SANDRIDGE ENERGY, INC. Introduction
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report, as well as our audited consolidated financial statements and the accompanying notes included in the 2019 Form 10-K . Our discussion and analysis includes the following subjects: •Overview; •Consolidated Results of Operations; •Liquidity and Capital Resources; and •Critical Accounting Policies and Estimates The financial information with respect to the three and six-month periods endedJune 30, 2020 , and 2019, discussed below, is unaudited. In the opinion of management, this information contains all adjustments, which consist only of normal recurring adjustments unless otherwise disclosed, necessary to state fairly the accompanying unaudited condensed consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full fiscal year.
Overview
We are an oil and natural gas company with a principal focus on the acquisition,
development and production of hydrocarbon resources in
Given current economic conditions, we have further reduced our capital expenditures budget for 2020 from$25.9 million to$4.6 million , which is exclusively comprised of capital workovers. We did not drill or complete any wells during the three and six-month period endedJune 30, 2020 , and do not expect to drill or complete any wells during 2020. During the three and six-month periods endedJune 30, 2019 , we drilled nine and 21 gross wells, respectively (6.6 and 13.5 net wells, respectively). Three and 11 of the gross wells drilled respectively in the three and six-month periods endedJune 30, 2019 were located in the Mid-Continent. The remaining six and 10 gross wells drilled respectively in the three and six-month periods endedJune 30, 2019 were located in theNorth Park Basin . 22 -------------------------------------------------------------------------------- Table of Contents The chart below shows production by product for the three and six-month periods endedJune 30, 2020 and 2019: [[Image Removed: sd-20200630_g1.jpg]] Recent Events •EffectiveJuly 29, 2020 , the Board, upon recommendation of the Board'sNominating and Governance Committee , appointed Mr.Carl F. Giesler , Jr., the Company's President and Chief Executive Officer, to serve as a member of the Board.Mr. Giesler's initial term as a member of the Board will end at the annual meeting of stockholders to be held in 2021. •InJuly 2020 , the Board declared a dividend distribution of one right (a "Right") for each outstanding share of Company common stock, par value$0.001 per share to stockholders of record at the close of business onJuly 13, 2020 . Each Right entitles its holder, under certain circumstances, to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, par value$0.001 per share, at an exercise price of$5.00 per Right, subject to adjustment. The description and terms of the Rights are set forth in the tax benefits preservation plan, dated as ofJuly 1, 2020 , between the Company andAmerican Stock Transfer & Trust Company, LLC , as rights agent (and any successor rights agent, the "Rights Agent"). •EffectiveJuly 1, 2020 , the Board appointed Mr. Salah Gamoudi as the Company's Chief Financial Officer and Chief Accounting Officer. Mr. Gamoudi, age 34, most recently served as the Company's Vice President of Accounting and Finance beginningApril 27, 2020 . Prior to joining the Company, Mr. Gamoudi served as a Vice President and Chief Accounting Officer atJones Energy, Inc. fromOctober 2018 toApril 2020 .Jones Energy, Inc. filed for protection under Chapter 11 of theU.S. Bankruptcy Code onApril 14, 2019 . Immediately before serving as Vice President and Chief Accounting Officer atJones Energy, Inc. , Mr. Gamoudi served as Chief Accounting Officer and Controller ofRemora Petroleum, L.P. from 2017 to 2018. From 2015 to 2017, he served as Corporate Controller ofGlacier Oil & Gas and its predecessor entity. From 2013 to 2015, he served as SOX and Internal Audit Manager ofLRR Energy, L.P. and Lime Rock Resources. Prior to that, he served as an auditor for Deloitte and forErnst & Young LLP . Mr. Gamoudi has a Bachelor of Arts in Accounting fromPortland State University and is a Certified Public Accountant. 23 -------------------------------------------------------------------------------- Table of Contents •InMay 2020 , we entered into an agreement for the sale of our corporate headquarters building located inOklahoma City, OK. We expect the sale to be completed in the third quarter of 2020 for proceeds of approximately$35.5 million . •Royalty Trust:SandRidge Mississippian Trust II : The Company is a party to the Amended and Restated Trust Agreement ofSandRidge Mississippian Trust II (the "Trust"), datedApril 23, 2012 , by and among the Company, theBank of New York Mellon Trust Company, N.A. , and theCorporation Trust Company (the "Trust Agreement"). Pursuant to the Trust Agreement, the Company has a right of first refusal with respect to any sale of assets of the Trust to a third party following