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, 2007March 31, 2008 |
OR |
o | | 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) | | 20-8084793 (I.R.S. Employer Identification No.) |
| | |
1601 N.W. Expressway, Suite 1600, Oklahoma City, Oklahoma (Address of principal executive offices) | | 73118 (Zip Code) |
Registrant’s telephone number, including area code:
(405) 753-5500
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 oþ No þo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definitionthe definitions of “large accelerated filer,” “accelerated filerfiler” and large accelerated filer”“smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
| | | |
Large accelerated filer o | Accelerated filer o | o Accelerated filer oNon-accelerated filer þ | Smaller reporting company o |
(Do not check if a 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 shares, as of the close of business on NovemberApril 30, 2007,2008, was 141,845,661.146,194,356.
SANDRIDGE ENERGY, INC.
FORM 10-Q
Quarter Ended September 30, 2007March 31, 2008
INDEX
2
DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report onForm 10-Q (“Quarterly Report”) includes “forward-looking statements” within the meaning of various provisionsSection 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Various statements contained in this Quarterly Report,report, including those that express a belief, expectation, or intention, as well as those that are not statements of historical fact, are forward-looking statements. The forward-looking statements may include projections and estimates concerning 2008 capital expenditures, the pending sale of assets in the Piceance Basin, the timing and success of specific projects such as our rig fleet expansion program, outcomes and effects of litigation, claims and disputes, and elements of our future production, revenues, income and capital spending.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 Risk Factorsthe risk factors discussed in Item 1A of our Registration Statementannual report onForm S-110-K filed withfor the Securities and Exchange Commission on October 23,year ended December 31, 2007, andItem 1A- Risk Factors contained herein, the opportunities that may be presented to and pursued by us, competitive actions by other companies, changes in laws or regulations and other factors, many of which are beyond our control. Consequently, all of the forward-looking statements made in this documentreport are qualified by these cautionary statements and there can be no assurance that thestatements. The actual results or developments anticipated willmay not be realized or, even if substantially realized, that they willmay not have the expected consequences to or effects on our company or our business or operations. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in the forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements.
3
PART I. Financial Information
| |
ITEM 1. | Financial Statements |
SandRidge Energy, Inc. and Subsidiaries
| | | | | | | | | | | | | | | | |
| | September 30,
| | December 31,
| | | March 31,
| | December 31,
| |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Unaudited) | | | (Unaudited)
| |
| | (In thousands) | | | (In thousands) | |
|
ASSETS | ASSETS | ASSETS |
Current assets: | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 32,013 | | | $ | 38,948 | | | $ | 726 | | | $ | 63,135 | |
Accounts receivable, net: | | | | | | | | | | | | | | | | |
Trade | | | 71,957 | | | | 89,774 | | | | 112,674 | | | | 94,741 | |
Related parties | | | 16,727 | | | | 5,731 | | | | 23,037 | | | | 20,018 | |
Derivative contracts | | | 27,903 | | | | — | | | | — | | | | 21,958 | |
Inventories | | | 4,249 | | | | 2,544 | | | | 4,864 | | | | 3,993 | |
Deferred income taxes | | | — | | | | 6,315 | | | | 1,428 | | | | 1,820 | |
Other current assets | | | 20,548 | | | | 31,494 | | | | 20,373 | | | | 20,787 | |
| | | | | | | | | | |
Total current assets | | | 173,397 | | | | 174,806 | | | | 163,102 | | | | 226,452 | |
Oil and natural gas properties, using full cost method of accounting | | | | | | | | | |
Crude oil and natural gas properties, using full cost method of accounting | | | | | | | | | |
Proved | | | 2,388,534 | | | | 1,636,832 | | | | 3,204,557 | | | | 2,848,531 | |
Unproved | | | 247,757 | | | | 282,374 | | | | 259,610 | | | | 259,610 | |
Less: accumulated depreciation and depletion | | | (174,552 | ) | | | (60,752 | ) | | | (294,729 | ) | | | (230,974 | ) |
| | | | | | | | | | |
| | | 2,461,739 | | | | 1,858,454 | | | | 3,169,438 | | | | 2,877,167 | |
| | | | | | | | | | |
Other property, plant and equipment, net | | | 427,756 | | | | 276,264 | | | | 506,156 | | | | 460,243 | |
Derivative contracts | | | 4,139 | | | | — | | | | 2,145 | | | | 270 | |
Goodwill | | | 27,076 | | | | 26,198 | | |
Investments | | | 6,983 | | | | 3,584 | | | | 8,815 | | | | 7,956 | |
Restricted deposits | | | 39,851 | | | | 33,189 | | | | 32,633 | | | | 31,660 | |
Other assets | | | 29,515 | | | | 15,889 | | | | 25,543 | | | | 26,818 | |
| | | | | | | | | | |
Total assets | | $ | 3,170,456 | | | $ | 2,388,384 | | | $ | 3,907,832 | | | $ | 3,630,566 | |
| | | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | Current liabilities: | | | | | | | | | | | | | | | | |
Current maturities of long-term debt | | $ | 14,293 | | | $ | 26,201 | | | $ | 15,662 | | | $ | 15,350 | |
Accounts payable and accrued expenses: | | | | | | | | | | | | | | | | |
Trade | | | 181,227 | | | | 129,799 | | | | 242,324 | | | | 215,497 | |
Related parties | | | 3,182 | | | | 1,834 | | | | 1,747 | | | | 395 | |
Deferred income taxes | | | 6,740 | | | | — | | |
Asset retirement obligation | | | | 882 | | | | 864 | |
Derivative contracts | | | — | | | | 958 | | | | 123,284 | | | | — | |
| | | | | | | | | | |
Total current liabilities | | | 205,442 | | | | 158,792 | | | | 383,899 | | | | 232,106 | |
Long-term debt | | | 1,437,211 | | | | 1,040,630 | | | | 1,263,270 | | | | 1,052,299 | |
Derivative contracts | | | — | | | | 3,052 | | |
Other long-term obligations | | | 16,219 | | | | 21,219 | | | | 16,817 | | | | 16,817 | |
Asset retirement obligation | | | 57,508 | | | | 45,216 | | | | 60,748 | | | | 57,716 | |
Deferred income taxes | | | 32,992 | | | | 24,922 | | | | 18,341 | | | | 49,350 | |
| | | | | | | | | | |
Total liabilities | | | 1,749,372 | | | | 1,293,831 | | | | 1,743,075 | | | | 1,408,288 | |
| | | | | | | | | | |
Commitments and contingencies (Note 12) | | | | | | | | | |
Commitments and contingencies (Note 11) | | | | | | | | | |
Minority interest | | | 5,605 | | | | 5,092 | | | | 4,875 | | | | 4,672 | |
Redeemable convertible preferred stock, $0.001 par value, 2,650 shares authorized; 2,184 and 2,137 shares issued and outstanding at September 30, 2007 and December 31, 2006, respectively | | | 450,356 | | | | 439,643 | | |
Redeemable convertible preferred stock, $0.001 par value, 2,625 shares authorized; 1,844 and 2,184 shares issued and outstanding at March 31, 2008 and December 31, 2007, respectively | | | | 380,893 | | | | 450,715 | |
Stockholders’ equity: | | | | | | | | | | | | | | | | |
Preferred stock, no par; 50,000 shares authorized; no shares issued and outstanding in 2007 and 2006 | | | — | | | | — | | |
Common stock, $0.001 par value, 400,000 shares authorized; 109,272 issued and 107,820 outstanding at September 30, 2007 and 93,048 issued and 91,604 outstanding at December 31, 2006 | | | 108 | | | | 92 | | |
Preferred stock, $0.001 par value; 47,375 shares authorized; no shares issued and outstanding in 2008 and 2007 | | | | — | | | | — | |
Common stock, $0.001 par value, 400,000 shares authorized; 147,516 issued and 146,206 outstanding at March 31, 2008 and 141,847 issued and 140,391 outstanding at December 31, 2007 | | | | 144 | | | | 140 | |
Additional paid-in capital | | | 889,211 | | | | 574,868 | | | | 1,763,225 | | | | 1,686,113 | |
Treasury stock, at cost | | | (18,496 | ) | | | (17,835 | ) | | | (17,389 | ) | | | (18,578 | ) |
Retained earnings | | | 94,300 | | | | 92,693 | | | | 33,009 | | | | 99,216 | |
| | | | | | | | | | |
Total stockholders’ equity | | | 965,123 | | | | 649,818 | | | | 1,778,989 | | | | 1,766,891 | |
| | | | | | | | | | |
Total liabilities and stockholders’ equity | | $ | 3,170,456 | | | $ | 2,388,384 | | | $ | 3,907,832 | | | $ | 3,630,566 | |
| | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
SandRidge Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
| | Nine Months Ended
| | | Three Months Ended
| |
| | September 30, | | September 30, | | | March 31, | |
| | 2007 | | 2006 | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Unaudited) | | | (Unaudited) | |
| | (In thousands except per share amounts) | | | (In thousands except per share amounts) | |
|
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Natural gas and crude oil | | $ | 113,106 | | | $ | 18,150 | | | $ | 319,556 | | | $ | 46,419 | | | $ | 205,487 | | | $ | 90,176 | |
Drilling and services | | | 16,684 | | | | 35,742 | | | | 56,928 | | | | 105,713 | | | | 12,334 | | | | 27,895 | |
Midstream and marketing | | | 19,030 | | | | 29,326 | | | | 71,131 | | | | 91,218 | | | | 46,409 | | | | 26,187 | |
Other | | | 4,828 | | | | 6,432 | | | | 14,160 | | | | 19,827 | | | | 4,856 | | | | 4,806 | |
| | | | | | | | | | | | | | |
Total revenues | | | 153,648 | | | | 89,650 | | | | 461,775 | | | | 263,177 | | | | 269,086 | | | | 149,064 | |
Expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Production | | | 28,689 | | | | 7,960 | | | | 77,707 | | | | 21,625 | | | | 34,188 | | | | 21,974 | |
Production taxes | | | 4,402 | | | | 1,050 | | | | 12,328 | | | | 2,579 | | | | 9,220 | | | | 2,933 | |
Drilling and services | | | 6,809 | | | | 24,985 | | | | 30,935 | | | | 72,670 | | | | 7,169 | | | | 18,777 | |
Midstream and marketing | | | 14,444 | | | | 27,139 | | | | 61,191 | | | | 85,525 | | | | 40,418 | | | | 23,420 | |
Depreciation, depletion and amortization — natural gas and crude oil | | | 45,177 | | | | 6,064 | | | | 115,876 | | | | 13,932 | | | | 65,076 | | | | 32,684 | |
Depreciation, depletion and amortization — other | | | 14,282 | | | | 8,298 | | | | 36,545 | | | | 22,106 | | | | 17,965 | | | | 10,160 | |
General and administrative | | | 20,421 | | | | 11,721 | | | | 45,781 | | | | 32,024 | | | | 20,994 | | | | 12,468 | |
Gain on derivative contracts | | | (39,247 | ) | | | (5,304 | ) | | | (55,228 | ) | | | (16,176 | ) | |
Gain on sale of assets | | | (1,045 | ) | | | (839 | ) | | | (1,704 | ) | | | (849 | ) | |
Loss on derivative contracts | | | | 136,844 | | | | 23,181 | |
Loss (gain) on sale of assets | | | | 23 | | | | (1 | ) |
| | | | | | | | | | | | | | |
Total expenses | | | 93,932 | | | | 81,074 | | | | 323,431 | | | | 233,436 | | | | 331,897 | | | | 145,596 | |
| | | | | | | | | | | | | | |
Income from operations | | | 59,716 | | | | 8,576 | | | | 138,344 | | | | 29,741 | | |
(Loss) income from operations | | | | (62,811 | ) | | | 3,468 | |
| | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 575 | | | | 51 | | | | 4,201 | | | | 448 | | | | 796 | | | | 1,088 | |
Interest expense | | | (28,522 | ) | | | (2,506 | ) | | | (88,630 | ) | | | (4,090 | ) | | | (25,172 | ) | | | (35,429 | ) |
Minority interest | | | (164 | ) | | | (182 | ) | | | (321 | ) | | | (281 | ) | | | (835 | ) | | | (146 | ) |
Income from equity investments | | | 1,235 | | | | 737 | | | | 3,399 | | | | 40 | | | | 859 | | | | 1,025 | |
| | | | | | | | | | | | | | |
Total other income (expense) | | | (26,876 | ) | | | (1,900 | ) | | | (81,351 | ) | | | (3,883 | ) | |
Total other (expense) income | | | | (24,352 | ) | | | (33,462 | ) |
| | | | | | | | | | | | | | |
Income before income tax expense | | | 32,840 | | | | 6,676 | | | | 56,993 | | | | 25,858 | | |
Income tax expense | | | 11,920 | | | | 1,781 | | | | 21,002 | | | | 6,931 | | |
Loss before income tax benefit | | | | (87,163 | ) | | | (29,994 | ) |
Income tax benefit | | | | (30,538 | ) | | | (10,501 | ) |
| | | | | | | | | | | | | | |
Net income | | | 20,920 | | | | 4,895 | | | | 35,991 | | | | 18,927 | | |
Net loss | | | | (56,625 | ) | | | (19,493 | ) |
Preferred stock dividends and accretion | | | 9,313 | | | | — | | | | 30,573 | | | | — | | | | 9,582 | | | | 8,966 | |
| | | | | | | | | | | | | | |
Income available to common stockholders | | $ | 11,607 | | | $ | 4,895 | | | $ | 5,418 | | | $ | 18,927 | | |
Loss applicable to common stockholders | | | $ | (66,207 | ) | | $ | (28,459 | ) |
| | | | | | | | | | | | | | |
Basic and diluted income per share available to common stockholders | | $ | 0.11 | | | $ | 0.07 | | | $ | 0.05 | | | $ | 0.26 | | |
Basic and diluted loss per share applicable to common stockholders | | | $ | (0.47 | ) | | $ | (0.31 | ) |
| | | | | | | | | | | | | | |
Weighted average number of shares outstanding: | | | | | | | | | | | | | | | | | |
Weighted average number of common shares outstanding: | | | | | | | | | |
Basic | | | 107,554 | | | | 71,870 | | | | 102,562 | | | | 71,692 | | | | 141,044 | | | | 92,442 | |
| | | | | | | | | | | | | | |
Diluted | | | 109,049 | | | | 72,806 | | | | 103,778 | | | | 72,633 | | | | 141,044 | | | | 92,442 | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
SandRidge Energy, Inc. and Subsidiaries
