) | ||
Accretion of discount expense | 5,316 | |||
Asset retirement obligation, September 30, 2009 | 90,110 | |||
Less: Current portion | 2,077 | |||
Asset retirement obligation, net of current | $ | 88,033 | ||
8. Long-Term Debt
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Senior credit facility | $ | 18,000 | $ | 573,457 | ||||
| Other notes payable: | ||||||||
| Drilling rig fleet and related crude oil field services equipment | 25,360 | 33,030 | ||||||
| Mortgage | 18,393 | 18,829 | ||||||
| Senior Floating Rate Notes due 2014 | 350,000 | 350,000 | ||||||
| 8.625% Senior Notes due 2015 | 650,000 | 650,000 | ||||||
| 9.875% Senior Notes due 2016, net of $15,258 discount | 350,242 | — | ||||||
| 8.0% Senior Notes due 2018 | 750,000 | 750,000 | ||||||
| Total debt | 2,161,995 | 2,375,316 | ||||||
| Less: Current maturities of long-term debt | 15,380 | 16,532 | ||||||
| Long-term debt | $ | 2,146,615 | $ | 2,358,784 | ||||
| September 30, 2009 | December 31, 2008 | |||||
Senior credit facility | $ | — | $ | 573,457 | ||
Other notes payable: | ||||||
Drilling rig fleet and related crude oil field services equipment | 21,410 | 33,030 | ||||
Mortgage | 18,174 | 18,829 | ||||
Senior Floating Rate Notes due 2014 | 350,000 | 350,000 | ||||
8.625% Senior Notes due 2015 | 650,000 | 650,000 | ||||
9.875% Senior Notes due 2016, net of $14,873 discount | 350,627 | — | ||||
8.0% Senior Notes due 2018 | 750,000 | 750,000 | ||||
Total debt | 2,140,211 | 2,375,316 | ||||
Less: Current maturities of long-term debt | 13,925 | 16,532 | ||||
Long-term debt | $ | 2,126,286 | $ | 2,358,784 | ||
For the three and nine months ended JuneSeptember 30, 2009, interest payments, including net amounts from current period settlements of the Company’s interest rate swap agreements (described below), were $8.8 million and $87.9 million, respectively. For the three and nine months ended September 30, 2008, interest payments, net of amounts capitalized, were approximately $65.4$9.4 million and $25.4$60.2 million, respectively. For the six months ended June 30, 2009 and 2008, interest payments, net of amounts capitalized, were approximately $75.4 million and $50.8 million, respectively.
Senior Credit Facility. The amount the Company can borrow under its senior secured revolving credit facility (the “senior credit facility”) is limited to a borrowing base, which was $985.4 million at JuneSeptember 30, 2009. The senior credit facility matures on November 21, 2011 and is available to be drawn on and repaid so long as the Company is in compliance withsubject to limitations based on its terms includingand certain financial covenants, as fully described below.
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
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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, including under the series of senior notes discussed below.
The senior credit facility contains financial covenants, including maintaining agreed levels for the (i) ratio of total funded debt to EBITDAX (as defined in the senior credit facility), which may not exceed 4.5:1.0 calculated using the last four completed fiscal quarters, (ii) ratio of EBITDAX to interest expense plus current maturities of long-term debt, which must be at least 2.5:1.0 calculated using the last four completed fiscal quarters, and (iii) ratio of current assets to current liabilities, which must be at least 1.0:1.0. In the current ratio calculation (as defined in the senior credit facility) any amounts available to be drawn under the senior credit facility are included in current assets, and unrealized assets and liabilities resulting frommark-to-market adjustments on the Company’s derivative contracts are disregarded. As of JuneSeptember 30, 2009, the Company was in compliance with all of the 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 each of the Company’s material present and future subsidiaries; all intercompany debt of the Company; and substantially all of the Company’s assets, including proved natural gas and crude oil reserves representing at least 80% of the discounted present value (as defined in the senior credit facility) of proved natural gas and crude oil reserves reviewed in determining the borrowing base for the senior credit facility.
14
The Company’s borrowing base is redetermined in April and October of each year. 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, natural gas and crude oil prices and production. Accordingly, the Company’s ability to develop its properties and changes in commodity prices impact the borrowing base. The borrowing base remained unchanged at $1.1 billion$985.4 million as a result of the AprilOctober 2009 redetermination; however, the issuance of the 9.875% Senior Notes due 2016 (discussed below) in May 2009 caused the borrowing base to be reduced to $985.4 million.redetermination. The Company has, at times, incurred additional costs related to the senior credit facility as a result of changes to the borrowing base. During 2009, additional costs of approximately $0.9 million were incurred. These costs have been deferred and are included in other assets in the accompanying condensed consolidated balance sheets. At JuneSeptember 30, 2009, the Company had $18.0 million outstanding under the senior credit facility along with $24.5$41.3 million in outstanding letters of credit.
On October 3, 2008, Lehman Brothers Commodity Services, Inc. (“Lehman Brothers”), a lender under the Company’s senior credit facility, filed for bankruptcy. At the time that its parent, Lehman Brothers Holdings Inc., declared bankruptcy on September 15, 2008, Lehman Brothers elected not to fund its pro rata share, or 0.29%, of borrowings requested by the Company under the senior credit facility. Accordingly, the Company does
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
not anticipate that Lehman Brothers will fund its pro rata share of any future borrowing requests. The Company does not expect this reduced availability of amounts under the senior credit facility to impact its liquidity or business operations.
Other Notes Payable. The Company has financed a portion of its drilling rig fleet and related oil field services equipment through the issuance of notes secured by thesuch equipment. At JuneSeptember 30, 2009, the aggregate outstanding balance of these notes was $25.4$21.4 million, with annual fixed interest rates ranging from 7.64% to 8.67%. The notes have a final maturity date of December 1, 2011 and require aggregate monthly installments of principal and interest in the amount of $1.2 million. The notes have a prepayment penalty (currently ranging from 0.50% to 2.00%1.00%) that is triggered if the Company repays the notes prior to maturity.
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 and a parking garage 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 in the amount of approximately $0.5 million are due on a quarterly basis through the maturity date. During 2009, the Company expects to make payments of principal and interest on this note totaling $0.9 million and $1.1 million, respectively.
Senior Floating Rate Notes Due 2014 and 8.625% Senior Notes Due 2015. In May 2008, pursuant to an exchange offer exempted from registration under the Securities Act of 1933, as amended (the “Securities Act”), the Company exchanged its senior term loans for senior unsecured notes with registration rights which were subsequently exchanged for substantially identical notes pursuant to ana registered exchange offer registered under the Securities Act.offer. The effect of the exchange offers resulted in the Company issuing $350.0 million of Senior Floating Rate Notes due 2014 (“Senior Floating Rate Notes”) in exchange for the total outstanding principal amount of its senior floating rate term loan and $650.0 million of 8.625% Senior Notes due 2015 (“8.625% Senior Notes”) in exchange for the total outstanding principal amount of its 8.625% senior term loan. Terms of these senior notes are
15
The Senior Floating Rate Notes bear interest at LIBOR plus 3.625% (4.83%(4.22% at JuneSeptember 30, 2009), except for the period from April 1, 2008 to June 30, 2008, for which the interest rate was 6.323%. Interest is payable quarterly with principal due on April 1, 2014. The average interest rates paid on outstanding Senior Floating Rate Notes for the three months and sixnine months ended JuneSeptember 30, 2009 were 4.83%4.22% and 4.95%4.70%, respectively, without consideration of the interest rate swap discussed below. The 8.625% Senior Notes bear interest at a fixed rate of 8.625% per annum with the principal due on April 1, 2015. Under the terms of the 8.625% Senior Notes, interest is payable semi-annually and, through the interest payment due on April 1, 2011, interest may be paid, at the Company’s option, either entirely in cash or entirely with additional fixed rate senior notes. If the Company elects to pay the interest due during any period in additional fixed rate senior notes, the interest rate will increase to 9.375% during that period. All interest payments made to date on the 8.625% Senior Notes have been paid in cash.
In January 2008, the Company entered into a $350.0 million notional interest rate swap agreement to fix the variable LIBOR interest rate on the floating rate senior term loan for the period from April 1, 2008 to April 1, 2011. As a result of the exchange of the floating rate senior term loan to Senior Floating Rate Notes, the interest rate swap is now used to fix the variable LIBOR interest rate on the Senior Floating Rate Notes at an annual rate of 6.26% through April 1, 2011. In May 2009, the Company entered into a $350.0 million notional interest rate swap agreement to fix the variable LIBOR interest rate on the Senior Floating Rate Notes at an annual rate of
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
6.69% for the period from April 1, 2011 to April 1, 2013. The two interest rate swaps effectively serve to fix the Company’s variable interest rate on its Senior Floating Rate Notes for the majority of the term of these notes. These swaps have not been designated as hedges.
The Company may redeem, at specified redemption prices, some or all of the Senior Floating Rate Notes at any time and some or all of the 8.625% Senior Notes on or after April 1, 2011.
The Company incurred $26.1 million of debt issuance costs in connection with the senior term loans. As the senior term loans were exchanged for unsecured senior notes with substantially identical terms, the remaining unamortized debt issuance costs on the senior term loans will beare being amortized over the terms of the Senior Floating Rate Notes and the 8.625% Senior Notes. These costs are included in other assets in the accompanying condensed consolidated balance sheets.
9.875% Senior Notes Due 2016. In May 2009, the Company completed a private placement of $365.5 million of unsecured 9.875% Senior Notes due 2016 (“9.875% Senior Notes”) to qualified institutional investors eligible under Rule 144A of the Securities Act.Act of 1933, as amended (the “Securities Act”). These notes were issued at a discount which will be amortized into interest expense over the term of the notes. Net proceeds from the offering were approximately $342.2$342.1 million after deducting offering expenses of $7.8$7.9 million. The Company used the net proceeds from the offering to repay outstanding borrowings under the senior credit facility and for general corporate purposes. The notes 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 are redeemable, in whole or in part, prior to their maturity at specified redemption prices. The notes are jointly and severally, unconditionally guaranteed on an unsecured basis by all of the Company’s wholly owned subsidiaries, except certain minor subsidiaries. See Note 19 for condensed consolidated financial information
In conjunction with the issuance of the subsidiary guarantors.9.875% Senior Notes, the Company entered into a Registration Rights Agreement requiring the Company to register these notes by May 16, 2010 if they are not already freely tradable at that time. The Company expects the notes willto become freely tradable 180 days after their issuance pursuant to Rule 144 under the Securities Act.
Debt issuance costs of $7.8$7.9 million incurred in connection with the offering of the 9.875% Senior Notes are included in other assets in the condensed consolidated balance sheet and are being amortized over the term of the notes.
16
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 condensed consolidated balance sheet and are being amortized over the term of the notes.
The indentures governing all of the senior notes contain financial covenants similar to those of the senior credit facility and include limitations on the incurrence of indebtedness, payment of dividends, investments, asset
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
sales, certain asset purchases, transactions with related parties and consolidations or mergers. As of JuneSeptember 30, 2009, the Company was in compliance with all of the covenants contained in the indentures governing the senior notes.
9. Other Long-Term Obligations
Pursuant to be paid under a settlement agreement with Conoco, Inc. entered into in January 2007. The2007, the Company agreed to pay approximately $25.0 million plus interest, payable in $5.0 million increments on April 1, 2007, July 1, 2008, July 1, 2009, July 1, 2010 and July 1, 2011.increments. The payment to be made on July 1, 2009 has beencurrent portion of the unpaid settlement of $5.0 million was included in accounts payable-trade in the accompanying condensed consolidated balance sheets at Juneas of September 30, 2009 and December 31, 2008. The non-current unpaid settlement amountamounts of $5.0 million and $10.0 million hashave been included in other long-term obligations in the accompanying condensed consolidated balance sheets at JuneSeptember 30, 2009 and December 31, 2008.
10. Derivatives
The Company’s derivative contracts have not been designated as hedges. The Company records all derivative contracts, which include commodity derivatives and interest rate swaps, at fair value. Changes in derivative contract fair values are recognized in earnings. Cash settlements and valuation gains and losses are included in loss (gain) on derivative contracts for the commodity derivative contracts and in interest expense for the interest rate swaps in the consolidated statements of operations. Commodity derivative contracts are settled on a monthly basis. Settlements on the 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 sheet.
Commodity Derivatives. The Company is exposed to commodity price risk, which impacts the predictability of its cash flows related to the sale of natural gas and crude oil andoil. This risk is managed by the Company’s use of commodity derivative contracts. These derivative contracts allow the Company to limit its exposure to a portion of its projected natural gas and crude oil sales. None of the Company’s derivative contracts may be terminated early as a result of a party having its credit rating downgraded. At JuneSeptember 30, 2009 and December 31, 2008, the Company’s commodity derivative contracts consisted of fixed price swaps 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. | ||
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. | ||
17
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
The Company has entered into two interest rate swap agreements to manage the interest rate risk on a portion of its floating rate debt by effectively fixing the variable interest rate on its Senior Floating Rate Notes. See Note 8 for further discussion of the Company’s interest rate swaps.
Fair Value of Derivatives. The balance sheet classification of assets and liabilities related to derivative contracts is summarized below at JuneSeptember 30, 2009 and December 31, 2008 (in thousands):
| Balance Sheet | Fair Value | |||||||||
| Type of Contract | Classification | June 30, 2009 | December 31, 2008 | |||||||
| Derivative assets | ||||||||||
| Natural gas swaps | Derivative assets-current | $ | 202,430 | $ | 188,045 | |||||
| Crude oil price swaps | Derivative assets-current | 4,912 | 13,066 | |||||||
| Natural gas swaps | Derivative assets-noncurrent | 34,557 | 45,537 | |||||||
| Interest rate swaps | Derivative assets-noncurrent | 1,152 | — | |||||||
| Total derivative assets | $ | 243,051 | $ | 246,648 | ||||||
| Derivative liabilities | ||||||||||
| Interest rate swaps | Derivative liabilities-current | $ | 6,238 | $ | 5,106 | |||||
| Natural gas basis swaps | Derivative liabilities-noncurrent | 733 | 3,639 | |||||||
| Total derivative liabilities | $ | 6,971 | $ | 8,745 | ||||||
Balance Sheet | Fair Value | |||||||
Type of Contract | September 30, 2009 | December 31, 2008 | ||||||
Derivative assets | ||||||||
Natural gas swaps | Derivative assets-current | $ | 126,934 | $ | 188,045 | |||
Crude oil price swaps | Derivative assets-current | 2,519 | 13,066 | |||||
Natural gas swaps | Derivative assets-noncurrent | — | 45,537 | |||||
Total derivative assets | $ | 129,453 | $ | 246,648 | ||||
Derivative liabilities | ||||||||
Interest rate swaps | Derivative liabilities-current | $ | 7,223 | $ | 5,106 | |||
Interest rate swaps | Derivative liabilities-noncurrent | 2,383 | — | |||||
Natural gas basis swaps | Derivative liabilities-noncurrent | 19,257 | 3,639 | |||||
Total derivative liabilities | $ | 28,863 | $ | 8,745 | ||||
A counterparty to one of the Company’s derivative contracts, Lehman Brothers, declared bankruptcy on October 3, 2008. Due to Lehman Brothers’ bankruptcy, and the declaration of bankruptcy by its parent, Lehman Brothers Holdings Inc., on September 15, 2008, and the asset position of the contract, the Company hasdid not assignedassign any value to this derivative contract as of Junefrom September 30, 2008 until September 30, 2009.
The following table summarizes the effect of the Company’s derivative contracts on the condensed consolidated statements of operations for the three and six-monthnine-month periods ended JuneSeptember 30, 2009 and 2008 (in thousands):
| Amount of (Gain) Loss Recognized in Income | ||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||
| Location of (Gain) Loss | June 30, | June 30, | ||||||||||||||||
| Type of Contract | Recognized in Income | 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Interest rate swap | Interest expense | $ | (2,641 | ) | $ | (9,643 | ) | $ | (1,354 | ) | $ | (10,449 | ) | |||||
| Natural gas and crude oil swaps | Loss (gain) on derivative contracts | 18,992 | 159,768 | (187,655 | ) | 296,612 | ||||||||||||
| Total | $ | 16,351 | $ | 150,125 | $ | (189,009 | ) | $ | 286,163 | |||||||||
18
| Amount of (Gain) Loss Recognized in Income | |||||||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
Type of Contract | Location of (Gain) Loss | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Interest rate swap | Interest expense | $ | 6,345 | $ | 2,714 | $ | 4,991 | $ | (7,736 | ) | |||||||
Natural gas and crude oil swaps | Loss (gain) on derivative contracts | 47,933 | (292,526 | ) | (139,722 | ) | 4,086 | ||||||||||
Total | $ | 54,278 | $ | (289,812 | ) | $ | (134,731 | ) | $ | (3,650 | ) | ||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
(Unaudited)
The following table summarizes the cash settlements and valuation gains and losses on commodity derivative contracts for the three and six-monthnine-month periods ended JuneSeptember 30, 2009 and 2008 (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Realized (gain) loss | $ | (94,747 | ) | $ | 58,003 | $ | (193,136 | ) | $ | 50,674 | ||||||
| Unrealized loss | 113,739 | 101,765 | 5,481 | 245,938 | ||||||||||||
| Loss (gain) on derivative contracts | $ | 18,992 | $ | 159,768 | $ | (187,655 | ) | $ | 296,612 | |||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Realized (gain) loss | $ | (83,038 | ) | $ | 27,279 | $ | (276,175 | ) | $ | 77,954 | ||||||
Unrealized loss (gain) | 130,971 | (319,805 | ) | 136,453 | (73,868 | ) | ||||||||||
Loss (gain) on commodity derivative contracts | $ | 47,933 | $ | (292,526 | ) | $ | (139,722 | ) | $ | 4,086 | ||||||
Net gainslosses of $2.6$6.3 million ($3.94.5 million unrealized gainloss and $1.3$1.8 million realized losses) and $1.4$5.0 million ($3.70.9 million unrealized gainloss and $2.3$4.1 million realized losses) related to the interest rate swaps discussed above were included in interest expense in the accompanying condensed consolidated statement of operations for the three months and sixnine months ended JuneSeptember 30, 2009, respectively. Unrealized gainsAn unrealized loss of $9.6$2.7 million and $10.4an unrealized gain of $7.7 million were included in the accompanying condensed consolidated statements of operations for the three months and sixnine months ended JuneSeptember 30, 2008, respectively.
See Note 3 for additional discussion onof the fair value measurement of the Company’s derivative contracts.
19
Natural Gas
| Notional | Weighted Avg. | |||||||
Period and Type of Contract | (MMcf)(1) | Fixed Price | ||||||
| July 2009 — September 2009 | ||||||||
| Price swap contracts | 18,710 | $ | 8.09 | |||||
| Basis swap contracts | 15,640 | $ | (0.74 | ) | ||||
| October 2009 — December 2009 | ||||||||
| Price swap contracts | 19,010 | $ | 8.46 | |||||
| Basis swap contracts | 15,640 | $ | (0.74 | ) | ||||
| January 2010 — March 2010 | ||||||||
| Price swap contracts | 20,475 | $ | 7.95 | |||||
| Basis swap contracts | 20,250 | $ | (0.74 | ) | ||||
| April 2010 — June 2010 | ||||||||
| Price swap contracts | 19,793 | $ | 7.32 | |||||
| Basis swap contracts | 20,475 | $ | (0.74 | ) | ||||
| July 2010 — September 2010 | ||||||||
| Price swap contracts | 20,010 | $ | 7.55 | |||||
| Basis swap contracts | 20,700 | $ | (0.74 | ) | ||||
| October 2010 — December 2010 | ||||||||
| Price swap contracts | 20,010 | $ | 7.97 | |||||
| Basis swap contracts | 20,700 | $ | (0.74 | ) | ||||
| January 2011 — March 2011 | ||||||||
| Basis swap contracts | 25,650 | $ | (0.47 | ) | ||||
| April 2011 — June 2011 | ||||||||
| Basis swap contracts | 25,935 | $ | (0.47 | ) | ||||
| July 2011 — September 2011 | ||||||||
| Basis swap contracts | 26,220 | $ | (0.47 | ) | ||||
| October 2011 — December 2011 | ||||||||
| Basis swap contracts | 26,220 | $ | (0.47 | ) | ||||
| January 2012 — March 2012 | ||||||||
| Basis swap contracts | 20,020 | $ | (0.54 | ) | ||||
| April 2012 — June 2012 | ||||||||
| Basis swap contracts | 20,020 | $ | (0.54 | ) | ||||
| July 2012 — September 2012 | ||||||||
| Basis swap contracts | 20,240 | $ | (0.54 | ) | ||||
| October 2012 — December 2012 | ||||||||
| Basis swap contracts | 20,240 | $ | (0.54 | ) | ||||
Period and Type of Contract | Notional (MMcf)(1) | Weighted Avg. Fixed Price | ||||
October 2009 — December 2009 | ||||||
Price swap contracts | 19,010 | $ | 8.46 | |||
Basis swap contracts | 17,480 | $ | (0.74 | ) | ||
January 2010 — March 2010 | ||||||
Price swap contracts | 20,475 | $ | 7.95 | |||
Basis swap contracts | 20,250 | $ | (0.74 | ) | ||
April 2010 — June 2010 | ||||||
Price swap contracts | 19,793 | $ | 7.32 | |||
Basis swap contracts | 20,475 | $ | (0.74 | ) | ||
July 2010 — September 2010 | ||||||
Price swap contracts | 20,010 | $ | 7.55 | |||
Basis swap contracts | 20,700 | $ | (0.74 | ) | ||
October 2010 — December 2010 | ||||||
Price swap contracts | 20,010 | $ | 7.97 | |||
Basis swap contracts | 20,700 | $ | (0.74 | ) | ||
January 2011 — March 2011 | ||||||
Basis swap contracts | 25,650 | $ | (0.47 | ) | ||
April 2011 — June 2011 | ||||||
Basis swap contracts | 25,935 | $ | (0.47 | ) | ||
July 2011 — September 2011 | ||||||
Basis swap contracts | 26,220 | $ | (0.47 | ) | ||
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Period and Type of Contract | Notional (MMcf)(1) | Weighted Avg. Fixed Price | ||||
October 2011 — December 2011 | ||||||
Basis swap contracts | 26,220 | $ | (0.47 | ) | ||
January 2012 — March 2012 | ||||||
Basis swap contracts | 28,210 | $ | (0.55 | ) | ||
April 2012 — June 2012 | ||||||
Basis swap contracts | 28,210 | $ | (0.55 | ) | ||
July 2012 — September 2012 | ||||||
Basis swap contracts | 28,520 | $ | (0.55 | ) | ||
October 2012 — December 2012 | ||||||
Basis swap contracts | 28,520 | $ | (0.55 | ) | ||
| (1) | Assumes ratio of 1:1 for Mcf to |
20
| Notional | Weighted Avg. | |||||||
Period and Type of Contract | (in MBbls) | Fixed Price | ||||||
| July 2009 — September 2009 | ||||||||
| Price swap contracts | 46 | $ | 126.61 | |||||
| October 2009 — December 2009 | ||||||||
| Price swap contracts | 46 | $ | 126.51 | |||||
Period and Type of Contract | Notional (in MBbls) | Weighted Avg. Fixed Price | |||
October 2009 — December 2009 | |||||
Price swap contracts | 46 | $ | 126.51 | ||
11. Income Taxes
In accordance with GAAP, 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 income taxes on a currentyear-to-date basis.