the occurrence of certain events (a "Triggering Event"). OnFebruary 14, 2020 , the Trust began dissolving and winding up its activities, which is a Triggering Event. InApril 2020 , the Trust engaged a third-party advisor to assist with the marketing and sale of the Trust's overriding royalty interests, which are in wells operated by the Company and subject to the right of first refusal. The Board and the Company evaluated the opportunity to acquire the properties related to the Trust's overriding royalty interests and determined that it would be in the Company's best interests to acquire such interests for a gross purchase price of$5.25 million (net purchase price of$3.28 million , given the Company's 37.6% ownership of the Trust). OnAugust 6, 2020 the Board authorized and the Company exercised its right of first refusal. The Company is currently negotiating this transaction.
•On
•OnApril 5, 2020 ,Bob G. Alexander , a member of the Board passed away.Mr. Alexander served on both theAudit Committee andNominating Committee of the Board. FollowingMr. Alexander's passing, the Board appointed John.J. Lipinski to the Audit Committee and appointedJonathan Christodoro to theNominating and Governance Committee and appointedMr. Lipinski as chairman of the committee.
•Effective
•In
•InApril 2020 , the borrowing base on our credit facility was reduced to$75.0 million from$225.0 million during the semi-annual redetermination. The credit facility has a maturity date ofApril 1, 2021 and amounts outstanding afterApril 1, 2020 are considered short-term borrowings under GAAP. •InDecember 2019 , COVID-19 was identified and subsequently declared a pandemic by theWorld Health Organization inMarch 2020 . As a result, there has been a significant reduction in demand for and prices of crude oil, natural gas and NGL, and we had to close our headquarters and issue a work from home policy to protect our employees and others from potential virus transmission.
Outlook
The COVID-19 pandemic and other pricing volatility caused by the announcement of production increases bySaudi Arabia -ledOPEC andRussia caused a steep decline in oil prices inMarch 2020 , which further decreased to historic lows inApril 2020 . Although we cannot reasonably estimate what the full impact of the COVID-19 pandemic and other market volatility will have on our business, we expect it will have a material, adverse impact on near-term future revenues and overall profitability. As a result, we have withdrawn our guidance fromFebruary 2020 and reduced our 2020 capital expenditures budget from$25.9 million to$4.6 million . Additionally, we have implemented several additional initiatives to maximize free cash flow, reduce our debt level, maximize our liquidity position and, ultimately realize greater shareholder value. These initiatives included personnel and non-personnel cost reductions, the sale of the company headquarters, and entering into additional commodity derivative contracts for natural gas during the remainder of calendar year 2020 and in year 2021. 24
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Consolidated Results of Operations
The majority of our consolidated revenues and cash flow are generated from the production and sale of oil, natural gas and NGLs. Our revenues, profitability and future growth depend substantially on prices received for our production, the quantity of oil, natural gas and NGLs we produce, our ability to find and economically develop and produce our reserves, and changes in the fair value of our commodity derivative contracts. Prices for oil, natural gas and NGLs fluctuate widely and are difficult to predict. To provide information on the general trend in pricing, the average NYMEX prices for oil and natural gas during the three and six-month periods endedJune 30, 2020 , and 2019 are shown in the table below: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 NYMEX Oil (per Bbl)$ 28.00 $ 59.91 $ 36.83 $ 57.45 NYMEX Natural gas (per MMBtu)$ 1.75 $
2.51
To reduce our exposure to price fluctuations, from time to time we enter into commodity derivative contracts for a portion of our anticipated future oil and natural gas production depending on the Company's view of opportunities under then-prevailing market conditions as discussed in "Item 3. Quantitative and Qualitative Disclosures About Market Risk." Reducing our exposure to price volatility helps mitigate the risk that we will not have adequate funds available for our capital expenditure and other programs. During periods where the strike prices for our commodity derivative contracts are below market prices at the time of settlement, we may not fully benefit from increases in the market price of oil and natural gas. Conversely, during periods of declining oil and natural gas market prices, our commodity derivative contracts may partially offset declining revenues and cash flow to the extent strike prices for our contracts are above market prices at the time of settlement.
