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 2021 Form 10-K and 10-K/A. 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 nine-month periods ended September 30, 2022 and 2021, 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 region (“Mid-Con”). Prior to February 5, 2021, we held assets in the North Park Basin ("NPB" or “North Park") of Colorado, which have been sold in their entirety. The chart below shows production by product for the three and nine-month periods ended September 30, 2022 and 2021: (1) Excludes 67 MBoe of oil production from North Park Basin, which was sold on February 5, 2021. Total MBoe production for the three-month period ended September 30, 2022 was comprised of approximately 15.8% oil, 53.7% natural gas and 30.5% NGL compared to 12.7% oil, 55.2% natural gas and 32.1% NGL in 2021. Total MBoe production for the nine-month period ended September 30, 2022 was comprised of approximately 14.0% oil, 53.8% natural gas and 32.2% NGL compared to 14.4% oil, 52.5% natural gas and 33.1% NGL in 2021. 16 Tabl e of Contents Recent Events • Consistent with our 2022 capital development program, we drilled three wells and completed three wells during the quarter ended September 30, 2022. • On October 5, 2022 the Company’s Board of Directors appointed Ms. Nancy Dunlap to serve as a member of the Board. Ms. Dunlap also joined the Audit Committee. Outlook We will continue to focus on growing the cash value and generation capability of our asset base in a safe, responsible and efficient manner, while exercising prudent capital allocations to projects we believe provide high rates of returns in the current commodity price environment. These projects include (1) a continuation of our well reactivation program, (2) artificial lift conversions to more efficient and cost effective systems and (3) focused drilling in high-graded areas. We will continue to monitor forward-looking commodity prices, results, costs and other factors that could influence returns on investments, which will continue to shape our disciplined development decisions in 2022 and beyond. We will also continue to maintain optionality to execute on value accretive merger and acquisition opportunities that could bring synergies, leverage our core competencies, compliment our portfolio of assets, further utilize our NOLs or otherwise yield attractive returns for our shareholders. Consolidated Results of Operations Our consolidated revenues and cash flows are generated from the production and sale of oil, natural gas and NGL. Our revenues, profitability and future growth depend substantially on prevailing prices received for our production, the quantity of oil, natural gas and NGL we produce, and our ability to find and economically develop and produce our reserves. Prices for oil, natural gas and NGL 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 tables below: Three-month periods ended September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 NYMEX Oil (per Bbl) $ 93.06 $ 108.83 $ 95.02 $ 77.34 $ 70.59 NYMEX Natural gas (per Mcf) $ 8.32 $ 7.75 $ 4.84 $ 4.93 $ 4.48 Nine-month periods ended September 30, 2022 September 30, 2021 NYMEX Oil (per Bbl) $ 98.96 $ 65.06 NYMEX Natural gas (per Mcf) $ 6.99 $ 3.47 In order to reduce our exposure to price fluctuations, from time to time we may enter into commodity derivative contracts for a portion of our anticipated future oil, natural gas and NGL production as discussed in “Item 3. Quantitative and Qualitative Disclosures About Market Risk.” 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 flows to the extent strike prices for our contracts are above market prices at the time of settlement. See “Note 3 — Derivatives” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding our commodity derivatives. 17 Tabl e of Contents Revenues Consolidated revenues for the three and nine-month periods ended September 30, 2022 and 2021 are presented in the table below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change % Change 2022 2021 Change % Change Oil $ 23,855 $ 15,198 $ 8,657 57 % $ 66,238 $ 45,412 $ 20,826 46 % NGL 15,364 14,863 501 3 % 52,559 34,344 18,215 53 % Natural gas 31,680 16,523 15,157 92 % 79,349 34,647 44,702 129 % Total revenues (1) $ 70,899 $ 46,584 $ 24,315 52 % $ 198,146 $ 114,403 $ 83,743 73 % (1) Mid-Continent represented $111.2 million, or 97.2% of total consolidated revenues for the nine-months ended September 30, 2021. NPB represented $3.2 million, or 2.8% of total consolidated revenues for the nine-months ended September 30, 2021. Oil, Natural Gas and NGL Production and Pricing Our production and pricing information for the three and nine-month periods ended September 30, 2022 and 2021 is shown in the table below: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change % Change 2022 2021 Change % Change Production data Oil (MBbls) 259 219 40 18 % 680 734 (54) (7) % NGL (MBbls) 499 552 (53) (10) % 1,566 1,686 (120) (7) % Natural gas (MMcf) 5,286 5,710 (424) (7) % 15,712 16,059 (347) (2) % Total volumes (MBoe) 1,638 1,722 (84) (5) % 4,864 5,096 (232) (5) % Average daily total volumes (MBoe/d) 17.8 18.7 (1) (5) % 17.8 18.7 (1) (5) % Average prices—as reported (1) Oil (per Bbl) $ 92.24 $ 69.40 $ 22.84 33 % $ 97.41 $ 61.87 $ 35.54 57 % NGL (per Bbl) $ 30.79 $ 26.93 $ 3.86 14 % $ 33.56 $ 20.37 $ 13.19 65 % Natural gas (per Mcf) $ 5.99 $ 2.89 $ 3.10 107 % $ 5.05 $ 2.16 $ 2.89 134 % Total (per Boe) $ 43.28 $ 27.06 $ 16.22 60 % $ 40.74 $ 22.45 $ 18.29 81 % Average prices—including impact of derivative contract settlements Oil (per Bbl) $ 92.24 $ 69.40 $ 22.84 33 % $ 97.41 $ 61.87 $ 35.54 57 % NGL (per Bbl) $ 30.79 $ 26.93 $ 3.86 14 % $ 33.36 $ 20.37 $ 12.99 64 % Natural gas (per Mcf) $ 6.03 $ 2.89 $ 3.14 109 % $ 5.01 $ 2.16 $ 2.85 132 % Total (per Boe) $ 43.42 $ 27.06 $ 16.36 60 % $ 40.56 $ 22.45 $ 18.11 81 % __________________ (1) Prices represent actual average sales prices for the periods presented and do not include effects of derivative settlements. 