The provisions (benefits) for income taxes consisted of the following components for the three and six-monthnine-month periods ended JuneSeptember 30 (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Current: | ||||||||||||||||
| Federal | $ | (50 | ) | $ | — | $ | (2,220 | ) | $ | — | ||||||
| State | (315 | ) | 945 | 682 | 1,024 | |||||||||||
| (365 | ) | 945 | (1,538 | ) | 1,024 | |||||||||||
| Deferred: | ||||||||||||||||
| Federal | — | (10,749 | ) | 4 | (41,236 | ) | ||||||||||
| State | — | (1,043 | ) | — | (1,173 | ) | ||||||||||
| — | (11,792 | ) | 4 | (42,409 | ) | |||||||||||
| Total benefits | $ | (365 | ) | $ | (10,847 | ) | $ | (1,534 | ) | $ | (41,385 | ) | ||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
Current: | ||||||||||||||||
Federal | $ | (1,763 | ) | $ | (848 | ) | $ | (3,983 | ) | $ | (848 | ) | ||||
State | (817 | ) | 4,542 | (135 | ) | 5,566 | ||||||||||
| (2,580 | ) | 3,694 | (4,118 | ) | 4,718 | |||||||||||
Deferred: | ||||||||||||||||
Federal | — | 122,832 | 4 | 81,596 | ||||||||||||
State | — | 4,167 | — | 2,994 | ||||||||||||
| — | 126,999 | 4 | 84,590 | |||||||||||||
Total (benefits) provisions | $ | (2,580 | ) | $ | 130,693 | $ | (4,114 | ) | $ | 89,308 | ||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax reporting. Deferred tax assets are reduced by a valuation allowance if 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. For the year ended
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
December 31, 2008, the Company determined it was appropriate to record a full valuation allowance against its net deferred tax asset. For the six-monthnine-month period ended JuneSeptember 30, 2009, the Company recorded a $438.5$467.2 million increase to the previously established valuation allowance. The increase is primarily a result of not recording a tax benefit for the current period loss before income taxes of $1,247.6$1,351.5 million.
Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain tax attributes on an annual basis following an ownership change. The Company has experienced several owner shifts,an ownership change, within the meaning of IRC Section 382, sinceduring December 2008. Although the timeCompany does expect a limitation on certain of its lasttax attributes as a result of the ownership change, which occurred in June 2008. Further owner shifts occurring during the three-year period beginning as of June 2008 maysuch limitation is not expected to result in another ownership change. Ina current federal tax liability for the event another ownership change occurs, the application of IRC Section 382 may limit the amount of tax attributes, including the 2009 projected net operating loss, that the Company can utilize on an annual basis. The Company will continue to closely monitor its ownership activity.
No reserves for uncertain income tax positions have been recorded pursuant to FASB Interpretation No. 48 “Accountingthe guidance for Uncertaintyuncertainty in income taxes under the Income Taxes — an interpretationTopic of FASB Statement No. 109” (“FIN 48”).the ASC. Tax
21
For the three-month period ended JuneSeptember 30, 2009 and 2008, income tax payments, net of refunds, were approximately $3.6$0.0 million and $1.7$0.1 million, respectively. For the six-monthnine-month period ended JuneSeptember 30, 2009 and 2008, income tax payments, net of refunds, were approximately $3.0 million and $1.9$2.0 million, respectively.
12. Earnings (Loss) 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 and outstanding convertible preferred stock. The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted earnings per share, for the three and six-monthnine-month periods ended JuneSeptember 30, 2009 and 2008 (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Weighted average basic common shares outstanding | 174,154 | 155,204 | 168,767 | 148,124 | ||||||||||||
| Effect of dilutive securities: | ||||||||||||||||
| Restricted stock | — | — | — | — | ||||||||||||
| Convertible preferred stock outstanding | — | — | — | — | ||||||||||||
| Weighted average diluted common and potential common shares outstanding | 174,154 | 155,204 | 168,767 | 148,124 | ||||||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2009 | 2008 | 2009 | 2008 | |||||
Weighted average basic common shares outstanding | 178,069 | 163,020 | 171,902 | 153,125 | ||||
Effect of dilutive securities: | ||||||||
Restricted stock | — | 1,534 | — | 1,364 | ||||
Convertible preferred stock | — | — | — | — | ||||
Weighted average diluted common and potential common shares outstanding | 178,069 | 164,554 | 171,902 | 154,489 | ||||
For the three-monththree and nine-month periods ended JuneSeptember 30, 2009, and 2008, restricted stock awards covering 2.43.2 million shares and 1.32.7 million shares of restricted stock not yet vested, respectively, were excluded from the computation of net loss per share because their effect would have been antidilutive. For the six-month periods ended June 30, 2009 and 2008, restricted stock awards covering 2.5 million shares and 1.3 million shares, respectively, were excluded from the computation of net 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 (see Note 15) for the three and six-monthnine-month periods ended JuneSeptember 30, 2009 and with respect to its then outstanding redeemable convertible preferred stock for the three and six-month periodsnine-month period ended JuneSeptember 30, 2008. Under this method, the Company assumes the conversion of the
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
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 to common stockholders. The Company determined the if-converted method iswas not more dilutive for the three and six-monthnine-month periods ended JuneSeptember 30, 20092009. The Company determined the if-converted method was not more dilutive and included preferred stock dividends in the determination of income available to common stockholders for the nine-month period ended September 30, 2008.
13. Commitments and Contingencies
The Company is a defendant in lawsuits from time to time in the normal course of business. In management’s opinion, the Company is not currently involved in any legal proceedings that, individually or in the aggregate, could have a material effect on the financial condition, results of operations or cash flows of the Company.
14. Redeemable Convertible Preferred Stock
In November 2006, the Company sold 2,136,667 shares of redeemable convertible preferred stock to finance a portion of its acquisition of NEG Oil & Gas, LLC. Each holder of redeemable convertible preferred stock was entitled to quarterly cash dividends at the annual rate of 7.75% of the accreted value, or $210 per share, of their
22
| Dividends | ||||||||||||
Declared | Dividend Period | per Share | Total | Payment Date | ||||||||
| January 31, 2007 | November 21, 2006 — February 1, 2007 | $ | 3.21 | $ | 6,859 | February 15, 2007 | ||||||
| May 8, 2007 | February 2, 2007 — May 1, 2007 | 3.97 | 8,550 | May 15, 2007 | ||||||||
| June 8, 2007 | May 2, 2007 — August 1, 2007 | 4.10 | 8,956 | August 15, 2007 | ||||||||
| September 24, 2007 | August 2, 2007 — November 1, 2007 | 4.10 | 8,956 | November 15, 2007 | ||||||||
| December 16, 2007 | November 2, 2007 — February 1, 2008 | 4.10 | 8,956 | February 15, 2008 | ||||||||
| March 7, 2008 | February 2, 2008 — May 1, 2008 | 4.01 | 8,095 | (1) | ||||||||
| May 7, 2008 | May 2, 2008 — May 7, 2008 | 4.01 | 501 | May 7, 2008 | ||||||||
Declared | Dividend Period | Dividends per Share | Total | Payment Date | ||||||
January 31, 2007 | November 21, 2006 — February 1, 2007 | $ | 3.21 | $ | 6,859 | February 15, 2007 | ||||
May 8, 2007 | February 2, 2007 — May 1, 2007 | 3.97 | 8,550 | May 15, 2007 | ||||||
June 8, 2007 | May 2, 2007 — August 1, 2007 | 4.10 | 8,956 | August 15, 2007 | ||||||
September 24, 2007 | August 2, 2007 — November 1, 2007 | 4.10 | 8,956 | November 15, 2007 | ||||||
December 16, 2007 | November 2, 2007 — February 1, 2008 | 4.10 | 8,956 | February 15, 2008 | ||||||
March 7, 2008 | February 2, 2008 — May 1, 2008 | 4.01 | 8,095 | (1) | ||||||
May 7, 2008 | May 2, 2008 — May 7, 2008 | 4.01 | 501 | May 7, 2008 | ||||||
| (1) | Includes $0.6 million of prorated dividends paid to holders of redeemable convertible preferred shares at the time their shares converted to common stock in March 2008. The remaining dividends of $7.5 million were paid during May 2008. |
On March 30, 2007, certain holders of the Company’s common units (consisting of shares of common stock and a warrant to purchase redeemable convertible preferred stock upon the surrender of common stock) exercised warrants to purchase redeemable convertible preferred stock. The holders converted 526,316 shares of common stock into 47,619 shares of redeemable convertible preferred stock.
During March 2008, holders of 339,823 shares of the Company’s redeemable convertible preferred stock elected to convert those shares into 3,465,593 shares of the Company’s common stock. Additionally, during May 2008, the Company converted the remaining outstanding 1,844,464 shares of its redeemable convertible preferred stock into 18,810,260 shares of its common stock as permitted under the terms of the redeemable convertible preferred stock. These conversions resulted in increases to additional paid-in capital totaling $452.2
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
$452.2 million, which represents the difference between the par value of the common stock issued and the carrying value of the redeemable convertible shares converted. The Company also recorded charges to retained earnings totaling $7.2 million in accelerated accretion expense related to the converted redeemable convertible preferred shares. Prorated dividends totaling $0.5 million for the period from May 2, 2008 to the date of conversion (May 7, 2008) were paid to the holders of the converted shares on May 7, 2008. On and after the conversion date, dividends ceased to accrue and the rights of common unit holders to exercise outstanding warrants to purchase redeemable convertible preferred shares terminated.
Approximately $0.5 million and $8.6 million in paid and unpaid dividends on the redeemable convertible preferred stock has been included in the Company’s earnings per share calculations for the three-month period and six-monthnine-month period ended JuneSeptember 30, 2008, respectively, as presented in the accompanying condensed consolidated statementsstatement of operations.
| No shares of redeemable convertible preferred stock were outstanding during the three-month period ended September 30, 2008. 15. Equity
|
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Shares authorized | 50,000 | 50,000 | ||||||
| Shares outstanding at end of period | 2,650 | — | ||||||
23
| September 30, 2009 | December 31, 2008 | |||
Shares authorized | 50,000 | 50,000 | ||
Shares outstanding at end of period | 2,650 | — |
Each share of 8.5% convertible perpetual preferred stock has a liquidation preference of $100 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 adjustments upon the occurrence of certain events. 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, with the first dividend payment due in February 2010. Approximately $2.8 million in unpaid dividends on the 8.5% convertible perpetual preferred stock has been included in the Company’s earnings per share calculations for the three and nine-month periods ended September 30, 2009 as presented in the accompanying condensed consolidated statements of operations. The 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 automatically convert into common stock at the then-prevailing conversion rate if certain conditions are met.
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Common Stock. The following table presents information regarding the Company’s common stock (in thousands):
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Shares authorized | 400,000 | 400,000 | ||||||
| Shares outstanding at end of period | 181,856 | 166,046 | ||||||
| Shares held in treasury | 1,398 | 1,326 | ||||||
| September 30, 2009 | December 31, 2008 | |||
Shares authorized | 400,000 | 400,000 | ||
Shares outstanding at end of period | 183,524 | 166,046 | ||
Shares held in treasury | 1,462 | 1,326 |
During March 2008, the Company issued 3,465,593 shares of common stock upon the conversion of 339,823 shares of its redeemable convertible preferred stock. In May 2008, the Company converted the remaining 1,844,464 outstanding shares of its redeemable convertible preferred stock into 18,810,260 shares of its common stock as permitted under the terms of the redeemable convertible preferred stock. See additional discussion in Note 14.
In April 2009, the Company completed a registered underwritten offering of 14,480,000 shares of its common stock, including 2,280,000 shares of common stock acquired by the underwriters from the Company to cover over-allotments. Net proceeds to the Company from the offering were approximately $107.7$107.6 million, after deducting offering expenses of approximately $2.3$2.4 million, and were used to repay a portion of the amount outstanding under the senior credit facility and for general corporate purposes.
Treasury Stock. The Company makes required 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 71,000136,000 shares having a total value of $0.5$1.1 million and approximately 52,00079,000 shares having a total value of $1.9$3.5 million during the six-monthnine-month periods ended JuneSeptember 30, 2009 and 2008, respectively. These shares were accounted for as treasury stock.
In February 2008, the Company transferred 184,484 shares of its treasury stock into an account established for the benefit of the Company’s 401(k) Plan. The transfer was made in order to satisfy the Company’s $5.0 million accrued payable to match employee contributions made to the plan during 2007. The historical cost of the shares transferred totaled approximately $2.4 million and resulted in an increase to the Company’s additional paid-in capital of approximately $2.6 million.
Equity Compensation. The Company awards restricted common stock under incentive compensation plans and such awardsthat vest over specified periods of time, subject to certain conditions. Awards issued prior to 2006 had vesting periods of one, four or seven years. All awards issued during and after 2006 have four year vesting periods.
24
Equity compensation provided to employees directly involved in natural gas and crude oil exploration and development activities is capitalized to the Company’s natural gas and crude oil 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 and six-monthnine-month periods ended JuneSeptember 30, 2009, the Company recognized stock-basedequity compensation expense of $5.2$6.2 million and $10.4$16.5 million, net of $0.8$1.1 million and $2.0$3.2 million capitalized, respectively, related to restricted common stock. For the three-month and six-monthnine-month periods ended JuneSeptember 30, 2008, the Company recognized stock-basedequity compensation expense of $4.1$5.5 million and $7.3$12.8 million, respectively, related to restricted common stock. There was no stock-basedequity compensation capitalized in 2008. Stock-based compensation expense is reflected in general and administrative expenses in the condensed consolidated statements of operations.
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
Effective June 5, 2009, the Company adopted the SandRidge Energy, Inc. 2009 Incentive Plan (the “2009 Incentive Plan”). Under the terms of the 2009 Incentive Plan, the Company may grant stock options, stock appreciation rights, shares of restricted stock, restricted stock units and other forms of awards based on the value (or increase in the value) of shares of the common stock of the Company for up to 12,000,000 shares of common stock. The 2009 Incentive Plan also permits cash incentive awards. Consistent with the prior plan,its other incentive plans, the Company intends for shares of restricted stock to be the primary form of awards granted under the 2009 Incentive Plan.
Noncontrolling Interest. On January 1, 2009, the Company implemented SFAS No. 160, which established accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. As required by SFAS No. 160, theThe noncontrolling interest in one of the Company’s subsidiaries represents an ownership interest in the consolidated entity and is included as a component of equity in the condensed consolidated balance sheets and condensed consolidated statement of changes in equity.
16. Related Party Transactions
The Company hasenters into transactions with certain stockholders and other related parties in the ordinary course of business.business with certain of its stockholders and other related parties. These transactions primarily consist of purchases of gas treating services and drilling equipment and sales of oil field service supplies.services and natural gas. Following is a summary of significant transactions with such related parties for the three and six-monthnine-month periods ended JuneSeptember 30, 2009 and 2008 (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Sales to and reimbursements from related parties | $ | 974 | $ | 27,070 | $ | 4,406 | $ | 52,426 | ||||||||
| Purchases of services from related parties | $ | 5,464 | $ | 19,171 | $ | 14,406 | $ | 39,061 | ||||||||
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||
Sales to and reimbursements from related parties | $ | 1,014 | $ | 24,552 | $ | 5,420 | $ | 76,978 | ||||
Purchases of services from related parties | $ | 4,550 | $ | 11,380 | $ | 18,956 | $ | 50,441 | ||||
Through August 2009, the Company leasesleased office space in Oklahoma City from a member of its Board of Directors. The Company believes that the payments made under this lease arewere at fair market rates. Rent expense related to the lease totaled $0.2$0.1 million and $0.3 million for the three-month periods ended JuneSeptember 30, 2009 and 2008, respectively. For the six-monthnine-month periods ended JuneSeptember 30, 2009 and 2008, rent expense under this lease was $0.5$0.6 million and $0.7$1.0 million, respectively. The lease expiresexpired in August 2009.
Larclay, L.P. Until April 15, 2009, Lariat and its partner Clayton Williams Energy, Inc. (“CWEI”) each owned a 50% interest in Larclay L.P. (“Larclay”), a limited partnership, and, until such time, Lariat operated the rigs owned by the partnership.Larclay. On April 15, 2009, Lariat completed an assignment to CWEI of Lariat’s 50% equity interest in Larclay pursuant to the terms of an Assignment and Assumption Agreement (the “Larclay Assignment”) entered into between Lariat and CWEI on March 13, 2009. Pursuant to the Larclay Assignment, Lariat assigned all of its right, title and interest in and to Larclay to CWEI effective April 15, 2009, and CWEI assumed all of the obligations and liabilities of Lariat relating to Larclay from and after April 15, 2009.Larclay. The Company fully impaired
25
For the Company’s other transactions withthree-month period ended September 30, 2008, sales to and reimbursements from Larclay forwere $11.2 million and purchases of services from Larclay were $7.1 million. There were no sales, reimbursements or purchases from Larclay during the three and six-monththree-month period ended September 30, 2009. For the nine-month periods ended JuneSeptember 30, 2009 and 2008, (in thousands):
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Sales to and reimbursements from Larclay | $ | 214 | $ | 12,035 | $ | 2,962 | $ | 22,973 | ||||||||
| Purchases of services from Larclay | $ | — | $ | 13,288 | $ | 1,762 | $ | 23,958 | ||||||||
| June 30, | December 31, | |||||||
| 2009 | 2008 | |||||||
| Accounts receivable from Larclay | $ | 5 | $ | 6,060 | ||||
| Accounts payable to Larclay | $ | — | $ | 152 | ||||
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
17. Crusader Acquisition
On September 22, 2009, the Company entered into a Stock Purchase Agreement (“Crusader Purchase Agreement”) with Crusader Energy Group Inc. and its subsidiaries (collectively, “Crusader”) to purchase all of the shares of common stock of Crusader that will be issued upon the effectiveness of Crusader’s reorganization under Chapter 11 of the United States Bankruptcy Code. The closing of the transaction is subject to customary conditions, approval by Crusader’s creditors and the Bankruptcy Court, consideration of alternative transactions that may be submitted prior to a bid deadline, and an auction to be held after the bid deadline. The closing of the transaction is expected to occur during the fourth quarter of 2009.
The consideration payable by the Company consists of the following: $55.0 million cash, subject to certain adjustments; 13,015,797 shares of Company common stock, subject to certain adjustments; and warrants to purchase an aggregate of 2.0 million shares of Company common stock at an exercise price of $15.00 per share during an exercise period ending five years after the closing date of the transactions contemplated under the Crusader Purchase Agreement. Recipients of the stock consideration and warrants will not be permitted to dispose of such stock consideration or warrants for 180 days after the closing date of the transaction.
If the total amount of the claims against Crusader that are required to be paid or reserved for under Crusader’s plan of reorganization (the “Plan”) on the closing date exceeds the amount of the cash consideration payable by the Company plus Crusader’s cash assets on the closing date, then the Company will make up to a $30.0 million loan to the liquidating trust created under the Plan to pay or reserve for such claims. In the event of such a loan, a number of shares of the Company’s common stock with an aggregate value (calculated at $13.4452 per share) equal to the amount of the loan will be withheld and reserved from the shares required to be issued on the closing date. Approximately six months after the closing date, the Company will deliver the number of reserved shares that has an aggregate value (calculated at $13.4452 per share) equal to the amount of the loan that was repaid to the Company by the liquidating trust minus unpaid interest.
18. Subsequent Events
Grey Ranch. During October 2009, the Company executed amendments to certain agreements related to the ownership and operation of Grey Ranch Plant, LP (“GRLP”), the limited partnership that operates the Grey Ranch Plant located in Pecos County, Texas. As a result of these amendments, the Company became the primary beneficiary of GRLP. The Company currently accounts for its ownership interest in GRLP using the equity method of accounting; however, due to this change, the Company will include the activity of GRLP in its consolidated financial statements prospectively beginning on the agreements’ effective date, or October 1, 2009. The change from equity method of accounting to the consolidation of GRLP activity will have no effect on the Company’s net income.
Events occurring after JuneSeptember 30, 2009 were evaluated as of August 6,November 5, 2009, the date this Quarterly Report was issued in compliance with SFAS No. 165 to ensure that any subsequent events that met the criteria for recognitionand/or disclosure in this report have been included. No such events were noted.