Condensed Consolidated Statement of Changes in Stockholders’ Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Additional
| | | | | | | | | | | Additional
| | | | | | | |
| | Common
| | Paid-in
| | Treasury
| | Retained
| | | | | Common
| | Paid-In
| | Treasury
| | Retained
| | | |
| | Stock | | Capital | | Stock | | Earnings | | Total | | | Stock | | Capital | | Stock | | Earnings | | Total | |
| | (Unaudited) | | | (Unaudited)
| |
| | (In thousands) | | | (In thousands) | |
|
Balance, December 31, 2006 | | $ | 92 | | | $ | 574,868 | | | $ | (17,835 | ) | | $ | 92,693 | | | $ | 649,818 | | |
Stock offering, net of $1.4 million in offering costs | | | 18 | | | | 318,652 | | | | — | | | | — | | | | 318,670 | | |
Conversion of common stock to redeemable convertible preferred stock | | | (1 | ) | | | (9,650 | ) | | | — | | | | — | | | | (9,651 | ) | |
Accretion on redeemable convertible preferred stock | | | — | | | | — | | | | — | | | | (1,062 | ) | | | (1,062 | ) | |
Three months ended March 31, 2008 | | | | | | | | | | | | | | | | | | | | | |
Balance, December 31, 2007 | | | $ | 140 | | | $ | 1,686,113 | | | $ | (18,578 | ) | | $ | 99,216 | | | $ | 1,766,891 | |
Purchase of treasury stock | | | (1 | ) | | | — | | | | (1,578 | ) | | | — | | | | (1,579 | ) | | | — | | | | — | | | | (1,254 | ) | | | — | | | | (1,254 | ) |
Common stock issued under retirement plan | | | — | | | | 379 | | | | 917 | | | | — | | | | 1,296 | | | | — | | | | 2,566 | | | | 2,443 | | | | — | | | | 5,009 | |
Conversion of redeemable convertible preferred stock to common stock | | | | 4 | | | | 71,305 | | | | — | | | | — | | | | 71,309 | |
Accretion on redeemable convertible preferred stock | | | | — | | | | — | | | | — | | | | (1,487 | ) | | | (1,487 | ) |
Stock-based compensation | | | — | | | | 4,962 | | | | — | | | | — | | | | 4,962 | | | | — | | | | 3,241 | | | | — | | | | — | | | | 3,241 | |
Net income | | | — | | | | — | | | | — | | | | 35,991 | | | | 35,991 | | |
Net loss | | | | — | | | | — | | | | — | | | | (56,625 | ) | | | (56,625 | ) |
Redeemable convertible preferred stock dividend | | | — | | | | — | | | | — | | | | (33,322 | ) | | | (33,322 | ) | | | — | | | | — | | | | — | | | | (8,095 | ) | | | (8,095 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
Balance, September 30, 2007 | | $ | 108 | | | $ | 889,211 | | | $ | (18,496 | ) | | $ | 94,300 | | | $ | 965,123 | | |
Balance, March 31, 2008 | | | $ | 144 | | | $ | 1,763,225 | | | $ | (17,389 | ) | | $ | 33,009 | | | $ | 1,778,989 | |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
6
SandRidge Energy, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | |
| | Nine Months Ended
| | | Three Months Ended
| |
| | September 30, | | | March 31, | |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (Unaudited) | | | (Unaudited)
| |
| | (In thousands) | | | (In thousands) | |
|
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | |
Net income | | $ | 35,991 | | | $ | 18,927 | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Provision for doubtful accounts | | | — | | | | 2,458 | | |
Net loss | | | $ | (56,625 | ) | | $ | (19,493 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | | | | | | |
Depreciation, depletion and amortization | | | 152,421 | | | | 36,038 | | | | 83,041 | | | | 42,844 | |
Debt issuance cost amortization | | | 14,903 | | | | — | | | | 1,097 | | | | 12,752 | |
Deferred income taxes | | | 20,004 | | | | 2,662 | | | | (30,617 | ) | | | (10,501 | ) |
Unrealized gain on derivatives | | | (36,052 | ) | | | (2,007 | ) | |
Gain on sale of assets | | | (1,704 | ) | | | (849 | ) | |
Unrealized loss on derivative contracts | | | | 143,367 | | | | 21,662 | |
Loss (gain) on sale of assets | | | | 23 | | | | (1 | ) |
Interest income — restricted deposits | | | (1,024 | ) | | | — | | | | (192 | ) | | | (266 | ) |
Income from equity investments, net of distributions | | | (3,399 | ) | | | (28 | ) | | | (859 | ) | | | (1,025 | ) |
Stock-based compensation | | | 4,962 | | | | 8,156 | | | | 3,241 | | | | 1,071 | |
Minority interest | | | 321 | | | | 281 | | | | 835 | | | | 146 | |
Changes in operating assets and liabilities | | | 53,133 | | | | 1,862 | | | | 13,378 | | | | (3,226 | ) |
| | | | | | | | | | |
Net cash provided by operating activities | | | 239,556 | | | | 67,500 | | | | 156,689 | | | | 43,963 | |
| | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | |
Capital expenditures for property, plant and equipment | | | (895,160 | ) | | | (181,231 | ) | | | (418,650 | ) | | | (181,095 | ) |
Acquisition of assets | | | (3,001 | ) | | | (63,125 | ) | |
Proceeds from sale of assets | | | 6,458 | | | | 19,742 | | | | 452 | | | | 26 | |
Proceeds from sale of investment | | | — | | | | 2,373 | | |
Contributions on equity investments | | | — | | | | (3,388 | ) | |
Restricted deposits | | | (5,638 | ) | | | — | | |
Restricted cash | | | — | | | | 2,373 | | |
Fundings of restricted deposits | | | | (781 | ) | | | (1,477 | ) |
| | | | | | | | | | |
Net cash used in investing activities | | | (897,341 | ) | | | (223,256 | ) | | | (418,979 | ) | | | (182,546 | ) |
| | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Proceeds from borrowings | | | 1,262,769 | | | | 295,215 | | | | 340,220 | | | | 1,142,772 | |
Repayments of borrowings | | | (879,592 | ) | | | (177,425 | ) | | | (128,937 | ) | | | (1,136,845 | ) |
Dividends paid — preferred | | | (24,366 | ) | | | — | | | | (9,516 | ) | | | (6,859 | ) |
Minority interest contributions (distributions) | | | 192 | | | | (390 | ) | |
Minority interest (distributions) contributions | | | | (632 | ) | | | 762 | |
Proceeds from issuance of common stock | | | 319,966 | | | | 3,343 | | | | — | | | | 318,925 | |
Purchase of treasury shares | | | (1,579 | ) | | | — | | |
Purchase of treasury stock | | | | (1,254 | ) | | | (661 | ) |
Debt issuance costs | | | (26,540 | ) | | | — | | | | — | | | | (25,000 | ) |
| | | | | | | | | | |
Net cash provided by financing activities | | | 650,850 | | | | 120,743 | | | | 199,881 | | | | 293,094 | |
| | | | | | | | | | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | | | (6,935 | ) | | | (35,013 | ) | |
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS | | | | (62,409 | ) | | | 154,511 | |
CASH AND CASH EQUIVALENTS, beginning of year | | | 38,948 | | | | 45,731 | | | | 63,135 | | | | 38,948 | |
| | | | | | | | | | |
CASH AND CASH EQUIVALENTS, end of period | | $ | 32,013 | | | $ | 10,718 | | | $ | 726 | | | $ | 193,459 | |
| | | | | | | | | | |
Supplemental Disclosure of Noncash Investing and Financing Activities: | | | | | | | | | | | | | | | | |
Insurance premiums financed | | $ | 1,496 | | | $ | — | | | $ | — | | | $ | 1,496 | |
Accretion on redeemable convertible preferred stock | | $ | 1,062 | | | $ | — | | | $ | 1,487 | | | $ | 350 | |
Common stock issued in connection with acquisitions | | $ | — | | | $ | 5,128 | | |
Redeemable convertible preferred stock dividends, net of dividends paid | | $ | 8,956 | | | $ | — | | |
Property, plant and equipment addition due to settlement | | $ | 4,500 | | | $ | — | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
SandRidge Energy, Inc. and Subsidiaries
(Unaudited)
Nature of Business. SandRidge Energy, Inc. and, together with its subsidiaries (collectively, the “Company” or “SandRidge”), “SandRidge”, “we”, “us”, or “our”) is ana natural gas and crude oil and gas company with its principal focus on exploration, development and production related toproduction. SandRidge also owns and operates natural gas gathering, marketing and processing facilities and CO2 treating and transportation facilities and conducts tertiary oil and gas activities.recovery operations. In addition, SandRidge also owns and operates drilling rigs and providesa related oil field services midstream gas services operations, and CO2 and tertiary oil recovery operations.business operating under the Lariat Services, Inc. brand name. SandRidge’s primary exploration, development and production areas are concentrated in West Texas. The Company also operates significant interests in the Cotton Valley Trend in East Texas, andthe Gulf Coast area.area, the Mid-Continent and the Gulf of Mexico.
On November 21, 2006, the Company acquired all of the outstanding membership interests of NEG Oil & Gas LLC (“NEG”).
Interim Financial Statements. The accompanying condensed consolidated balance sheetfinancial statements as of December 31, 2006 has2007 have been derived from ourthe audited financial statements contained in the Company’s Registration Statementannual report onForm S-1/A10-K filed October 23,for the fiscal year ended December 31, 2007 (the “Registration Statement”“2007Form 10-K”). The unaudited interim condensed consolidated financial statements of SandRidge and its subsidiaries have been prepared by the Company in accordance with the accounting policies stated in the audited consolidated financial statements contained in the Company’s2007S-1/AForm 10-K. filed October 23, 2007 pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). 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 we believethe 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 for a fair presentationto state fairly the information in accordance with GAAP have been included in thesethe Company’s unaudited interim condensed consolidated financial statements.statements have been included. These condensed financial statements should be read in conjunction with the financial statements and notes thereto included in the Registration Statement.2007Form 10-K.
| |
2. | Significant Accounting Policies |
For a description of the Company’s accounting policies, refer to Note 1 of the 2006 consolidated financial statements included in the Company’s Registration Statement, as well as Note 10 herein.2007Form 10-K.
Reclassifications. Certain reclassifications have been made in prior period financial statements to conform with current period presentation.
Change in MethodRecent Accounting Pronouncements. Effective January 1, 2008, SandRidge implemented Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”. SFAS No. 157 defines fair value, establishes a framework for Oilmeasuring fair value and Gas Operations. Inexpands disclosures about fair value measurements. SFAS No. 157 does not require new fair value measurements. SFAS No. 157 did not have an effect on the fourth quarter of 2006, the Company changed from the successful efforts method to the full cost method of accounting for its oil and gas operations. Prior periodCompany’s financial statements presented herein have been restated to reflect the change.other than requiring additional disclosures regarding fair value measurements. See Note 4.
SandRidge’sIn February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff PositionFAS 157-2, “Effective Date of FASB Statement No. 157”(“FSP 157-2”).FSP 157-2 delays the effective date of SFAS No. 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities, except those recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually. The adoption ofFSP 157-2 is not expected to have a material impact on the Company’s financial position, results have been retroactively restated to reflectof operations or cash flows.
In December 2007, the conversion toFASB issued SFAS No. 141(R), “Business Combinations”, which replaces SFAS No. 141. SFAS No. 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the full cost method. As prescribed by full cost accounting rules, all costs associated with property acquisition, exploration, and development activities are capitalized. Exploration and development costs include dry hole costs, geological and geophysical costs, direct overhead related to exploration and development activities and other costs incurred foridentifiable assets acquired, the purpose of finding oil and gas reserves.liabilities assumed, any noncontrolling
8
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
A comparisoninterest in the acquiree and the goodwill acquired. The Statement also establishes disclosure requirements which will enable users to evaluate the nature and financial effects of the Company’s previously presented income tax expense, net income, and earnings per share underbusiness combination. SFAS No. 141(R) is effective for fiscal years beginning after December 15, 2008. The Company plans to implement this standard on January 1, 2009. The Company has not yet evaluated the successful efforts methodpotential impact of accounting to its results of operations disclosed herein are as follows (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | |
| | Three Months Ended
| | | Nine Months Ended
| |
| | September 30, 2006 | | | September 30, 2006 | |
| | (As Originally
| | | | | | (As Originally
| | | | |
| | Presented) | | | (As Restated) | | | Presented) | | | (As Restated) | |
|
Income tax expense | | $ | 4,844 | | | $ | 1,781 | | | $ | 8,998 | | | $ | 6,931 | |
| | | | | | | | | | | | | | | | |
Net income | | $ | 13,308 | | | $ | 4,895 | | | $ | 15,175 | | | $ | 18,927 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.18 | | | $ | 0.07 | | | $ | 0.21 | | | $ | 0.26 | |
| | | | | | | | | | | | | | | | |
Diluted earnings per share | | $ | 0.18 | | | $ | 0.07 | | | $ | 0.21 | | | $ | 0.26 | |
| | | | | | | | | | | | | | | | |
this standard.
