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

MetricQ1 2009Q1 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.