19. Business Segment Information
|
26
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
(Unaudited)
Management evaluates the performance of the Company’s business segments based on operating income, which is defined as segment operating revenues less operating expenses and depreciation, depletion and amortization. Summarized financial information concerning the Company’s segments is shown in the following table (in thousands):
| Exploration and | Drilling and Oil | Midstream Gas | Consolidated | |||||||||||||||||
| Production | Field Services | Services | All Other | Total | ||||||||||||||||
Three Months Ended June 30, 2009 | ||||||||||||||||||||
| Revenues | $ | 103,727 | $ | 55,975 | $ | 71,838 | $ | 6,511 | $ | 238,051 | ||||||||||
| Inter-segment revenue | (64 | ) | (50,877 | ) | (52,742 | ) | (269 | ) | (103,952 | ) | ||||||||||
| Total revenues | $ | 103,663 | $ | 5,098 | $ | 19,096 | $ | 6,242 | $ | 134,099 | ||||||||||
| Operating loss | $ | (5,248 | ) | $ | (2,801 | ) | $ | (28,030 | ) | $ | (13,908 | ) | $ | (49,987 | ) | |||||
| Interest expense, net | (41,387 | ) | (558 | ) | — | (286 | ) | (42,231 | ) | |||||||||||
| Other income, net | 483 | — | 200 | — | 683 | |||||||||||||||
| Loss before income taxes | $ | (46,152 | ) | $ | (3,359 | ) | $ | (27,830 | ) | $ | (14,194 | ) | $ | (91,535 | ) | |||||
| Capital expenditures(2) | $ | 121,347 | $ | 188 | $ | 17,340 | $ | 8,813 | $ | 147,688 | ||||||||||
| Depreciation, depletion and amortization | $ | 35,025 | $ | 6,909 | $ | 2,115 | $ | 4,335 | $ | 48,384 | ||||||||||
Three Months Ended June 30, 2008 | ||||||||||||||||||||
| Revenues | $ | 293,472 | $ | 108,720 | $ | 219,819 | $ | 5,653 | $ | 627,664 | ||||||||||
| Inter-segment revenue | (44 | ) | (96,856 | ) | (151,523 | ) | (1,191 | ) | (249,614 | ) | ||||||||||
| Total revenues | $ | 293,428 | $ | 11,864 | $ | 68,296 | $ | 4,462 | $ | 378,050 | ||||||||||
| Operating (loss) income | $ | (6,545 | ) | $ | 4,644 | $ | 6,553 | $ | (16,447 | ) | $ | (11,795 | ) | |||||||
| Interest expense, net | (19,823 | ) | (770 | ) | — | (297 | ) | (20,890 | ) | |||||||||||
| Other income (expense), net | 848 | (109 | ) | 664 | 108 | 1,511 | ||||||||||||||
| (Loss) income before income taxes | $ | (25,520 | ) | $ | 3,765 | $ | 7,217 | $ | (16,636 | ) | $ | (31,174 | ) | |||||||
| Capital expenditures(2) | $ | 459,135 | $ | 17,870 | $ | 38,203 | $ | 7,993 | $ | 523,201 | ||||||||||
| Depreciation, depletion and amortization | $ | 72,998 | $ | 9,344 | $ | 3,359 | $ | 2,335 | $ | 88,036 | ||||||||||
27
| Exploration and Production | Drilling and Oil Field Services | Midstream Gas Services | All Other | Consolidated Total | ||||||||||||||||
Three Months Ended September 30, 2009 | ||||||||||||||||||||
Revenues | $ | 105,026 | $ | 42,958 | $ | 52,564 | $ | 9,576 | $ | 210,124 | ||||||||||
Inter-segment revenue | (66 | ) | (37,160 | ) | (36,644 | ) | (1,399 | ) | (75,269 | ) | ||||||||||
Total revenues | $ | 104,960 | $ | 5,798 | $ | 15,920 | $ | 8,177 | $ | 134,855 | ||||||||||
Operating (loss) income | $ | (31,123 | ) | $ | (4,621 | ) | $ | 476 | $ | (14,961 | ) | $ | (50,229 | ) | ||||||
Interest expense, net | (52,344 | ) | (482 | ) | — | (286 | ) | (53,112 | ) | |||||||||||
Other (expense) income, net | (1,144 | ) | — | 593 | — | (551 | ) | |||||||||||||
(Loss) income before income taxes | $ | (84,611 | ) | $ | (5,103 | ) | $ | 1,069 | $ | (15,247 | ) | $ | (103,892 | ) | ||||||
Capital expenditures(1) | $ | 87,288 | $ | 569 | $ | 2,500 | $ | 7,360 | $ | 97,717 | ||||||||||
Depreciation, depletion and amortization | $ | 33,759 | $ | 7,042 | $ | 558 | $ | 3,793 | $ | 45,152 | ||||||||||
Three Months Ended September 30, 2008 | ||||||||||||||||||||
Revenues | $ | 259,878 | $ | 121,376 | $ | 198,220 | $ | 5,851 | $ | 585,325 | ||||||||||
Inter-segment revenue | (66 | ) | (109,343 | ) | (140,510 | ) | (1,383 | ) | (251,302 | ) | ||||||||||
Total revenues | $ | 259,812 | $ | 12,033 | $ | 57,710 | $ | 4,468 | $ | 334,023 | ||||||||||
Operating income (loss) | $ | 418,751 | $ | 4,054 | $ | (1,359 | ) | $ | (20,159 | ) | $ | 401,287 | ||||||||
Interest expense, net | (39,075 | ) | (729 | ) | — | (299 | ) | (40,103 | ) | |||||||||||
Other (expense) income, net | (63 | ) | 281 | (418 | ) | 57 | (143 | ) | ||||||||||||
Income (loss) before income taxes | $ | 379,613 | $ | 3,606 | $ | (1,777 | ) | $ | (20,401 | ) | $ | 361,041 | ||||||||
Capital expenditures(1) | $ | 590,167 | $ | 25,749 | $ | 40,696 | $ | 18,442 | $ | 675,054 | ||||||||||
Depreciation, depletion and amortization | $ | 72,702 | $ | 10,015 | $ | 4,057 | $ | 2,787 | $ | 89,561 | ||||||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
| Exploration and | Drilling and Oil | Midstream Gas | Consolidated | |||||||||||||||||
| Production | Field Services | Services | All Other | Total | ||||||||||||||||
Six Months Ended June 30, 2009 | ||||||||||||||||||||
| Revenues | $ | 225,660 | $ | 149,789 | $ | 166,205 | $ | 12,407 | $ | 554,061 | ||||||||||
| Inter-segment revenue | (130 | ) | (138,380 | ) | (121,695 | ) | (744 | ) | (260,949 | ) | ||||||||||
| Total revenues | $ | 225,530 | $ | 11,409 | $ | 44,510 | $ | 11,663 | $ | 293,112 | ||||||||||
| Operating loss(1) | $ | (1,101,110 | ) | $ | (5,556 | ) | $ | (27,820 | ) | $ | (31,781 | ) | $ | (1,166,267 | ) | |||||
| Interest expense, net | (81,205 | ) | (1,191 | ) | — | (572 | ) | (82,968 | ) | |||||||||||
| Other income, net | 1,243 | — | 434 | — | 1,677 | |||||||||||||||
| Loss before income taxes | $ | (1,181,072 | ) | $ | (6,747 | ) | $ | (27,386 | ) | $ | (32,353 | ) | $ | (1,247,558 | ) | |||||
| Capital expenditures(2) | $ | 383,231 | $ | 2,201 | $ | 41,288 | $ | 17,764 | $ | 444,484 | ||||||||||
| Depreciation, depletion and amortization | $ | 95,785 | $ | 14,195 | $ | 3,957 | $ | 7,266 | $ | 121,203 | ||||||||||
At June 30, 2009 | ||||||||||||||||||||
| Total assets | $ | 1,894,446 | $ | 246,173 | $ | 109,640 | $ | 114,057 | $ | 2,364,316 | ||||||||||
Six Months Ended June 30, 2008 | ||||||||||||||||||||
| Revenues | $ | 500,438 | $ | 188,558 | $ | 368,054 | $ | 11,507 | $ | 1,068,557 | ||||||||||
| Inter-segment revenue | (88 | ) | (164,372 | ) | (254,671 | ) | (2,290 | ) | (421,421 | ) | ||||||||||
| Total revenues | $ | 500,350 | $ | 24,186 | $ | 113,383 | $ | 9,217 | $ | 647,136 | ||||||||||
| Operating (loss) income | $ | (53,934 | ) | $ | 2,496 | $ | 6,585 | $ | (29,753 | ) | $ | (74,606 | ) | |||||||
| Interest expense, net | (43,235 | ) | (1,412 | ) | — | (603 | ) | (45,250 | ) | |||||||||||
| Other income, net | 780 | 109 | 1,306 | 159 | 2,354 | |||||||||||||||
| (Loss) income before income taxes | $ | (96,389 | ) | $ | 1,193 | $ | 7,891 | $ | (30,197 | ) | $ | (117,502 | ) | |||||||
| Capital expenditures(2) | $ | 813,900 | $ | 35,791 | $ | 69,429 | $ | 15,181 | $ | 934,301 | ||||||||||
| Depreciation, depletion and amortization | $ | 138,588 | $ | 21,692 | $ | 6,133 | $ | 4,664 | $ | 171,077 | ||||||||||
At December 31, 2008 | ||||||||||||||||||||
| Total assets | $ | 2,986,070 | $ | 275,164 | $ | 284,281 | $ | 109,543 | $ | 3,655,058 | ||||||||||
(Unaudited)
| Exploration and Production | Drilling and Oil Field Services | Midstream Gas Services | All Other | Consolidated Total | ||||||||||||||||
Nine Months Ended September 30, 2009 | ||||||||||||||||||||
Revenues | $ | 330,686 | $ | 192,747 | $ | 218,769 | $ | 21,983 | $ | 764,185 | ||||||||||
Inter-segment revenue | (196 | ) | (175,540 | ) | (158,339 | ) | (2,143 | ) | (336,218 | ) | ||||||||||
Total revenues | $ | 330,490 | $ | 17,207 | $ | 60,430 | $ | 19,840 | $ | 427,967 | ||||||||||
Operating loss(2) | $ | (1,132,233 | ) | $ | (10,177 | ) | $ | (27,344 | ) | $ | (46,742 | ) | $ | (1,216,496 | ) | |||||
Interest expense, net | (133,550 | ) | (1,673 | ) | — | (858 | ) | (136,081 | ) | |||||||||||
Other income, net | 100 | — | 1,027 | — | 1,127 | |||||||||||||||
Loss before income taxes | $ | (1,265,683 | ) | $ | (11,850 | ) | $ | (26,317 | ) | $ | (47,600 | ) | $ | (1,351,450 | ) | |||||
Capital expenditures(1) | $ | 470,519 | $ | 2,770 | $ | 43,788 | $ | 25,124 | $ | 542,201 | ||||||||||
Depreciation, depletion and amortization | $ | 129,544 | $ | 21,237 | $ | 4,515 | $ | 11,058 | $ | 166,354 | ||||||||||
At September 30, 2009 | ||||||||||||||||||||
Total assets | $ | 1,837,704 | $ | 234,445 | $ | 112,526 | $ | 126,293 | $ | 2,310,968 | ||||||||||
Nine Months Ended September 30, 2008 | ||||||||||||||||||||
Revenues | $ | 760,316 | $ | 309,934 | $ | 566,274 | $ | 17,358 | $ | 1,653,882 | ||||||||||
Inter-segment revenue | (154 | ) | (273,715 | ) | (395,181 | ) | (3,673 | ) | (672,723 | ) | ||||||||||
Total revenues | $ | 760,162 | $ | 36,219 | $ | 171,093 | $ | 13,685 | $ | 981,159 | ||||||||||
Operating income (loss) | $ | 364,817 | $ | 6,550 | $ | 5,226 | $ | (49,912 | ) | $ | 326,681 | |||||||||
Interest expense, net | (82,310 | ) | (2,141 | ) | — | (902 | ) | (85,353 | ) | |||||||||||
Other income, net | 716 | 389 | 891 | 215 | 2,211 | |||||||||||||||
Income (loss) before income taxes | $ | 283,223 | $ | 4,798 | $ | 6,117 | $ | (50,599 | ) | $ | 243,539 | |||||||||
Capital expenditures(1) | $ | 1,404,067 | $ | 61,540 | $ | 110,125 | $ | 33,623 | $ | 1,609,355 | ||||||||||
Depreciation, depletion and amortization | $ | 211,290 | $ | 31,707 | $ | 10,190 | $ | 7,451 | $ | 260,638 | ||||||||||
At December 31, 2008 | ||||||||||||||||||||
Total assets | $ | 2,986,070 | $ | 275,164 | $ | 284,281 | $ | 109,543 | $ | 3,655,058 | ||||||||||
| (1) | Capital expenditures are presented on an accrual basis. |
| (2) | The operating loss for the exploration and production segment for the | |
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Unaudited)
20. Condensed Consolidating Financial Information
The Company is providingprovides condensed consolidating financial information for its subsidiaries that are guarantors of its registered debt. SubsidiaryThe subsidiary guarantors are wholly owned and have, jointly and severally, unconditionally guaranteed on an unsecured basis the Company’s 8.625% Senior Notes and Senior Floating Rate Notes. 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
28
Effective May 1, 2009, SandRidge Energy, Inc., the parent, contributed all of its rights, title and interest in its natural gas and crude oil related assets and accompanying liabilities to one of its wholly owned subsidiaries, leaving it with no natural gas or crude oil related assets or operations.
The following condensed consolidating financial information represents the financial information of SandRidge Energy, Inc. and its wholly owned subsidiary guarantors, prepared on the equity basis of accounting. The non-guarantor subsidiaries are minor and, therefore, not presented separately. The information is presented in accordance with the requirements ofRule 3-10 under the SEC’sRegulation S-X. 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.
29
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
(Unaudited)
Condensed Consolidating Balance Sheets
| June 30, 2009 | ||||||||||||||||
| Parent | Guarantor | |||||||||||||||
| Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 162 | $ | 459 | $ | — | $ | 621 | ||||||||
| Accounts and notes receivable, net | 58,417 | 364,633 | (349,724 | ) | 73,326 | |||||||||||
| Derivative contracts | — | 207,342 | — | 207,342 | ||||||||||||
| Other current assets | — | 40,169 | — | 40,169 | ||||||||||||
| Total current assets | 58,579 | 612,603 | (349,724 | ) | 321,458 | |||||||||||
| Property, plant and equipment, net | — | 1,920,902 | — | 1,920,902 | ||||||||||||
| Investment in subsidiaries | 2,249,681 | — | (2,249,681 | ) | — | |||||||||||
| Other assets | 44,548 | 128,792 | (51,384 | ) | 121,956 | |||||||||||
| Total assets | $ | 2,352,808 | $ | 2,662,297 | $ | (2,650,789 | ) | $ | 2,364,316 | |||||||
LIABILITIES AND EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 320,147 | $ | 215,205 | $ | (349,724 | ) | $ | 185,628 | |||||||
| Other current liabilities | 6,238 | 15,508 | — | 21,746 | ||||||||||||
| Total current liabilities | 326,385 | 230,713 | (349,724 | ) | 207,374 | |||||||||||
| Long-term debt | 2,118,243 | 79,756 | (51,384 | ) | 2,146,615 | |||||||||||
| Asset retirement obligation | — | 89,421 | — | 89,421 | ||||||||||||
| Other liabilities | — | 12,700 | — | 12,700 | ||||||||||||
| Total liabilities | 2,444,628 | 412,590 | (401,108 | ) | 2,456,110 | |||||||||||
| (Deficit) equity | (91,820 | ) | 2,249,707 | (2,249,681 | ) | (91,794 | ) | |||||||||
| Total liabilities and equity | $ | 2,352,808 | $ | 2,662,297 | $ | (2,650,789 | ) | $ | 2,364,316 | |||||||
30
| September 30, 2009 | |||||||||||||||
| Parent Company | Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| (In thousands) | |||||||||||||||
| ASSETS | |||||||||||||||
Current assets: | |||||||||||||||
Cash and cash equivalents | $ | 14,414 | $ | 228 | $ | — | $ | 14,642 | |||||||
Accounts and notes receivable, net | 69,173 | 414,127 | (402,715 | ) | 80,585 | ||||||||||
Derivative contracts | — | 129,453 | — | 129,453 | |||||||||||
Other current assets | — | 35,763 | — | 35,763 | |||||||||||
Total current assets | 83,587 | 579,571 | (402,715 | ) | 260,443 | ||||||||||
Property, plant and equipment, net | — | 1,964,227 | — | 1,964,227 | |||||||||||
Investment in subsidiaries | 2,198,115 | — | (2,198,115 | ) | — | ||||||||||
Other assets | 41,605 | 96,077 | (51,384 | ) | 86,298 | ||||||||||
Total assets | $ | 2,323,307 | $ | 2,639,875 | $ | (2,652,214 | ) | $ | 2,310,968 | ||||||
| LIABILITIES AND EQUITY | |||||||||||||||
Current liabilities: | |||||||||||||||
Accounts payable and accrued expenses | $ | 404,089 | $ | 229,287 | $ | (402,715 | ) | $ | 230,661 | ||||||
Other current liabilities | 7,223 | 21,143 | — | 28,366 | |||||||||||
Total current liabilities | 411,312 | 250,430 | (402,715 | ) | 259,027 | ||||||||||
Long-term debt | 2,100,627 | 77,043 | (51,384 | ) | 2,126,286 | ||||||||||
Asset retirement obligation | — | 88,033 | — | 88,033 | |||||||||||
Other liabilities | 2,383 | 26,224 | — | 28,607 | |||||||||||
Total liabilities | 2,514,322 | 441,730 | (454,099 | ) | 2,501,953 | ||||||||||
(Deficit) equity | (191,015 | ) | 2,198,145 | (2,198,115 | ) | (190,985 | ) | ||||||||
Total liabilities and equity | $ | 2,323,307 | $ | 2,639,875 | $ | (2,652,214 | ) | $ | 2,310,968 | ||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
| December 31, 2008 | ||||||||||||||||
| Parent | Guarantor | |||||||||||||||
| Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 18 | $ | 618 | $ | — | $ | 636 | ||||||||
| Accounts and notes receivable, net | 863,129 | 66,463 | (820,519 | ) | 109,073 | |||||||||||
| Derivative contracts | 201,111 | — | — | 201,111 | ||||||||||||
| Other current assets | 3,194 | 41,899 | — | 45,093 | ||||||||||||
| Total current assets | 1,067,452 | 108,980 | (820,519 | ) | 355,913 | |||||||||||
| Property, plant and equipment, net | 1,106,623 | 2,068,936 | — | 3,175,559 | ||||||||||||
| Investment in subsidiaries | 1,002,336 | — | (1,002,336 | ) | — | |||||||||||
| Other assets | 135,161 | 39,809 | (51,384 | ) | 123,586 | |||||||||||
| Total assets | $ | 3,311,572 | $ | 2,217,725 | $ | (1,874,239 | ) | $ | 3,655,058 | |||||||
LIABILITIES AND EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable and accrued expenses | $ | 163,068 | $ | 1,024,018 | $ | (820,519 | ) | $ | 366,567 | |||||||
| Other current liabilities | 5,106 | 30,951 | — | 36,057 | ||||||||||||
| Total current liabilities | 168,174 | 1,054,969 | (820,519 | ) | 402,624 | |||||||||||
| Long-term debt | 2,323,458 | 86,710 | (51,384 | ) | 2,358,784 | |||||||||||
| Asset retirement obligation | 12,759 | 71,738 | — | 84,497 | ||||||||||||
| Other liabilities | 13,660 | 1,942 | — | 15,602 | ||||||||||||
| Total liabilities | 2,518,051 | 1,215,359 | (871,903 | ) | 2,861,507 | |||||||||||
| Equity | 793,521 | 1,002,366 | (1,002,336 | ) | 793,551 | |||||||||||
| Total liabilities and equity | $ | 3,311,572 | $ | 2,217,725 | $ | (1,874,239 | ) | $ | 3,655,058 | |||||||
31
| December 31, 2008 | |||||||||||||
| Parent Company | Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||
| (In thousands) | |||||||||||||
| ASSETS | |||||||||||||
Current assets: | |||||||||||||
Cash and cash equivalents | $ | 18 | $ | 618 | $ | — | $ | 636 | |||||
Accounts and notes receivable, net | 863,129 | 66,463 | (820,519 | ) | 109,073 | ||||||||
Derivative contracts | 201,111 | — | — | 201,111 | |||||||||
Other current assets | 3,194 | 41,899 | — | 45,093 | |||||||||
Total current assets | 1,067,452 | 108,980 | (820,519 | ) | 355,913 | ||||||||
Property, plant and equipment, net | 1,106,623 | 2,068,936 | — | 3,175,559 | |||||||||
Investment in subsidiaries | 1,002,336 | — | (1,002,336 | ) | — | ||||||||
Other assets | 135,161 | 39,809 | (51,384 | ) | 123,586 | ||||||||
Total assets | $ | 3,311,572 | $ | 2,217,725 | $ | (1,874,239 | ) | $ | 3,655,058 | ||||
| LIABILITIES AND EQUITY | |||||||||||||
Current liabilities: | |||||||||||||
Accounts payable and accrued expenses | $ | 163,068 | $ | 1,024,018 | $ | (820,519 | ) | $ | 366,567 | ||||
Other current liabilities | 5,106 | 30,951 | — | 36,057 | |||||||||
Total current liabilities | 168,174 | 1,054,969 | (820,519 | ) | 402,624 | ||||||||
Long-term debt | 2,323,458 | 86,710 | (51,384 | ) | 2,358,784 | ||||||||
Asset retirement obligation | 12,759 | 71,738 | — | 84,497 | |||||||||
Other liabilities | 13,660 | 1,942 | — | 15,602 | |||||||||
Total liabilities | 2,518,051 | 1,215,359 | (871,903 | ) | 2,861,507 | ||||||||
Equity | 793,521 | 1,002,366 | (1,002,336 | ) | 793,551 | ||||||||
Total liabilities and equity | $ | 3,311,572 | $ | 2,217,725 | $ | (1,874,239 | ) | $ | 3,655,058 | ||||
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
(Unaudited)
Condensed Consolidating Statements of Operations
| Parent | Guarantor | |||||||||||||||
| Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Three Months Ended June 30, 2009 | ||||||||||||||||
| Revenues | $ | 9,588 | $ | 124,558 | $ | (47 | ) | $ | 134,099 | |||||||
| Expenses: | ||||||||||||||||
| Direct operating expenses | 5,561 | 87,564 | (47 | ) | 93,078 | |||||||||||
| General and administrative | 5,152 | 18,480 | — | 23,632 | ||||||||||||