Oil and Natural Gas Operations. The Company uses the full cost method to account for its natural gas and oil properties. Under full cost accounting, all costs directly associated with the acquisition, exploration and development of natural gas and oil reserves are capitalized into a “full cost pool.” These capitalized costs include costs of all unproved properties, internal costs directly related to the Company’s acquisition, exploration and development activities and capitalized interest. These costs are amortized using a unit-of-production method. Under this method, the provision for depreciation, depletion and amortization is computed at the end of each quarter by multiplying total production for such quarter by a depletion rate. The depletion rate is determined by dividing the total unamortized cost base by net equivalent proved reserves at the beginning of the quarter.
Recent Accounting Pronouncements.In September 2006,December 2007, the FASB issued SFAS No. 157, “Fair Value Measurements,”160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of Accounting Research Bulletin No. 51”, which establishes 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 formal framework for measuring fair valuesparent’s ownership interest and the valuation of assetsretained noncontrolling equity investments when a subsidiary is deconsolidated. The Statement also establishes disclosure requirements to clearly identify and liabilities in financial statements that are already required by GAAP to be measured at fair value.distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 157 clarifies guidance in160 is effective for fiscal years beginning after December 15, 2008. The Company plans to implement this standard on January 1, 2009. The Company has not yet evaluated the potential impact of this standard.
In March 2008, the FASB Conceptsissued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities”, which changes disclosure requirements for derivative instruments and hedging activities. The Statement (“CON”) No. 7 which discusses present value techniques in measuring fair value. Additionalrequires enhanced disclosure, including qualitative disclosures are also requiredabout objectives and strategies for transactions measured at fair value. No newusing derivatives, quantitative disclosures about fair value measurements are prescribed,amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements. SFAS No. 157 is intended to codify the several definitions of fair value included in various accounting standards. However, the application of this Statement may change current practices for certain companies. SFAS No. 157161 is effective for fiscal years beginning after November 15, 2007.2008. The Company is currently evaluating the impact of adopting SFAS No. 157plans to implement this standard on the financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option For Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115”(“SFAS No. 159”), which permits an entity to choose to measure certain financial assets and liabilities at fair value. SFAS No. 159 also revises provisions of SFAS No. 115 that apply to available-for-sale and trading securities. This statement is effective for fiscal years beginning after November 15, 2007.January 1, 2009. The Company has not yet evaluated the potential impact of this standard.
| |
3. | Acquisitions and Dispositions |
On March 15, 2006, the Company acquired from an executive officer and director, an additional 12.5% interest in PetroSource Energy Company, a consolidated subsidiary. The acquisition consisted of the extinguishment of subordinated debt of approximately $1.0 million and a $4.5 million cash payment for the ownership interest acquired for a total acquisition price of approximately $5.5 million.
On May 1, 2006, the Company purchased certain leases in developed and undeveloped properties from an oil and gas company. The purchase price was approximately $40.9 million in cash. The cash consideration was paid in July 2006.
On May 26, 2006, the Company purchased several oil and natural gas properties from an oil and gas company. The purchase price was approximately $12.9 million, comprised of $8.2 million in cash, and 251,351 shares of
9
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
SandRidge Energy, Inc. common stock (valued at $4.7 million). The cash and equity consideration was paid in July 2006.
On June 7, 2006, the Company acquired the remaining 1% interest in PetroSource Energy Company, a consolidated subsidiary, from an oil and gas company. The purchase price was 27,749 shares of SandRidge Energy, Inc. common stock (valued at $0.5 million). As a result of this acquisition, the Company became a 100% owner of PetroSource Energy Company.
In July 2006, the Company sold leaseholds and lease and well equipment for $16.0 million. The book basis of the assets at the time of the sale transaction was $3.7 million resulting in a gain of $12.3 million. The sale was accounted for as an adjustment to the full cost pool, with no gain recognized.
| |
4. | Property, Plant and Equipment |
Property, plant and equipment consists of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | September 30,
| | December 31,
| | | March 31,
| | December 31,
| |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
|
Oil and natural gas properties: | | | | | | | | | |
Crude oil and natural gas properties: | | | | | | | | | |
Proved | | $ | 2,388,534 | | | $ | 1,636,832 | | | $ | 3,204,557 | | | $ | 2,848,531 | |
Unproved | | | 247,757 | | | | 282,374 | | | | 259,610 | | | | 259,610 | |
| | | | | | | | | | |
Total oil and natural gas properties | | | 2,636,291 | | | | 1,919,206 | | |
Total crude oil and natural gas properties | | | | 3,464,167 | | | | 3,108,141 | |
Less accumulated depreciation and depletion | | | (174,552 | ) | | | (60,752 | ) | | | (294,729 | ) | | | (230,974 | ) |
| | | | | | | | | | |
Net oil and natural gas properties capitalized costs | | | 2,461,739 | | | | 1,858,454 | | |
Net crude oil and natural gas properties capitalized costs | | | | 3,169,438 | | | | 2,877,167 | |
| | | | | | | | | | |
Land | | | 1,344 | | | | 738 | | | | 1,344 | | | | 1,149 | |
Non oil and gas equipment | | | 491,000 | | | | 337,294 | | |
Non crude oil and natural gas equipment | | | | 602,488 | | | | 539,893 | |
Buildings and structures | | | 37,725 | | | | 6,564 | | | | 39,225 | | | | 38,288 | |
| | | | | | | | | | |
Total | | | 530,069 | | | | 344,596 | | | | 643,057 | | | | 579,330 | |
Less accumulated depreciation, depletion and amortization | | | (102,313 | ) | | | (68,332 | ) | | | (136,901 | ) | | | (119,087 | ) |
| | | | | | | | | | |
Net capitalized costs | | | 427,756 | �� | | | 276,264 | | | | 506,156 | | | | 460,243 | |
| | | | | | | | | | |
Total property, plant and equipment | | $ | 2,889,495 | | | $ | 2,134,718 | | | $ | 3,675,594 | | | $ | 3,337,410 | |
| | | | | | | | | | |
The amount of capitalized interest in the nine months ended September 30, 2007 and 2006 was approximately $1.5 million and $1.0 million, respectively, and is included in the above non crude oil and natural gas equipment balance.balance at March 31, 2008 and December 31, 2007 was approximately $3.7 million and $3.4 million, respectively.
9
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
| |
4. | Fair Value Measurements |
The Company implemented SFAS No. 157 effective January 1, 2008 for its financial assets and liabilities measured on a recurring basis. SFAS No. 157 applies to all financial assets and liabilities that are being measured and reported on a fair value basis. In February 2008, the FASB issuedFSP 157-2, which delayed the effective date of SFAS No. 157 by one year for certain nonfinancial assets and liabilities.
On July 11, 2007,As defined in SFAS No. 157, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:
| | |
Level 1: | | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. 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. |
|
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: | | Measured based on prices or valuation models that required 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). |
As required by SFAS No. 157, financial assets and liabilities 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, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. Per SFAS No. 157, the Company purchased property to serve ashas classified its future corporate headquarters. The 3.51-acre site contains four buildings and is located in downtown Oklahoma City, Oklahoma. The purchase pricederivative contracts into one of the property was approximately $25 million in cash plusthree levels based upon the assumption of an obligationdata relied upon to indemnifydetermine the sellers in connection with pending litigation involving the property. Paymentfair value. The fair values of the purchase price was funded through a draw onCompany’s natural gas and crude oil swaps, crude oil collars and interest rate swap are based upon quotes obtained from counterparties to the derivative contracts and are designated as Level 3 as the Company does not have sufficient corroborating market evidence to support classifying these assets and liabilities as Level 2. The following table summarizes the valuation of the Company’s senior credit facility. financial assets and liabilities by SFAS No. 157 pricing levels as of March 31, 2008:
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using: | | | | |
| | Quoted Prices in
| | | Significant
| | | | | | | |
| | Active Markets for
| | | Other
| | | Significant
| | | | |
| | Identical Assets
| | | Observable
| | | Unobservable
| | | Assets/
| |
| | or Liabilities
| | | Inputs
| | | Inputs
| | | Liabilities at
| |
Description | | (Level 1) | | | (Level 2) | | | (Level 3) | | | FairValue | |
| | | | | (In thousands) | | | | |
|
Derivative assets | | $ | — | | | $ | — | | | $ | 2,145 | | | $ | 2,145 | |
Derivative liabilities | | | — | | | | — | | | | (123,284 | ) | | | (123,284 | ) |
| | | | | | | | | | | | | | | | |
| | $ | — | | | $ | — | | | $ | (121,139 | ) | | $ | (121,139 | ) |
| | | | | | | | | | | | | | | | |
The related litigation was settled subsequent to September 30, 2007, resulting in an additional cost to the Company of $4.5 million which was treated as an adjustment to the purchase pricedetermination of the property. For additional discussionfair values above incorporates various factors required under SFAS No. 157. These factors include not only the impact of this settlement, refer to Note 17 herein.the Company’s nonperformance risk on its liabilities, but also the credit standing of the counterparties.
10
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
The table below sets forth a reconciliation for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the first quarter of 2008 (in thousands):
| | | | |
Derivative contracts as of December 31, 2007 | | $ | 22,228 | |
Total gains or losses (realized/unrealized) | | | (136,038 | ) |
Purchases, issuances and settlements | | | (7,329 | ) |
Transfers in and out of Level 3 | | | — | |
| | | | |
Derivative contracts as of March 31, 2008 | | $ | (121,139 | ) |
| | | | |
Change in unrealized gains (losses) on derivative contracts still held as of March 31, 2008 | | $ | (143,367 | ) |
| | | | |
The change in the carrying amount of goodwill from December 31, 2006 to September 30, 2007 was as follows (in thousands):
| | | | |
Balance at December 31, 2006 | | $ | 26,198 | |
Adjustments | | | 878 | |
| | | | |
Balance at September 30, 2007 | | $ | 27,076 | |
| | | | |
The adjustments made in the nine months ended September 30, 2007 related to the preliminary purchase allocation in connection with the NEG acquisition in November 2006. The Company has assigned all of the NEG goodwill to the Exploration and Production segment.
| |
6. | Asset Retirement Obligation |
A reconciliation of the beginning and ending aggregate carrying amounts of the asset retirement obligationsobligation for the period offrom December 31, 20062007 to September 30, 2007March 31, 2008 is as follows (in thousands):
| | | | | | | | |
Asset retirement obligation, December 31, 2006 | | $ | 45,216 | | |
Asset retirement obligation, December 31, 2007 | | | $ | 58,580 | |
Liability incurred upon acquiring and drilling wells | | | 1,688 | | | | 1,730 | |
Revisions in estimated cash flows | | | 7,747 | | | | — | |
Liability settled in current period | | | (9 | ) | | | — | |
Accretion of discount expense | | | 2,866 | | | | 1,320 | |
| | | | | | |
Asset retirement obligation, September 30, 2007 | | $ | 57,508 | | |
Asset retirement obligation, March 31, 2008 | | | | 61,630 | |
Less: Current portion | | | | 882 | |
| | | | | | |
Asset retirement obligation, net of current | | | $ | 60,748 | |
| | | | |
Long-term obligations consistdebt consists of the following (in thousands):
| | | | | | | | | | | | | | | | |
| | September 30,
| | December 31,
| | | March 31,
| | December 31,
| |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
|
Senior term loans | | | $ | 1,000,000 | | | $ | 1,000,000 | |
Senior credit facility | | $ | 400,000 | | | $ | 140,000 | | | | 215,000 | | | | — | |
Senior bridge facility | | | — | | | | 850,000 | | |
Senior term loan | | | 1,000,000 | | | | — | | |
Other notes payable: | | | | | | | | | | | | | | | | |
Drilling rig fleet and related oil field services equipment | | | 51,261 | | | | 61,105 | | | | 44,347 | | | | 47,836 | |
Sagebrush | | | — | | | | 4,000 | | |
Insurance financing | | | 199 | | | | 7,240 | | |
Mortgage | | | | 19,450 | | | | 19,651 | |
Other equipment and vehicles | | | 44 | | | | 4,486 | | | | 135 | | | | 162 | |
| | | | | | | | | | |
Total debt | | | 1,451,504 | | | | 1,066,831 | | | | 1,278,932 | | | | 1,067,649 | |
Less: Current maturities of long-term debt | | | 14,293 | | | | 26,201 | | | | 15,662 | | | | 15,350 | |
| | | | | | | | | | |
Long-term debt | | $ | 1,437,211 | | | $ | 1,040,630 | | | $ | 1,263,270 | | | $ | 1,052,299 | |
| | | | | | | | | | |
Senior Credit Facility. On November 21, 2006, the Company entered into a $750 million senior secured revolving credit facility (the “senior credit facility”). The senior credit facility matures on November 21, 2011.
