Business Context and Reporting Period
Company: SandRidge Energy, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: November 2, 2014
Subject: Non-reliance on previously issued financial statements due to potential accounting restatements regarding a CO2 treating agreement with Occidental Petroleum Corporation.
Key Financial Metrics and Context
This filing does not report current period revenue, profit, or cash flow. It addresses specific liabilities related to a 30-year agreement requiring the delivery of approximately 3,200 Bcf of CO2 to Occidental's Century Plant.
- CO2 Delivered (through Sept 30, 2014): 117 Bcf.
- Penalty Structure: $0.25 per Mcf for annual underdeliveries; additional $0.70 per Mcf for aggregate underdeliveries if not made up by 2041.
- Historical Accruals ($0.25 Fee): $8.5 million (2012) and $32.7 million (2013).
- 2014 Expected Accrual: Previously disclosed as between $30.0 million and $37.0 million.
Material Changes and Accounting Issues
The Company is reconsidering its historical accounting treatment for the $0.25 underdelivery fee following discussions with the SEC Division of Corporation Finance. The Company historically accrued this liability in the fourth quarter of each year. The SEC Staff has raised concerns that these liabilities may need to be re-recorded in prior quarterly periods rather than annually.
Impact: This change could materially affect net income previously reported for prior periods. Consequently, the Audit Committee concluded that investors should no longer rely on:
- Consolidated financial statements for years ended December 31, 2012 and 2013 (Form 10-K).
- Unaudited consolidated financial statements for quarters ended March 31, June 30, and September 30, 2013, and March 31 and June 30, 2014 (Form 10-Q).
Outlook, Risks, and Management Commentary
Restatement Plan: Upon resolution with the SEC Staff, the Company will restate prior period financial statements as necessary. The Company does not anticipate other corrections from Staff comments to be material.
Filing Delays: The Company anticipates that its Quarterly Report for the period ended September 30, 2014, will not be filed timely due to the time required to resolve the accounting matter.
Internal Controls: The Company is reassessing the effectiveness of its internal control over financial reporting and disclosure controls related to the Agreement.
Risks: Actual results depend on the outcome of SEC discussions and potential changes in accounting methods. Forward-looking statements are subject to significant uncertainties.
Investor Verification Checklist
- Verify the final accounting treatment for the $0.25 CO2 underdelivery fee as determined by the SEC Staff.
- Monitor the timing and content of the restated financial statements for 2012, 2013, and 2014.
- Track the filing status of the delayed Form 10-Q for the quarter ended September 30, 2014.
- Review the updated assessment of internal controls over financial reporting once the restatement process is complete.