| Depreciation, depletion, amortization and impairment | 4,689 | 43,695 | — | 48,384 | ||||||||||||
| (Gain) loss on derivative contracts | (30,704 | ) | 49,696 | — | 18,992 | |||||||||||
| Total expenses | (15,302 | ) | 199,435 | (47 | ) | 184,086 | ||||||||||
| Income (loss) from operations | 24,890 | (74,877 | ) | — | (49,987 | ) | ||||||||||
| Equity earnings from subsidiaries | (75,008 | ) | — | 75,008 | — | |||||||||||
| Interest expense, net | (41,421 | ) | (810 | ) | — | (42,231 | ) | |||||||||
| Other income, net | — | 683 | — | 683 | ||||||||||||
| Loss before income tax benefit | (91,539 | ) | (75,004 | ) | 75,008 | (91,535 | ) | |||||||||
| Income tax benefit | (365 | ) | — | — | (365 | ) | ||||||||||
| Net loss | (91,174 | ) | (75,004 | ) | 75,008 | (91,170 | ) | |||||||||
| Less: net income attributable to noncontrolling interest | — | 4 | — | 4 | ||||||||||||
| Net loss attributable to SandRidge Energy, Inc. | $ | (91,174 | ) | $ | (75,008 | ) | $ | 75,008 | $ | (91,174 | ) | |||||
Three Months Ended June 30, 2008 | ||||||||||||||||
| Revenues | $ | 104,294 | $ | 275,013 | $ | (1,257 | ) | $ | 378,050 | |||||||
| Expenses: | ||||||||||||||||
| Direct operating expenses | 20,010 | 97,085 | (1,257 | ) | 115,838 | |||||||||||
| General and administrative | 10,130 | 16,073 | — | 26,203 | ||||||||||||
| Depreciation, depletion, and amortization | 29,007 | 59,029 | — | 88,036 | ||||||||||||
| Loss on derivative contracts | 159,768 | — | — | 159,768 | ||||||||||||
| Total expenses | 218,915 | 172,187 | (1,257 | ) | 389,845 | |||||||||||
| (Loss) income from operations | (114,621 | ) | 102,826 | — | (11,795 | ) | ||||||||||
| Equity earnings from subsidiaries | 103,440 | — | (103,440 | ) | — | |||||||||||
| Interest expense, net | (20,002 | ) | (888 | ) | — | (20,890 | ) | |||||||||
| Other (expense) income, net | (7 | ) | 1,518 | — | 1,511 | |||||||||||
| (Loss) income before income tax benefit | (31,190 | ) | 103,456 | (103,440 | ) | (31,174 | ) | |||||||||
| Income tax benefit | (10,847 | ) | — | — | (10,847 | ) | ||||||||||
| Net (loss) income | (20,343 | ) | 103,456 | (103,440 | ) | (20,327 | ) | |||||||||
| Less: net income attributable to noncontrolling interest | — | 16 | — | 16 | ||||||||||||
| Net (loss) income attributable to SandRidge Energy, Inc. | $ | (20,343 | ) | $ | 103,440 | $ | (103,440 | ) | $ | (20,343 | ) | |||||
32
| Parent Company | Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Three Months Ended September 30, 2009 | ||||||||||||||||
Revenues | $ | — | $ | 134,855 | $ | — | $ | 134,855 | ||||||||
Expenses: | ||||||||||||||||
Direct operating expenses | — | 66,993 | — | 66,993 | ||||||||||||
General and administrative | — | 25,006 | — | 25,006 | ||||||||||||
Depreciation, depletion and amortization | — | 45,152 | — | 45,152 | ||||||||||||
Loss on derivative contracts | — | 47,933 | — | 47,933 | ||||||||||||
Total expenses | — | 185,084 | — | 185,084 | ||||||||||||
Loss from operations | — | (50,229 | ) | — | (50,229 | ) | ||||||||||
Equity earnings from subsidiaries | (51,566 | ) | — | 51,566 | — | |||||||||||
Interest expense, net | (52,330 | ) | (782 | ) | — | (53,112 | ) | |||||||||
Other (expense) income, net | — | (551 | ) | — | (551 | ) | ||||||||||
Loss before income tax benefit | (103,896 | ) | (51,562 | ) | 51,566 | (103,892 | ) | |||||||||
Income tax benefit | (2,580 | ) | — | — | (2,580 | ) | ||||||||||
Net loss | (101,316 | ) | (51,562 | ) | 51,566 | (101,312 | ) | |||||||||
Less: net income attributable to noncontrolling interest | — | 4 | — | 4 | ||||||||||||
Net loss applicable to SandRidge Energy, Inc. | $ | (101,316 | ) | $ | (51,566 | ) | $ | 51,566 | $ | (101,316 | ) | |||||
Three Months Ended September 30, 2008 | ||||||||||||||||
Revenues | $ | 98,320 | $ | 234,415 | $ | 1,288 | $ | 334,023 | ||||||||
Expenses: | ||||||||||||||||
Direct operating expenses | 18,806 | 86,372 | 1,288 | 106,466 | ||||||||||||
General and administrative | 10,722 | 18,513 | — | 29,235 | ||||||||||||
Depreciation, depletion, and amortization | 31,400 | 58,161 | — | 89,561 | ||||||||||||
Gain on derivative contracts | (292,526 | ) | — | — | (292,526 | ) | ||||||||||
Total expenses | (231,598 | ) | 163,046 | 1,288 | (67,264 | ) | ||||||||||
Income from operations | 329,918 | 71,369 | — | 401,287 | ||||||||||||
Equity earnings from subsidiaries | 70,172 | — | (70,172 | ) | — | |||||||||||
Interest expense, net | (39,130 | ) | (973 | ) | — | (40,103 | ) | |||||||||
Other income (expense), net | 43 | (186 | ) | — | (143 | ) | ||||||||||
Income before income tax expense | 361,003 | 70,210 | (70,172 | ) | 361,041 | |||||||||||
Income tax expense | 130,657 | 36 | — | 130,693 | ||||||||||||
Net income | 230,346 | 70,174 | (70,172 | ) | 230,348 | |||||||||||
Less: net income attributable to noncontrolling interest | — | 2 | — | 2 | ||||||||||||
Net income attributable to SandRidge Energy, Inc. | $ | 230,346 | $ | 70,172 | $ | (70,172 | ) | $ | 230,346 | |||||||
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
| Parent | Guarantor | |||||||||||||||
| Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Six Months Ended June 30, 2009 | ||||||||||||||||
| Revenues | $ | 58,271 | $ | 236,946 | $ | (2,105 | ) | $ | 293,112 | |||||||
| Expenses: | ||||||||||||||||
| Direct operating expenses | 27,737 | 143,664 | (2,105 | ) | 169,296 | |||||||||||
| General and administrative | 15,515 | 36,602 | — | 52,117 | ||||||||||||
| Depreciation, depletion, amortization and impairment | 627,478 | 798,143 | — | 1,425,621 | ||||||||||||
| (Gain) loss on derivative contracts | (237,351 | ) | 49,696 | — | (187,655 | ) | ||||||||||
| Total expenses | 433,379 | 1,028,105 | (2,105 | ) | 1,459,379 | |||||||||||
| Loss from operations | (375,108 | ) | (791,159 | ) | — | (1,166,267 | ) | |||||||||
| Equity earnings from subsidiaries | (791,369 | ) | — | 791,369 | — | |||||||||||
| Interest expense, net | (81,190 | ) | (1,778 | ) | — | (82,968 | ) | |||||||||
| Other income, net | 102 | 1,575 | — | 1,677 | ||||||||||||
| �� | ||||||||||||||||
| Loss before income tax benefit | (1,247,565 | ) | (791,362 | ) | 791,369 | (1,247,558 | ) | |||||||||
| Income tax benefit | (1,534 | ) | — | — | (1,534 | ) | ||||||||||
| Net loss | (1,246,031 | ) | (791,362 | ) | 791,369 | (1,246,024 | ) | |||||||||
| Less: net income attributable to noncontrolling interest | — | 7 | — | 7 | ||||||||||||
| Net loss attributable to SandRidge Energy, Inc. | $ | (1,246,031 | ) | $ | (791,369 | ) | $ | 791,369 | $ | (1,246,031 | ) | |||||
Six Months Ended June 30, 2008 | ||||||||||||||||
| Revenues | $ | 168,610 | $ | 480,893 | $ | (2,367 | ) | $ | 647,136 | |||||||
| Expenses: | ||||||||||||||||
| Direct operating expenses | 35,523 | 173,700 | (2,367 | ) | 206,856 | |||||||||||
| General and administrative | 17,300 | 29,897 | — | 47,197 | ||||||||||||
| Depreciation, depletion, and amortization | 51,936 | 119,141 | — | 171,077 | ||||||||||||
| Loss on derivative contracts | 296,612 | — | — | 296,612 | ||||||||||||
| Total expenses | 401,371 | 322,738 | (2,367 | ) | 721,742 | |||||||||||
| (Loss) income from operations | (232,761 | ) | 158,155 | — | (74,606 | ) | ||||||||||
| Equity earnings from subsidiaries | 158,081 | — | (158,081 | ) | — | |||||||||||
| Interest expense, net | (43,610 | ) | (1,640 | ) | — | (45,250 | ) | |||||||||
| Other (expense) income, net | (63 | ) | 2,417 | — | 2,354 | |||||||||||
| (Loss) income before income tax benefit | (118,353 | ) | 158,932 | (158,081 | ) | (117,502 | ) | |||||||||
| Income tax benefit | (41,385 | ) | — | — | (41,385 | ) | ||||||||||
| Net (loss) income | (76,968 | ) | 158,932 | (158,081 | ) | (76,117 | ) | |||||||||
| Less: net income attributable to noncontrolling interest | — | 851 | — | 851 | ||||||||||||
| Net (loss) income attributable to SandRidge Energy, Inc. | $ | (76,968 | ) | $ | 158,081 | $ | (158,081 | ) | $ | (76,968 | ) | |||||
33
| Parent Company | Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Nine Months Ended September 30, 2009 | ||||||||||||||||
Revenues | $ | 58,271 | $ | 371,801 | $ | (2,105 | ) | $ | 427,967 | |||||||
Expenses: | ||||||||||||||||
Direct operating expenses | 27,737 | 210,658 | (2,105 | ) | 236,290 | |||||||||||
General and administrative | 15,515 | 61,608 | — | 77,123 | ||||||||||||
Depreciation, depletion, amortization and impairment | 627,478 | 843,294 | — | 1,470,772 | ||||||||||||
(Gain) loss on derivative contracts | (237,351 | ) | 97,629 | — | (139,722 | ) | ||||||||||
Total expenses | 433,379 | 1,213,189 | (2,105 | ) | 1,644,463 | |||||||||||
Loss from operations | (375,108 | ) | (841,388 | ) | — | (1,216,496 | ) | |||||||||
Equity earnings from subsidiaries | (842,935 | ) | — | 842,935 | — | |||||||||||
Interest expense, net | (133,520 | ) | (2,561 | ) | — | (136,081 | ) | |||||||||
Other income, net | 102 | 1,025 | — | 1,127 | ||||||||||||
Loss before income tax benefit | (1,351,461 | ) | (842,924 | ) | 842,935 | (1,351,450 | ) | |||||||||
Income tax benefit | (4,114 | ) | — | — | (4,114 | ) | ||||||||||
Net loss | (1,347,347 | ) | (842,924 | ) | 842,935 | (1,347,336 | ) | |||||||||
Less: net income attributable to noncontrolling interest | — | 11 | — | 11 | ||||||||||||
Net loss applicable to SandRidge Energy, Inc. | $ | (1,347,347 | ) | $ | (842,935 | ) | $ | 842,935 | $ | (1,347,347 | ) | |||||
Nine Months Ended September 30, 2008 | ||||||||||||||||
Revenues | $ | 266,929 | $ | 715,308 | $ | (1,078 | ) | $ | 981,159 | |||||||
Expenses: | ||||||||||||||||
Direct operating expenses | 54,327 | 260,073 | (1,078 | ) | 313,322 | |||||||||||
General and administrative | 28,021 | 48,411 | — | 76,432 | ||||||||||||
Depreciation, depletion, and amortization | 83,336 | 177,302 | — | 260,638 | ||||||||||||
Loss on derivative contracts | 4,086 | — | — | 4,086 | ||||||||||||
Total expenses | 169,770 | 485,786 | (1,078 | ) | 654,478 | |||||||||||
Income from operations | 97,159 | 229,522 | — | 326,681 | ||||||||||||
Equity earnings from subsidiaries | 228,249 | — | (228,249 | ) | — | |||||||||||
Interest expense, net | (82,738 | ) | (2,615 | ) | — | (85,353 | ) | |||||||||
Other (expense) income, net | (20 | ) | 2,231 | — | 2,211 | |||||||||||
Income before income tax expense | 242,650 | 229,138 | (228,249 | ) | 243,539 | |||||||||||
Income tax expense | 89,272 | 36 | — | 89,308 | ||||||||||||
Net income | 153,378 | 229,102 | (228,249 | ) | 154,231 | |||||||||||
Less: net income attributable to noncontrolling interest | — | 853 | — | 853 | ||||||||||||
Net income attributable to SandRidge Energy, Inc. | $ | 153,378 | $ | 228,249 | $ | (228,249 | ) | $ | 153,378 | |||||||
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (CONTINUED)STATEMENTS—(Continued)
(Unaudited)
Condensed Consolidating Statements of Cash Flows
| Parent | Guarantor | |||||||||||||||
| Company | Subsidiaries | Eliminations | Consolidated | |||||||||||||
| (In thousands) | ||||||||||||||||
Six Months Ended June 30, 2009 | ||||||||||||||||
| Net cash provided by operating activities | $ | 104,718 | $ | 37,264 | $ | — | $ | 141,982 | ||||||||
| Net cash used in investing activities | (240,992 | ) | (29,306 | ) | — | (270,298 | ) | |||||||||
| Net cash provided by (used in) financing activities | 136,418 | (8,117 | ) | — | 128,301 | |||||||||||
| Net increase (decrease) in cash and cash equivalents | 144 | (159 | ) | — | (15 | ) | ||||||||||
| Cash and cash equivalents at beginning of period | 18 | 618 | — | 636 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 162 | $ | 459 | $ | — | $ | 621 | ||||||||
Six Months Ended June 30, 2008 | ||||||||||||||||
| Net cash (used in) provided by operating activities | $ | (133,603 | ) | $ | 430,437 | $ | — | $ | 296,834 | |||||||
| Net cash used in investing activities | (384,314 | ) | (401,577 | ) | — | (785,891 | ) | |||||||||
| Net cash provided by (used in) financing activities | 730,540 | (28,730 | ) | — | 701,810 | |||||||||||
| Net increase in cash and cash equivalents | 212,623 | 130 | — | 212,753 | ||||||||||||
| Cash and cash equivalents at beginning of period | 62,967 | 168 | — | 63,135 | ||||||||||||
| Cash and cash equivalents at end of period | $ | 275,590 | $ | 298 | $ | — | $ | 275,888 | ||||||||
34
| Parent Company | Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
| (In thousands) | |||||||||||||||
Nine Months Ended September 30, 2009 | |||||||||||||||
Net cash provided by operating activities | $ | 137,794 | $ | 135,426 | $ | — | $ | 273,220 | |||||||
Net cash used in investing activities | (240,992 | ) | (123,531 | ) | — | (364,523 | ) | ||||||||
Net cash provided by (used in) financing activities | 117,594 | (12,285 | ) | — | 105,309 | ||||||||||
Net increase (decrease) in cash and cash equivalents | 14,396 | (390 | ) | — | 14,006 | ||||||||||
Cash and cash equivalents at beginning of period | 18 | 618 | — | 636 | |||||||||||
Cash and cash equivalents at end of period | $ | 14,414 | $ | 228 | $ | — | $ | 14,642 | |||||||
Nine Months Ended September 30, 2008 | |||||||||||||||
Net cash (used in) provided by operating activities | $ | (150,969 | ) | $ | 685,337 | $ | — | $ | 534,368 | ||||||
Net cash used in investing activities | (789,828 | ) | (667,274 | ) | — | (1,457,102 | ) | ||||||||
Net cash provided by (used in) financing activities | 877,858 | (17,361 | ) | — | 860,497 | ||||||||||
Net (decrease) increase in cash and cash equivalents | (62,939 | ) | 702 | — | (62,237 | ) | |||||||||
Cash and cash equivalents at beginning of period | 62,967 | 168 | — | 63,135 | |||||||||||
Cash and cash equivalents at end of period | $ | 28 | $ | 870 | $ | — | $ | 898 | |||||||
| 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 our business, financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report, as well as our audited consolidated financial statements and the accompanying notes included in our 2008Form 10-K.
The financial information with respect to the three and six-monthnine-month periods ended JuneSeptember 30, 2009 and JuneSeptember 30, 2008 that is discussed below is unaudited. In the opinion of management, this information contains all adjustments, consisting 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 Our Company
We currently generate the majority of our consolidated revenues, earnings and cash flow from the production and sale of natural gas and crude oil. Our revenues, profitability and future growth depend substantially on prevailing prices for natural gas and crude oil and on our ability to find and economically develop and produce natural gas and crude oil reserves. Prices for natural gas and crude oil fluctuate widely. In order to reduce our exposure to these fluctuations, we enter into derivative commodity contracts for a portion of our anticipated future natural gas and crude oil production. Reducing our exposure to price volatility helps ensure that we have adequate funds available for our capital expenditure programs.
We operate businesses that are complementary to our exploration, development and production activities. We own 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 our 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 our own account are eliminated in consolidation and, therefore, do not contribute to our consolidated results of operations.
Recent Events
Crusader Acquisition.On September 22, 2009, we entered into the Crusader Purchase Agreement with Crusader to purchase all of the shares of common stock of Crusader that will be issued upon the effectiveness of Crusader’s reorganization under Chapter 11 of the United States Bankruptcy Code. The closing of the transaction is subject to customary conditions, approval by Crusader’s creditors and the Bankruptcy Court, consideration of alternative transactions that may be submitted prior to the bid deadline, and an auction to be held after the bid deadline. The closing of the transaction is expected to occur during the fourth quarter of 2009.
The consideration payable by us consists of the following: $55.0 million cash, subject to certain adjustments; 13,015,797 shares of Company common stock, subject to certain adjustments; and warrants to purchase an aggregate of 2.0 million shares of Company common stock at an exercise price of $15.00 per share during an exercise period ending five years after the closing date of the transactions contemplated under the Crusader Purchase Agreement. Recipients of the stock consideration and warrants will not be permitted to dispose of such stock consideration or warrants for 180 days after the closing date of the transaction.
If the total amount of the claims against Crusader that are required to be paid or reserved for under Crusader’s plan of reorganization (the “Plan”) on the closing date exceeds the amount of the cash consideration payable by us plus Crusader’s cash assets on the closing date, then we will make up to a $30.0 million loan to the liquidating trust created under the Plan to pay or reserve for such claims. In the event of such a loan, a number of
shares of the Company’s common stock with an aggregate value (calculated at $13.4452 per share) equal to the amount of the loan will be withheld and reserved from the shares required to be issued on the closing date. Approximately six months after the closing date, we will deliver the number of reserved shares that has an aggregate value (calculated at $13.4452 per share) equal to the amount of the loan that was repaid to us by the liquidating trust minus unpaid interest.
Grey Ranch. During October 2009, we executed amendments to certain agreements related to the ownership and operation of Grey Ranch Plant, LP (“GRLP”), the limited partnership that operates the Grey Ranch Plant located in Pecos County, Texas. As a result of these amendments, we became the primary beneficiary of GRLP. We currently account for our ownership interest in GRLP using the equity method of accounting; however, due to this change, we will include the activity of GRLP in our consolidated financial statements prospectively beginning on the agreements’ effective date, or October 1, 2009. The change from equity method of accounting to the consolidation of GRLP activity will have no effect on our net income.