The proceeds of the senior credit facility were used to (i) partially finance the NEG acquisition, (ii) refinance the existing senior secured revolving credit facility and NEG’s existing credit facility,and (iii) pay fees and expenses related to the NEG acquisition and the existing credit facility. Future borrowings under the senior credit
11
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
facility will be available for capital expenditures, working capital and general corporate purposes and to finance permitted acquisitions of oil and gas properties and other assets related to the exploration, production and development of oil and gas properties. The senior credit facility will be available to be drawn on and repaid without restriction so long as the Company is in compliance with its terms, including certain financial covenants.
The senior credit facility contains various covenants that limit the Company and certain of its subsidiaries’ ability to grant certain liens; make certain loans and investments; make distributions; redeem stock; redeem or prepay debt; merge or consolidate with or into a third party; or engage in certain asset dispositions, including a sale of all or substantially all of the Company’s assets. Additionally, the senior credit facility limits the Company and certain of its subsidiaries’ ability to incur additional indebtedness with certain exceptions, including under the senior unsecured bridge facility (as discussed below) which was repaid in full during March 2007.
The senior credit facility also contains financial covenants, including maintenance of agreed upon levels for the ratio of (i) total funded debt to EBITDAX (as defined in the senior credit facility), (ii) EBITDAX to interest expense plus current maturities of long-term debt, and (iii) current ratio. The Company was in compliance with these financial covenants as of September 30, 2007.
The obligations under the senior credit facility are secured by first priority liens on all shares of capital stock of each of the Company’s present and future subsidiaries; all intercompany debt of the Company and its subsidiaries; and substantially all of the Company assets and the assets of its guarantor subsidiaries, including proven oil and gas reserves representing at least 80% of the present discounted value (as defined in the senior credit facility) of proven oil and gas reserves reviewed in determining the borrowing base for the senior credit facility. Additionally, the obligations under the senior credit facility will be guaranteed by certain Company subsidiaries.
At the Company’s election, interest under the senior credit facility is determined by reference to (i) the British Bankers Association LIBOR rate, or LIBOR, plus an applicable margin between 1.25% and 2.00% per annum or (ii) the higher of the federal funds rate plus 0.5% or the prime rate plus, in either case, an applicable margin between 0.25% and 1.00% per annum. Interest will be payable quarterly for prime rate loans and at the applicable maturity date for LIBOR loans, except that if the interest period for a LIBOR loan is six months, interest will be paid at the end of each three-month period. The average interest rates paid on amounts outstanding under our senior credit facility for the three and nine month periods ended September 30, 2007 were 7.08% and 7.62%, respectively.
The borrowing base of proved reserves was initially set at $300.0 million. As of December 31, 2006, the Company had $140.0 million of outstanding indebtedness on the senior credit facility. Proceeds from the Company’s sale of common stock on March 20, 2007, as described in Note 14, were used to repay outstanding borrowings under the Company’s senior credit facility.
The borrowing base was increased to $400 million on May 2, 2007, and to $700 million on September 14, 2007. At September 30, 2007, the Company had $400 million in outstanding indebtedness under this facility. The Company repaid all amounts outstanding under this facility subsequent to September 30, 2007. See Note 17 for further discussion.
Senior Bridge Facility. On November 21, 2006, the Company also entered into an $850.0 million senior unsecured bridge facility (the “senior bridge facility”), which was repaid in March 2007. The Company expensed remaining unamortized debt issuance costs related to the senior bridge facility of approximately $12.5 million to interest expense in March 2007.
Together with borrowings under the senior credit facility, the proceeds from the senior bridge facility were used to (i) partially finance the NEG acquisition, (ii) refinance existing senior secured revolving credit facility and NEG’s existing credit facility,and (iii) pay fees and expenses related to the NEG acquisition and the existing credit facility.
Senior Term Loans. On March 22, 2007, the Company entered intoissued $1.0 billion inof senior unsecured term loans (the “senior term loans”). The closing of the senior term loans was generally contingent upon closing the private
12
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
placement of common equity as described in Note 14.13. The senior term loans include both floating rate term loans and fixed rate term loans. A portion of the proceeds from the senior term loans was used to repay the Company’s $850.0 million senior bridge facility, which was paid in full in March 2007.
11
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
The Company issued $350.0 million at a variable rate with interest payable quarterly and principal due on April 1, 2014 (the “variable rate term loans”). The variable rate term loans bear interest, at the Company’s option, at the British Bankers Association LIBOR rate plus 3.625% or the higher of (i) the federal funds rate, as defined, plus 3.125% or (ii) a Bank’sbank’s prime rate plus 2.625%. After April 1, 2009, the variable rate term loans may be prepaid in whole or in part with certain prepayment penalties. The average interest ratesrate paid on amounts outstanding under ourthe Company’s variable term loans for the three and nine month periodsperiod ended September 30, 2007 were 8.99% and 8.98%, respectively.March 31, 2008 was 8.36%.
In January 2008, the Company entered into an interest rate swap to fix the variable LIBOR interest rate on the variable rate term loans at 6.26% for the period from April 1, 2008 to April 1, 2011. This swap has not been designated as a hedge.
The Company issued $650.0 million at a fixed rate of 8.625% with the principal due on April 1, 2015 (the “fixed rate term loans”). Under the terms of the fixed rate term loans, interest is payable quarterly and during the first four years interest may be paid, at the Company’s option, either entirely in cash or entirely with additional fixed rate term loans. If the Company elects to pay the interest due during any period in additional fixed rate term loans, the interest rate increases to 9.375% during such period. After April 1, 2011, the fixed rate term loans may be prepaid in whole or in part with certain prepayment penalties.
After March 22, 2008, the Company is required to offer to exchange the senior term loans for senior unsecured notes with registration rights and with identical terms and conditions as the term loans. If the Company is unable or does not offer to exchange the senior term loans for senior unsecured notes with registration rights by April 30, 2008, the interest rate on the senior term loans will increase by 0.25% every 90 days up to a maximum of 0.50%.
Debt covenants under the senior term loans include financial covenants similar to those of the senior credit facility and include limitations on the incurrence of indebtedness, payment of dividends, asset sales, certain asset purchases, transactions with related parties, and consolidation or merger agreements. merger.
The Company incurred $26.1 million of debt issuance costs in connection with the senior term loans. These costs are included in other assets and amortized over the term of the senior term loans. A portion
On March 28, 2008, the Company commenced an offer to exchange the senior term loans for senior unsecured notes with registration rights, as required under the senior term loan credit agreement. See Note 15.
Senior Credit Facility. On November 21, 2006, the Company entered into a $750.0 million senior secured revolving credit facility (the “senior credit facility”). The senior credit facility matures on November 21, 2011 and is available to be drawn on and repaid without restriction so long as the Company is in compliance with its terms, including certain financial covenants. The initial proceeds of the senior credit facility were used to (i) partially finance the acquisition of NEG, (ii) refinance the existing senior secured revolving credit facility and NEG’s existing credit facility,and (iii) pay fees and expenses related to the NEG acquisition and the existing credit facility.
The senior credit facility contains various covenants that limit the Company and certain of its subsidiaries’ ability to grant certain liens; make certain loans and investments; make distributions; redeem stock; redeem or prepay debt; merge or consolidate with or into a third party; or engage in certain asset dispositions, including a sale of all or substantially all of the Company’s assets. Additionally, the senior credit facility limits the ability of the Company and certain of its subsidiaries to incur additional indebtedness with certain exceptions, including under the senior term loans (as discussed above).
The senior credit facility also contains financial covenants, including maintenance of agreed upon levels for the (i) ratio of total funded debt to EBITDAX (as defined in the senior credit facility), (ii) ratio of EBITDAX to interest expense plus current maturities of long-term debt, and (iii) current ratio. The Company was in compliance with all of the covenants under the senior credit facility as of March 31, 2008.
The obligations under the senior credit facility are secured by first priority liens on all shares of capital stock of each of the Company’s present and future subsidiaries; all intercompany debt of the Company and its subsidiaries; and substantially all of the Company’s assets and the assets of its guarantor subsidiaries, including proved crude oil and natural gas reserves representing at least 80% of the present discounted value (as defined in the senior credit facility) of proved crude oil and natural gas reserves reviewed in determining the borrowing base for the senior credit facility. Additionally, the obligations under the senior credit facility are guaranteed by certain Company subsidiaries.
12
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
At the Company’s election, interest under the senior credit facility is determined by reference to (i) the LIBOR rate plus an applicable margin between 1.25% and 2.00% per annum or (ii) the higher of the federal funds rate plus 0.5% or the prime rate plus, in either case, an applicable margin between 0.25% and 1.00% per annum. Interest is payable quarterly for prime rate loans and at the applicable maturity date for LIBOR loans, except that if the interest period for a LIBOR loan is six months, interest is paid at the end of each three month period. The average interest rate paid on amounts outstanding under our senior credit facility for the three month period ended March 31, 2008 was 4.57%.
The borrowing base of proved reserves was initially set at $300.0 million. The borrowing base was increased to $400.0 million on May 2, 2007, to $700.0 million on September 14, 2007 and to $1.2 billion on April 4, 2008. Borrowings under the senior credit facility may not exceed the lower of the borrowing base or the committed loan amount, which was increased to $1.75 billion on April 4, 2008. At March 31, 2008, the Company had $215.0 million in outstanding indebtedness under this facility.
Senior Bridge Facility. On November 21, 2006, the Company entered into an $850.0 million senior unsecured bridge facility (the “senior bridge facility”). Together with borrowings under the senior credit facility, the proceeds from the senior term loans wasbridge facility were used to repay(i) partially finance the NEG acquisition, (ii) refinance the existing senior secured revolving credit facility and NEG’s existing credit facility,and (iii) pay fees and expenses related to the NEG acquisition and the existing credit facility. The senior bridge facility was repaid in March 2007. The Company expensed remaining unamortized debt issuance costs related to the senior bridge facility of approximately $12.5 million to interest expense in March 2007.
Other Indebtedness. The Company has financed a portion of its drilling rig fleet and related oil field services equipment through notes. At March 31, 2008, the aggregate outstanding balance of these notes was $44.3 million, with an annual fixed interest rate ranging from 7.64% to 8.87%. The notes have a final maturity date of December 1, 2011, require aggregate monthly installments for principal and interest in the amount of $1.2 million and are secured by the equipment. The notes have a prepayment penalty (currently ranging from 1 to 3%) that is triggered if the Company repays the notes prior to maturity.
On November 15, 2007, the Company entered into a note payable in the amount of $20.0 million with a lending institution as a mortgage on the downtown Oklahoma City property purchased by the Company in July 2007 to serve as its corporate headquarters. This note is fully secured by one of the buildings and a parking garage located on the downtown property, 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 2008, the Company expects to make payments of principal and interest on this note totaling $0.8 million and $1.2 million, respectively.
Prior to 2007, the Company financed the purchase of various vehicles, oil field services equipment and other equipment through various notes payable. The aggregate outstanding balance of these notes as of December 31, 2006 was $4.5 million. Additionally, the Company financed its insurance premium payment made in 2007. These notes were substantially repaid during 2007 with borrowings under the Company’s $850.0senior credit facility. Also, in 2007 the Company repaid a $4.0 million senior bridge facility.loan incurred in 2005 for the purpose of completing a gas processing plant and pipeline in Colorado.
For the ninethree months ended September 30,March 31, 2008 and 2007, interest payments, net of amounts capitalized, were approximately $59.5$25.4 million in 2007 and $4.6$28.5 million, in 2006.respectively.
| |
8.7. | Other Long-Term Obligations |
The Company has recorded a long-term obligation for amounts to be paid under a settlement agreement with Conoco, Inc. (“Conoco”). Duringentered into in January 2007, the2007. The Company agreed to pay approximately $25.0 million plus interest, to Conoco to settle outstanding litigation. Under this agreement, payments are to be madepayable in $5.0 million increments on April 1, 2007, July 1, 2008, July 1, 2009, July 1, 2010, and July 1, 2011. On March 30, 2007, the Company made the first $5.0 million settlement payment plus accrued interest. The $5.0 million
13
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
payment to be made on July 1, 2008 has been included in accounts payable-trade in the accompanying condensed consolidated balance sheets as of September 30,March 31, 2008 and December 31, 2007. UnpaidThe unpaid settlement amountsamount of approximately $15.0 million and $20.0 million havehas been included in other long-term obligations in the accompanying condensed consolidated balance sheets as of September 30, 2007March 31, 2008 and December 31, 2006, respectively.2007.
| |
9.8. | DerivativesDerivative Contracts |
The Company has entered into various derivative contracts including collars, fixed price swaps, basis swaps and basisinterest rate swaps with counterparties. The contracts expire on various dates through December 31, 2009.
13
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)2011.