Revenues
Consolidated revenues for the three and six-month periods ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Oil $ 11,554 $ 55,615 $ 40,208 $ 98,774
NGL 1,591 9,413 7,525 22,524
Natural gas 3,303 10,168 8,854 26,946
Other 207 192 397 380
Total revenues $ 16,655 $ 75,388 $ 56,984 $ 148,624
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Oil, Natural Gas and NGL Production and Pricing
The Company's production and pricing information for the three and six-month
periods ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Production data
Oil (MBbls) 520 984 1,202 1,833
NGL (MBbls) 681 830 1,451 1,706
Natural gas (MMcf) 5,697 8,476 12,391 17,096
Total volumes (MBoe) 2,151 3,227 4,718 6,388
Average daily total volumes (MBoe/d) 23.6 35.5 25.9 35.3
Average prices-as reported(1)
Oil (per Bbl) $ 22.22 $ 56.52 $ 33.45 $ 53.89
NGL (per Bbl) $ 2.34 $ 11.34 $ 5.19 $ 13.20
Natural gas (per Mcf) $ 0.58 $ 1.20 $ 0.71 $ 1.58
Total (per Boe) $ 7.65 $ 23.30 $ 11.99 $ 23.21
Average prices-including impact of
derivative contract settlements
Oil (per Bbl) $ 33.47 $ 56.52 $ 41.72 $ 53.89
NGL (per Bbl) $ 2.34 $ 11.34 $ 5.19 $ 13.20
Natural gas (per Mcf) $ 0.69 $ 1.20 $ 0.77 $ 1.87
Total (per Boe) $ 10.67 $ 23.30 $ 14.24 $ 24.00
__________________1.Prices represent actual average sales prices for the periods presented and do not include effects of derivatives.
The table below presents production by area of operation for the three and
six-month periods ended
Three Months Ended June 30 , Six Months Ended June 30,
2020 2019 2020 2019
Production (MBoe) % of Total Production (MBoe) % of Total Production (MBoe) % of Total Production (MBoe) % of Total
Mississippian Lime 1,786 83.0 % 2,468 76.5 % 3,847 81.5 % 5,118 80.2 %
NW STACK 143 6.6 % 309 9.6 % 321 6.8 % 545 8.5 %
North Park Basin 222 10.3 % 450 13.9 % 550 11.7 % 725 11.3 %
Total 2,151 100.0 % 3,227 100.0 % 4,718 100.0 % 6,388 100.0 %
Variances in oil, natural gas and NGL revenues attributable to changes in the
average prices received for our production and total production volumes sold for
the three and six-month periods ended June 30, 2020 , and 2019 are shown in the
table below (in thousands):
Three Months Ended Six Months Ended
June 30, 2020 June 30, 2020
2019 oil, natural gas and NGL revenues $ 75,196 $ 148,244
Change due to production volumes $ (12,274) $ (20,028)
Change due to average prices $ (46,474) $ (71,629)
2020 oil, natural gas and NGL revenues $ 16,448 $ 56,587
26-------------------------------------------------------------------------------- Table of Contents Revenues from oil, natural gas and NGL sales decreased$58.7 million , or 77.9% for the quarter endedJune 30, 2020 as compared to the quarter endedJune 30, 2019 . Revenues from oil, natural gas and NGL sales decreased$91.6 million or 61.7% for the six months endedJune 30, 2020 as compared to the six months endedJune 30, 2019 . The average prices for oil, natural gas and NGL's declined significantly during both periods, due largely to an increase in anticipated global supplies of these commodities after a pledged increase in oil production fromSaudi Arabia -ledOPEC , and the reduction in demand stemming from the COVID-19 pandemic. See " Item 1A. Risk Factors " included in Part II of this Quarterly Report for additional discussion of the potential impact these events may have on our future revenues. The decline in production between the three months endedJune 30, 2020 and 2019, as well as the six months endedJune 30, 2020 and 2019 largely resulted from the absence of newly drilled wells in 2020 and natural production declines in our existing producing wells in the Mississippian Lime, and to a lesser extent, the NW STACK andNorth Park Basin .
