SANDRIDGE ENERGY INC 10-Q

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 2020 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-month periods ended March 31, 2021, and 2020, 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 independent oil and natural gas company with a principal focus on acquisition, development and production activities in the U.S. Mid-Continent. Prior to February 5, 2021, we held assets in the North Park Basin of Colorado, which have been sold in their entirety. The charts below shows production by product for the three-month periods ended March 31, 2021 and 2020: (1) For the year three-months ended March 31, 2021, Mid-Continent production was 832 MBoe of natural gas, 521 MBoe of NGLs and 221 MBoe of oil totaling 1,574 MBoe. North Park Basin had 67 MBoe of oil production. (2) For the year three-months ended March 31, 2020, Mid-Continent production was 1,116 MBoe of natural gas, 769 MBoe of NGLs and 354 MBoe of oil totaling 2,239 MBoe. North Park Basin had 328 MBoe of oil production. Total production for the three-month periods ended March 31, 2021 was comprised of approximately 17.6% oil, 50.7% natural gas and 31.7% NGLs compared to 26.6% oil, 43.4% natural gas and 30.0% NGLs in 2020. 19 Tabl e of Contents Mid-continent production for the three-months ended March 31, 2021 was comprised of approximately 14.0% oil, 52.9% natural gas and 33.1% NGLs compared to 15.8% oil, 49.9% natural gas and 34.3% NGLs in 2020. The decline in Mid-Continent production was primarily due to pro-active well shut-ins in response to a drop in commodity prices in the second quarter of 2020, as well as regular production declines. Recent Events • On April 22, 2021, we announced the acquisition of all the overriding royalty interest assets of SandRidge Mississippian Trust I (the “Trust”). The gross purchase price is $4.9 million (net $3.6 million, given our 26.9% ownership of the Trust). • On March 3, 2021, we named Mr. Grayson Pranin, formerly its Vice President for Reserves and Engineering, as Senior Vice President and Chief Operating Officer. We also named Mr. Salah Gamoudi, our Chief Financial Officer and Chief Accounting Officer, as a Senior Vice President. We also named Mr. Dean Parrish, formerly our Director of Operations, as our Vice President of Operations. • On February 5, 2021, we sold all of our oil and natural gas properties and related assets of the North Park Basin ("NPB") in Colorado for a purchase price of $47 million in cash. Outlook We will focus on maximizing free cash flow in 2021 through a combination of cost control measures and the continued exercise of financial discipline and prudent capital allocation, which includes limiting our capital projects to projects we believe will provide high rates of return in the current commodity price environment. As a result, our planned capital expenditures for 2021 will be similar to our 2020 levels. Given this expected level of capital expenditures, our oil, natural gas and NGL production will likely decline in 2021. We will consider expanding our capital program after assessing all factors, including commodity prices. We will also continue our pursuit of acquisitions and business combinations which provide high margin properties with attractive returns at current commodity prices. The COVID-19 pandemic reduced global economic activity and negatively impacted energy demand during the previous twelve months. Demand for oil and natural gas is slowly returning to pre-pandemic levels as COVID-19 vaccination rates and economic activity have increased. 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, along with the sale of the Company's headquarters during 2020. Prior to February 5, 2021, we held assets in the North Park Basin, which have been sold in their entirety. 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 prevailing prices received for our production, the quantity of oil, natural gas and NGLs we produce, and our ability to find and economically develop and produce our reserves. 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 New York Mercantile Exchange "NYMEX" prices for oil and natural gas are shown in the table below: Three month periods ended March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 NYMEX Oil (per Bbl) $ 58.09 $ 42.58 $ 40.92 $ 28.00 NYMEX Natural gas (per MMBtu) $ 2.72 $ 2.76 $ 2.12 $ 1.75 In order to reduce our exposure to price fluctuations, we have historically entered into commodity derivative contracts for a portion of our anticipated future oil and natural gas production as discussed in “Item 3. Quantitative and Qualitative Disclosures About Market Risk.” As of March 31, 2021, we had no open commodity derivative contracts and there was no commodity derivative activity during the quarter ended March 31, 2021. 