Segment Overview
We operate in three business segments: exploration and production, drilling and oil field services and midstream gas services. The all otherAll Other column in the tables below includes items not related to our reportable segments including our CO2 gathering and sales operations and corporate operations. Management evaluates the performance of our business segments based on operating income (loss), which is defined as segment operating revenue less operating expenses and depreciation, depletion and amortization. Results of these measures provide important
35
| Exploration and | Drilling and Oil | Midstream Gas | Consolidated | |||||||||||||||||
| Production | Field Services | Services | All Other | Total | ||||||||||||||||
Three Months Ended June 30, 2009 | ||||||||||||||||||||
| Revenues | $ | 103,727 | $ | 55,975 | $ | 71,838 | $ | 6,511 | $ | 238,051 | ||||||||||
| Inter-segment revenue | (64 | ) | (50,877 | ) | (52,742 | ) | (269 | ) | (103,952 | ) | ||||||||||
| Total revenues | $ | 103,663 | $ | 5,098 | $ | 19,096 | $ | 6,242 | $ | 134,099 | ||||||||||
| Operating loss | $ | (5,248 | ) | $ | (2,801 | ) | $ | (28,030 | ) | $ | (13,908 | ) | $ | (49,987 | ) | |||||
| Interest expense, net | (41,387 | ) | (558 | ) | — | (286 | ) | (42,231 | ) | |||||||||||
| Other income, net | 483 | — | 200 | — | 683 | |||||||||||||||
| Loss before income taxes | $ | (46,152 | ) | $ | (3,359 | ) | $ | (27,830 | ) | $ | (14,194 | ) | $ | (91,535 | ) | |||||
Three Months Ended June 30, 2008 | ||||||||||||||||||||
| Revenues | $ | 293,472 | $ | 108,720 | $ | 219,819 | $ | 5,653 | $ | 627,664 | ||||||||||
| Inter-segment revenue | (44 | ) | (96,856 | ) | (151,523 | ) | (1,191 | ) | (249,614 | ) | ||||||||||
| Total revenues | $ | 293,428 | $ | 11,864 | $ | 68,296 | $ | 4,462 | $ | 378,050 | ||||||||||
| Operating (loss) income | $ | (6,545 | ) | $ | 4,644 | $ | 6,553 | $ | (16,447 | ) | $ | (11,795 | ) | |||||||
| Interest expense, net | (19,823 | ) | (770 | ) | — | (297 | ) | (20,890 | ) | |||||||||||
| Other income (expense), net | 848 | (109 | ) | 664 | 108 | 1,511 | ||||||||||||||
| (Loss) income before income taxes | $ | (25,520 | ) | $ | 3,765 | $ | 7,217 | $ | (16,636 | ) | $ | (31,174 | ) | |||||||
| Exploration and | Drilling and Oil | Midstream Gas | Consolidated | |||||||||||||||||
| Production | Field Services | Services | All Other | Total | ||||||||||||||||
Six Months Ended June 30, 2009 | ||||||||||||||||||||
| Revenues | $ | 225,660 | $ | 149,789 | $ | 166,205 | $ | 12,407 | $ | 554,061 | ||||||||||
| Inter-segment revenue | (130 | ) | (138,380 | ) | (121,695 | ) | (744 | ) | (260,949 | ) | ||||||||||
| Total revenues | $ | 225,530 | $ | 11,409 | $ | 44,510 | $ | 11,663 | $ | 293,112 | ||||||||||
| Operating loss(1) | $ | (1,101,110 | ) | $ | (5,556 | ) | $ | (27,820 | ) | $ | (31,781 | ) | $ | (1,166,267 | ) | |||||
| Interest expense, net | (81,205 | ) | (1,191 | ) | — | (572 | ) | (82,968 | ) | |||||||||||
| Other income, net | 1,243 | — | 434 | — | 1,677 | |||||||||||||||
| Loss before income taxes | $ | (1,181,072 | ) | $ | (6,747 | ) | $ | (27,386 | ) | $ | (32,353 | ) | $ | (1,247,558 | ) | |||||
Six Months Ended June 30, 2008 | ||||||||||||||||||||
| Revenues | $ | 500,438 | $ | 188,558 | $ | 368,054 | $ | 11,507 | $ | 1,068,557 | ||||||||||
| Inter-segment revenue | (88 | ) | (164,372 | ) | (254,671 | ) | (2,290 | ) | (421,421 | ) | ||||||||||
| Total revenues | $ | 500,350 | $ | 24,186 | $ | 113,383 | $ | 9,217 | $ | 647,136 | ||||||||||
| Operating (loss) income | $ | (53,934 | ) | $ | 2,496 | $ | 6,585 | $ | (29,753 | ) | $ | (74,606 | ) | |||||||
| Interest expense, net | (43,235 | ) | (1,412 | ) | — | (603 | ) | (45,250 | ) | |||||||||||
| Other income, net | 780 | 109 | 1,306 | 159 | 2,354 | |||||||||||||||
| (Loss) income before income taxes | $ | (96,389 | ) | $ | 1,193 | $ | 7,891 | $ | (30,197 | ) | $ | (117,502 | ) | |||||||
| Exploration and Production | Drilling and Oil Field Services | Midstream Gas Services | All Other | Consolidated Total | ||||||||||||||||
Three Months Ended September 30, 2009 | ||||||||||||||||||||
Revenues | $ | 105,026 | $ | 42,958 | $ | 52,564 | $ | 9,576 | $ | 210,124 | ||||||||||
Inter-segment revenue | (66 | ) | (37,160 | ) | (36,644 | ) | (1,399 | ) | (75,269 | ) | ||||||||||
Total revenues | $ | 104,960 | $ | 5,798 | $ | 15,920 | $ | 8,177 | $ | 134,855 | ||||||||||
Operating (loss) income | $ | (31,123 | ) | $ | (4,621 | ) | $ | 476 | $ | (14,961 | ) | $ | (50,229 | ) | ||||||
Interest expense, net | (52,344 | ) | (482 | ) | — | (286 | ) | (53,112 | ) | |||||||||||
Other (expense) income, net | (1,144 | ) | — | 593 | — | (551 | ) | |||||||||||||
(Loss) income before income taxes | $ | (84,611 | ) | $ | (5,103 | ) | $ | 1,069 | $ | (15,247 | ) | $ | (103,892 | ) | ||||||
Three Months Ended September 30, 2008 | ||||||||||||||||||||
Revenues | $ | 259,878 | $ | 121,376 | $ | 198,220 | $ | 5,851 | $ | 585,325 | ||||||||||
Inter-segment revenue | (66 | ) | (109,343 | ) | (140,510 | ) | (1,383 | ) | (251,302 | ) | ||||||||||
Total revenues | $ | 259,812 | $ | 12,033 | $ | 57,710 | $ | 4,468 | $ | 334,023 | ||||||||||
Operating income (loss) | $ | 418,751 | $ | 4,054 | $ | (1,359 | ) | $ | (20,159 | ) | $ | 401,287 | ||||||||
Interest expense, net | (39,075 | ) | (729 | ) | — | (299 | ) | (40,103 | ) | |||||||||||
Other (expense) income, net | (63 | ) | 281 | (418 | ) | 57 | (143 | ) | ||||||||||||
Income (loss) before income taxes | $ | 379,613 | $ | 3,606 | $ | (1,777 | ) | $ | (20,401 | ) | $ | 361,041 | ||||||||
Nine Months Ended September 30, 2009 Revenues Inter-segment revenue Total revenues Operating loss(1) Interest expense, net Other income, net Loss before income taxes Nine Months Ended September 30, 2008 Revenues Inter-segment revenue Total revenues Operating income (loss) Interest expense, net Other income, net Income (loss) before income taxes Exploration and
Production Drilling and Oil
Field Services Midstream Gas
Services All Other Consolidated
Total $ 330,686 $ 192,747 $ 218,769 $ 21,983 $ 764,185 (196 ) (175,540 ) (158,339 ) (2,143 ) (336,218 ) $ 330,490 $ 17,207 $ 60,430 $ 19,840 $ 427,967 $ (1,132,233 ) $ (10,177 ) $ (27,344 ) $ (46,742 ) $ (1,216,496 ) (133,550 ) (1,673 ) — (858 ) (136,081 ) 100 — 1,027 — 1,127 $ (1,265,683 ) $ (11,850 ) $ (26,317 ) $ (47,600 ) $ (1,351,450 ) $ 760,316 $ 309,934 $ 566,274 $ 17,358 $ 1,653,882 (154 ) (273,715 ) (395,181 ) (3,673 ) (672,723 ) $ 760,162 $ 36,219 $ 171,093 $ 13,685 $ 981,159 $ 364,817 $ 6,550 $ 5,226 $ (49,912 ) $ 326,681 (82,310 ) (2,141 ) — (902 ) (85,353 ) 716 389 891 215 2,211 $ 283,223 $ 4,798 $ 6,117 $ (50,599 ) $ 243,539 ��
| (1) | The operating loss for the exploration and production segment for the |
36
The primary factors affecting the financial results of our exploration and production segment are the prices we receive for our natural gas and crude oil production, the quantity of natural gas and crude oil we produce and changes in the fair value of commodity derivative contracts we use to reduce the volatility of the prices we receive for our natural gas and crude oil production. A threeThree and six-month comparisonnine-month comparisons of production and prices isare presented in the following table:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2009 | 2008 | 2009 | 2008 | |||||||||||||
| Production data: | ||||||||||||||||
| Natural gas (Mmcf) | 22,255 | 21,715 | 46,687 | 40,888 | ||||||||||||
| Crude oil (MBbls) | 722 | 620 | 1,440 | 1,231 | ||||||||||||
| Combined equivalent volumes (Mmcfe) | 26,587 | 25,435 | 55,327 | 48,274 | ||||||||||||
| Average daily combined equivalent volumes (Mmcfe/d) | 292 | 280 | 306 | 265 | ||||||||||||
| Average prices — as reported(1): | ||||||||||||||||
| Natural gas (per Mcf) | $ | 2.95 | $ | 10.22 | $ | 3.41 | $ | 9.11 | ||||||||
| Crude oil (per Bbl)(2) | $ | 51.79 | $ | 113.12 | $ | 45.13 | $ | 101.55 | ||||||||
| Combined equivalent (per Mcfe) | $ | 3.88 | $ | 11.49 | $ | 4.05 | $ | 10.31 | ||||||||
| Average prices — including impact of derivative contract settlements: | ||||||||||||||||
| Natural gas (per Mcf) | $ | 7.07 | $ | 7.93 | $ | 7.40 | $ | 8.11 | ||||||||
| Crude oil (per Bbl)(2) | $ | 56.01 | $ | 99.97 | $ | 49.85 | $ | 93.74 | ||||||||
| Combined equivalent (per Mcfe) | $ | 7.44 | $ | 9.21 | $ | 7.54 | $ | 9.26 | ||||||||
| Three Months Ended September 30, | Change | ||||||||||||
| 2009 | 2008 | Amount | Percent | ||||||||||
Production data: | |||||||||||||
Natural gas (Mmcf) | 20,897 | 22,209 | (1,312 | ) | (5.9 | )% | |||||||
Crude oil (MBbls) | 723 | 521 | 202 | 38.8 | % | ||||||||
Combined equivalent volumes (Mmcfe) | 25,235 | 25,335 | (100 | ) | (0.4 | )% | |||||||
Average daily combined equivalent volumes (Mmcfe/d) | 274 | 275 | (1 | ) | (0.4 | )% | |||||||
Average prices — as reported(1): | |||||||||||||
Natural gas (per Mcf) | $ | 2.82 | $ | 9.04 | $ | (6.22 | ) | (68.8 | )% | ||||
Crude oil (per Bbl)(2) | $ | 62.76 | $ | 112.24 | $ | (49.48 | ) | (44.1 | )% | ||||
Combined equivalent (per Mcfe) | $ | 4.14 | $ | 10.23 | $ | (6.09 | ) | (59.5 | )% | ||||
Average prices — including impact of derivative contract settlements: | |||||||||||||
Natural gas (per Mcf) | $ | 6.67 | $ | 8.09 | $ | (1.42 | ) | (17.6 | )% | ||||
Crude oil (per Bbl)(2) | $ | 66.47 | $ | 100.19 | $ | (33.72 | ) | (33.7 | )% | ||||
Combined equivalent (per Mcfe) | $ | 7.43 | $ | 9.15 | $ | (1.72 | ) | (18.8 | )% | ||||
Production data: Natural gas (Mmcf) Crude oil (MBbls) Combined equivalent volumes (Mmcfe) Average daily combined equivalent volumes (Mmcfe/d) Average prices — as reported(1): Natural gas (per Mcf) Crude oil (per Bbl)(2) Combined equivalent (per Mcfe) Average prices — including impact of derivative contract settlements: Natural gas (per Mcf) Crude oil (per Bbl)(2) Combined equivalent (per Mcfe) Nine Months Ended
September 30, Change 2009 2008 Amount Percent 67,583 63,097 4,486 7.1 % 2,163 1,751 412 23.5 % 80,561 73,603 6,958 9.5 % 295 269 26 9.7 % $ 3.23 $ 9.09 $ (5.86 ) (64.5 )% $ 51.02 $ 104.73 $ (53.71 ) (51.3 )% $ 4.08 $ 10.28 $ (6.20 ) (60.3 )% $ 7.18 $ 8.10 $ (0.92 ) (11.4 )% $ 55.40 $ 95.66 $ (40.26 ) (42.1 )% $ 7.51 $ 9.22 $ (1.71 ) (18.5 )%
| (1) | Prices represent actual average prices for the periods presented and do not give effect to derivative transactions. | |
| (2) | Includes natural gas liquids. |
Exploration and Production Segment — Three months ended JuneSeptember 30, 2009 compared to the three months ended JuneSeptember 30, 2008
Exploration and production segment revenues decreased 64.7%59.6% to $103.7$105.0 million in the three months ended JuneSeptember 30, 2009 from $293.4$259.8 million in the three months ended JuneSeptember 30, 2008, as a result of a 66.2%59.5% decrease in the combined average price we received for our natural gas and crude oil production. In the three-month period ended JuneSeptember 30, 2009, we increased natural gas production by 0.5decreased slightly to 20.9 Bcf to 22.2 Bcf and increased crude oil production increased by 102202 MBbls to 722723 MBbls from the comparable period in 2008. The total combined 1.2 Bcfe increasedecrease in natural gas production was primarily due to an increase in the number of producing wells in which we owned interests as a resultresulted from shut-ins for repair and maintenance activities conducted on certain of our successful drilling program in the Mid-Continent and West Texas area.
The average price we received for our natural gas production for the three-month period ended JuneSeptember 30, 2009 decreased 71.1%68.8%, or $7.27$6.22 per Mcf, to $2.95$2.82 per Mcf from $10.22$9.04 per Mcf in the comparable period in 2008. The average price received for our crude oil production decreased 54.2%44.1%, or $61.33$49.48 per barrel, to $51.79$62.76 per barrel during the three months ended JuneSeptember 30, 2009 from $113.12$112.24 per barrel during the same period in 2008. Including the impact of derivative contract settlements, the effective price received for natural gas for the three-month period ended JuneSeptember 30, 2009 was $7.07$6.67 per Mcf compared to $7.93$8.09 per Mcf during the same period in 2008. Including the impact of derivative contract settlements, the effective price received for crude oil for the three-month period ended JuneSeptember 30, 2009 was $56.01$66.47 per Bbl compared to $99.97$100.19 per Bbl during the same period in 2008. During 2008 and continuing intoearly 2009, we entered into derivative contracts to mitigate the impact of commodity price fluctuations on our production through 2012. Due to the long-term nature of our investment in the development of the WTO,West Texas Overthrust (“WTO”), we enter into natural gas and crude oil swaps and natural gas basis swaps for a portion of our production in order to stabilize future cash inflows for planning purposes. Our derivative contracts are not designated as hedges and, as a
37
During the three-month period ended JuneSeptember 30, 2009, the exploration and production segment reported a $19.0$47.9 million net loss on our commodity derivative positions ($113.7130.9 million unrealized loss and $94.7$83.0 million realized gains) compared to a $159.8$292.5 million net lossgain on our commodity derivative positions ($101.8319.8 million
unrealized lossgain and $58.0$27.3 million realized losses) in the comparable period in 2008. Unrealized gains or losses on derivative contracts represent the change in fair value of open derivative contracts during the period. The unrealized loss on natural gas and crude oil derivative contracts recorded during the three months ended JuneSeptember 30, 2009 was attributable to an increase in average natural gas and crude oil prices at JuneSeptember 30, 2009 compared to the average natural gas and crude oil prices at March 31,June 30, 2009 or the contract price for contracts entered into during the secondthird quarter of 2009.
For the three months ended September 30, 2009, we had a $31.1 million operating loss in our exploration and production segment compared to operating income of $418.8 million for the same period in 2008. The operating loss for the three months ended September 30, 2009 was attributable to a $154.8 million decrease in exploration and production revenues and an increase of $340.5 million in loss (gain) on derivative contracts, partially offset by a $38.9 million decrease in depreciation, depletion and amortization (“DD&A”) and a $5.6 million decrease in production taxes. See further discussion of DD&A and production taxes at “Results of Operations—Consolidated.”
Exploration and Production Segment — SixNine months ended JuneSeptember 30, 2009 compared to the sixnine months ended JuneSeptember 30, 2008
Exploration and production segment revenues decreased 54.9%56.5% to $225.5$330.5 million in the sixnine months ended JuneSeptember 30, 2009 from $500.4$760.2 million in the sixnine months ended JuneSeptember 30, 2008, as a result of a 60.7%60.3% decrease in the combined average price we received for our natural gas and crude oil production. The decrease in prices received was slightly offset by a 14.6%9.5% increase in combined production volumes. In the six-monthnine-month period ended JuneSeptember 30, 2009, we increased natural gas production by 5.84.5 Bcf to 46.767.6 Bcf and increased crude oil production by 209412 MBbls to 1,4402,163 MBbls from the comparable period in 2008. The total combined 7.17.0 Bcfe increase in production was primarily due to an increase in the increased number of producing wells in which we owned interests as a result ofduring the successful drilling programs in2009 period compared to the WTO and the Mid-Continent.
The average price we received for our natural gas production for the six-monthnine-month period ended JuneSeptember 30, 2009 decreased 62.6%64.5%, or $5.70$5.86 per Mcf, to $3.41$3.23 per Mcf from $9.11$9.09 per Mcf in the comparable period in 2008. The average price received for our crude oil production decreased 55.6%51.3%, or $56.42$53.71 per barrel, to $45.13$51.02 per barrel during the sixnine months ended JuneSeptember 30, 2009 from $101.55$104.73 per barrel during the same period in 2008. Including the impact of derivative contract settlements, the effective price received for natural gas for the six-monthnine-month period ended JuneSeptember 30, 2009 was $7.40$7.18 per Mcf compared to $8.11$8.10 per Mcf during the same period in 2008. Including the impact of derivative contract settlements, the effective price received for crude oil for the six-monthnine-month period ended JuneSeptember 30, 2009 was $49.85$55.40 per Bbl compared to $93.74$95.66 per Bbl during the same period in 2008.
During the nine-month period ended September 30, 2009, the exploration and production segment reported a $139.7 million net gain on our commodity derivative positions ($136.5 million unrealized loss and $276.2 million realized gains) compared to a $4.1 million net loss on our commodity derivative positions ($73.9 million unrealized gain and $78.0 million realized losses) in the same period in 2008. The unrealized loss on natural gas and crude oil derivative contracts recorded during the nine months ended September 30, 2009 was attributable to an increase in average natural gas and crude oil prices at September 30, 2009 compared to the average natural gas and crude oil prices at December 31, 2008 or the contract price for contracts entered into during 2009. The realized gains of $276.2 million for the nine months ended September 30, 2009 was due to a decline in natural gas prices at the time of settlement compared to the contract price.
For the sixnine months ended JuneSeptember 30, 2009, we had a $1,101.1$1,132.2 million operating loss in our exploration and production segment compared to a lossoperating income of $53.9$364.8 million for the same period in 2008. The operating loss for the sixnine months ended JuneSeptember 30, 2009 is attributable to a $274.8$429.7 million decrease in exploration and production revenues, and a first quarter $1,304.4 million full cost ceiling impairment, and a $12.9 million increase in production expenses, partially offset by a $187.7$139.7 million net gain on our commodity
derivative contracts, of which $5.5included a $136.5 million was an unrealized loss, a $42.8$81.7 million decrease in depreciation, depletion and amortizationDD&A and a $20.7$26.3 million decrease in production taxes. The full cost ceiling impairment was the result of the decline of the future value of our reserves due to depressed natural gas and crude oil prices at March 31, 2009. No additional full cost ceiling impairment was recognized at June 30, 2009.
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The financial results of our drilling and oil field services segment depend on many factors, particularly the demand for and the price we can charge for our services. In addition to providing drilling services, our oil field services business also conducts operations that complement our drilling services 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 we operate, are included in drilling and services revenuerevenues and expenseexpenses while drilling and oil field service revenues earned and expenses incurred in performing services for our own account are eliminated in consolidation.
As of JuneSeptember 30, 2009, we owned 31 drilling rigs, through Lariat, of which 2320 were idle, through Lariat.idle. As Lariat’s rigs are intended primarily to drill for our account, there is not a significant impact to our consolidated results of operations in having this number of rigs idle. The table below presents information concerning rigs owned by Lariat:
| June 30, | ||||||||
| 2009 | 2008 | |||||||
| Rigs working for SandRidge | 6 | 27 | ||||||
| Rigs working for third parties | — | 2 | ||||||
| Idle rigs(1) | 23 | 2 | ||||||
| Total operational | 29 | 31 | ||||||
| Non-operational rigs | 2 | 1 | ||||||
| Total rigs owned | 31 | 32 | ||||||
| September 30, | ||||
| 2009 | 2008 | |||
Rigs working for SandRidge | 7 | 26 | ||
Rigs working for third parties | 1 | 2 | ||
Idle rigs(1) | 20 | — | ||
Total operational | 28 | 28 | ||
Non-operational rigs(2) | 3 | 4 | ||
Total rigs owned | 31 | 32 | ||
| (1) | Includes |
| (2) | Includes rigs being serviced. |
Until April 15, 2009, we also indirectly owned an additional eleven operational rigs through our investment in Larclay. Although our ownership in Larclay afforded us access to Larclay’s operational rigs, we did not control Larclay, and, therefore, did not consolidate the results of its operations with ours. Only the activities of our wholly owned drilling and oil field services subsidiaries are included in the financial results of our drilling and oil field services segment. On April 15, 2009, Lariat completed an assignment to CWEI of Lariat’s 50% equity interest in Larclay. Pursuant to the Larclay Assignment, Lariat assigned all of its right, title and interest in and to Larclay to CWEI effective as of April 15, 2009, and CWEI assumed all of the obligations and liabilities of Lariat relating to Larclay from and after April 15, 2009.Larclay. We fully impaired our investment in and notes receivable due from Larclay at December 31, 2008. There were no additional losses on Larclay during the three or six-monthnine-month periods ended JuneSeptember 30, 2009 or as a result of the Larclay Assignment.
Drilling and Oil Field Services Segment — Three months ended JuneSeptember 30, 2009 compared to the three months ended JuneSeptember 30, 2008
Drilling and oil field services segment revenues decreased to $5.1$5.8 million in the three-month period ended JuneSeptember 30, 2009 from $11.9$12.0 million in the three-month period ended JuneSeptember 30, 2008. This resulted in an operating loss of $2.8$4.6 million in the three-month period ended JuneSeptember 30, 2009 compared to operating
income of $4.6$4.1 million for the same period in 2008. The decline in revenues and operating income was primarily attributable to a decrease in the number of our rigs operating and services performed for third parties as well as lower operating margins. All sixSeven of our eight rigs working at JuneSeptember 30, 2009 were working for our account, compared to 2726 of our 2928 working rigs working for our account at JuneSeptember 30, 2008. Additionally, theThe average daily rate received per rig working for third parties declined to an average of $9,000$11,020 per rig per working day during the three-month period ended JuneSeptember 30, 2009 from an average of $13,932$13,600 per rig per working day during the comparable period in 2008. We received reduced, or stand-by, rates on two of our rigs during the three-month period ended JuneSeptember 30, 2009.