At September 30, 2007,March 31, 2008, the Company’s open commodity derivative contracts consisted of the following:
| | | | | | | | | | | | |
| | | | | | | | Weighted Avg.
| |
Period | | Commodity | | | Notional | | | Fix Price | |
|
Fixed price swaps: | | | | | | | | | | | | |
April 2007 — October 2007 | | | Natural gas | | | | 4,280,000 MmBtu | | | $ | 7.02 | |
April 2007 — October 2007 | | | Natural gas | | | | 4,280,000 MmBtu | | | $ | 7.50 | |
September 2007 — December 2007 | | | Natural gas | | | | 1,220,000 MmBtu | | | $ | 8.88 | |
October 2007 — December 2007 | | | Natural gas | | | | 920,000 MmBtu | | | $ | 7.60 | |
October 2007 — December 2007 | | | Natural gas | | | | 920,000 MmBtu | | | $ | 7.82 | |
October 2007 — December 2007 | | | Natural gas | | | | 920,000 MmBtu | | | $ | 8.00 | |
October 2007 — December 2007 | | | Natural gas | | | | 920,000 MmBtu | | | $ | 8.04 | |
October 2007 — December 2007 | | | Natural gas | | | | 920,000 MmBtu | | | $ | 8.77 | |
October 2007 — December 2007 | | | Natural gas | | | | 920,000 MmBtu | | | $ | 9.04 | |
November 2007 — June 2008 | | | Natural gas | | | | 4,860,000 MmBtu | | | $ | 8.05 | |
November 2007 — June 2008 | | | Natural gas | | | | 9,720,000 MmBtu | | | $ | 8.20 | |
November 2007 — March 2008 | | | Natural gas | | | | 1,520,000 MmBtu | | | $ | 8.51 | |
January 2008 — June 2008 | | | Natural gas | | | | 3,640,000 MmBtu | | | $ | 7.99 | |
January 2008 — June 2008 | | | Natural gas | | | | 3,640,000 MmBtu | | | $ | 7.99 | |
January 2008 — December 2008 | | | Natural gas | | | | 3,660,000 MmBtu | | | $ | 8.23 | |
January 2008 — December 2008 | | | Natural gas | | | | 3,660,000 MmBtu | | | $ | 8.48 | |
January 2008 — December 2008 | | | Natural gas | | | | 3,660,000 MmBtu | | | $ | 9.00 | |
May 2008 — August 2008 | | | Natural gas | | | | 2,460,000 MmBtu | | | $ | 8.38 | |
July 2008 — September 2008 | | | Natural gas | | | | 920,000 MmBtu | | | $ | 8.23 | |
July 2008 — December 2008 | | | Natural gas | | | | 1,840,000 MmBtu | | | $ | 8.31 | |
Collars: | | | | | | | | | | | | |
January 2007 — December 2007 | | | Crude oil | | | | 60,000 Bbls | | | $ | 50.00 − $84.50 | |
January 2008 — June 2008 | | | Crude oil | | | | 42,000 Bbls | | | $ | 50.00 − $83.35 | |
July 2008 — December 2008 | | | Crude oil | | | | 54,000 Bbls | | | $ | 50.00 − $82.60 | |
Waha basis swaps: | | | | | | | | | | | | |
January 2007 — December 2007 | | | Natural gas | | | | 7,300,000 MmBtu | | | $ | (0.5925 | ) |
January 2007 — December 2007 | | | Natural gas | | | | 14,600,000 MmBtu | | | $ | (0.70 | ) |
April 2007 — October 2007 | | | Natural gas | | | | 4,280,000 MmBtu | | | $ | (0.530 | ) |
January 2008 — December 2008 | | | Natural gas | | | | 10,980,000 MmBtu | | | $ | (0.57 | ) |
January 2008 — December 2008 | | | Natural gas | | | | 7,320,000 MmBtu | | | $ | (0.585 | ) |
January 2008 — December 2008 | | | Natural gas | | | | 7,320,000 MmBtu | | | $ | (0.59 | ) |
January 2008 — December 2008 | | | Natural gas | | | | 3,660,000 MmBtu | | | $ | (0.595 | ) |
January 2008 — December 2008 | | | Natural gas | | | | 3,660,000 MmBtu | | | $ | (0.625 | ) |
January 2008 — December 2008 | | | Natural gas | | | | 7,320,000 MmBtu | | | $ | (0.635 | ) |
January 2008 — December 2008 | | | Natural gas | | | | 7,320,000 MmBtu | | | $ | (0.6525 | ) |
May 2008 — August 2008 | | | Natural gas | | | | 2,460,000 MmBtu | | | $ | (0.45 | ) |
January 2009 — December 2009 | | | Natural gas | | | | 3,650,000 MmBtu | | | $ | (0.47 | ) |
January 2009 — December 2009 | | | Natural gas | | | | 3,650,000 MmBtu | | | $ | (0.49 | ) |
January 2009 — December 2009 | | | Natural gas | | | | 3,650,000 MmBtu | | | $ | (0.4975 | ) |
Natural Gas
| | | | | | | | |
| | Notional
| | | Weighted Avg.
| |
Period and Type of Contract | | (in MMBtus) | | | Fixed Price | |
|
April 2008 — June 2008 | | | | | | | | |
Price swap contracts | | | 17,900 | | | $ | 7.69 | |
Basis swap contracts | | | 13,350 | | | $ | (0.59 | ) |
July 2008 — September 2008 | | | | | | | | |
Price swap contracts | | | 18,100 | | | $ | 8.23 | |
Basis swap contracts | | | 15,640 | | | $ | (0.57 | ) |
October 2008 — December 2008 | | | | | | | | |
Price swap contracts | | | 17,480 | | | $ | 8.67 | |
Basis swap contracts | | | 14,720 | | | $ | (0.65 | ) |
January 2009 — March 2009 | | | | | | | | |
Price swap contracts | | | 6,300 | | | $ | 9.12 | |
Basis swap contracts | | | 2,700 | | | $ | (0.49 | ) |
April 2009 — June 2009 | | | | | | | | |
Price swap contracts | | | 910 | | | $ | 8.10 | |
Basis swap contracts | | | 2,730 | | | $ | (0.49 | ) |
July 2009 — September 2009 | | | | | | | | |
Basis swap contracts | | | 2,760 | | | $ | (0.49 | ) |
October 2009 — December 2009 | | | | | | | | |
Basis swap contracts | | | 2,760 | | | $ | (0.49 | ) |
January 2011 — March 2011 | | | | | | | | |
Basis swap contracts | | | 1,350 | | | $ | (0.47 | ) |
April 2011 — June 2011 | | | | | | | | |
Basis swap contracts | | | 1,365 | | | $ | (0.47 | ) |
July 2011 — September 2011 | | | | | | | | |
Basis swap contracts | | | 1,380 | | | $ | (0.47 | ) |
October 2011 — December 2011 | | | | | | | | |
Basis swap contracts | | | 1,380 | | | $ | (0.47 | ) |
14
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
Crude Oil
| | | | | | | | |
| | Notional
| | | Weighted Avg.
| |
Period and Type of Contract | | (in MBbls) | | | Fixed Price | |
|
April 2008 — June 2008 | | | | | | | | |
Price swap contracts | | | 270 | | | $ | 95.04 | |
Collar contracts | | | 21 | | | $ | 50.00 — 83.35 | |
July 2008 — September 2008 | | | | | | | | |
Price swap contracts | | | 225 | | | $ | 94.33 | |
Collar contracts | | | 27 | | | $ | 50.00 — 82.60 | |
October 2008 — December 2008 | | | | | | | | |
Price swap contracts | | | 225 | | | $ | 93.17 | |
Collar contracts | | | 27 | | | $ | 50.00 — 82.60 | |
In January 2008, the Company entered into an interest rate swap to fix the variable LIBOR interest rate on its variable rate term loans at 6.26% for the period April 1, 2008 to April 1, 2011.
These derivatives have not been designated as hedges and thehedges. The Company records all derivatives on the balance sheet at fair value. Changes in derivative fair values are recognized in earnings. Cash settlements and valuation gains and losses for commodity derivative contracts are included in gainloss on derivative contracts in the condensed consolidated statements of operations. The following table summarizes the cash settlements and valuation gains and losses on commodity derivative contracts for the three and nine month periods ended September 30,March 31, 2008 and 2007 and 2006 (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended
| | | Nine Months Ended
| |
| | September 30, | | | September 30, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
|
Realized gain | | $ | (19,969 | ) | | $ | (13,875 | ) | | $ | (19,176 | ) | | $ | (14,169 | ) |
Unrealized loss (gain) | | | (19,278 | ) | | | 8,571 | | | | (36,052 | ) | | | (2,007 | ) |
| | | | | | | | | | | | | | | | |
Gain on derivative contracts | | $ | (39,247 | ) | | $ | (5,304 | ) | | $ | (55,228 | ) | | $ | (16,176 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended
| |
| | March 31, | |
| | 2008 | | | 2007 | |
|
Realized (gain) loss | | $ | (7,329 | ) | | $ | 1,519 | |
Unrealized loss | | | 144,173 | | | | 21,662 | |
| | | | | | | | |
Loss on derivative contracts | | $ | 136,844 | | | $ | 23,181 | |
| | | | | | | | |
An unrealized gain of $0.8 million related to the interest rate swap is included in interest expense in the condensed consolidated statement of operations for the three month period ended March 31, 2008.
In accordance with applicable generally accepted accounting principles, 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 current year-to-date basis.
On January 1, 2007, the Company adopted the provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” The Company has determined that no uncertain tax positions exist where the Company would be required to make additional tax payments. As a result, the Company has not recorded any additional liabilities for any unrecognized tax benefits as of September 30, 2007. The Company and its subsidiaries file income tax returns in the U.S. federal and various state jurisdictions. Tax years 1994 to present remain open for the majority of taxing authorities. The Company’s accounting policy is to recognize penalties and interest related to unrecognized tax benefits as income tax expense. The Company does not have an accrued liability for the payment of penalties and interest at September 30, 2007.
For the ninethree months ended September 30,March 31, 2008 and 2007, income tax payments were approximately $2.7$0.2 million in 2007 and $1.9$0.4 million, in 2006.respectively.
| |
11.10. | Earnings Per Share |
Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average shares outstanding during the year,period, but also include the dilutive effect of awards of restricted stock. The following table summarizes the
15
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
calculation of weighted average common shares outstanding used in the computation of diluted earnings per share, for the three and nine month periods ended September 30,March 31, 2008 and 2007 and 2006 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
| | Nine Months Ended
| | | Three Months Ended
| |
| | September 30, | | September 30, | | | March 31, | |
| | 2007 | | 2006 | | 2007 | | 2006 | | | 2008 | | 2007 | |
|
Weighted average basic common shares outstanding | | | 107,554 | | | | 71,870 | | | | 102,562 | | | | 71,692 | | | | 141,044 | | | | 92,442 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock | | | 1,495 | | | | 936 | | | | 1,216 | | | | 941 | | | | — | | | | — | |
| | | | | | | | | | | | | | |
Weighted average diluted common and potential common shares outstanding | | | 109,049 | | | | 72,806 | | | | 103,778 | | | | 72,633 | | | | 141,044 | | | | 92,442 | |
| | | | | | | | | | | | | | |
For the three month periods ended March 31, 2008 and 2007, restricted stock awards covering 2.2 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.method with respect to its outstanding redeemable convertible preferred stock. Under this method, the Company assumes the conversion of the outstanding redeemable convertible 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
15
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
income available to common stockholders. The Company determined the if-converted method is not more dilutive and has included preferred stock dividends in the determination of income availableloss applicable to common stockholders.
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12.11. | Commitments and Contingencies |
The Company is a defendant in certain 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 other than those specifically identified below, which, individually or in the aggregate, could have a material effect on the financial condition, operationsand/or cash flows of the Company.
Roosevelt Litigation. On May 18, 2004, the Company commenced a civil action seeking declaratory judgment against Elliot Roosevelt, Jr., E.R. Family Limited Partnership and Ceres Resource Partners, L.P. in the District Court of Dallas County, Texas, 101st Judicial District, SandRidge Energy, Inc. and Riata Energy Piceance, LLC v. Elliot Roosevelt, Jr. et al, CauseNo. 92.717-C. This suit sought a declaratory judgment relating to the rights of the parties in and to certain leases in a defined area of mutual interest in the Piceance Basin pursuant to an acquisition agreement entered into in 1989, including the Company’s 41,454 gross (16,193 net) acreage position. The Company tried the case to a jury in July 2006. Before the case was submitted to the jury, the trial court granted Roosevelt a directed verdict stating that he owned a 25% deferred interest in the Company’s acreage after project payout. The directed verdict is not likely to affect the Company’s proved reserves of 11.7 Bcfe, because of the requirement that project payout be achieved before the deferred interest shares in revenue. Other issues of fact were submitted to the jury. The trial court recently entered a judgment favorable to Roosevelt. The Company has filed a motion to modify the judgment and for a new trial. Depending on the outcome of this motion, the Company expects to appeal, at a minimum, from the entry of the directed verdict. If the Company does not ultimately prevail, the deferred interest will reduce the Company’s economic returns from the project, if project payout is achieved.
The Company is subject to other claims in the ordinary course of business. However, the Company believes that the ultimate resolution of the above mentioned claims and other current legal proceedings will not have a material adverse effect on its results of operations, financial condition, or cash flows.
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13.12. | Redeemable Convertible Preferred Stock |
In November 2006, the Company sold 2,136,667 shares of redeemable convertible preferred stock as partin order to finance a portion of the NEG acquisition and received net proceeds from this sale of approximately $439.5 million after deducting offering expenses of approximately $9.3 million. Each holder of the redeemable convertible preferred stock is entitled to quarterly cash dividends at the annual rate of 7.75% of the accreted value of its redeemable convertible preferred stock. The accreted value iswas $210 per share as of September 30,March 31, 2008 and December 31, 2007. Each share of convertible preferred stock iswas initially convertible into ten (10.2 currently) shares of common stock at the option of the holder, subject to certain anti-dilution adjustments.