20 Tabl e of Contents Revenues Consolidated revenues for the three-month periods ended March 31, 2021, and 2020 are presented in the table below (in thousands): Three Months Ended March 31, 2021 2020 Oil $ 15,548 $ 28,654 NGL 8,856 5,934 Natural gas 9,219 5,551 Other — 190 Total revenues (1) $ 33,623 $ 40,329 (1) Mid-Continent represented $30.4 million, or 90.6% and $27.5 million, or 68.4% of total consolidated revenues for the three-months ended March 31, 2021 and 2020, respectively. NPB represented $3.2 million, or 9.4% and $12.8 million, or 31.6% of total consolidated revenues for the three-months ended March 31, 2021 and 2020, respectively. Oil, Natural Gas and NGL Production and Pricing The Company's production and pricing information for the three-month periods ended March 31, 2021, and 2020 is shown in the table below: Three Months Ended March 31, 2021 2020 Production data Oil (MBbls) 288 682 NGL (MBbls) 521 769 Natural gas (MMcf) 4,993 6,695 Total volumes (MBoe) 1,641 2,567 Average daily total volumes (MBoe/d) 18.2 28.2 Average prices—as reported (1) Oil (per Bbl) $ 53.99 $ 42.01 NGL (per Bbl) $ 17.00 $ 7.72 Natural gas (per Mcf) $ 1.85 $ 0.83 Total (per Boe) $ 20.49 $ 15.64 Average prices—including impact of derivative contract settlements Oil (per Bbl) $ 53.99 $ 48.01 NGL (per Bbl) $ 17.00 $ 7.72 Natural gas (per Mcf) $ 1.85 $ 0.83 Total (per Boe) $ 20.49 $ 17.23 __________________ (1) Prices represent actual average sales prices for the periods presented and do not include effects of derivatives. 21 Tabl e of Contents The table below presents production by area of operation for the three-month periods ended March 31, 2021, and 2020: Three Months Ended March 31, 2021 2020 Production (MBoe) % of Total Production (MBoe) % of Total Mid-Continent 1,574 95.9 % 2,239 87.2 % North Park Basin 67 4.1 % 328 12.8 % Total 1,641 100.0 % 2,567 100.0 % 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-month periods ended March 31, 2021, and 2020 are shown in the table below (in thousands): Three Months Ended March 31, 2021 2020 oil, natural gas and NGL revenues $ 40,139 Change due to production volumes $ (18,972) Change due to average prices $ 12,456 2021 oil, natural gas and NGL revenues $ 33,623 Revenues from oil, natural gas and NGL sales decreased $6.5 million or 16.2%for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020. Revenue has declined primarily due to the divestiture of the North Park Basin properties and natural production declines in our existing producing wells in the Mid-Continent partially offset by increased realized commodity prices. Mid-Continent represented $30.4 million, or 90.6% and $27.5 million, or 68.4% of total consolidated revenues for the three-months ended March 31, 2021 and 2020, respectively. NPB represented $3.2 million, or 9.4% and $12.8 million, or 31.6% of total consolidated revenues for the three-months ended March 31, 2021 and 2020, respectively. See "Item 1A—Risk Factors" included in the Company's 2020 Form 10-K for additional discussion of the potential impact these events may have on our future revenues. Operating Expenses Operating expenses for the three-month periods ended March 31, 2021, and 2020 consisted of the following (in thousands): Three Months Ended March 31, 2021 2020 Lease operating expenses $ 7,954 $ 15,642 Production, ad valorem, and other taxes 2,176 3,199 Depreciation and depletion—oil and natural gas 2,505 24,855 Depreciation and amortization—other 1,494 2,634 Total operating expenses $ 14,129 $ 46,330 Lease operating expenses ($/Boe) $ 4.85 $ 6.09 Production, ad valorem, and other taxes ($/Boe) $ 1.33 $ 1.25 Depreciation and depletion—oil and natural gas ($/Boe) $ 1.53 $ 9.68 Production, ad valorem, and other taxes (% of oil, natural gas, and NGL revenue) 6.5 % 8.0 % Lease operating expenses decreased by $7.7 million or $1.24/Boe for the three months ended March 31, 2021, as compared to the three months ended March 31, 2020 . These decreases primarily resulted from field personnel reductions in force, the sale of NPB and the shut-in of wells that had become uneconomic due to natural production declines. NPB represented $0.9 million, or 11.6% and $3.5 million, or 22.7% of consolidated Lease operating expense for the three months ended March 31, 2021 and 2020, respectively. 22 Tabl e of Contents Production, ad valorem, and other taxes have continued to decrease primarily due to declining production and revenues as discussed above. Further, they have decreased as a percentage of oil, natural gas, and NGL revenue for the three months ended March 31, 2021 as compared to the same period in 2020, primarily due to decreases in ad valorem taxes as a result of credits and deductions earned on production taxes. NPB represented $0.2 million, or 11.4% and $0.8 million, or 24.1% of consolidated Production, ad valorem and other taxes for the three months ended March 31, 2021 and 2020, respectively. The average depreciation and depletion rate for our oil and natural gas properties for the three months ended March 31, 2021 decreased by $8.15/Boe from the three months ended March 31, 2020. This decrease is primarily due to the sale of the North Park Basin properties and full cost ceiling test impairments recorded during 2020, which lowered the net cost basis of oil and gas properties significantly. Impairment We did not record a full cost ceiling limitation impairment during the three months ended March 31, 2021. We recorded a full cost ceiling limitation impairment of $8.0 million during the three months ended March 31, 2020, which resulted from various factors including a decrease in the trailing twelve-month weighted average natural gas price in the first quarter of 2020. Calculation