SANDRIDGE ENERGY INC 10-Q

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk General This discussion provides information about the financial instruments we have historically used to manage commodity prices. All contracts were settled in cash and did not require the actual delivery of a commodity at settlement. Additionally, our exposure to credit risk and interest rate risk is also discussed. Commodity Price Risk . Our most significant market risk relates to the prices we receive for our oil, natural gas and NGLs. Due to the historical price volatility of these commodities, from time to time we have historically entered into commodity derivative contracts for a portion of our anticipated production volumes for the purpose of reducing the variability of the oil and natural gas prices we receive. We have used, and may use, a variety of commodity-based derivative contracts, including fixed price swaps, basis swaps and collars. At March 31, 2022, we had no open commodity derivative contracts or obligations to enter into commodity derivative contracts. Because we historically have not designated any of our derivative contracts as hedges for accounting purposes, changes in the fair value of our derivative contracts were recognized as gains and losses in current period earnings. As a result, and when applicable, current period earnings could have been significantly affected by changes in the fair value of our commodity derivative contracts. Changes in fair value were principally measured based on a comparison of future prices to the contract price at the end of the period. The following table summarizes derivative activity for the three-month periods ended March 31, 2022, and 2021 (in thousands): Three Months Ended March 31, 2022 2021 (Gain) loss on commodity derivative contracts $ 1,064 $ — Cash received (paid) on settlements $ (1,085) $ — See “Note 3 - Derivatives” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding our commodity derivatives. Credit Risk. As applicable, we were exposed to credit risk related to the counterparty to our derivative financial contracts. All of our derivative transactions have been carried out in the over-the-counter market. The use of derivative transactions in over-the-counter markets involves the risk that the counterparty may be unable to meet the financial terms of the transactions. The counterparty for all of our derivative transactions has had an “investment grade” credit rating. We have historically monitored the credit ratings of our derivative counterparties and considered our counterparties’ credit default risk ratings in determining the fair value of our derivative contracts. We did not require collateral or other security from counterparties to support derivative instruments. We historically had master netting agreements with each of our derivative contract counterparties, which allowed us to net our derivative assets and liabilities by commodity type with the same counterparty. As a result of the netting provisions, our maximum amount of loss under derivative transactions due to credit risk was limited to the net amounts due from the counterparties under the commodity derivative contracts. Therefore, we were not required to post additional collateral under our commodity derivative contracts. We are also exposed to credit risk related to the collection of receivables from our joint interest partners for their proportionate share of expenditures on wells and properties we operate. Historically, our credit losses on joint interest receivables have been immaterial. 24 Tabl e of Contents