SANDRIDGE ENERGY INC quarterly report, Q1 FY2009

SandRidge Energy, Inc. — Q1 2009 Form 10-Q

Reporting period: Three months ended March 31, 2009; financial statements are unaudited. SandRidge is an independent oil and gas exploration, development and production company, with drilling and oil-field services and midstream gas operations. Unless stated otherwise, amounts below are in U.S. dollars.

Financial results and liquidity

Metric	Q1 2009	Q1 2008
Total revenue	$159.0 million	$269.1 million
Operating loss	$1,116.3 million	$62.8 million
Net loss attributable to SandRidge	$1,154.9 million	$56.6 million
Loss per common share, basic and diluted	$7.07	$0.47
Cash provided by operating activities	$73.2 million	$156.7 million
Cash used in investing activities	$349.9 million	$419.0 million
Cash provided by financing activities	$276.1 million	$199.9 million

Q1 2009 revenue fell 40.9%. Oil and gas revenue declined 41.0% to $121.2 million; drilling and services revenue fell 48.2% to $6.4 million; midstream and marketing revenue fell 44.1% to $26.0 million.
Production increased 25.8% to 28.7 Bcfe, or 319.3 Mmcfe per day. However, reported average realized oil and gas price fell 53.1% to $4.22 per Mcfe. Including derivative settlements, the effective price was $7.64 per Mcfe, versus $9.32 a year earlier.
A noncash $1,304.4 million full-cost ceiling impairment drove the operating loss. Commodity derivative contracts produced a $206.6 million accounting gain, including $108.3 million unrealized and $98.3 million realized.
Cash and cash equivalents were just $76,000 at March 31. Total debt was $2,408.7 million, including $610.9 million outstanding under the revolving credit facility. The company reported $459.6 million available to draw after letters of credit. Total equity was a deficit of $114.3 million.
Interest expense rose to $40.7 million from $25.2 million, primarily reflecting higher average debt balances and interest-rate swap losses. The income-tax benefit was only $1.2 million; a full valuation allowance on deferred tax assets limited tax benefits.

Changes versus the prior comparable period

The $1,304.4 million Q1 impairment followed a $1,855.0 million full-cost ceiling impairment recorded at December 31, 2008. The Q1 ceiling test used period-end prices of $3.63 per MMBtu for Henry Hub natural gas and $49.66 per barrel for NYMEX crude oil; derivative contracts were not included in the ceiling calculation.
Despite higher production, lower commodity prices sharply reduced revenue and operating cash flow. Production expense rose 33.3% to $45.6 million as production and operating wells increased; production taxes declined 83.8% to $1.5 million.
Derivative results shifted from a $136.8 million loss in Q1 2008 to a $206.6 million gain in Q1 2009. Derivatives are not designated as accounting hedges, so fair-value changes flow through current earnings.
Accrued capital expenditures were $297.2 million, down from $418.7 million. Cash capital expenditures were $350.2 million. Operating cash flow declined 53.3% year over year.
The company issued $243.3 million net of expenses of 8.5% convertible perpetual preferred stock in January, using proceeds to repay revolver borrowings and for general corporate purposes.

Outlook, risks and notable events

Management budgeted 2009 capital expenditures of $500 million to $700 million, excluding acquisitions. It said spending is substantially discretionary and may be reduced or increased based on cash flows, commodity prices, asset sales and access to capital.
The April 2009 borrowing-base redetermination left the facility limit unchanged at $1.1 billion. At May 1, the revolver balance was $564.4 million and reported availability was $506.1 million. The company said it complied with credit-facility and senior-note covenants at March 31; the facility includes leverage, interest-coverage and current-ratio tests.
After quarter-end, an April common-stock offering raised approximately $108.0 million net, used to repay revolver borrowings and for general corporate purposes. In May, SandRidge agreed to sell East Texas leasehold rights below the Cotton Valley formation for $60.0 million, subject to customary adjustments and closing conditions; closing was expected in Q2.
Other post-quarter developments: Lariat assigned its 50% Larclay interest to Clayton Williams Energy on April 15, with no additional loss reported; the filing says the related investment and notes had already been fully impaired. The filing also reports that 14.48 million shares were issued in the April offering.
Key risks include volatile oil and gas prices, reserve-value effects on borrowing capacity, restricted access to capital markets, counterparty and lender credit risk, and derivative valuation uncertainty. Derivative assets totaled $354.9 million and were classified as Level 3 fair-value measurements; the filing assigned no value to a Lehman Brothers derivative contract.
SandRidge reported no legal proceedings expected by management to have a material adverse effect and no material change to the risk factors in its 2008 Form 10-K. It reported effective disclosure controls and no material change in internal control over financial reporting.

Most important facts for investors to verify

Whether production growth and derivative settlements can offset persistently lower realized commodity prices, and how much of reported derivative gains are realized versus unrealized.
Updated reserve values, future full-cost ceiling impairment exposure, and the effect of commodity prices on borrowing-base redeterminations.
Liquidity after the April equity issuance and subsequent use of proceeds, including actual revolver availability, covenant headroom and upcoming debt and preferred-dividend obligations.
Whether 2009 capital spending remains within the $500 million–$700 million budget and can be funded by operating cash flow, credit availability and asset sales.
Completion and net proceeds of the proposed $60 million East Texas leasehold sale, and any further consequences of the Larclay transfer or the Lehman Brothers counterparty bankruptcy.