of the full cost ceiling test is based on, among other factors, trailing twelve-month (“SEC prices”) as adjusted for price differentials and other contractual arrangements. The SEC prices utilized in the calculation of proved reserves included in the full cost ceiling test at March 31, 2021 were $40.01 per barrel of oil and $2.16 per Mcf of natural gas, before price differential adjustments. Based on the SEC prices over the eleven months ended May 1, 2021, as well as one month of NYMEX strip pricing for June of 2021 as of May 7, 2021 we anticipate the SEC prices utilized in the June 30, 2021 full cost ceiling test may be $49.54 per barrel of oil and $2.44 per Mcf of natural gas, (the "estimated second quarter prices"). Applying these estimated second quarter prices, and holding all other inputs constant to those used in the calculation of our March 31, 2021 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the second quarter of 2021. 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-month SEC prices, lower NGL pricing, changes in estimated future development costs and operating expenses, and other adjustments to our levels of proved reserves. Any such ceiling test impairments in 2021 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-month periods ended March 31, 2021, and 2020 consisted of the following (in thousands): Three Months Ended March 31, 2021 2020 General and administrative $ 2,090 $ 5,483 Restructuring expenses 2,054 — Employee termination benefits 49 3,254 (Gain) loss on derivative contracts — (10,226) (Gain) loss on sale of assets (19,713) — Other operating (income) expense (48) 277 Total non-operating expenses $ (15,568) $ (1,212) General and administrative expenses decreased by $3.4 million for the three months ended March 31, 2021, compared to the same period in 2020. These decreases resulted primarily from a reduction in compensation related costs after completing reductions in force during 2020, significant reductions in information technology and software costs and overhead related to the Company's previously held corporate headquarters building. Part of the decrease is also due to reductions in professional costs such as legal expenses, audit fees and consulting services. General and administrative expenses for the first three months of 2021 were impacted by a refund of a $0.4 million legal retainer related to prior periods. 23 Tabl e of Contents Restructuring expenses represent fees and costs associated with the 2016 bankruptcy and exit from North Park Basin in Colorado. Restructuring expenses included payments of $1.3 million to settle general unsecured claims related to our 2016 bankruptcy during the quarter ended March 31, 2021. Employee termination benefits for the three-month periods ended March 31, 2021 and 2020 include cash and share-based severance costs incurred for the reduction in force, sale of NPB and other employee terminations in the relevant periods. See “ Note 12 - Employee Termination Benefits ” in the accompanying unaudited condensed consolidated financial statements for additional discussion of these expenses. The following table summarizes derivative activity for the three-month periods ended March 31, 2021, and 2020 (in thousands): Three Months Ended March 31, 2021 2020 (Gain) loss on commodity derivative contracts $ — $ (10,226) Cash (received) paid on settlements $ — $ (4,087) There were no open commodity derivative contracts during the three months ended March 31, 2021. As applicable, our derivative contracts were not designated as accounting hedges and, as a result, changes in their fair values were recorded each quarter as a component of operating expenses. Internally, management has historically viewed 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. See further discussion of derivative contracts 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-month periods ended March 31, 2021, and 2020 are presented in the table below (in thousands): Three Months Ended March 31, 2021 2020 Other income (expense) Interest expense, net $ (47) $ (637) Other income (expense), net 28 76 Total other expense $ (19) $ (561) Interest expense incurred during the three-month period ended March 31, 2021 is primarily comprised of interest paid on the New Credit Facility. Interest expense incurred during the three-month period ended March 31, 2020 is primarily comprised of interest and fees paid on the prior credit facility that was terminated on November 30, 2020. Interest expense is net of amounts capitalized. Liquidity and Capital Resources As of March 31, 2021, we had cash and cash equivalents, excluding restricted cash, of $73.9 million. Additionally, we had a $20.0 million term loan outstanding and $10.0 million available under our $30.0 million New Credit Facility, which matures on November 30, 2023. See "Note—8 Long-Term Debt" to the accompanying condensed consolidated financial statements in Item 1 of this report. As of May 7, 2021, we had approximately $81.2 million of cash on hand, excluding restricted cash, $20.0 million outstanding under its term loan facility and no balance outstanding under the $10.0 million revolving loan facility. For the next twelve months, we expect to have ample liquidity with amounts available to be drawn on our New Credit Facility, cash on hand, and cash from operations. 