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Drilling and oil field services segment revenues decreased to $11.4$17.2 million in the six-monthnine-month period ended JuneSeptember 30, 2009 from $24.2$36.2 million in the six-monthnine-month period ended JuneSeptember 30, 2008. This resulted in an operating loss of $5.6$10.2 million in the three-monthnine-month period ended JuneSeptember 30, 2009 compared to operating income of $2.5$6.6 million in the same period in 2008. The decline in revenues and operating income was primarily attributable to the decrease in the number of our rigs operating and services performed for third parties as well as lower operating margins. During the six-monthnine-month period ended JuneSeptember 30, 2009, approximately 92.4%91.1%, or $138.4$175.5 million, of our drilling and oil field serviceservices revenues were generated by work performed on our own account and eliminated in consolidation compared to approximately 87.2%88.3%, or $164.4$273.7 million, for the same period in 2008. The average daily rate received per rig working for third parties declined to an average of $10,264$10,524 per rig per working day during the six-monthnine-month period ended JuneSeptember 30, 2009 from an average of $14,000$14,600 per rig per working day during the comparable period in 2008. During the six-month period ended June 30, 2008, one of our rigs working for a third-party was operated under a turnkey contract, while none of our rigs were operated under turnkey contracts during the six-month period ended June 30, 2009. Additionally, weWe received reduced, or stand-by, rates on two of our rigs during the six-monthnine-month period ended JuneSeptember 30, 2009.
Midstream Gas Services Segment
Midstream gas services segment revenues consist mostly of gas marketing revenue, which is one of our largest revenue components; however, gas marketing is a very low-margin business. On a consolidated basis, midstream and marketing revenues represent natural gas sold on behalf of third parties and the fees we charge related to gathering, compressing and treating this gas. Gas marketing operating costs represent payments made to third parties for the proceeds from the sale of gas owned by such parties, net of any applicable margin and actual costs to gather, compress and treat the gas that we charge. The primary factors affecting midstream gas services are the quantity of natural gas we gather, treat and market and the prices we pay and receive for natural gas.
In June 2009, we completed the sale of our gathering and compression assets located in the Piñon Field of the WTO. Net proceeds from the sale were approximately $197.5 million, which resulted in a loss on the sale of $26.5 million. The sale of these assets is not expected to have a significant impact on our future consolidated results of operations. In conjunction with the sale, we entered into a gas gathering agreement and an operations and maintenance agreement. Under the gas gathering agreement, we have dedicated our Piñon Field acreage for priority gathering services for a period of twenty years and we will pay a fee for such services that was negotiated at arms’ length. Pursuant to the operations and maintenance agreement, we will operate and maintain the gathering system assets sold for a period of twenty years unless we or the buyer of the assets chooses to terminate the agreement.
Midstream Gas Services Segment — Three months ended JuneSeptember 30, 2009 compared to the three months ended JuneSeptember 30, 2008
Midstream gas services segment revenues for the three months ended JuneSeptember 30, 2009 were $19.1$15.9 million compared to $68.3$57.7 million in the comparable period of 2008. The quarterly decrease in midstream gas services revenues was attributable to a 68.3%66.4% decrease in natural gas prices received in the three-month period ended JuneSeptember 30, 2009 compared to the same period in 2008. Operating costs decreased in proportion to revenues due to the decrease in natural gas prices paid in the three-month period ended JuneSeptember 30, 2009 compared to the same period in 2008. Profit margin for the three-month period ended JuneSeptember 30, 2009 was 6.1%9.5% compared to a profit margin of 6.8%10.9% for the same period in 2008. The net loss of $27.8 million for the three months ended June 30, 2009 was primarily attributable to the loss on the sale of our gathering and compression assets in the Piñon Field.
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Midstream gas services segment revenues for the sixnine months ended JuneSeptember 30, 2009 were $44.5$60.4 million compared to $113.4$171.1 million in the comparable period of 2008. The decrease in midstream gas services revenues was attributable to a 60.8%61.7% decrease in natural gas prices received in the six-monthnine-month period ended JuneSeptember 30, 2009 compared to the same period in 2008. Midstream operating costs decreased in proportion to revenue based on the decrease in natural gas prices paid in the six-monthnine-month period ended JuneSeptember 30, 2009 compared to the same period in 2008. Profit margin for the six-monthnine-month period ended JuneSeptember 30, 2009 was 8.3%8.6% compared to a profit margin of 9.3%9.8% for the same period in 2008. The netoperating loss of $27.4$27.3 million for the six-monthnine-month period ended JuneSeptember 30, 2009 compared to netoperating income of $7.9$5.2 million for the same period in 2008 is primarily attributable to the loss on the sale of our gathering and compression assets in the Piñon Field in 2009.
Results of Operations — Consolidated
Three months ended JuneSeptember 30, 2009 compared to the three months ended JuneSeptember 30, 2008
Revenues. Total revenues decreased 64.5%59.6% to $134.1$134.9 million for the three months ended JuneSeptember 30, 2009 from $378.1$334.0 million in the same period in 2008. This decrease was primarily due to a $189.1$154.8 million decrease in natural gas and crude oil sales combined with decreases in midstream and marketing revenues. The table below presents a comparison of revenues for the three-month periods ended JuneSeptember 30, 2009 and 2008.
| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Natural gas and crude oil | $ | 103,039 | $ | 292,134 | $ | (189,095 | ) | (64.7 | )% | |||||||
| Drilling and services | 5,176 | 11,957 | (6,781 | ) | (56.7 | )% | ||||||||||
| Midstream and marketing | 19,642 | 69,488 | (49,846 | ) | (71.7 | )% | ||||||||||
| Other | 6,242 | 4,471 | 1,771 | 39.6 | % | |||||||||||
| Total revenues | $ | 134,099 | $ | 378,050 | $ | (243,951 | ) | (64.5 | )% | |||||||
| Three Months Ended September 30, | |||||||||||||
| 2009 | 2008 | $ Change | % Change | ||||||||||
| (In thousands) | |||||||||||||
Revenues: | |||||||||||||
Natural gas and crude oil | $ | 104,348 | $ | 259,141 | $ | (154,793 | ) | (59.7 | )% | ||||
Drilling and services | 5,878 | 12,054 | (6,176 | ) | (51.2 | )% | |||||||
Midstream and marketing | 16,453 | 58,343 | (41,890 | ) | (71.8 | )% | |||||||
Other | 8,176 | 4,485 | 3,691 | 82.3 | % | ||||||||
Total revenues | $ | 134,855 | $ | 334,023 | $ | (199,168 | ) | (59.6 | )% | ||||
Total natural gas and crude oil revenues decreased $189.1 million to $103.0$104.3 million for the three months ended JuneSeptember 30, 2009 compared to $292.1$259.1 million for the same period in 2008. The decrease was primarily attributable to a decrease in prices received for our natural gas and crude oil production. The average price received, excluding the impact of derivative contracts, for our natural gas and crude oil production decreased 66.2%59.5% in the 2009 period to $3.88$4.14 per Mcfe compared to $11.49$10.23 per Mcfe in 2008.
Drilling and services revenues decreased 56.7%51.2% to $5.2$5.9 million for the three months ended JuneSeptember 30, 2009 compared to $12.0$12.1 million in the same period in 2008. The decline in revenues was due to the decrease in rigs operating for and services provided to third parties combined with the decline in the average daily rate received per rig working for third parties.
Midstream and marketing revenues decreased $49.8$41.9 million, or 71.7%71.8%, with revenues of $19.6$16.4 million in the three-month period ended JuneSeptember 30, 2009 compared to $69.5$58.3 million in the three-month period ended JuneSeptember 30, 2008. The quarterly decrease in midstream gas services revenues was primarily attributable to the decrease in natural gas prices for third party volumes we marketed in the three-month period ended JuneSeptember 30, 2009 compared to the same period in 2008.
Other revenuerevenues, generated primarily by our CO2gathering and sales operations, increased to $6.2$8.2 million for the three months ended JuneSeptember 30, 2009 from $4.5 million for the same period in 20082008. The increase was due to higher CO2 volumes sold to third parties forduring the three months ended JuneSeptember 30, 2009. Other revenue was generated primarily by our CO2 gathering and sales operations.
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| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Production | $ | 41,450 | $ | 40,254 | $ | 1,196 | 3.0 | % | ||||||||
| Production taxes | 593 | 13,519 | (12,926 | ) | (95.6 | )% | ||||||||||
| Drilling and services | 6,415 | 5,066 | 1,349 | 26.6 | % | |||||||||||
| Midstream and marketing | 18,450 | 64,733 | (46,283 | ) | (71.5 | )% | ||||||||||
| Depreciation, depletion and amortization — natural gas and crude oil | 34,350 | 72,256 | (37,906 | ) | (52.5 | )% | ||||||||||
| Depreciation, depletion and amortization — other | 14,034 | 15,780 | (1,746 | ) | (11.1 | )% | ||||||||||
| General and administrative | 23,632 | 26,203 | (2,571 | ) | (9.8 | )% | ||||||||||
| Loss on derivative contracts | 18,992 | 159,768 | (140,776 | ) | (88.1 | )% | ||||||||||
| Loss (gain) on sale of assets | 26,170 | (7,734 | ) | 33,904 | (438.4 | )% | ||||||||||
| Total operating costs and expenses | $ | 184,086 | $ | 389,845 | $ | (205,759 | ) | (52.8 | )% | |||||||
| Three Months Ended September 30, | ||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||
| (In thousands) | ||||||||||||||
Operating costs and expenses: | ||||||||||||||
Production | $ | 41,350 | $ | 41,070 | $ | 280 | 0.7 | % | ||||||
Production taxes | 1,069 | 6,717 | (5,648 | ) | (84.1 | )% | ||||||||
Drilling and services | 9,676 | 8,191 | 1,485 | 18.1 | % | |||||||||
Midstream and marketing | 14,889 | 51,908 | (37,019 | ) | (71.3 | )% | ||||||||
Depreciation, depletion and amortization — natural gas and crude oil | 33,060 | 71,964 | (38,904 | ) | (54.1 | )% | ||||||||
Depreciation, depletion and amortization — other | 12,092 | 17,597 | (5,505 | ) | (31.3 | )% | ||||||||
General and administrative | 25,006 | 29,235 | (4,229 | ) | (14.5 | )% | ||||||||
Loss (gain) on derivative contracts | 47,933 | (292,526 | ) | 340,459 | (116.4 | )% | ||||||||
Loss (gain) on sale of assets | 9 | (1,420 | ) | 1,429 | (100.6 | )% | ||||||||
Total operating costs and expenses | $ | 185,084 | $ | (67,264 | ) | $ | 252,348 | (375.2 | )% | |||||
Production taxes decreased $12.9$5.6 million, or 95.6%84.1%, to $0.6 million$1.1 million. The decrease was primarily due to severance tax refunds received in 2009 and the decreased prices received for our production during the three months ended JuneSeptember 30, 2009.
Drilling and services expenses, which includes operating expenses attributable to the drilling and oil field services segment and our CO2 services companies, increased 26.6%18.1% for the three months ended JuneSeptember 30, 2009 compared to the same period in 2008. The increase was primarily due to less rig activity and lower profit margins in 2009. This2009, which resulted in lessa lower amount of costs associated with the drilling business being allocated to the full cost pool and an increased amount of such costs being eliminated by intercompany activity.
Midstream and marketing expenses decreased $46.3$37.0 million, or 71.5%71.3%, to $18.5$14.9 million due to lower natural gas prices paid for natural gas that we sold on behalf of third parties during the three months ended JuneSeptember 30, 2009 than duringcompared to the comparablesame period in 2008.
DD&A for our natural gas and crude oil properties decreased to $34.4$33.1 million for the three months ended JuneSeptember 30, 2009 from $72.3$72.0 million for the same period in 2008. Our DD&A per Mcfe decreased $1.55$1.53 to $1.29
$1.31 in the secondthird quarter of 2009 from $2.84 in the comparable period in 2008 as a result of the cumulative $3,159.4 million full cost ceiling impairment, which reduced the carrying value of our natural gas and crude oil properties. Of the cumulative impairment, $1,855.0 million was incurred at December 31, 2008 and $1,304.4 million was incurred at March 31, 2009. See Note 5 of Notes to the Condensed Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding the full cost ceiling impairment.
DD&A for our other assets consists primarily of depreciation of our drilling rigs, midstream gathering and compression facilities and other equipment. The decrease in DD&A for our other assets was attributable primarily to a change in asset lives of certain of our drilling, oil field services, midstream and other assets to align with
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General and administrative expenses decreased $2.6$4.2 million to $23.6$25.0 million for the three months ended JuneSeptember 30, 2009 from $26.2$29.2 million for the comparable period in 2008. The decrease was principally attributable to higher professional services and feesbad debt expense for the three months ended JuneSeptember 30, 2008 relateddue to audit, consultingthe establishment of a $1.5 million allowance for amounts due from a customer filing for bankruptcy and legal fees.overall decreases in spending due to economic conditions and a decrease in employees during the three months ended September 30, 2009. General and administrative expenses included non-cash stock compensation expense of $4.6$6.2 million, net of amounts capitalized, for the three months ended JuneSeptember 30, 2009 compared to $4.1$5.5 million for the comparable period in 2008. Salaries, and wages and stock compensation were reduced by $5.4$6.0 million in capitalized general and administrative expenses, which included $0.8$1.1 million of capitalized stock compensation expense, for the three months ended JuneSeptember 30, 2009 compared to $4.3$6.3 million for the three months ended JuneSeptember 30, 2008.
We recorded a net loss of $19.0$47.9 million ($113.7130.9 million unrealized loss and $94.7$83.0 million realized gains) on our commodity derivative contracts for the three months ended JuneSeptember 30, 2009 compared to a $159.8$292.5 million net lossgain ($101.8319.8 million unrealized lossgain and $58.0$27.3 million realized losses) for the same period in 2008. The unrealized loss recorded in the secondthird quarter of 2009 was attributable to an increase in average natural gas prices at JuneSeptember 30, 2009 compared to average natural gas prices at March 31,June 30, 2009 or the contract date for contracts entered into during the secondthird quarter of 2009.
Other Income (Expense). Total other expense increased to $41.5$53.7 million in the three-month period ended JuneSeptember 30, 2009 from $19.4$40.2 million in the three-month period ended JuneSeptember 30, 2008. The increase is reflected in the table below.
| Three Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | $ | 188 | $ | 1,333 | $ | (1,145 | ) | (85.9 | )% | |||||||
| Interest expense | (42,419 | ) | (22,223 | ) | (20,196 | ) | 90.9 | % | ||||||||
| Income from equity investments | 200 | 556 | (356 | ) | (64.0 | )% | ||||||||||
| Other income, net | 483 | 955 | (472 | ) | (49.4 | )% | ||||||||||
| Total other (expense) income | (41,548 | ) | (19,379 | ) | (22,169 | ) | 114.4 | % | ||||||||
| Loss before income tax benefit | (91,535 | ) | (31,174 | ) | (60,361 | ) | 193.6 | % | ||||||||
| Income tax benefit | (365 | ) | (10,847 | ) | 10,482 | (96.6 | )% | |||||||||
| Net loss | $ | (91,170 | ) | $ | (20,327 | ) | $ | (70,843 | ) | 348.5 | % | |||||
| Three Months Ended September 30, | |||||||||||||||
| 2009 | 2008 | $ Change | % Change | ||||||||||||
| (In thousands) | |||||||||||||||
Other income (expense): | |||||||||||||||
Interest income | $ | 89 | $ | 923 | $ | (834 | ) | (90.4 | )% | ||||||
Interest expense | (53,201 | ) | (41,026 | ) | (12,175 | ) | 29.7 | % | |||||||
Income (loss) from equity investments | 593 | (60 | ) | 653 | (1,088.3 | )% | |||||||||
Other expense, net | (1,144 | ) | (83 | ) | (1,061 | ) | 1,278.3 | % | |||||||
Total other (expense) income | (53,663 | ) | (40,246 | ) | (13,417 | ) | 33.3 | % | |||||||
(Loss) income before income tax (benefit) expense | (103,892 | ) | 361,041 | (464,933 | ) | (128.8 | )% | ||||||||
Income tax (benefit) expense | (2,580 | ) | 130,693 | (133,273 | ) | (102.0 | )% | ||||||||
Net (loss) income | $ | (101,312 | ) | $ | 230,348 | $ | (331,660 | ) | (144.0 | )% | |||||
Interest income decreasedexpense increased to $0.2$53.2 million for the three months ended JuneSeptember 30, 2009 from $1.3 million for the same period in 2008. This decrease was generally due to lower excess cash levels during the three months ended June 30, 2009 compared to the same period in 2008.
balances outstanding during the three months ended JuneSeptember 30, 2009, which was slightly offset by the net gain of $2.6 million on our interest rate swap. Also contributing to the increase was a $9.62009. A $4.5 million unrealized gainloss on our interest rate swap which reducedfurther increased interest expense for the three months ended JuneSeptember 30, 2009 compared to a $2.7 million unrealized loss for the three months ended September 30, 2008.
We reported an income tax benefit of $0.4$2.6 million for the three months ended JuneSeptember 30, 2009, compared to a benefitan expense of $10.9$130.7 million for the same period in 2008. The current period income tax benefit represents an effective income tax rate of 0.4%2.5% compared to an effective income tax rate of 34.8%36.2% in the same period in 2008. The lower
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SixNine months ended JuneSeptember 30, 2009 compared to the sixnine months ended JuneSeptember 30, 2008
Revenues. Total revenues decreased 54.7%56.4% to $293.1$428.0 million for the sixnine months ended JuneSeptember 30, 2009 from $647.1$981.2 million for the same period in 2008. This decrease was primarily due to a $273.3$428.1 million decrease in natural gas and crude oil sales and a $112.2 million decrease in midstream and marketing revenues. The table below presents a comparison of revenues for the six-monthnine-month periods ended JuneSeptember 30, 2009 and 2008.
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Revenues: | ||||||||||||||||
| Natural gas and crude oil | $ | 224,280 | $ | 497,621 | $ | (273,341 | ) | (54.9 | )% | |||||||
| Drilling and services | 11,571 | 24,291 | (12,720 | ) | (52.4 | )% | ||||||||||
| Midstream and marketing | 45,598 | 115,897 | (70,299 | ) | (60.7 | )% | ||||||||||
| Other | 11,663 | 9,327 | 2,336 | 25.0 | % | |||||||||||
| Total revenues | $ | 293,112 | $ | 647,136 | $ | (354,024 | ) | (54.7 | )% | |||||||
| Nine Months Ended September 30, | $ Change | % Change | |||||||||||
| 2009 | 2008 | ||||||||||||
| (In thousands) | |||||||||||||
Revenues: | |||||||||||||
Natural gas and crude oil | $ | 328,628 | $ | 756,762 | $ | (428,134 | ) | (56.6 | )% | ||||
Drilling and services | 17,449 | 36,345 | (18,896 | ) | (52.0 | )% | |||||||
Midstream and marketing | 62,051 | 174,240 | (112,189 | ) | (64.4 | )% | |||||||
Other | 19,839 | 13,812 | 6,027 | 43.6 | % | ||||||||
Total revenues | $ | 427,967 | $ | 981,159 | $ | (553,192 | ) | (56.4 | )% | ||||
Natural gas and crude oil revenues decreased $273.3 million to $224.3$328.6 million for the sixnine months ended JuneSeptember 30, 2009 compared to $497.6$756.8 million for the same period in 2008,2008. The decrease was primarily as a result ofattributable to a decrease in prices received for our natural gas and crude oil production, which was slightly offset by an increase in the natural gas and crude oil produced. The average price received, excluding the impact of derivative contracts, for our natural gas and crude oil production decreased 60.7%60.3% in the 2009 period to $4.05$4.08 per Mcfe compared to $10.31$10.28 per Mcfe in 2008. Total natural gas production increased 14.2%7.1% to 46.767.6 Bcf in 2009 compared to 40.963.1 Bcf in 2008, while crude oil production increased 17.0%23.5% to 1,4402,163 MBbls in 2009 from 1,2311,751 MBbls in 2008.
Drilling and services revenues decreased 52.4%52.0% to $11.6$17.4 million for the sixnine months ended JuneSeptember 30, 2009 compared to $24.3$36.3 million for the same period in 2008. The decline in revenues was due to the decrease in rigs operating for and services provided to third parties and the decline in the average daily rate received per rig working for third parties.
Midstream and marketing revenues decreased $70.3$112.2 million, or 60.7%64.4%, with revenues of $45.6$62.0 million in the six-monthnine-month period ended JuneSeptember 30, 2009 compared to $115.9$174.2 million in the six-monthnine-month period ended JuneSeptember 30, 2008. The decrease was attributable to the decrease in prices for natural gas that we sold on behalf of third parties in the six-monthnine-month period ended JuneSeptember 30, 2009 compared to the same period in 2008.
Other revenuerevenues increased to $11.7$19.8 million for the sixnine months ended JuneSeptember 30, 2009 from $9.3$13.8 million for the same period in 2008. Other revenueThe increase was generated primarily by ourdue to higher CO2 gathering and sales operations.
