SandRidge Energy, Inc. — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. SandRidge is an independent oil and gas producer, with drilling and oilfield services and midstream gas operations. Financial statements are unaudited.
Key financial results
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Total revenue | $134.1 million | $378.1 million | $293.1 million | $647.1 million |
| Operating loss | $50.0 million | $11.8 million | $1,166.3 million | $74.6 million |
| Net loss | $91.2 million | $20.3 million | $1,246.0 million | $76.1 million |
| Loss per common share | $0.52 | $0.17 | $7.38 | $0.63 |
| Operating cash flow | Not separately reported here | Not separately reported here | $142.0 million | $296.8 million |
Q2 revenue fell 64.5% year over year, principally as realized oil and gas prices declined. Six-month revenue fell 54.7%. Production volumes increased: Q2 equivalent production was 292 MMcfe/day versus 280 MMcfe/day; six-month production was 306 MMcfe/day versus 265 MMcfe/day. Reported average oil and gas price was $3.88/Mcfe in Q2 and $4.05/Mcfe for six months, compared with $11.49 and $10.31, respectively, in 2008. Including derivative settlements, effective prices were $7.44/Mcfe and $7.54/Mcfe.
Q2 operating loss included a $26.5 million loss on the Piñon gathering-asset sale and $19.0 million of net commodity-derivative losses. Six-month results included a $1.304 billion noncash full-cost ceiling impairment recorded in Q1; no additional impairment was recorded in Q2. The impairment reduced the carrying value of oil and gas properties and materially drove the year-to-date loss. Six-month commodity derivatives produced a net gain of $187.7 million, including $193.1 million realized gains and $5.5 million unrealized losses.
Margins: Management reported midstream gas services profit margins of 6.1% in Q2 2009 versus 6.8% in Q2 2008, and 8.3% for the first six months versus 9.3%. The filing does not provide a single consolidated gross-margin measure.
Balance sheet, debt and liquidity
- At June 30, cash was $0.6 million; current assets were $321.5 million and current liabilities $207.4 million.
- Total debt was approximately $2.162 billion, including $18.0 million drawn on the revolving credit facility; long-term debt was $2.147 billion. Debt declined from $2.375 billion at December 31, 2008.
- Total assets were $2.364 billion and total liabilities $2.456 billion, leaving a $91.8 million stockholders’ deficit, compared with $793.6 million of equity at year-end 2008.
- The revolving facility had a $985.4 million borrowing base, matured November 2011, and had $24.5 million in letters of credit outstanding at June 30. The company reported compliance with facility and senior-note covenants at quarter-end.
- At July 31, 2009, cash was approximately $83.2 million, revolving-facility borrowings were $124.6 million and letters of credit were $30.5 million.
- Six-month investing cash use was $270.3 million, including $524.3 million of cash capital expenditures, partly offset by asset-sale proceeds. Accrual-basis capital expenditures were $444.5 million, down from $934.3 million in the first half of 2008.
Material changes and financing
- Oil and gas prices were substantially lower than in 2008, while production grew. Lower prices also reduced production taxes and depletion expense.
- In January, SandRidge issued $243.3 million net proceeds of 8.5% convertible perpetual preferred stock; in April, it raised $107.7 million net from common shares. Proceeds were used to repay facility borrowings and for general corporate purposes.
- In May, it issued $365.5 million principal amount of 9.875% senior notes due 2016; net proceeds were approximately $342.2 million. The issuance reduced the facility borrowing base to $985.4 million. Interest expense rose to $42.4 million in Q2 from $22.2 million and to $83.2 million for six months from $47.4 million, primarily reflecting higher average debt.
- In June, the company sold Piñon Field gathering and compression assets for approximately $197.5 million net, recording a $26.5 million loss. It also sold East Texas deep rights for approximately $55.9 million, subject to post-closing adjustments, with no gain or loss recognized.
Outlook, risks and contingencies
- 2009 capital expenditure budget: $500 million to $700 million, excluding acquisitions. Management said spending is largely discretionary and could be reduced depending on cash flows, commodity prices, asset sales and access to capital.
- Management said it expected no material near-term liquidity impact from financial-market conditions, but noted that future credit-market disruptions or lender nonperformance could affect access to funding. Lehman Brothers, representing 0.29% of facility commitments, had declared bankruptcy and did not fund its share; one associated derivative contract was assigned no value.
- Commodity derivatives are not designated as accounting hedges, so fair-value changes affect reported earnings. Derivative assets and liabilities were Level 3 fair-value measurements; commodity price, counterparty-credit and interest-rate risks remain relevant. Fixed-price and basis swaps covered portions of production through 2012.
- The Piñon sale requires a 20-year gathering arrangement and operations-and-maintenance agreement. Disclosed gathering-fee obligations total approximately $476.8 million, including $327.7 million after 2013.
- The company recorded a full valuation allowance against net deferred tax assets and added $438.5 million to it during the first half. Potential ownership changes could limit use of tax attributes. Proposed tax, derivatives and hydraulic-fracturing legislation could increase costs or restrict operations or hedging.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect. No subsequent events requiring recognition or disclosure were identified through August 6, 2009.
Most important facts for investors to verify
- Whether cash generation and subsequent liquidity can support the planned capital program and debt service, given June 30 cash of only $0.6 million and substantial debt.
- Facility borrowing-base availability, covenant headroom, borrowing-base redeterminations and the July increase in facility borrowings.
- The assumptions behind the $1.304 billion Q1 full-cost impairment and the sensitivity of reserve values and future impairment to commodity prices.
- Hedge volumes, realized cash settlements, Level 3 valuation inputs and counterparty exposure, including the Lehman Brothers contract.
- The economic effect of the Piñon divestiture and the long-term gathering commitments, as well as execution and funding of the 2009 capital budget.