Business Context and Reporting Period
Company: SandRidge Energy, Inc. (Registrant) and Dynamic Offshore Resources, LLC (Target)
Filing Type: Form 8-K (Current Report)
Date of Report: April 2, 2012
Event: Regulation FD Disclosure regarding the pending acquisition of Dynamic Offshore Resources, LLC ("Dynamic"). On February 1, 2012, SandRidge entered into an Equity Purchase Agreement to acquire 100% of Dynamic's outstanding equity interests. The transaction is expected to close during the quarter ended June 30, 2012.
Consideration: Approximately $1.3 billion, consisting of 73,961,554 shares of SandRidge common stock and $681.8 million in cash.
Key Financial Metrics
SandRidge Energy, Inc. (Historical 2011)
| Metric | Value (in thousands) |
|---|---|
| Revenues | $1,415,213 |
| Net Income Attributable to SandRidge | $108,065 |
| EBITDA | $726,310 |
| Net Cash Provided by Operating Activities | $475,485 |
| Total Debt | $2,814,176 |
| Cash and Cash Equivalents | $207,681 |
| Proved Reserves (Total) | 470.6 MMBoe |
Dynamic Offshore Resources, LLC (Historical 2011)
| Metric | Value (in thousands) |
|---|---|
| Revenues | $520,782 |
| Net Income Attributable to Dynamic | $155,987 |
| EBITDAX | $361,335 |
| Net Cash Provided by Operating Activities | $277,142 |
| Total Debt | $365,000 |
| Cash and Cash Equivalents | $58,696 |
| Proved Reserves (Total) | 62.5 MMBoe |
Material Changes and Pro Forma Impact
Combined Reserves: The acquisition adds 62.5 MMBoe of proved reserves to SandRidge's 470.6 MMBoe, resulting in a combined total of 533.1 MMBoe. Dynamic's reserves are 51% oil and 81% proved developed.
Production: Dynamic's properties had an average net daily production of approximately 25,500 Boe per day in February 2012. Pro forma combined average daily production for 2011 is estimated at 84.9 MBoe/d.
Accounting Adjustments: SandRidge uses the full cost method of accounting, while Dynamic uses the successful efforts method. Pro forma financial statements will adjust Dynamic's historical results to reflect the full cost method, capitalizing certain exploration costs currently expensed by Dynamic.
Asset Retirement Obligations (ARO): Dynamic's offshore operations carry higher AROs than SandRidge's onshore properties. The pro forma balance sheet will reflect these assumed liabilities.
Pro Forma Financial Outlook (2011)
SandRidge Pro Forma EBITDA: $656.8 million (adjusted for SandRidge Transactions, excluding Dynamic).
Dynamic Pro Forma EBITDAX: $433.2 million (adjusted for XTO acquisition).
Management Expectation: The acquisition is expected to be accretive to SandRidge's cash flows from operations. Pro forma EBITDA for the combined entity is expected to approximate the sum of SandRidge's pro forma EBITDA and Dynamic's pro forma EBITDAX.
Risks, Contingencies, and Unusual Items
- Transaction Closing: The deal is subject to customary conditions, including the absence of any material adverse effect relating to Dynamic. Closing is anticipated in Q2 2012.
- Debt Financing: The cash portion of the purchase price ($681.8 million) will be funded through the issuance of additional long-term debt, resulting in increased pro forma interest expense.
- Commodity Hedging: Dynamic has hedged a portion of its 2012-2013 production via swaps and collars. SandRidge is required to hedge at least half of its estimated production from proved developed reserves under its credit agreement.
- Accounting Methodology: Significant adjustments are required to reconcile Dynamic's successful efforts accounting to SandRidge's full cost method, impacting the presentation of operating costs and net income.
- Forward-Looking Statements: Pro forma data is illustrative only and does not guarantee future results. Actual results may differ due to commodity price fluctuations, reserve estimation variances, and integration challenges.
Investor Verification Checklist
- Pro Forma Financials: Verify the final unaudited pro forma financial statements (expected mid-April 2012) to confirm the accretive impact on EBITDA and cash flow.
- Debt Covenants: Review SandRidge's amended credit agreement to ensure the increased leverage post-acquisition remains within covenant limits (leverage ratio, interest coverage).
- Reserve Estimates: Confirm the independent reserve report by Netherland, Sewell & Associates, Inc. for Dynamic, specifically regarding the 62.5 MMBoe proved reserves and PV-10 valuation of $1.895 billion.
- Asset Retirement Obligations: Assess the magnitude of Dynamic's offshore AROs and the impact on future capital requirements for plugging and abandonment.
- Integration Costs: Monitor for any undisclosed integration costs or synergies that may affect the projected cash flow accretion.