Operating Costs and Expenses. Total operating costs and expenses increased to $1,459.4$1,644.5 million for the sixnine months ended JuneSeptember 30, 2009 compared to $721.7$654.5 million for the same period in 2008. The increase was primarily due to a first quarter 2009 full cost ceiling impairment and increasesof $1,304.4 million, an increase in production expenses and generala loss on the sale of our gathering and administrative expenses.compression assets in the Piñon Field. These increases were partially offset by net gains on our derivative contracts and decreases in production taxes, midstream and marketing and
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| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Operating costs and expenses: | ||||||||||||||||
| Production | $ | 87,029 | $ | 74,442 | $ | 12,587 | 16.9 | % | ||||||||
| Production taxes | 2,084 | 22,739 | (20,655 | ) | (90.8 | )% | ||||||||||
| Drilling and services | 12,021 | 12,235 | (214 | ) | (1.7 | )% | ||||||||||
| Midstream and marketing | 41,812 | 105,151 | (63,339 | ) | (60.2 | )% | ||||||||||
| Depreciation, depletion, and amortization — natural gas and crude oil | 94,443 | 137,332 | (42,889 | ) | (31.2 | )% | ||||||||||
| Depreciation, depletion and amortization — other | 26,760 | 33,745 | (6,985 | ) | (20.7 | )% | ||||||||||
| Impairment | 1,304,418 | — | 1,304,418 | 100.0 | % | |||||||||||
| General and administrative | 52,117 | 47,197 | 4,920 | 10.4 | % | |||||||||||
| (Gain) loss on derivative contracts | (187,655 | ) | 296,612 | (484,267 | ) | (163.3 | )% | |||||||||
| Loss (gain) on sale of assets | 26,350 | (7,711 | ) | 34,061 | (441.7 | )% | ||||||||||
| Total operating costs and expenses | $ | 1,459,379 | $ | 721,742 | $ | 737,637 | 102.2 | % | ||||||||
| Nine Months Ended September 30, | $ Change | % Change | |||||||||||||
| 2009 | 2008 | ||||||||||||||
| (In thousands) | |||||||||||||||
Operating costs and expenses: | |||||||||||||||
Production | $ | 128,379 | $ | 115,512 | $ | 12,867 | 11.1 | % | |||||||
Production taxes | 3,153 | 29,456 | (26,303 | ) | (89.3 | )% | |||||||||
Drilling and services | 21,697 | 20,426 | 1,271 | 6.2 | % | ||||||||||
Midstream and marketing | 56,702 | 157,059 | (100,357 | ) | (63.9 | )% | |||||||||
Depreciation, depletion and amortization — natural gas and crude oil | 127,503 | 209,296 | (81,793 | ) | (39.1 | )% | |||||||||
Depreciation, depletion and amortization — other | 38,851 | 51,342 | (12,491 | ) | (24.3 | )% | |||||||||
Impairment | 1,304,418 | — | 1,304,418 | 100.00 | % | ||||||||||
General and administrative | 77,123 | 76,432 | 691 | 0.9 | % | ||||||||||
(Gain) loss on derivative contracts | (139,722 | ) | 4,086 | (143,808 | ) | (3,519.5 | )% | ||||||||
Loss (gain) on sale of assets | 26,359 | (9,131 | ) | 35,490 | (388.7 | )% | |||||||||
Total operating costs and expenses | $ | 1,644,463 | $ | 654,478 | $ | 989,985 | 151.3 | % | |||||||
Production expenses increased $12.6$12.9 million primarily due to an increase in the number of wells in which we own an interest and increased production volumes. In the six-monthnine-month period ended JuneSeptember 30, 2009, we increased natural gas production by 5.84.5 Bcf to 46.767.6 Bcf and increased crude oil production by 209412 MBbls to 1,4402,163 MBbls from the comparable period in 2008. Production taxes decreased $20.7$26.3 million, or 90.8%89.3%, to $2.1$3.2 million. The decrease was primarily due to severance tax refunds received in 2009 and the decreased prices received for production during the sixnine months ended JuneSeptember 30, 2009.
Midstream and marketing expenses decreased $63.3$100.4 million, or 60.2%63.9%, to $41.8$56.7 million due to lower prices paid for natural gas that we sold on behalf of third parties during the sixnine months ended JuneSeptember 30, 2009 than during the comparable period in 2008.
DD&A for our natural gas and crude oil properties decreased to $94.4$127.5 million for the sixnine months ended JuneSeptember 30, 2009 from $137.3$209.3 million during the same period in 2008. Our average DD&A per Mcfe decreased $1.14$1.26 to $1.71$1.58 in the first sixnine months of 2009 from $2.85$2.84 for the comparable period in 2008 as a result of the $3,159.4 million cumulative full cost ceiling impairment, which reduced the carrying value of our natural gas and crude oil properties. The effect of the decrease in DD&A per Mcfe was slightly offset by the 14.6%9.5% increase in production during the first sixnine months of 2009 compared to the same period in 2008.
DD&A for our other assets consists primarily of depreciation of our drilling rigs, midstream gathering and compression facilities and other equipment. The decrease in DD&A for our other assets was attributable primarily to the change in asset lives of certain of our drilling, oil field services, midstream and other assets to align with industry average lives for similar assets.
General and administrative expenses increased $4.9 millionslightly to $52.1$77.1 million for the sixnine months ended JuneSeptember 30, 2009 from $47.2$76.4 million for the comparable period in 2008. The increase was principally attributable to an increase in corporate salaries and wages, including non-cash stock compensation expense. The increase in corporate salaries was primarily due to the increase in the average number of corporate and support staff employed during the six months ended June 30, 2009 compared to the same period in 2008. General and administrative expenses included non-cash stock compensation expense, net of amounts capitalized, of $9.4$16.5 million for the sixnine months
ended JuneSeptember 30, 2009 compared to $7.3$12.8 million for the comparable period in 2008. The increases in salaries and wages and stock compensation were partially offset by $12.9$18.9 million in capitalized general and administrative expenses, which
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We recorded a net gain of $187.7$139.7 million ($5.5136.5 million unrealized loss and $193.2$276.2 million realized gains) on our commodity derivatives contracts for the sixnine months ended JuneSeptember 30, 2009 compared to a $296.6$4.1 million net loss ($245.973.9 million unrealized lossgain and $50.7$78.0 million realized losses) for the same period in 2008. The unrealized loss recorded in 2009 was attributable to an increase in average natural gas prices at JuneSeptember 30, 2009 compared to average natural gas prices at December 31, 2008 or the contract date for contracts entered into during 2009. The realized gains of $193.2$276.2 million for the sixnine months ended JuneSeptember 30, 2009 were primarily due to a decline in natural gas prices at the time of settlement compared to the contract price.
The loss on sale of assets for the sixnine months ended JuneSeptember 30, 2009 was primarily due to the $26.5 million loss on the sale of our gathering and compression assets in the Piñon Field. For the sixnine months ended JuneSeptember 30, 2008, the gain on sale of assets of $7.7$9.1 million was attributable to the approximately $7.5 million gain on the sale of our assets located in the Piceance Basin of Colorado.
Other Income (Expense). Total other expense increased to $81.3$135.0 million in the six-monthnine-month period ended JuneSeptember 30, 2009 from $42.9$83.1 million in the six-monthnine-month period ended JuneSeptember 30, 2008. The increase is reflected in the table below.
| Six Months Ended | ||||||||||||||||
| June 30, | ||||||||||||||||
| 2009 | 2008 | $ Change | % Change | |||||||||||||
| (In thousands) | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | $ | 199 | $ | 2,145 | $ | (1,946 | ) | (90.7 | )% | |||||||
| Interest expense | (83,167 | ) | (47,395 | ) | (35,772 | ) | 75.5 | % | ||||||||
| Income from equity investments | 434 | 1,415 | (981 | ) | (69.3 | )% | ||||||||||
| Other income, net | 1,243 | 939 | 304 | 32.4 | % | |||||||||||
| Total other (expense) income | (81,291 | ) | (42,896 | ) | (38,395 | ) | 89.5 | % | ||||||||
| Loss before income tax benefit | (1,247,558 | ) | (117,502 | ) | (1,130,056 | ) | 961.7 | % | ||||||||
| Income tax benefit | (1,534 | ) | (41,385 | ) | 39,851 | (96.3 | )% | |||||||||
| Net loss | $ | (1,246,024 | ) | $ | (76,117 | ) | $ | (1,169,907 | ) | 1,537.0 | % | |||||
| Nine Months Ended September 30, | |||||||||||||||
| 2009 | 2008 | $ Change | % Change | ||||||||||||
| (In thousands) | |||||||||||||||
Other income (expense): | |||||||||||||||
Interest income | $ | 287 | $ | 3,068 | $ | (2,781 | ) | (90.6 | )% | ||||||
Interest expense | (136,368 | ) | (88,421 | ) | (47,947 | ) | 54.2 | % | |||||||
Income from equity investments | 1,027 | 1,355 | (328 | ) | (24.2 | )% | |||||||||
Other income, net | 100 | 856 | (756 | ) | (88.3 | )% | |||||||||
Total other (expense) income | (134,954 | ) | (83,142 | ) | (51,812 | ) | 62.3 | % | |||||||
(Loss) income before income tax (benefit) expense | (1,351,450 | ) | 243,539 | (1,594,989 | ) | (654.9 | )% | ||||||||
Income tax (benefit) expense | (4,114 | ) | 89,308 | (93,422 | ) | (104.6 | )% | ||||||||
Net (loss) income | $ | (1,347,336 | ) | $ | 154,231 | $ | (1,501,567 | ) | (973.6 | )% | |||||
Interest income decreased to $0.2$0.3 million for the sixnine months ended JuneSeptember 30, 2009 from $2.1$3.1 million for the same period in 2008. The decrease was generally due to lower excess cash levels during the sixnine months ended JuneSeptember 30, 2009 compared to the same period in 2008.
Interest expense increased to $83.2$136.4 million for the sixnine months ended JuneSeptember 30, 2009 from $47.4$88.4 million for the same period in 2008. This increase was attributable to the higher average debt balances outstanding during the sixnine months ended JuneSeptember 30, 2009. For the nine months ended September 30, 2009, an unrealized loss of $0.9 million related to our interest rate swap resulted in higher interest expense during this period. Also contributing to the increase was a $10.4$7.7 million unrealized gain related to our interest rate swap which reduced interest expense for the sixnine months ended JuneSeptember 30, 2008.
We reported an income tax benefit of $1.5$4.1 million for the sixnine months ended JuneSeptember 30, 2009, compared to a benefitan expense of $41.4$89.3 million for the same period in 2008. The current period income tax benefit represents an
effective income tax rate of 0.1%0.3% compared to an effective income tax rate of 35.0%36.8% for the same period in 2008. The lower effective income tax rate associated with the current period loss before income taxes was primarily a result of not recording a tax benefit for the loss due to our full valuation allowance on our net deferred tax asset.
Liquidity and Capital Resources
We historically have funded our capital requirements through a combination of cash flow generated from operations, borrowings under our senior credit facility, the issuance of equity and debt securities and, to a lesser extent, the sale of assets. During the first sixnine months of 2009, our primary sources of cash were cash flow generated from operations, borrowings under our senior credit facility, proceeds from the issuance of convertible perpetual
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Our working capital balance fluctuates as a result of the timing and amount of borrowings or repayments under our credit arrangements and changes in the fair value of our outstanding commodity derivative instruments. Absent any significant effects from our commodity derivative instruments, we typically have a working capital deficit or a relatively small amount of positive working capital because our capital spending generally has exceeded our cash flows from operations and we generally use excess cash to pay down borrowings outstanding under our credit arrangements.
Our cash flows for the six monthsnine-month periods ended JuneSeptember 30, 2009 and 2008 are presented in the following table and discussed below:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
| Cash flows provided by operating activities | $ | 141,982 | $ | 296,834 | ||||
| Cash flows used in investing activities | (270,298 | ) | (785,891 | ) | ||||
| Cash flows provided by financing activities | 128,301 | 701,810 | ||||||
| Net (decrease) increase in cash and cash equivalents | $ | (15 | ) | $ | 212,753 | |||
| Nine Months Ended September 30, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
Cash flows provided by operating activities | $ | 273,220 | $ | 534,368 | ||||
Cash flows used in investing activities | (364,523 | ) | (1,457,102 | ) | ||||
Cash flows provided by financing activities | 105,309 | 860,497 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | 14,006 | $ | (62,237 | ) | |||
Cash Flows from OperationsOperating Activities
Our operating cash flow is mainly influenced by the prices we receive for our natural gas and crude oil production; the quantity of natural gas we produce and, to a lesser extent, the quantity of crude oil we produce; the demand for our drilling rigs and oil field services and the rates we are able to charge for these services; and the margins we obtain from our natural gas and CO2 gathering and treating contracts.
Net cash provided by operating activities for the six monthsnine-month periods ended JuneSeptember 30, 2009 and 2008 was $142.0$273.2 million and $296.8$534.4 million, respectively. The decrease in cash provided by operating activities in 2009 compared to 2008 was primarily due to a 60.7%60.3% decrease in the combined average prices we received for our natural gas and crude oil production for the sixnine months ended JuneSeptember 30, 2009. Decreases in midstream and marketing revenues also contributed to the decrease in operating cash flows.
Cash Flows from Investing Activities
We dedicate and expect to continue to dedicate a substantial portion of our capital expenditure program toward the exploration, development, production and acquisition of natural gas and crude oil reserves. These capital expenditures are necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive natural gas and crude oil industry. Net cash used in investing activities, which included capital expenditures for property, plant and equipment, for the sixnine months ended JuneSeptember 30, 2009 and 2008 was $270.3$364.5 million and $785.9$1,457.1 million, respectively.
During the first sixnine months of 2009 and 2008, our capital expenditures, on an accrual basis, by segment were:
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
| (In thousands) | ||||||||
| Capital Expenditures: | ||||||||
| Exploration and production | $ | 383,231 | $ | 813,900 | ||||
| Drilling and oil field services | 2,201 | 35,791 | ||||||
| Midstream gas services | 41,288 | 69,429 | ||||||
| Other | 17,764 | 15,181 | ||||||
| Total | $ | 444,484 | $ | 934,301 | ||||
| Nine Months Ended September 30, | ||||||
| 2009 | 2008 | |||||
| (In thousands) | ||||||
Capital Expenditures: | ||||||
Exploration and production | $ | 470,519 | $ | 1,404,067 | ||
Drilling and oil field services | 2,770 | 61,540 | ||||
Midstream gas services | 43,788 | 110,125 | ||||
Other | 25,124 | 33,623 | ||||
Total | $ | 542,201 | $ | 1,609,355 | ||
Capital expenditures decreased $489.8$1,067.2 million to $444.5$542.2 million for the sixnine months ended JuneSeptember 30, 2009 compared to $934.3$1,609.4 million for the same period in 2008 primarily due to our decreased drilling activities. Cash outflows from capital expenditures in the first sixnine months of 2009 were partially offset by approximately $254.0 million in
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Cash Flows from Financing Activities
Our financing activities provided $128.3$105.3 million in cash for the six-monthnine-month period ended JuneSeptember 30, 2009 compared to $701.8$860.5 million for the same period in 2008. Proceeds from borrowings, including the senior notes described below, were $1,431.8$1,638.4 million for the sixnine months ended JuneSeptember 30, 2009 compared to $1,408.0$1,768.7 million for the same period in 2008. Repayments of approximately $1,645.3$1,874.0 million resulted in net repayments during the six-monthnine-month period ended JuneSeptember 30, 2009 of approximately $213.5$235.6 million. Repayments of $665.6$864.1 million during the first sixnine months of 2008 resulted in net borrowings during the period of $742.4$904.6 million. Additionally, the issuance of our 8.5% convertible perpetual preferred stock and 14,480,000 shares of common stock provided additional net proceeds of $243.3 million and $107.7$107.6 million, respectively, during the sixnine months ended JuneSeptember 30, 2009.
Long-Term Debt Issuances and Repayments
Senior Credit Facility. As a result of net repayments of $555.5$573.5 million during the first sixnine months of 2009, we had totalno outstanding indebtedness of $18.0 million under our senior credit facility as of JuneSeptember 30, 2009. The amount we may borrow under the facility is limited to a borrowing base amount, which is currently $985.4 million, and is subject to periodic redeterminations. The borrowing base is available to be drawn on and repaid so long as we are in compliance withsubject to limitations based on its terms includingand certain financial covenants. The borrowing base is determined based upon proved developed producing reserves, proved developed non-producing reserves and proved undeveloped reserves. Our ability to develop properties andas well as changes in commodity prices may affect the borrowing base of our senior credit
facility. Based on the AprilOctober 2009 redetermination, our borrowing base remained unchanged from the previous determination of $1.1 billion; however, the borrowing base was reduced to $985.4 million as a result of our issuance of the 9.875% Senior Notes in May 2009.million. The average annual interest rate paid on amounts outstanding under our senior credit facility was 2.28%2.30% for the sixnine months ended JuneSeptember 30, 2009. Our senior credit facility matures on November 21, 2011.
9.875% Senior Notes Due 2016. In May 2009, we completed a private placement of $365.5 million of unsecured 9.875% Senior Notes to qualified institutional investors eligible under Rule 144A of the Securities Act. These notes were issued at a discount which will be amortized into interest expense over the term of the notes. Net proceeds from the offering were approximately $342.2$342.1 million after deducting the discount and offering expenses of $7.8$7.9 million. We used the net proceeds from the offering to repay outstanding borrowings under our senior credit facility and for general corporate purposes. The notes bear interest at a fixed rate of 9.875% per annum, payable semi-annually, with the principal due on May 15, 2016. We may redeem the notes, in whole or in part, prior to their maturity at specified redemption prices. The notes are jointly and severally, unconditionally guaranteed on an unsecured basis by all of the Company’s wholly owned subsidiaries, except certain minor subsidiaries, and will become freely tradable 180 dayssix months after their issuance pursuant to Rule 144 under the Securities Act.
8.0% Senior Notes Due 2018. In May 2008, we received approximately $735.0 million net proceeds from the issuance of $750.0 million of unsecured 8.0% Senior Notes due 2018. The notes 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. The notes becameare freely tradable on November 17, 2008, 180 days after their issuance, pursuant to Rule 144 under the Securities Act.
Preferred and Common Stock Issuances
8.5% Convertible Perpetual Preferred Stock. In January 2009, we completed a private placement of 2,650,000 shares of 8.5% convertible perpetual preferred stock to qualified institutional buyers eligible under Rule 144A under the Securities Act. The offering included 400,000 shares of convertible perpetual preferred stock issued upon the full exercise of the initial purchasers’ option to cover over-allotments. Net proceeds from the offering were approximately $243.3 million after deducting offering expenses of approximately $8.6 million. We
48
Each share of 8.5% convertible perpetual preferred stock has a liquidation preference of $100 and is convertible at the holder’s option at any time initially into approximately 12.4805 shares of our common stock, subject to adjustments upon the occurrence of certain events. 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 our election with the first dividend payment due in February 2010. The convertible perpetual preferred stock is not redeemable by us at any time. After February 20, 2014, we may cause all outstanding shares of the convertible perpetual preferred stock to automatically convert into common stock at the then-prevailing conversion rate if certain conditions are met.
Common Stock. On April 29, 2009, we completed a registered underwritten offering of 14,480,000 shares of our common stock, including 2,280,000 shares of common stock acquired by the underwriters from us to cover over-allotments. Net proceeds from the offering were approximately $107.7$107.6 million after deducting offering expenses of approximately $2.3$2.4 million and were used to repay a portion of the amount outstanding under our senior credit facility and for general corporate purposes.
Outlook
We have budgeted a range of $500.0 million to $700.0 million for capital expenditures, excluding acquisitions, for the year ending December 31, 2009. For 2010, we are budgeting approximately $750.0 million for capital expenditures. The majority of our planned capital expenditures areis discretionary and could be curtailed
if our cash flows decline from expected levels or we are unable to obtain capital on attractive terms. We may increase or decrease planned capital expenditures depending on natural gas prices, asset sales and the availability of capital through the issuance of additional long-term debt or equity. Additionally, we have entered into interest rate swaps as well as fixed-price swaps and basis swaps for a portion of our production through 2012 in order to stabilize future cash flows for planning purposes. See “Item 3. Quantitative and Qualitative Disclosures About Market Risk” for additional information regarding our derivative contracts.
As of JuneSeptember 30, 2009, our cash and cash equivalents were $0.6$14.6 million and we had approximately $2.2$2.1 billion in total debt outstanding. Amountsoutstanding with no amounts outstanding under our senior credit facility at June 30, 2009 totaled $18.0 million.facility. As of JuneSeptember 30, 2009, we were in compliance with all of the covenants under all of our senior notes and our senior credit facility. See Note 8 of Notes to the Condensed Consolidated Financial Statements included in “Item 1. Financial Statements” for additional information regarding our long-term debt. As of July 31,November 5, 2009, our cash and cash equivalents were approximately $83.2$27.0 million, the balance outstanding under our senior credit facility was $124.6$29.9 million and we had $30.5$46.7 million in outstanding letters of credit.
If future capital expenditures exceed operating cash flow and cash on hand, funds would likely be supplemented as needed by borrowings under our senior credit facility. We may choose to refinance borrowings outstanding under the facility by issuing long-term debt or equity in the public or private markets, or both.
Debt and equity capital markets experienced adverse conditions during the latter part of 2008 and into 2009. Continued volatility in the capital markets may increase costs associated with issuing debt due to increased interest rates, and may affect our ability to access these markets. Currently, we do not believe our liquidity has been, or in the near future will be, materially affected by recent events in the global financial markets. Nevertheless, we continue to monitor events and circumstances surrounding each of the 27 lenders under our senior credit facility. To date, the only disruption to our ability to access the full amounts available under our senior credit facility was the bankruptcy of Lehman Brothers, a lender responsible for 0.29% of the obligations under our senior credit facility. The largest commitment from any lender under the senior credit facility is 6.6%6.3% of the total amount available under the facility. We cannot predict with any certainty the impact to us of any further disruptions in the credit or capital markets.
Contractual Obligations
Gas Gathering Agreement. In conjunction with the sale of our gathering and compression assets located in the Piñon Field of the WTO, we entered into a gas gathering agreement. Under the gas gathering agreement, we
49
| Payments Due | ||||
| (In thousands) | ||||
| 2009 | $ | 7,584 | ||
| 2010 | 22,226 | |||
| 2011 | 33,780 | |||
| 2012 | 42,814 | |||
| 2013 | 42,634 | |||
| After 2013 | 327,749 | |||
| $ | 476,787 | |||
| Payments Due | |||
| (In thousands) | |||
2009 | $ | 3,929 | |
2010 | 22,226 | ||
2011 | 33,780 | ||
2012 | 42,814 | ||
2013 | 42,634 | ||
After 2013 | 327,749 | ||
| $ | 473,132 | ||
Long-TermLong Term Debt. We issued our 9.875% Senior Notes in May 2009. This debt issuance along with the pay down of the outstanding balance on theour senior credit facility are discussed further under “Long-Term Debt Issuances and Repayments” above.
