SANDRIDGE ENERGY INC quarterly report, Q3 FY2009

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SandRidge Energy, Inc. — Q3 2009 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2009. SandRidge is an independent oil and gas exploration and production company, with drilling and oilfield services, midstream gas, marketing, and CO₂ operations. Financial amounts below are in U.S. dollars; “Q3” refers to the three months ended September 30.

Financial performance

  • Revenue: Q3 revenue was $134.9 million, down 59.6% from $334.0 million. Nine-month revenue was $428.0 million, down 56.4% from $981.2 million. The main drivers were sharply lower realized commodity prices and reduced midstream and marketing revenue.
  • Profit and EPS: Q3 net loss was $101.3 million, versus net income of $230.3 million; common-stockholder loss was $104.1 million, or $0.58 per diluted share. Nine-month net loss was $1.347 billion, versus net income of $154.2 million; common-stockholder loss was $1.350 billion, or $7.85 per diluted share.
  • Major unusual charge: Nine-month results include a $1.304 billion noncash full-cost ceiling impairment recorded in Q1 after lower oil and gas prices reduced the calculated value of proved reserves. No additional impairment was recorded in Q2 or Q3. Cumulative impairment charges were $3.159 billion.
  • Derivatives: Commodity contracts produced a $47.9 million loss in Q3, compared with a $292.5 million gain in Q3 2008. For nine months, they produced a $139.7 million gain, compared with a $4.1 million loss in 2008. These contracts were not designated as hedges, so fair-value changes affected reported earnings.
  • Production and prices: Q3 equivalent production was 25.2 Bcfe, nearly flat year over year; natural gas volumes fell 5.9% while crude oil volumes rose 38.8%. Nine-month equivalent production increased 9.5% to 80.6 Bcfe. Q3 unhedged average realized prices fell 68.8% for gas and 44.1% for oil; including derivative settlements, the combined realized price was $7.43/Mcfe, down 18.8%.
  • Cash flow and investment: Nine-month operating cash flow was $273.2 million, down from $534.4 million. Investing activities used $364.5 million, after $263.6 million of asset-sale proceeds; financing provided $105.3 million. Cash ended at $14.6 million. Accrual-basis capital expenditures were $542.2 million, versus $1.609 billion in the prior-year period.
  • Debt and liquidity: Total debt was $2.140 billion at September 30, down from $2.375 billion at year-end 2008; cash was $14.6 million. No borrowings were outstanding under the $985.4 million borrowing-base credit facility at quarter-end, though $41.3 million of letters of credit were outstanding. The facility’s borrowing base remained unchanged after its October redetermination. SandRidge reported compliance with debt covenants.
  • Balance sheet and equity: Total assets were $2.311 billion, down from $3.655 billion at year-end 2008. Stockholders’ deficit was $191.0 million, compared with positive equity of $793.6 million. The company issued $243.3 million net proceeds of 8.5% convertible perpetual preferred stock and $107.6 million net proceeds from a common-stock offering during the period.

Material changes and management commentary

  • The collapse in commodity prices drove lower revenue despite higher nine-month production. Management said Q3 gas production was also affected by shut-ins for repairs and maintenance.
  • Interest expense rose to $53.2 million in Q3 from $41.0 million and to $136.4 million for nine months from $88.4 million, primarily reflecting higher average debt balances.
  • In June, SandRidge sold Piñon Field gathering and compression assets for approximately $197.5 million net, recording a $26.5 million loss, and sold East Texas deep drilling rights for approximately $55.9 million. The Piñon sale includes a 20-year gathering arrangement and operations and maintenance agreement.
  • As of November 5, 2009, management reported cash of approximately $27.0 million, credit-facility borrowings of $29.9 million, and letters of credit of $46.7 million.

Outlook, risks, and contingencies

  • Capital spending: Budgeted 2009 capital expenditures, excluding acquisitions, were $500–$700 million; the 2010 budget was approximately $750 million. Management said spending is largely discretionary and may be reduced if cash flow or access to capital weakens.
  • Crusader acquisition: A proposed purchase remained subject to bankruptcy-court and creditor approval, competing bids, and an auction. Consideration included $55 million cash, about 13.0 million SandRidge shares, and warrants for 2.0 million shares; SandRidge could also lend up to $30 million to a liquidating trust for specified claims.
  • Commodity and financing risk: Results and liquidity remain sensitive to oil and gas prices, production, hedging outcomes, borrowing-base redeterminations, and access to debt and equity markets. Derivative valuations rely on significant unobservable inputs and expose the company to counterparty risk. A Lehman Brothers contract was settled through September 30 and assigned to a third party for its remaining term.
  • Other risks and contingencies: The filing identifies proposed federal tax changes affecting oil and gas deductions, possible new derivatives regulation, and proposed hydraulic-fracturing chemical disclosure requirements as potential adverse developments. Management reported no legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
  • Subsequent change: Effective October 1, SandRidge became the primary beneficiary of Grey Ranch Plant, LP and began consolidating it prospectively; management said the accounting change would not affect net income.

Important facts for investors to verify

  • Whether operating cash flow and available credit can support planned capital spending, debt service, and the proposed Crusader transaction.
  • How much of reported earnings and cash generation depends on derivative settlements versus volatile, noncash mark-to-market changes; also verify hedge volumes, counterparties, and exposure limits.
  • The assumptions behind the full-cost ceiling test, reserve values, and future impairment risk if commodity prices decline.
  • Debt maturities, covenant headroom, borrowing-base availability, and the post-quarter credit-facility draw and letters of credit.
  • Final Crusader transaction terms and approvals, including any additional loan obligation or equity issuance, and the costs and duration of the Piñon gathering commitment.