Operating Expenses
Operating expenses for the three and six-month periods ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Lease operating expenses $ 8,698 $ 25,076 $ 24,340 $ 47,855
Production, ad valorem, and other taxes 1,854 5,877 5,053 10,957
Depreciation and depletion-oil and natural gas 13,348 39,419 38,203 75,884
Depreciation and amortization-other 1,739 2,986 4,373 5,929
Total operating expenses $ 25,639 $
73,358
Lease operating expenses ($/Boe)$ 4.04 $ 7.77 $ 5.16 $ 7.49 Production, ad valorem, and other taxes ($/Boe)$ 0.86 $ 1.82 $ 1.07 $ 1.72 Depreciation and depletion-oil and natural gas ($/Boe)$ 6.21 $ 12.22 $ 8.10 $ 11.88 Production, ad valorem, and other taxes (% of oil, natural gas, and NGL revenue) 11.3 % 7.8 % 8.9 % 7.4 % Lease operating expenses decreased by$16.4 million or$3.73 /Boe for the three months endedJune 30, 2020 , as compared to the three months endedJune 30, 2019 . Lease operating expenses decreased by$23.5 million or$2.33 /Boe for the six months endedJune 30, 2020 , as compared to the six months endedJune 30, 2019 . These decreases primarily resulted from field personnel reductions in force, in addition to the shut-in of wells that had become uneconomic due to natural production declines and deteriorating pricing in the three and six-month periods endedJune 30, 2020 . Production, ad valorem, and other taxes have continued to decrease primarily due to declining production and revenues as discussed above. Further, they have increased as a percentage of oil, natural gas, and NGL revenue for the three and six months endedJune 30, 2020 as compared to comparable periods in 2019, primarily due to ad valorem taxes remaining consistent throughout 2020 while revenues have declined during 2020. The average depreciation and depletion rate for our oil and natural gas properties for the three months endedJune 30, 2020 decreased by$6.01 /Boe from the three months endedJune 30, 2019 . The average depreciation and depletion rate for our oil and natural gas properties for the six months endedJune 30, 2020 decreased by$3.78 /Boe from the six months endedJune 30, 2019 . These decreases were primarily due to the full cost ceiling test impairments recorded in the third and fourth quarters of 2019, as well as the first quarter of 2020.