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk |
General
The discussion in this section provides information about the financial instruments we use to manage commodity prices and interest rate volatility. All contracts are settled in cash and do not require the actual delivery of a commodity at settlement.
Commodity Price Risk. Our most significant market risk relates to the prices we receive for our natural gas and crude oil production. Due to the historical volatility of these commodities, we periodically have entered into, and expect in the future to enter into, derivative arrangements for the purpose of reducing the variability of natural gas and crude oil prices we receive for our production. From time to time, we enter into commodity pricing derivative contracts for a portion of our anticipated production volumes depending upon management’s view of opportunities under the then current market conditions. We do not intend to enter into derivative contracts that would exceed our expected production volumes for the period covered by the derivative arrangement. Our current credit agreement limits our ability to enter into derivative transactions to 85% of expected production volumes from estimated proved reserves. Future credit agreements could require a minimum level of commodity price hedging.
The use of derivative contracts also involves the risk that the counterparties will be unable to meet their obligations under the contracts. Our derivative contracts are with multiple counterparties to minimize our exposure to any individual counterparty. As of JuneSeptember 30, 2009, we had eighteen approved derivative counterparties, seventeen of which are lenders under our senior credit facility. We currently have derivative contracts outstanding with twelveeleven of these counterparties, including Lehman Brothers.counterparties. We have no derivative contracts in 2009 and beyond with counterparties other than those that are lenders under our senior credit facility. Lehman Brothers iswas a counterparty onto one of our derivative contracts. Due to the bankruptcy of Lehman Brothers and its parent, Lehman Brothers Holdings Inc., and the asset position of the contract, we did not assign any value to this derivative contract (notional amountfrom September 30, 2008 until September 30, 2009. During August 2009, the Company entered into an agreement with Lehman Brothers to settle all unsettled positions under this derivative contract through September 30, 2009. As of 3,680 MMcf)October 1, 2009, Lehman Brothers assigned this contract to a third party to serve as the counterparty for the remainder of the contract. Accordingly, both the realized portion and the future value of this contract were included in the condensed consolidated financial statements at JuneSeptember 30, 2009.
We use, and may continue to use, a variety of commodity-based derivative contracts, including collars, fixed-price swaps and basis protection swaps. Our fixed price swap transactions are settled based upon NYMEX prices, and our basis protection swap transactions are settled based upon the index price of natural gas at the Waha hub, a West Texas gas marketing and delivery center and the Houston Ship Channel. Settlement for natural gas derivative contracts occurs in the production month.
We have not designated any of our derivative contracts as hedges for accounting purposes. We record all derivative contracts on the balance sheet at fair value, which reflects changes in natural gas and crude oil prices. We establish fair value of our derivative contracts by price quotations obtained from counterparties to the derivative contracts. Changes in fair values of our derivative contracts are recognized as unrealized gains and losses in current
50
At JuneSeptember 30, 2009, our open natural gas and crude oil commodity derivative contracts consisted of the following:
Natural Gas
| Notional | Weighted Avg. | |||||||
Period and Type of Contract | (MMcf)(1) | Fixed Price | ||||||
| July 2009 — September 2009 | ||||||||
| Price swap contracts | 18,710 | $ | 8.09 | |||||
| Basis swap contracts | 15,640 | $ | (0.74 | ) | ||||
| October 2009 — December 2009 | ||||||||
| Price swap contracts | 19,010 | $ | 8.46 | |||||
| Basis swap contracts | 15,640 | $ | (0.74 | ) | ||||
| January 2010 — March 2010 | ||||||||
| Price swap contracts | 20,475 | $ | 7.95 | |||||
| Basis swap contracts | 20,250 | $ | (0.74 | ) | ||||
| April 2010 — June 2010 | ||||||||
| Price swap contracts | 19,793 | $ | 7.32 | |||||
| Basis swap contracts | 20,475 | $ | (0.74 | ) | ||||
| July 2010 — September 2010 | ||||||||
| Price swap contracts | 20,010 | $ | 7.55 | |||||
| Basis swap contracts | 20,700 | $ | (0.74 | ) | ||||
| October 2010 — December 2010 | ||||||||
| Price swap contracts | 20,010 | $ | 7.97 | |||||
| Basis swap contracts | 20,700 | $ | (0.74 | ) | ||||
| January 2011 — March 2011 | ||||||||
| Basis swap contracts | 25,650 | $ | (0.47 | ) | ||||
| April 2011 — June 2011 | ||||||||
| Basis swap contracts | 25,935 | $ | (0.47 | ) | ||||
| July 2011 — September 2011 | ||||||||
| Basis swap contracts | 26,220 | $ | (0.47 | ) | ||||
| October 2011 — December 2011 | ||||||||
| Basis swap contracts | 26,220 | $ | (0.47 | ) | ||||
| January 2012 — March 2012 | ||||||||
| Basis swap contracts | 20,020 | $ | (0.54 | ) | ||||
| April 2012 — June 2012 | ||||||||
| Basis swap contracts | 20,020 | $ | (0.54 | ) | ||||
| July 2012 — September 2012 | ||||||||
| Basis swap contracts | 20,240 | $ | (0.54 | ) | ||||
| October 2012 — December 2012 | ||||||||
| Basis swap contracts | 20,240 | $ | (0.54 | ) | ||||
Period and Type of Contract | Notional (MMcf)(1) | Weighted Avg. Fixed Price | ||||
October 2009 — December 2009 | ||||||
Price swap contracts | 19,010 | $ | 8.46 | |||
Basis swap contracts | 17,480 | $ | (0.74 | ) | ||
January 2010 — March 2010 | ||||||
Price swap contracts | 20,475 | $ | 7.95 | |||
Basis swap contracts | 20,250 | $ | (0.74 | ) | ||
April 2010 — June 2010 | ||||||
Price swap contracts | 19,793 | $ | 7.32 | |||
Basis swap contracts | 20,475 | $ | (0.74 | ) | ||
July 2010 — September 2010 | ||||||
Price swap contracts | 20,010 | $ | 7.55 | |||
Basis swap contracts | 20,700 | $ | (0.74 | ) | ||
October 2010 — December 2010 | ||||||
Price swap contracts | 20,010 | $ | 7.97 | |||
Basis swap contracts | 20,700 | $ | (0.74 | ) | ||
January 2011 — March 2011 | ||||||
Basis swap contracts | 25,650 | $ | (0.47 | ) | ||
April 2011 — June 2011 | ||||||
Basis swap contracts | 25,935 | $ | (0.47 | ) | ||
July 2011 — September 2011 | ||||||
Basis swap contracts | 26,220 | $ | (0.47 | ) | ||
October 2011 — December 2011 | ||||||
Basis swap contracts | 26,220 | $ | (0.47 | ) | ||
January 2012 — March 2012 | ||||||
Basis swap contracts | 28,210 | $ | (0.55 | ) | ||
April 2012 — June 2012 | ||||||
Basis swap contracts | 28,210 | $ | (0.55 | ) | ||
July 2012 — September 2012 | ||||||
Basis swap contracts | 28,520 | $ | (0.55 | ) | ||
October 2012 — December 2012 | ||||||
Basis swap contracts | 28,520 | $ | (0.55 | ) | ||
| (1) | Assumes ratio of 1:1 for Mcf to |
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| Notional | Weighted Avg. | |||||||
Period and Type of Contract | (in MBbls) | Fixed Price | ||||||
| July 2009 — September 2009 | ||||||||
| Price swap contracts | 46 | $ | 126.61 | |||||
| October 2009 — December 2009 | ||||||||
| Price swap contracts | 46 | $ | 126.51 | |||||
Period and Type of Contract | Notional (in MBbls) | Weighted Avg. Fixed Price | |||
October 2009 — December 2009 | |||||
Price swap contracts | 46 | $ | 126.51 | ||
The following table summarizes the cash settlements and valuation gains and losses on our commodity derivative contracts for the sixnine months ended JuneSeptember 30, 2009 and 2008 (in thousands):
| Six Months Ended | ||||||||
| June 30, | ||||||||
| 2009 | 2008 | |||||||
| Realized (gain) loss | $ | (193,136 | ) | $ | 50,674 | |||
| Unrealized loss | 5,481 | 245,938 | ||||||
| (Gain) loss on derivative contracts | $ | (187,655 | ) | $ | 296,612 | |||
| Nine Months Ended September 30, | ||||||||
| 2009 | 2008 | |||||||
Realized (gain) loss | $ | (276,175 | ) | $ | 77,954 | |||
Unrealized loss (gain) | 136,453 | (73,868 | ) | |||||
(Gain) loss on commodity derivative contracts | $ | (139,722 | ) | $ | 4,086 | |||
Credit Risk. A portion of our liquidity is concentrated in derivative contracts that enable us to mitigate a portion of our exposure to natural gas and crude oil prices and interest rate volatility. We periodically review the credit quality of each counterparty to our derivative contracts and the level of financial exposure we have to each counterparty to limit our credit risk exposure with respect to these contracts. Additionally, we apply a credit default risk rating factor for our counterparties in determining the fair value of our derivative contracts.
Our ability to fund our capital expenditure budget is partially dependent upon the availability of funds under our senior credit facility. In order to mitigate the credit risk associated with individual financial institutions committed to participate in our senior credit facility, our bank group consists of 27 financial institutions with commitments ranging from 0.25% to 6.6%6.3%. Lehman Brothers, a lender under our senior credit facility, declared bankruptcy on October 3, 2008. As a result of the bankruptcy of Lehman Brothers and its parent company, Lehman Brothers Holdings Inc., on September 15, 2008, Lehman Brothers elected not to fund its pro rata share, or 0.29%, of borrowings requested by us under the facility. Although we do not currently expect this reduced amount available under the senior credit facility to impact our liquidity or business operations, the inability of one or more of our other lenders to fund their obligations under the facility could have a material adverse effect on our financial condition.
Interest Rate Risk. We are subject to interest rate risk on our long-term fixed and variable interest rate borrowings. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes us to (i) changes in market interest rates reflected in the fair value of the debt and (ii) the risk that we may need to refinance maturing debt with new debt at a higher rate. Variable rate debt, where the interest rate fluctuates, exposes us to short-term changes in market interest rates as our interest obligations on these instruments are periodically redetermined based on prevailing market interest rates, primarily LIBOR and the federal funds rate.
In addition to commodity price derivative arrangements, we may enter into derivative transactions to fix the interest we pay on a portion of the money we borrow under our credit agreement. In January 2008, we entered into a $350.0 million notional amount interest rate swap agreement with a financial institution that effectively fixed the interest rate on our variable rate term loan for the period from April 1, 2008 through April 1, 2011. As a result of the exchange of our variable rate term loan to Senior Floating Rate Notes, the interest rate swap is now used to fix the variable LIBOR interest rate on the Senior Floating Rate Notes at 6.26% through April 2011. In May 2009, we entered into a $350.0 million notional amount interest rate swap agreement with a financial institution that effectively fixed the interest rate on our Senior Floating Rate Notes at 6.69% for the period from April 1, 2011 through April 1, 2013. These swaps have not been designated as hedges.
Our interest rate swaps reduce our market risk on our Senior Floating Rate Notes. We use sensitivity analyses to determine the impact that market risk exposures could have on our variable interest rate borrowings if not for our interest rate swaps. Based on the $350.0 million outstanding balance of our Senior Floating Rate Notes at JuneSeptember 30, 2009, a one percent change in the applicable rates, with all other variables held constant, would have resulted in a
52
Unrealized gainslosses of $3.9$4.5 million and $9.6$2.7 million were recorded in interest expense in the consolidated statements of operations for the change in fair value of the interest rate swapswaps for the three months ended JuneSeptember 30, 2009 and 2008, respectively. Unrealized gainsAn unrealized loss of $3.7$0.9 million and $10.4an unrealized gain of $7.7 million were recorded in interest expense in the consolidated statements of operations for the change in fair value of the interest rate swapswaps for the sixnine months ended JuneSeptember 30, 2009 and 2008, respectively. Realized losses of $1.3$1.8 million and $2.3$4.1 million were included in interest expense in the condensed consolidated statements of operations for the three and sixnine months ended JuneSeptember 30, 2009, respectively. There were no realized gains or losses recorded on our interest rate swapswaps during the first sixnine months of 2008.
| ITEM 4. | Controls and Procedures |
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we performed an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange ActRules 13a-15 and15d-15 as of the end of the period covered by this Quarterly Report. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of JuneSeptember 30, 2009 to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.
There was no change in our internal control over financial reporting during the quarter ended JuneSeptember 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. Other Information
| ITEM 1. | Legal Proceedings |
The Company is a defendant in lawsuitsparty to various legal actions from time to time in the normal course of business. InWhile the final outcome of such actions cannot be predicted with certainty, it is management’s opinion that the Company is not currently involved in any legal proceedings that, individually or in the aggregate, could have a material adverse effect on its financial position, results of operations, financial condition or cash flows.
| ITEM 1A. | Risk Factors |
We describe certain of our business risk factors below. This description includes material changes to the description of the risk factors previously disclosed in Part I, Item 1A of the 2008 Form 10-K.
Certain U.S. federal income tax deductions currently available with respect to oil and gas exploration and development may be eliminated as a result of future legislation.
President Obama’s Proposed Fiscal Year 2010 Budget includes proposed legislation that would, if enacted into law, make significant changes to United States tax laws, including the elimination of certain key U.S. federal income tax incentives currently available to oil and natural gas exploration and production companies. These changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain domestic production activities, and (iv) an extension of the amortization period for certain geological and geophysical expenditures. It is unclear whether any such changes will be enacted or how soon any such changes could become effective. The passage of any legislation as a result of these proposals or any other similar changes in U.S. federal income tax laws could negatively affect our financial condition and results of operations.
The adoption of derivatives legislation by Congress could have an adverse impact on our ability to hedge risks associated with our business.
Congress is currently considering legislation to impose restrictions on certain transactions involving derivatives, which could affect the use of derivatives in hedging transactions. The “American Clean Energy
53
Federal and state legislation and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays.
Congress is currently considering legislation to amend the federal Safe Drinking Water Act to require the disclosure of chemicals used by the oil and gas industry in the hydraulic fracturing process. Hydraulic fracturing involves the injection of water, sand and chemicals under pressure into rock formations to stimulate natural gas production. Sponsors of bills currently pending before the Senate and House of Representatives have asserted that chemicals used in the fracturing process could adversely affect drinking water supplies. The proposed legislation would require the reporting and public disclosure of chemicals used in the fracturing process, which could make it easier for third parties opposing the hydraulic fracturing process to initiate legal proceedings based on allegations that specific chemicals used in the fracturing process could adversely affect groundwater. In addition, these bills, if adopted, could establish an additional level of regulation at the federal level that could lead to operational delays or increased operating costs and could result in additional regulatory burdens that could make it more difficult to perform hydraulic fracturing and increase our costs of compliance and doing business.
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
As part of our restricted stock program, we make required tax payments on behalf of employees as their stock awards vest and then withhold a number of vested shares having a value on the date of vesting equal to the tax obligation. The shares withheld are recorded as treasury shares. During the quarter ended JuneSeptember 30, 2009, the following shares were withheld in satisfaction of tax withholding obligations arising from the vesting of restricted stock:
| Total Number of | Maximum Number | |||||||||||||||
| Shares Purchased | of Shares that May | |||||||||||||||
| Total Number | Average | as Part of Publicly | Yet Be Purchased | |||||||||||||
| of Shares | Price Paid | Announced Plans | Under the Plans | |||||||||||||
Period | Purchased | per Share | or Programs | or Programs | ||||||||||||
| April 1, 2009 — April 30, 2009 | 398 | $ | 8.16 | N/A | N/A | |||||||||||
| May 1, 2009 — May 31, 2009 | 457 | 10.72 | N/A | N/A | ||||||||||||
| June 1, 2009 — June 30, 2009 | 132 | 8.47 | N/A | N/A | ||||||||||||
54
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||
July 1, 2009 — July 31, 2009 | 64,344 | $ | 8.78 | N/A | N/A | ||||
August 1, 2009 — August 31, 2009 | 312 | $ | 12.20 | N/A | N/A | ||||
September 1, 2009 — September 30, 2009 | 319 | $ | 12.96 | N/A | N/A | ||||
| ITEM 6. | |
Nominee | For | Authority Withheld | ||||||
| Daniel W. Jordan | 120,703,644 | 22,984,139 | ||||||
See the Exhibit Index accompanying this Quarterly Report.
55
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SandRidge Energy, Inc. | ||
| By: | / | |
Dirk M. Van Doren Executive Vice President and Chief Financial Officer | ||
Date: August 6,November 5, 2009
| Incorporated by Reference | ||||||||||||||
| Exhibit | SEC | Filed | ||||||||||||
No. | Exhibit Description | Form | File No. | Exhibit | Filing Date | Herewith | ||||||||
| 3 | .1 | Certificate of Incorporation of SandRidge Energy, Inc. | S-1 | 333-148956 | 3.1 | 01/30/2008 | ||||||||
| 3 | .2 | Amended and Restated Bylaws of SandRidge Energy, Inc. | 8-K | 001-33784 | 3.1 | 03/09/2009 | ||||||||
| 4 | .1 | Amendment, dated April 23, 2009, to Registration Rights Agreement, dated March 20, 2007, among SandRidge Energy, Inc. and the purchasers named therein | 8-K | 001-33784 | 4.1 | 04/28/2009 | ||||||||
| 4 | .2 | Indenture, dated May 14, 2009, among SandRidge Energy, Inc. and the several guarantors named therein, and Wells Fargo Bank, National Association, as trustee | 8-K | 001-33784 | 4.1 | 05/15/2009 | ||||||||
| 4 | .3 | Registration Rights Agreement, dated May 14, 2009, among SandRidge Energy, Inc., the several guarantors named therein and Barclays Capital Inc., Banc of America Securities LLC, J.P. Morgan Securities Inc., RBC Capital Markets Corporation and RBS Securities Inc., as representatives of the several initial purchasers | 8-K | 001-33784 | 4.2 | 05/15/2009 | ||||||||
| 10 | .1 | Amendment No. 6 to Senior Credit Facility, dated April 17, 2009 | 8-K | 001-33784 | 10.1 | 04/21/2009 | ||||||||
| 10 | .2 | Underwriting Agreement, dated April 23, 2009, among SandRidge Energy, Inc., Tom L. Ward and Morgan Stanley & Co. Incorporated, as representative of the underwriters named therein | 8-K | 001-33784 | 1.1 | 04/28/2009 | ||||||||
| 10 | .3† | SandRidge Energy, Inc. 2009 Incentive Plan | 8-K | 001-33784 | 10.1 | 06/09/2009 | ||||||||
| 10 | .4 | Membership Interest Purchase Agreement, dated June 30, 2009, between SandRidge Midstream, Inc. and TCW Pecos Midstream, L.L.C. | * | |||||||||||
| 10 | .5 | Gas Gathering Agreement, dated June 30, 2009, between SandRidge Exploration and Production, LLC and Piñon Gathering Company, LLC. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. The omitted portions have been filed separately with the Securities and Exchange Commission. | * | |||||||||||
| 10 | .6 | Operations and Maintenance Agreement, dated June 30, 2009, between SandRidge Midstream, Inc. and Piñon Gathering Company, LLC | * | |||||||||||
| 31 | .1 | Section 302 Certification — Chief Executive Officer | * | |||||||||||
| 31 | .2 | Section 302 Certification — Chief Financial Officer | * | |||||||||||
| 32 | .1 | Section 906 Certifications of Chief Executive Officer and Chief Financial Officer | * | |||||||||||
| 101 | .INS | XBRL Instance Document | * | |||||||||||
| 101 | .SCH | XBRL Taxonomy Extension Schema Document | * | |||||||||||
| 101 | .CAL | XBRL Taxonomy Extension Calculation Linkbase Document | * | |||||||||||
| 101 | .LAB | XBRL Taxonomy Extension Label Linkbase Document | * | |||||||||||
| 101 | .PRE | XBRL Taxonomy Extension Presentation Linkbase Document | * | |||||||||||
| 101 | .DEF | XBRL Taxonomy Extension Definition Document | * | |||||||||||
| Incorporated by Reference | ||||||||||||
Exhibit No. | Exhibit Description | Form | SEC File No. | Exhibit | Filing Date | Filed Herewith | ||||||
| 2.1 | Stock Purchase Agreement, dated September 22, 2009, among SandRidge Energy, Inc., SandRidge Exploration, LLC, Crusader Energy Group Inc., Crusader Energy Group, LLC, Hawk Energy Fund I, LLC, Knight Energy Group, LLC, Knight Energy Group II, LLC, Knight Energy Management, LLC and RCH Upland Acquisition, LLC | * | ||||||||||
| 3.1 | Certificate of Incorporation of SandRidge Energy, Inc. | S-1 | 333-148956 | 3.1 | 01/30/2008 | |||||||
| 3.2 | Amended and Restated Bylaws of SandRidge Energy, Inc. | 8-K | 001-33784 | 3.1 | 03/09/2009 | |||||||
| 31.1 | Section 302 Certification — Chief Executive Officer | * | ||||||||||
| 31.2 | Section 302 Certification — Chief Financial Officer | * | ||||||||||
| 32.1 | Section 906 Certifications of Chief Executive Officer and Chief Financial Officer | * | ||||||||||
| 101.INS | XBRL Instance Document | * | ||||||||||
| 101.SCH | XBRL Taxonomy Extension Schema Document | * | ||||||||||
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | * | ||||||||||
| 101.DEF | XBRL Taxonomy Extension Definition Document | * | ||||||||||
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | * | ||||||||||
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | * | ||||||||||