On January 31, 2007, the Company’s Board A summary of Directorsdividends declared a dividendand paid on the outstanding shares of redeemable convertible preferred stock. The dividend of $3.21stock is as follows (in thousands except per share wasdata):
| | | | | | | | | | | | |
| | | | 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) |
16
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
| | |
(1) | | Includes $0.6 million of prorated dividends paid to holders of redeemable convertible preferred shares who converted to shares of common stock in March 2008. The remaining dividends of $7.5 million were paid subsequent to March 31, 2008. |
Approximately $8.1 million and $8.6 million in paid and unpaid dividends have been included in cash on February 15, 2007. The dividend covered the time period from November 21, 2006, whenCompany’s earnings per share calculations for the shares were issued, through February 1, 2007.three month periods ended March 31, 2008 and 2007, respectively, as presented in the accompanying condensed consolidated statements of operations.
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.
On May 8, 2007,During March 2008, holders of 339,823 shares of the Company’s Boardredeemable convertible preferred stock elected to convert those shares into 3,465,593 shares of Directors declaredthe Company’s common stock. The conversion resulted in an increase to additional paid in capital of $71.3 million, which represents the difference between the par value of the common stock issued and the carrying value of the redeemable convertible preferred shares converted. Additionally, the Company recorded a dividend onone-time charge to retained earnings for $1.1 million in accelerated accretion expense related to the converted redeemable convertible preferred shares.
Beginning in the second quarter of 2008, the Company may convert all outstanding shares of redeemable convertible preferred stock. The dividend of $3.97 per share was paid in cash on May 15, 2007. The dividend coveredstock at the time period from February 2, 2007 through May 1, 2007.
16
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
On June 8, 2007, the Company’s Board of Directors declared a dividend on the outstanding shares of redeemable convertible preferred stock. The dividend of $4.10 per share was paid in cash on August 15, 2007. The dividend covered the time period from May 2, 2007 through August 1, 2007.
On September 24, 2007, the Company’s Board of Directors declared a dividend on the outstanding shares of redeemable convertible preferred stock. The dividend of $4.10 per share was paid in cash on November 15, 2007. The dividend covers the time period from August 2, 2007 to November 1, 2007.
Approximately $9.0 million and $29.5 million in paid and unpaid dividendsthen conversion rate if certain conditions have been included in the Company’s earnings per share calculations for the three and nine month periods ended September 30, 2007, respectively, as presented in the accompanying condensed consolidated statements of operations.met. See Note 15.
| |
14.13. | Stockholders’ Equity |
The following table presents information regarding SandRidge’s common stock (in thousands):
| | | | | | | | | | | | | | | | |
| | September 30,
| | December 31,
| | | March 31,
| | December 31,
| |
| | 2007 | | 2006 | | | 2008 | | 2007 | |
|
Shares authorized | | | 400,000 | | | | 400,000 | | | | 400,000 | | | | 400,000 | |
Shares outstanding at end of period | | | 107,820 | | | | 91,604 | | | | 146,206 | | | | 140,391 | |
Shares held in treasury | | | 1,452 | | | | 1,444 | | | | 1,310 | | | | 1,456 | |
The Company is authorized to issue 50,000,000 shares of preferred stock, no$0.001 par value, of which 2,625,000 shares are designated as redeemable convertible preferred. As of March 31, 2008 and December 31, 2007, there were 1,844,464 and 2,184,286 shares, respectively, of redeemable convertible preferred stock outstanding. (See Note 12.) There were no undesignated preferred shares were outstanding as of September 30, 2007March 31, 2008 and December 31, 2006.2007.
Common Stock Issuance. In March 2007, the Company sold approximately 17.8 million shares of common stock for net proceeds of $318.7 million after deducting offering expenses of approximately $1.4 million. The stock was sold in private sales to various investors including Tom L. Ward, the Company’s Chairman of the Board of Directors and Chief Executive Officer, who invested $61.4 million in exchange for approximately 3.4 million shares of common stock.
On November 9, 2007, the Company completed the initial public offering of its common stock. The Company sold 32,379,500 shares of its common stock, including 4,710,000 shares sold directly to an entity controlled by Tom L. Ward, at a price of $26 per share. After deducting underwriting discounts of approximately $44.0 million and
17
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
offering expenses of approximately $3.1 million, the Company received net proceeds of approximately $794.7 million. The Company used the net proceeds from the offering as follows (in millions):
| | | | |
Repayment of outstanding balance and accrued interest on senior credit facility | | $ | 515.9 | |
Repayment of note payable and accrued interest incurred in connection with recent acquisition | | | 49.1 | |
Excess cash to fund future capital expenditures | | | 229.7 | |
| | | | |
Total | | $ | 794.7 | |
| | | | |
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 (see additional discussion at Note 12).
Treasury Stock. The Company makes required tax payments on behalf of employees as 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 41,095approximately 38,000 and 37,000 shares at a total value of $1.3 million and $0.7 million during the ninethree month periodperiods ended September 30, 2007.March 31, 2008 and 2007, respectively. These shares were accounted for as treasury stock.
On June 28, 2007,During the Company purchased 39,844 shares of its common stock into treasury through an open market repurchase program in order to fund a portion of its 401(K) matching obligation as described below. Cash consideration for these shares of approximately $0.8 million was paid in July 2007.
On June 29, 2007,first quarter 2008, the Company transferred 72,044184,484 shares of its treasury stock tointo an account established for the benefit of the Company’s 401k Plan brokerage account.401(k) Plan. The transfer was made in order to satisfy the Company’s $1.3$5.0 million accrued payable to match employee contributions made to the plan during 2006.2007. Historical cost of the shares transferred totaled approximately $0.9$2.4 million, resulting in an increase to the Company’s additional paid-in capital of approximately $0.4$2.6 million.
Restricted Stock. The Company issues restricted stock awards under incentive compensation plans which vest over specified periods of time. Awards issued prior to 2006 vest overhad vesting periods of one, four or seven years. All awards issued during and after 2006 have four year vesting periods. These sharesShares of restricted common stock are subject to restriction on transfer and certain conditions to vesting.
For the three months ended September 30,March 31, 2008 and 2007, the Company recognized stock-based compensation expense related to restricted stock of $2.7$3.2 million in 2007 and $3.7$1.1 million, in 2006. For the nine months ended September 30, the Company recognized stock-based compensation expense related to restricted stock of approximately $5.0 million in 2007 and $8.2 million in 2006.respectively. Stock-based compensation expense is reflected in general and administrative expense in the condensed consolidated statements of operations.
17
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
| |
15.14. | Related Party Transactions |
DuringIn the ordinary course of business, the Company hasengages in transactions with certain shareholders and other related parties. These transactions primarily consist of purchases of drilling equipment and sales of oilfieldoil field service supplies. Following is a summary of significant transactions with such related parties for the three and nine month periods ended September 30,March 31, 2008 and 2007 and 2006 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
| | Nine Months Ended
| | Three Months Ended
| |
| | September 30, | | September 30, | | March 31, | |
| | 2007 | | 2006 | | 2007 | | 2006 | | 2008 | | 2007 | |
|
Sales to and reimbursements from related parties | | $ | 27,355 | | | $ | 4,449 | | | $ | 72,434 | | | $ | 12,070 | | | $ | 25,356 | | | $ | 2,319 | |
| | | | | | | | | | | | | | |
Purchases of services from related parties | | $ | 32,093 | | | $ | 1,394 | | | $ | 42,544 | | | $ | 3,656 | | | $ | 19,890 | | | $ | 6,785 | |
| | | | | | | | | | | | | | |
On June 1, 2006, theThe Company purchased certain producing well interestleases office space in Oklahoma City from an executive officer and director. The purchase price was approximately $9.0 million in cash. The cash consideration was paid in July 2006.
In August 2006, the Company sold various non-energy related assets to the Company’s former President and Chief Operating Officer, N. Malone Mitchell, 3rd, for approximately $6.1 million in cash. The sale transaction resulted in a $0.8 million gain recognized in earnings by the Company in August 2006. The gain is included in gain on sale of assets in the condensed consolidated statements of operations.
In September 2006, the Company entered into a facilities lease with a member of its Board of Directors. The Company believes that the payments to be made under this lease are at fair market rates. Rent expense related to the lease totaled $1.7$0.4 million and $0.1$0.3 million for the ninethree month periods ended September 30,March 31, 2008 and 2007, and 2006, respectively. The lease extends toexpires in August 2009.
On May 2, 2007, the Company purchased certain leasehold acreage from a partnership controlled by a director. The purchase price was approximately $8.3 million in cash.
On June 11, 2007, the Company purchased certain producing well interests from a director. The purchase price was approximately $3.5 million in cash.
Larclay, L.P. Larclay is a joint venture between theThe Company and Clayton Williams Energy, Inc. (“CWEI”) and waseach own a 50% interest in Larclay, L.P., a limited partnership formed in 2006 to acquire drilling rigs and provide land drilling services. Larclay
18
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
currently owns 12 rigs, one of which has not yet been assembled. The Company purchased its investment in 2006 and accounts for it under the equity method of accounting. The Company serves as the operations manager of the joint venture.partnership. Under the partnership agreement, CWEI iswas responsible for rig financing and purchasing of the rigs.purchasing. The Company had sales to and cost reimbursements from Larclay for the three and nine months ended September 30,March 31, 2008 and 2007 of $20.0$10.9 million and $48.9 million, respectively. The Company had sales to and cost reimbursements from Larclay for the three and nine months ended September 30, 2006 of $0.7 million and $0.8$2.3 million, respectively. As of September 30, 2007March 31, 2008 and December 31, 2006,2007, the Company had accounts receivable — related party due from Larclay of $16.0$18.3 million and $3.0$16.6 million, respectively. Additionally, the Company had purchases fromcontracted with Larclay to utilize rigs for drilling. For the three month periods ended March 31, 2008 and nine months ended September 30, 2007, of $10.0the Company was billed $10.7 million and $25.6$6.8 million, respectively.respectively, for these services. As of September 30,March 31, 2008 and December 31, 2007, the Company had accounts payable — related party due to Larclay of $2.2$1.5 million and $0.3 million, respectively.
Increase in Borrowing Base. In April 2008, the Company’s borrowing base under its senior credit facility was increased to $1.2 billion from $700.0 million and the total available under the facility was increased to $1.75 billion from $750.0 million.
Exchange of Senior Term Loans. On May 1, 2008, the Company issued $650.0 million of its Senior Notes due 2015 in exchange for an equal outstanding principal amount of its fixed rate term loans and $350.0 million of its Senior Floating Rate Notes due 2014 in exchange for an equal outstanding principal amount of its variable rate term loans. The exchange was made pursuant to a non-public exchange offer that commenced on March 28, 2008 and expired on April 28, 2008. The newly issued senior notes have terms that are substantially identical to those of the exchanged senior term loans, except that the senior notes have been issued with registration rights.
Conversion of Redeemable Convertible Preferred Stock. In May 2008, the Company made no purchasesconverted 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. This conversion resulted in a one-time charge to retained earnings of $6.1 million in accelerated accretion expense related to the remaining offering costs of the redeemable convertible preferred shares. Prorated dividends totaling $0.5 million for the period from LarclayMay 2, 2008 to the date of conversion (May 7, 2008) were paid to the holders of the converted shares on May 7, 2008.
Sale of Assets. In May 2008, the Company entered into an agreement, along with other parties, to sell substantially all of its assets located in 2006.the Piceance Basin of Colorado to a subsidiary of The Williams Companies, Inc. The total purchase price is $285 million with net proceeds to the Company estimated to be approximately $140 million, subject to closing adjustments and allocation of the sales price among multiple sellers. Assets to be sold include undeveloped acreage, working interests in wells, gathering and compression systems and other facilities related to the wells. The sale is subject to customary closing conditions and is expected to close during the second quarter of 2008.
| |
16. | Industry Segment Information |
SandRidge has four business segments: Explorationexploration and Production, Drillingproduction, drilling and Oilfield Services, Midstream Gas Services,oil field services, midstream gas services, and Other representing itsother. These segments represent the Company’s four main business units, each offering different products and services. The Explorationexploration and Productionproduction segment is engaged in the development, acquisition and production of crude oil and natural gas properties. The Drillingdrilling and Oilfield Servicesoil field services segment is engaged in the land contract drilling of crude oil and natural gas wells. The Midstream Gas Servicesmidstream gas services segment is engaged in the purchasing, gathering, processing and treating of
18
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
natural gas. The Otherother segment transportsincludes transporting CO2 to market for use by the Company and others in tertiary oil recovery operations and other miscellaneous operations.