Impairment
In the three-month period endedJune 30, 2020 , we recorded a total impairment charge of$201.8 million , which included a full cost ceiling limitation impairment charge of$163.8 million , and an impairment charge of$38.0 million to write down the value of the Company's office headquarters, classified as assets held for sale, to its estimated fair value less estimated costs to sell the building. 27
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In the six-month period endedJune 30, 2020 , we recorded a total impairment charge of$209.8 million , which included a full cost ceiling limitation impairment charge of$171.8 million , and an impairment charge of$38.0 million to write down the value of the Company's office headquarters, classified as assets held for sale, to its estimated fair value less estimated costs to sell the building. The ceiling limitation impairment charges recorded in the three and six-month period endedJune 30, 2020 resulted from various factors including a decrease in the trailing twelve-month weighted average natural gas price in 2020. No impairment charges were recorded in the three and six month period endedJune 30, 2019 . Calculation of the full cost ceiling test is based on, among other factors, average prices for the trailing twelve-month period determined by reference to the first-day-of-the-month index prices ("SEC prices") as adjusted for price differentials and other contractual arrangements. TheSEC prices utilized in the calculation of proved reserves included in the full cost ceiling test atJune 30, 2020 were$47.17 per barrel of oil and$2.07 per Mcf of natural gas, before price differential adjustments. Based on theSEC prices over the eleven months endedJuly 7, 2020 , as well as the short-term pricing outlook for the remainder of the third quarter 2020, we anticipate theSEC prices utilized in theJune 30, 2020 full cost ceiling test may be$43.27 per barrel of oil and$1.96 per Mcf of natural gas, (the "estimated third quarter prices"). Applying these estimated third quarter prices, and holding all other inputs constant to those used in the calculation of ourJune 30, 2020 ceiling test, we expect to incur an additional impairment charge of approximately$31.9 million in the third quarter of 2020. Any actual full cost ceiling limitation impairment recognized in future quarters may fluctuate significantly from projected amounts based on the outcome of numerous other factors such as additional declines in the actual trailing twelve-monthSEC prices, changes in estimated future development costs and operating expenses, and other adjustments to our levels of proved reserves. Any such ceiling test impairments in 2020 could be material to our net earnings.
Full cost pool impairments have no impact to our cash flow or liquidity.
Other Operating Expenses
Other operating expenses for the three and six-month periods ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
General and administrative $ 4,314 $ 10,084 $ 9,797 $ 20,023
Restructuring expenses 444 - 444 -
Employee termination benefits 1,993 4,465 5,247 4,465
(Gain) loss on derivative contracts (2,241) - (12,467) 209
Other operating expense 108 37 385 119
Total other operating expenses $ 4,618 $
14,586
General and administrative expenses decreased by$5.8 million for the three months endedJune 30, 2020 , compared to the same period in 2019. General and administrative expenses decreased by$10.2 million for the six months endedJune 30, 2020 , compared to the same period in 2019. These decreases resulted primarily from a reduction in compensation related costs after completing reductions in force during the second quarter of 2019 and the first half of 2020. Part of the decrease is also due to reductions in professional costs such as legal expenses, audit fees and consulting services.
Restructuring expenses represent fees and costs associated with our outsourcing and relocation of certain corporate specific functions that are of a non-recurring nature.
Employee termination benefits for the three and six-month periods endedJune 30, 2020 and 2019 include cash and share-based severance costs incurred for the reduction in force in the relevant periods. See " Note 12 - Employee Termination Benefits " in the accompanying unaudited condensed consolidated financial statements for additional discussion of these expenses. 28 -------------------------------------------------------------------------------- Table of Contents The following table summarizes derivative activity for the three and six-month periods endedJune 30, 2020 , and 2019 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Gain (loss) on commodity derivative contracts $ 2,241 $ -$ 12,467 $ (209) Cash received on settlements $ 6,490 $ -$ 10,577 $ 5,078 Our derivative contracts are not designated as accounting hedges and, as a result, changes in their fair values are recorded each quarter as a component of operating expenses. Internally, management views the settlement of commodity derivative contracts at contractual maturity as adjustments to the price received for oil and natural gas production to determine "effective prices." In general, cash is received on settlement of contracts due to lower oil and natural gas prices at the time of settlement compared to the contract price for our commodity derivative contracts, and cash is paid on settlement of contracts due to higher oil and natural gas prices at the time of settlement compared to the contract price for our commodity derivative contracts. InApril 2020 , we entered into additional natural gas commodity derivative contracts as discussed in "Item 3. Quantitative and Qualitative Disclosures about Market Risk" included in Part I of this Quarterly Report.