24 Tabl e of Contents 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 New Credit Facility, as discussed in “Note 8—Long-Term Debt” to the accompanying unaudited condensed consolidated financial statements and “Item 1A. Risk Factors” included in Part I of the Company's Form 10-K Report, we expect market volatility factors to have a material, adverse impact on future revenue growth and overall profitability for the foreseeable future. Our working capital increased to $39.8 million at March 31, 2021, compared to a deficit of $18.1 million at December 31, 2020, the positive impact on working capital resulted primarily from an increase in cash and cash equivalents at March 31, 2021 as a result of proceeds from the sale of NPB and cash from operations. In addition, accounts payable and accrued liabilities decreased due to our continuous cost reduction efforts, the sale of NPB and the timing of payments. Cash Flows Our cash flows from operations 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 three-month periods ended March 31, 2021, and 2020 are presented in the following table and discussed below (in thousands): Three Months Ended March 31, 2021 2020 Cash flows provided by (used in ) operating activities $ 14,331 $ 18,103 Cash flows provided by (used in) investing activities 34,085 (4,463) Cash flows provided by (used in) financing activities (167) (11,867) Net increase (decrease) in cash and cash equivalents $ 48,249 $ 1,773 Cash Flows from Operating Activities The $3.8 million decrease in operating cash flows for the three-month period ended March 31, 2021 compared to the same period in 2020, is primarily due to the declines in revenues, partially offset by reduction in accounts payable and accrued expenses and reductions in expenses due to our cost reduction efforts. See “—Condensed Consolidated Results of Operations” for further analysis of the changes in revenues and operating expenses, and see “Note 13—Employee Termination Benefits” to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this report for additional detail on cash paid for employee termination benefits. Cash Flows from Investing Activities Our cash flows provided in investing activities during the three-month period ended March 31, 2021 primarily reflects $37.2 million of net cash proceeds from the sale of assets offset by capital expenditures of $3.1 million. See "Note 6 — Acquisitions and Divestitures" to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this report for additional information. During the three-month period ended March 31, 2020, cash flows used in investing activities primarily reflects cash payments made for capital expenditures accrued at December 31, 2019. 25 Tabl e of Contents Capital expenditures for the three-month periods ended March 31, 2021, and 2020 are summarized below (in thousands): Three Months Ended March 31, 2021 2020 Capital Expenditures Drilling, completion and capital workovers $ 2,037 $ 1,425 Leasehold and geophysical 111 503 Capital expenditures, excluding acquisitions (on an accrual basis) 2,148 1,928 Acquisitions 59 — Capital expenditures, including acquisitions 2,207 1,928 Change in capital accruals (1) 946 3,524 Total cash paid for capital expenditures $ 3,153 $ 5,452 __________________ 1. Reflects cash paid or adjustments to accruals during the period presented for expenditures related to prior period capital expenditures program. Cash Flows from Financing Activities Cash used in financing activities for the three-month period ended March 31, 2021 consisted primarily of finance lease payments and cash paid for tax obligations on vested awards. Indebtedness See “Note 8—Long-Term Debt” to the accompanying unaudited condensed consolidated financial statements for additional discussion of the Company's debt at March 31, 2021 and December 31, 2020. Contractual Obligations and Off-Balance Sheet Arrangements At March 31, 2021, our contractual obligations included asset retirement obligations, long-term debt obligations and short-term leases and other individually insignificant obligations. Additionally, we have certain financial instruments representing potential commitments that were incurred in the normal course of business to support our operations, including surety bonds. The underlying liabilities insured by these instruments are reflected in our balance sheets, where applicable. Therefore, no additional liability is reflected for the surety bonds or other instruments. There were no other significant changes in total contractual obligations and off-balance sheet arrangements from those reported in the 2020 Form 10-K. Critical Accounting Policies and Estimates For a description of our critical accounting policies and estimates, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2020 Form 10-K . For a discussion of recent accounting pronouncements, newly adopted and recent accounting pronouncements not yet adopted, see “Note 1 - Basis of Presentation” to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report. We did not have any material changes in critical accounting policies, estimates, judgments and assumptions during the first three months of 2021. 26 Tabl e of Contents