19
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
Management evaluates the performance of SandRidge’s operatingthe 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 ourthe Company’s segments is shown in the following table (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended
| | | Nine Months Ended
| |
| | September 30, | | | September 30, | |
| | 2007 | | | 2006 | | | 2007 | | | 2006 | |
|
Revenues: | | | | | | | | | | | | | | | | |
Exploration and production | | $ | 113,105 | | | $ | 20,942 | | | $ | 320,984 | | | $ | 50,704 | |
Elimination of inter-segment revenue | | | — | | | | (142 | ) | | | (574 | ) | | | (354 | ) |
| | | | | | | | | | | | | | | | |
Exploration and production, net of inter-segment revenue | | | 113,105 | | | | 20,800 | | | | 320,410 | | | | 50,350 | |
| | | | | | | | | | | | | | | | |
Drilling and oilfield services | | | 70,728 | | | | 55,795 | | | | 188,887 | | | | 154,295 | |
Elimination of inter-segment revenue | | | (53,957 | ) | | | (19,864 | ) | | | (131,888 | ) | | | (48,040 | ) |
| | | | | | | | | | | | | | | | |
Drilling and oilfield services, net of inter-segment revenue | | | 16,771 | | | | 35,931 | | | | 56,999 | | | | 106,255 | |
| | | | | | | | | | | | | | | | |
Midstream gas services | | | 55,395 | | | | 47,405 | | | | 189,143 | | | | 137,329 | |
Elimination of inter-segment revenue | | | (36,364 | ) | | | (18,081 | ) | | | (118,012 | ) | | | (46,115 | ) |
| | | | | | | | | | | | | | | | |
Midstream gas services, net of inter-segment revenue | | | 19,031 | | | | 29,324 | | | | 71,131 | | | | 91,214 | |
| | | | | | | | | | | | | | | | |
Other | | | 7,209 | | | | 3,652 | | | | 19,780 | | | | 15,578 | |
Elimination of inter-segment revenue | | | (2,468 | ) | | | (57 | ) | | | (6,545 | ) | | | (220 | ) |
| | | | | | | | | | | | | | | | |
Other, net of inter-segment revenue | | | 4,741 | | | | 3,595 | | | | 13,235 | | | | 15,358 | |
| | | | | | | | | | | | | | | | |
Total revenues | | $ | 153,648 | | | $ | 89,650 | | | $ | 461,775 | | | $ | 263,177 | |
| | | | | | | | | | | | | | | | |
Operating Income: | | | | | | | | | | | | | | | | |
Exploration and production | | $ | 61,843 | | | $ | 241 | | | $ | 138,306 | | | $ | 8,203 | |
Drilling and oilfield services | | | 5,376 | | | | 10,153 | | | | 14,252 | | | | 27,178 | |
Midstream gas services | | | 3,657 | | | | 1,361 | | | | 5,958 | | | | 3,138 | |
Other | | | (11,160 | ) | | | (3,179 | ) | | | (20,172 | ) | | | (8,778 | ) |
| | | | | | | | | | | | | | | | |
Total operating income | | | 59,716 | | | | 8,576 | | | | 138,344 | | | | 29,741 | |
Interest income | | | 575 | | | | 51 | | | | 4,201 | | | | 448 | |
Interest expense | | | (28,522 | ) | | | (2,506 | ) | | | (88,630 | ) | | | (4,090 | ) |
Other income (expense) | | | 1,071 | | | | 555 | | | | 3,078 | | | | (241 | ) |
| | | | | | | | | | | | | | | | |
Income before income tax expense | | $ | 32,840 | | | $ | 6,676 | | | $ | 56,993 | | | $ | 25,858 | |
| | | | | | | | | | | | | | | | |
Capital Expenditures: | | | | | | | | | | | | | | | | |
Exploration and production | | $ | 329,430 | | | $ | 37,127 | | | $ | 706,550 | | | $ | 88,861 | |
Drilling and oilfield services | | | 20,883 | | | | 4,709 | | | | 104,796 | | | | 53,832 | |
Midstream gas services | | | 22,297 | | | | 17,387 | | | | 45,427 | | | | 25,406 | |
Other | | | 30,406 | | | | 7,508 | | | | 38,387 | | | | 13,132 | |
| | | | | | | | | | | | | | | | |
Total capital expenditures | | $ | 403,016 | | | $ | 66,731 | | | $ | 895,160 | | | $ | 181,231 | |
| | | | | | | | | | | | | | | | |
Depreciation, Depletion and Amortization: | | | | | | | | | | | | | | | | |
Exploration and production | | $ | 45,643 | | | $ | 6,680 | | | $ | 117,329 | | | $ | 14,902 | |
Drilling and oilfield services | | | 10,092 | | | | 5,206 | | | | 25,962 | | | | 14,070 | |
Midstream gas services | | | 1,688 | | | | 845 | | | | 4,182 | | | | 2,238 | |
Other | | | 2,036 | | | | 1,631 | | | | 4,948 | | | | 4,828 | |
| | | | | | | | | | | | | | | | |
Total depreciation, depletion and amortization | | $ | 59,459 | | | $ | 14,362 | | | $ | 152,421 | | | $ | 36,038 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Three Months Ended
| |
| | March 31, | |
| | 2008 | | | 2007 | |
|
Revenues: | | | | | | | | |
Exploration and production | | $ | 206,966 | | | $ | 92,634 | |
Elimination of inter-segment revenue | | | (44 | ) | | | (1,808 | ) |
| | | | | | | | |
Exploration and production, net of inter-segment revenue | | | 206,922 | | | | 90,826 | |
| | | | | | | | |
Drilling and oil field services | | | 79,838 | | | | 56,915 | |
Elimination of inter-segment revenue | | | (67,516 | ) | | | (29,020 | ) |
| | | | | | | | |
Drilling and oil field services, net of inter-segment revenue | | | 12,322 | | | | 27,895 | |
| | | | | | | | |
Midstream gas services | | | 148,235 | | | | 61,422 | |
Elimination of inter-segment revenue | | | (103,148 | ) | | | (35,235 | ) |
| | | | | | | | |
Midstream gas services, net of inter-segment revenue | | | 45,087 | | | | 26,187 | |
| | | | | | | | |
Other | | | 5,854 | | | | 5,753 | |
Elimination of inter-segment revenue | | | (1,099 | ) | | | (1,597 | ) |
| | | | | | | | |
Other, net of inter-segment revenue | | | 4,755 | | | | 4,156 | |
| | | | | | | | |
Total revenues | | $ | 269,086 | | | $ | 149,064 | |
| | | | | | | | |
Operating (Loss) Income: | | | | | | | | |
Exploration and production | | $ | (47,389 | ) | | $ | 371 | |
Drilling and oil field services | | | (2,148 | ) | | | 5,202 | |
Midstream gas services | | | 32 | | | | 1,350 | |
Other | | | (13,306 | ) | | | (3,455 | ) |
| | | | | | | | |
Total operating (loss) income | | | (62,811 | ) | | | 3,468 | |
Interest income | | | 796 | | | | 1,088 | |
Interest expense | | | (25,172 | ) | | | (35,429 | ) |
Other income | | | 24 | | | | 879 | |
| | | | | | | | |
Loss before income tax benefit | | $ | (87,163 | ) | | $ | (29,994 | ) |
| | | | | | | | |
Capital Expenditures: | | | | | | | | |
Exploration and production | | $ | 354,765 | | | $ | 127,582 | |
Drilling and oil field services | | | 17,921 | | | | 41,242 | |
Midstream gas services | | | 38,721 | | | | 9,543 | |
Other | | | 7,243 | | | | 2,728 | |
| | | | | | | | |
Total capital expenditures | | $ | 418,650 | | | $ | 181,095 | |
| | | | | | | | |
1920
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
| | | | | | | | | | | | | | | | |
| | September 30,
| | December 31,
| | | Three Months Ended
| |
| | 2007 | | 2006 | | | March 31, | |
| | 2008 | | 2007 | |
Identifiable Asset(1): | | | | | | | | | |
| |
Depreciation, Depletion and Amortization: | | | | | | | | | |
Exploration and production | | $ | 2,712,621 | | | $ | 2,091,459 | | | $ | 65,590 | | | $ | 33,211 | |
Drilling and oilfield services | | | 264,272 | | | | 175,169 | | |
Drilling and oil field services | | | | 12,348 | | | | 7,163 | |
Midstream gas services | | | 108,031 | | | | 75,606 | | | | 2,774 | | | | 1,113 | |
Other | | | 85,532 | | | | 46,150 | | | | 2,329 | | | | 1,357 | |
| | | | | | | | | | |
Total | | $ | 3,170,456 | | | $ | 2,388,384 | | |
Total depreciation, depletion and amortization | | | $ | 83,041 | | | $ | 42,844 | |
| | | | | | | | | | |
| | | | | | | | |
| | March 31,
| | | December 31,
| |
| | 2008 | | | 2007 | |
|
Identifiable Assets(1): | | | | | | | | |
Exploration and production | | $ | 3,364,879 | | | $ | 3,143,137 | |
Drilling and oil field services | | | 272,374 | | | | 271,563 | |
Midstream gas services | | | 169,578 | | | | 127,822 | |
Other | | | 101,001 | | | | 88,044 | |
| | | | | | | | |
Total | | $ | 3,907,832 | | | $ | 3,630,566 | |
| | | | | | | | |
| | |
(1) | | Identifiable assets are those used in SandRidge’s operations in each industrybusiness segment. |
Acquisitions. On October 9, 2007, the Company purchased developed and undeveloped properties located in West Texas from an oil and gas company. The purchase price was approximately $74 million, comprised of $25 million in cash and a $49 million note payable. The $25 million cash consideration paid was funded through a draw on the Company’s senior credit facility. All principal and accrued interest (interest at 7% annually) due on the note payable were repaid on November 9, 2007 with proceeds from the Company’s initial public offering.
On November 28, 2007, the Company purchased a gas treatment plant and related gathering system located in Pecos County, Texas. The purchase price of approximately $10.0 million was paid in cash.
On November 29, 2007, the Company purchased leasehold acreage and producing well interests located predominately in the WTO from a group of entities. The purchase price of approximately $32.0 million was paid in cash.
Litigation Settlement. On October 29, 2007, the Company entered into an agreement whereby it settled outstanding litigation related to certain property purchased by the Company during July 2007. Under the terms of the agreement, the Company paid $4.5 million to the counterparties on November 15, 2007 and the litigation was dismissed. The amount paid has been included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheet as of September 30, 2007.
Note Payable. On November 15, 2007, the Company entered into a note payable in the amount of $20 million with a lending institution as a mortgage on the downtown Oklahoma City property purchased by the Company during July 2007 (see additional discussion in Note 4). This note is fully secured by one of the buildings and a parking garage located on the downtown property, bears interest at 6.08% annually, and matures 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 the next twelve months, the Company expects to make payments of principal and interest on this note totaling $1.0 million and $1.1 million, respectively.
Initial Public Offering. On November 9, 2007, the Company completed an initial public offering (the “IPO”) of its common stock. The Company sold 28,700,000 shares of SandRidge common stock, including 4,170,000 shares sold directly to an entity controlled by Tom L. Ward. The shares were sold at a price of $26 per share. After deducting underwriting discounts of approximately $38.3 million and estimated offering expenses of approximately $2.5 million, the Company received net proceeds of approximately $705.4 million. This transaction priced after market close on November 5, 2007. In conjunction with the IPO, the underwriters were granted an option to purchase 3,679,500 additional shares of the Company’s common stock. The underwriters fully exercised this option and purchased the additional shares on November 6, 2007. After deducting underwriting discounts of approximately $5.7 million, the Company received net proceeds of approximately $89.9 million from
20
SandRidge Energy, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements — (Continued)
these additional shares. This offering generated total gross proceeds to the Company of $841.8 million and total net proceeds of approximately $795.3 million to us after deducting total underwriting discounts of approximately $44.0 million and other offering expenses estimated to be approximately $2.5 million. The aggregate net proceeds of approximately $795.3 million received by the Company at closing on November 9, 2007 were utilized as follows (in millions):
| | | | |
Repayment of outstanding balance and accrued interest on senior credit facility | | $ | 515.9 | |
Repayment of note payable and accrued interest incurred in connection with recent acquisition | | | 49.1 | |
Excess cash to fund future capital expenditures | | | 230.3 | |
| | | | |
Total | | $ | 795.3 | |
| | | | |
21
| |
ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Introduction
The following discussion and analysis is intended to assist you in understandinghelp the reader understand our business, and thefinancial condition, results of operations, together with our present financial condition.liquidity and capital resources. This sectiondiscussion and analysis should be read in conjunction with our condensed consolidated financial statements and the accompanying notes included in this Quarterly Report,report, as well as our historicalaudited consolidated financial statements and the accompanying notes included in registration statementour annual report onForm S-1/A10-K filed with the Securities and Exchange Commission on October 23, 2007. Our operating results for the periodsyear ended December 31, 2007 (the “2007Form 10-K”). The following discussion contains forward-looking statements that reflect our future plans, estimates, beliefs and expected performance. The forward-looking statements are dependent upon events, risks and uncertainties that may be outside our control. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, market prices for natural gas and crude oil, economic and competitive conditions, regulatory changes, estimates of proved reserves, potential failure to achieve production from development projects, capital expenditures and other uncertainties, as well as those factors discussed below and elsewhere in this report and in our 2007Form 10-K, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not be indicative of future performance. Statements concerning future results are forward-looking statements. In the text below, financial statement numbers have been rounded; however, the percentage changes are based on amounts that have not been rounded.occur.