Other Income (Expense)
The Company's other income (expense) for the three and six-month periods ended
Six Months Ended June
Three Months Ended June 30, 30,
2020 2019 2020 2019
Other income (expense)
Interest expense, net $ (447) $ (702) $ (1,084) $ (1,287)
Other income (expense), net 58 (26) 134 (457)
Total other expense $ (389) $ (728) $ (950) $ (1,744)
29-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As ofJune 30, 2020 , we had cash and cash equivalents, excluding restricted cash, of$13.5 million . Additionally, we had$59.0 million outstanding under our$75.0 million credit facility which matures onApril 1, 2021 , and$4.3 million in outstanding letters of credit, which reduce the amount available under the credit facility on a dollar-for dollar basis. This leaves an additional$11.7 million available to be borrowed under the credit facility. As discussed in " - Recent Events " and "- Outlook" above, we have undertaken several initiatives in the second quarter of 2020 which we believe have the potential to positively impact our ability to repay our outstanding credit facility borrowings at or before maturity. These initiatives are also expected to maximize free cash flow, maximize our liquidity position and, ultimately realize greater shareholder value to address the negative impact of the COVID-19 pandemic and commodity price volatility on our financial position and future liquidity. These initiatives included personnel and non-personnel cost reductions, the sale of our corporate headquarters, and entering into commodity derivative contracts for natural gas to reduce our exposure to near term commodity price volatility. We are actively working to refinance the outstanding borrowings under our credit facility. As ofJuly 31, 2020 , we had approximately$16.3 million in cash and cash equivalents, excluding restricted cash,$59.0 million outstanding under our credit facility, and$4.3 million in outstanding letters of credit. Amounts outstanding under the credit facility afterApril 1, 2020 are classified as short-term borrowings under GAAP. We currently project that we will not have sufficient cash on hand or available liquidity to repay the outstanding credit facility balance at maturity without the company taking specific actions to alleviate this liquidity short-fall. These conditions and events raise substantial doubt about our ability to continue as a going concern. Our failure to close on the corporate building sale and use the proceeds to repay the outstanding borrowings at maturity or otherwise restate or amend our current credit facility terms prior to maturity could result in the potential foreclosure on the collateral securing the credit facility. We are unable to project the full impact the COVID-19 pandemic will have on our financial position and results of operations at this time, but these measures, along with amounts available to be drawn on our credit facility, cash on hand, and other cash flows from operations are expected to provide ample liquidity for the next 12 months. While we cannot give absolute assurance that our plans will succeed, we have concluded that our plans are probable of being achieved to alleviate substantial doubt about the Company's ability to continue as a going concern.
Working Capital and Sources and Uses of Cash
Our principal sources of liquidity for the next year include cash flows from operations, cash on hand and amounts available under our credit facility. As discussed in " - Outlook " above to the accompanying unaudited condensed consolidated financial statements and "Item 1A. Risk Factors" included in Part II of this Quarterly Report, we expect the COVID-19 pandemic and other market volatility factors including production decisions made byOPEC and its affiliate countries to have a material, adverse impact on future revenue growth and overall profitability for the foreseeable future. We had a working capital deficit of$53.3 million atJune 30, 2020 , as compared to a deficit of$49.8 million atDecember 31, 2019 . The change was largely due to the negative impact on working capital resulting from the reclassification of our credit facility from long-term debt to current maturities of long-term debt, partially offset by the positive impact resulting from the reclassification of our office headquarters from other property, plant and equipment, net, to assets held for sale. Further, working capital was negatively impacted by a decrease in accounts receivable for oil and gas sales as revenues continue to decline, and was positively impacted by an increase in our short-term derivatives assets atJune 30, 2020 resulting from a decrease in the market price for natural gas compared to contract prices for our open natural gas derivatives atJune 30, 2020 . Management is pursuing an agreement to refinance the outstanding borrowings under the credit facility.
Cash Flows
Our cash flows from operations, which impact our ability to fund our capital expenditures, are substantially dependent on current and future prices for oil and natural gas, which historically have been, and may continue to be, volatile. Cash flows from operations are also affected by timing of cash receipts and disbursements and changes in other working capital assets and liabilities.
Our cash flows for the six-month periods ended
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