The financial information with respect to the three and nine month periods ended September 30,March 31, 2008 and March 31, 2007 and 2006 that is discussed below is unaudited. In the opinion of management, this information contains all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation ofto state fairly the results for such periods.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 are a rapidly expanding independent natural gas and crude oil company concentrating on exploration, development and production activities. We are focused on continuing the exploration and exploitation of our significant holdings in the West Texas Overthrust, which we refer to as the WTO, a natural gas prone geological region where we have operated since 1986 that1986. The WTO includes the Piñon Field and ouras well as the Allison Ranch, South Sabino, andThistle, Big Canyon, Prospects.and McKay Creek exploration areas. We also own and operate drilling rigs and conduct related oil field services, and we own and operate interests in gas gathering, marketing and processing facilities and CO2 gathering and transportation facilities.
On November 21, 2006, we acquired all of the outstanding membership interests in NEG Oil & Gas or NEG,LLC (“NEG”) for total consideration of approximately $1.5 billion, excluding cash acquired. With core assets in the Val Verde and Permian Basins of West Texas, including overlapping or contiguous interests in the WTO, the NEG acquisition has dramatically increased our exploration and production segment operations. TheIn addition to the NEG acquisition, coupled withwe have completed numerous acquisitions of additional working interests completedin the WTO during 2007, 2006 andthe period from late 2005 have significantly increased our holdings in the WTO.through March 31, 2008. We also operate significant interests in the Cotton Valley Trend in East Texas, the Gulf Coast area, the Mid-Continent and the Gulf Coast region.of Mexico.
During November 2007, we completed anthe initial public offering of our common stock, a portion ofstock. We used the proceeds from which were usedthis offering to repay indebtedness outstanding under our senior credit facility as well as a note payable outstanding related to a recent acquisition.2007 acquisition and to fund the remainder of our 2007 capital expenditure program and a portion of our 2008 capital expenditure program. See further discussion of these transactions in Note 1713 to the condensed consolidated financial statements contained in Part I, Item I1 of this Quarterly Report.report.
22
Segment Overview
OperatingWe operate in four related business segments: exploration and production, drilling and oil field services, midstream gas services and other. Management evaluates the performance of our business segments based on operating income, which is computeddefined as segment operating revenue less direct operating costs.expenses and depreciation, depletion and amortization. These measurements provide important information to us about the activity and profitability of our lines of business. Set forth in the table below is financial information regarding each of our currentbusiness segments.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended
| | Nine Months Ended
| | | Three Months Ended
| |
| | September 30, | | September 30, | | | March 31, | |
| | 2007 | | 2006 | | 2007 | | 2006 | | | 2008 | | 2007 | |
| | (In thousands) | | |
| |
Segment revenue: | | | | | | | | | | | | | | | | | |
Segment income and expense (in thousands): | | | | | | | | | |
Revenue: | | | | | | | | | |
Exploration and production | | $ | 113,105 | | | $ | 20,800 | | | $ | 320,410 | | | $ | 50,350 | | | $ | 206,922 | | | $ | 90,826 | |
Drilling and oil field services | | | 16,771 | | | | 35,931 | | | | 56,999 | | | | 106,255 | | | | 12,322 | | | | 27,895 | |
Midstream gas services | | | 19,031 | | | | 29,324 | | | | 71,131 | | | | 91,214 | | | | 45,087 | | | | 26,187 | |
Other | | | 4,741 | | | | 3,595 | | | | 13,235 | | | | 15,358 | | | | 4,755 | | | | 4,156 | |
| | | | | | | | | | | | | | |
Total revenues | | | 153,648 | | | | 89,650 | | | | 461,775 | | | | 263,177 | | | | 269,086 | | | | 149,064 | |
Segment operating income: | | | | | | | | | | | | | | | | | |
Operating (loss) income: | | | | | | | | | |
Exploration and production | | | 61,843 | | | | 241 | | | | 138,306 | | | | 8,203 | | | | (47,389 | ) | | | 371 | |
Drilling and oil field services | | | 5,376 | | | | 10,153 | | | | 14,252 | | | | 27,178 | | | | (2,148 | ) | | | 5,202 | |
Midstream gas services | | | 3,657 | | | | 1,361 | | | | 5,958 | | | | 3,138 | | | | 32 | | | | 1,350 | |
Other | | | (11,160 | ) | | | (3,179 | ) | | | (20,172 | ) | | | (8,778 | ) | | | (13,306 | ) | | | (3,455 | ) |
| | | | | | | | | | | | | | |
Total operating income | | | 59,716 | | | | 8,576 | | | | 138,344 | | | | 29,741 | | |
Total operating (loss) income | | | | (62,811 | ) | | | 3,468 | |
Interest income | | | 575 | | | | 51 | | | | 4,201 | | | | 448 | | | | 796 | | | | 1,088 | |
Interest expense | | | (28,522 | ) | | | (2,506 | ) | | | (88,630 | ) | | | (4,090 | ) | | | (25,172 | ) | | | (35,429 | ) |
Other income (expense) | | | 1,071 | | | | 555 | | | | 3,078 | | | | (241 | ) | |
Other income | | | | 24 | | | | 879 | |
| | | | | | | | | | | | | | |
Income before income taxes | | $ | 32,840 | | | $ | 6,676 | | | $ | 56,993 | | | $ | 25,858 | | |
Loss before income taxes | | | $ | (87,163 | ) | | $ | (29,994 | ) |
| | | | | | | | | | | | | | |
Production data: | | | | | | | | | | | | | | | | | | | | | | | | |
Gas (Mmcf) | | | 12,856 | | | | 2,637 | | | | 35,148 | | | | 6,856 | | |
Oil (MBbls) | | | 535 | | | | 24 | | | | 1,441 | | | | 70 | | |
Natural gas (Mmcf) | | | | 19,173 | | | | 10,449 | |
Crude oil (MBbls) | | | | 611 | | | | 393 | |
Combined equivalent volumes (Mmcfe) | | | 16,067 | | | | 2,780 | | | | 43,793 | | | | 7,275 | | | | 22,839 | | | | 12,807 | |
Daily combined equivalent volumes (Mmcfe/d) | | | 174.6 | | | | 30.2 | | | | 160.4 | | | | 26.6 | | |
Average daily combined equivalent volumes (Mmcfe/d) | | | | 251.0 | | | | 142.3 | |
Average prices — as reported(1): | | | | | | | | | | | | | | | | | | | | | | | | |
Natural gas (per Mcf) | | $ | 5.99 | | | $ | 6.23 | | | $ | 6.56 | | | $ | 6.14 | | | $ | 7.86 | | | $ | 6.60 | |
Oil (per Bbl) | | $ | 67.57 | | | $ | 59.76 | | | $ | 61.67 | | | $ | 61.89 | | |
Crude oil (per Bbl)(3) | | | $ | 89.81 | | | $ | 54.06 | |
Combined equivalent (per Mcfe) | | $ | 7.04 | | | $ | 6.42 | | | $ | 7.30 | | | $ | 6.38 | | | $ | 9.00 | | | $ | 7.04 | |
Average prices — including impact of derivatives: | | | | | | | | | | | | | | | | | |
Average prices — including impact of derivative contract settlements: | | | | | | | | | |
Natural gas (per Mcf) | | $ | 7.54 | | | $ | 11.61 | | | $ | 7.11 | | | $ | 8.21 | | | $ | 8.32 | | | $ | 6.45 | |
Oil (per Bbl) | | $ | 67.57 | | | $ | 59.76 | | | $ | 61.67 | | | $ | 61.89 | | |
Crude oil (per Bbl)(3) | | | $ | 87.42 | | | $ | 54.06 | |
Combined equivalent (per Mcfe) | | $ | 8.28 | | | $ | 11.52 | | | $ | 7.73 | | | $ | 8.33 | | | $ | 9.32 | | | $ | 6.92 | |
Drilling and oil field services: | | | | | | | | | | | | | | | | | | | | | | | | |
Number of operational drilling rigs owned at end of period | | | 27.0 | (3) | | | 23.0 | | | | 27.0 | (3) | | | 23.0 | | | | 26.0 | | | | 25.0 | |
Average number of operational drilling rigs owned during the period | | | 27.0 | (3) | | | 22.3 | | | | 26.0 | (3) | | | 21.0 | | | | 26.0 | | | | 25.0 | |
Average total revenue per rig per day(2) | | $ | 17,771 | | | $ | 17,121 | | | $ | 17,302 | | | $ | 17,089 | | | $ | 17,500 | | | $ | 16,600 | |
| | |
(1) | | Reported pricesPrices represent actual average prices for the periods presented and do not give effect to hedgingderivative transactions. |
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| | |
(2) | | Does not include revenues for related rental equipment. |
|
(3) | | Does not include five rigs being retrofitted as of September 30, 2007.Includes natural gas liquids. |
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We report the results of our operations in the following segments:
Exploration and Production Segment
We explore for, develop and produce natural gas and crude oil reserves, with a focus on our proved reserves and extensive undeveloped acreage positions in the WTO. We operate substantially all of our wells in our core areas and employ our drilling rigs and other drilling services in the exploration and development of our operated wells and, to a lesser extent, on our non-operated wells.
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 our natural gas and crude oil production and changes in the fair value of derivative instrumentscontracts we use to reduce the volatility of the prices we receive for our natural gas and crude oil production. Because we are vertically integrated, our exploration and production activities affect the results of our drilling and oil field serviceservices and midstream gas services segments. The NEG acquisition in 2006 substantially increased our revenues and operating income in our exploration and production segment. However, because our working interest in the Piñon Field increased to approximately 85%93%, there are greater intercompany eliminations that affect the consolidated financial results of our drilling and oil field serviceservices and midstream gas services segments.
Exploration and Production Segment — Three months ended September 30, 2007 compared to the three months ended September 30, 2006
Exploration and production segment revenues increased to $113.1$206.9 million in the three months ended September 30, 2007March 31, 2008 from $20.8$90.8 million in the three months ended September 30, 2006,March 31, 2007, an increase of 443.8%127.8%, as a result of a 477.9%78.1% increase in combined production volumes and a 9.7%27.8% increase in the combined average price we received for the natural gas and crude oil we produced. In the three month period ended September 30, 2007March 31, 2008 we increased natural gas production by 10.28.8 Bcf to 12.919.2 Bcf and increased crude oil production by 511218 MBbls to 535611 MBbls from the comparable period in 2006.2007. The total combined 13.310.0 Bcfe increase in production was due primarily to acquisitionsan increase in our average working interest in the WTO from 81% at March 31, 2007 to 93% at March 31, 2008 and successful drilling in the WTO.WTO throughout 2007 and the first quarter of 2008. The Company had 1,869 producing wells at March 31, 2008 as compared to 1,333 producing wells at March 31, 2007.
The average price we received for our natural gas production for the three month period ended September 30, 2007 decreased 3.9%March 31, 2008 increased 19.1%, or $0.24$1.26 per Mcf, to $5.99$7.86 per Mcf from $6.23$6.60 per Mcf in the comparable period in 2006.2007. The average price received for our crude oil production however, increased 13.1%66.1%, or $7.81$35.75 per barrel, to $67.57$89.81 per barrel during the three months ended September 30, 2007March 31, 2008 from $59.76$54.06 per barrel during the same period in 2006.2007. Including the impact of derivative contract settlements, the effective price received for natural gas for the three month period ended September 30, 2007March 31, 2008 was $7.54$8.32 per Mcf as compared to $11.61$6.45 per Mcf during the same period in 2006.2007. Including the impact of derivative contract settlements, the effective price received for crude oil for the three month period ended March 31, 2008 was $87.42. Our derivativesderivative contracts had no impact on effective oil prices during the three months ended September 30,March 31, 2007. During 2007 or the comparable period in 2006. During late 2006 and continuing into 20072008, we entered into derivatives contracts to mitigate the impact of commodity price fluctuations on our 2007, 2008 and 20082009 production. Our derivativesderivative contracts are not designated as accounting hedges and, as a result, gains or losses on derivativescommodity derivative contracts are recorded as an operating expense. Internally, management views the settlement of such derivativesderivative contracts as adjustments to the price received for natural gas and crude oil production to determine “effective prices.”
For the three months ended September 30, 2007,March 31, 2008, we had $61.8a $47.4 million in operating incomeloss in our exploration and production segment, compared to $0.2$0.4 million in operating income for the same period in 2006.2007. Our $92.3$116.1 million increase in exploration and production revenues was offset by a $20.7$12.2 million increase in production expenses, and a $39.1$32.4 million increase in depreciation, depletion and amortization, or DD&A, due to the step upincrease in basisproduction and a $136.8 million loss on the NEG properties.our derivative contracts. The increase in production expenses was attributable to the additional properties acquiredincrease in the NEG acquisitionnumber of operating wells we own and operating expenses onan increase in our newaverage working interest in those wells. During the three month period ended September 30, 2007,March 31, 2008, the exploration and production segment reported a $39.2$136.8 million net gainloss on our derivativescommodity derivative positions ($19.97.3 million realized gainsgain and $19.3$144.1 million unrealized gains)loss) compared to a $5.3$23.2 million gainloss ($13.91.5 million realized gainsloss and $8.6$21.7 million unrealized losses)loss) in the comparable period in 2006.2007. During 2007 and first quarter 2008, we selectively entered into natural gas and oil swaps and natural gas basis swaps by capitalizing on what we perceived as spikesin order to mitigate the effects of fluctuations in prices received for our production. Given the long term nature of our investment in the priceWTO development program and the relatively high level of natural gas or favorable basis differences between the NYMEX priceprices compared to our budgeted prices, management believes it prudent to enter into natural gas and crude oil swaps and natural gas prices atbasis swaps for a portion of our principal West Texasproduction. Unrealized gains or losses on derivative contracts represent
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