18 Tabl e of Contents The table below presents production by area of operation for the three and nine-month periods ended September 30, 2022 and 2021: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Production (MBoe) % of Total Production (MBoe) % of Total Production (MBoe) % of Total Production (MBoe) % of Total Mid-Continent 1,638 100.0 % 1,722 100.0 % 4,864 100.0 % 5,029 98.7 % North Park Basin — — % — — % — — % 67 1.3 % Total 1,638 100.0 % 1,722 100.0 % 4,864 100.0 % 5,096 100.0 % 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 nine-month periods ended September 30, 2022 are shown in the table below (in thousands): Three Months Ended September 30, 2022 Nine Months Ended September 30, 2022 2021 oil, natural gas and NGL revenues $ 46,584 $ 114,403 Change due to production volumes (3,636) (9,451) Change due to average prices 27,951 93,194 2022 oil, natural gas and NGL revenues $ 70,899 $ 198,146 Revenue increased due to favorable realized commodity prices offset by a slight decrease in production primarily as a result of the sale of NPB, in addition to natural production declines partially offset by our well reactivation program and production from new wells. See "Item 1A—Risk Factors" included in our 2021 Form 10-K and 10-K/A for additional discussion of the potential impact these events may have on our future revenues. Operating Expenses Operating expenses for the three and nine-month periods ended September 30, 2022 and 2021 consisted of the following (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change % Change 2022 2021 Change % Change Lease operating expenses $9,693 $9,080 $613 7% $30,067 $26,266 $3,801 14% Production, ad valorem, and other taxes 4,768 2,219 2,549 115% 13,677 6,929 6,748 97% Depreciation and depletion—oil and natural gas 3,091 2,092 999 48% 8,318 6,790 1,528 23% Depreciation and amortization—other 1,582 1,513 69 5% 4,720 4,482 238 5% Total operating expenses $19,134 $14,904 $4,230 28% $56,782 $44,467 $12,315 28% Lease operating expenses ($/Boe) $5.92 $5.27 $0.65 12% $6.18 $5.15 $1.03 20% Production, ad valorem, and other taxes ($/Boe) $2.91 $1.29 $1.62 126% $2.81 $1.36 $1.45 107% Depreciation and depletion—oil and natural gas ($/Boe) $1.89 $1.22 $0.67 55% $1.71 $1.33 $0.38 29% Production, ad valorem, and other taxes (% of oil, natural gas, and NGL revenue) 6.7% 4.8% 1.9% 40% 6.9% 6.1% 0.8% 13% The increase in lease operating expenses was primarily due to inflationary pressures, a higher number of producing wells and higher workover expense due to our well reactivation program. 19 Tabl e of Contents Production, ad valorem, and other taxes increased primarily due to higher commodity prices and related revenues as discussed above for the three-and nine-months ended September 30, 2022. Further, it increased as a percentage of oil, natural gas, and NGL revenue for the three and nine-months ended September 30, 2022 as compared to the same periods in 2021. The increase in production, ad valorem, and other taxes as a percentage of commodity revenues stems primarily from an increase in ad valorem taxes for the three-months ended September 30, 2022. For the three-months ended September 30, 2021, ad valorem taxes were lower in part due to a change in estimate related to NPB. For the nine-months ended September 30, 2022, the increase in percentage of commodity revenues related primarily to an increase in production taxes. The increase in depreciation and depletion for oil and natural gas properties was primarily the result of increased capital expenditures which increased our depletion rate. Impairment A ceiling limitation calculation is performed at the end of each quarter. If the full cost pool balance exceeds the ceiling limitation, an impairment of the full cost pool is required. Calculation of the full cost ceiling test is based on, among other factors, trailing twelve-month first-day-of-the-month index prices (“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 September 30, 2022 were $91.71 per barrel of oil and $6.13 per Mcf of natural gas, before price differential adjustments. The ceiling limitation was not exceeded; therefore, no full cost ceiling limitation impairments were recorded during the three and nine-month periods ended September 30, 2022 or 2021. During certain periods within the past five years, the SEC prices used in the full cost ceiling test have been lower than the SEC prices used for the September 30, 2022 full cost ceiling test and resulted in material ceiling limitation impairments. Full cost pool ceiling limitation impairments have no impact to our cash flow or liquidity. Based on the SEC prices over the trailing ten months ended October 1, 2022, as well as two months of NYMEX strip pricing for November and December of 2022 as of October 11, 2022, we estimate the SEC prices utilized in the December 31, 2022 full cost ceiling test may be $94.08 per barrel of oil and $6.49 per Mcf of natural gas (the "estimated year-end prices"). Applying these estimated year-end prices, and holding all other inputs constant to those used in the calculation of our September 30, 2022 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the fourth quarter of 2022. 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 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. Other Operating Expenses (Income) Other operating expenses (income) for the three and nine-month periods ended September 30, 2022 and 2021 consisted of the following (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 Change % Change 2022 2021 Change % Change General and administrative $2,382 $2,229 $153 7% $7,083 $6,841 $242 4% Restructuring expenses 76 (1,696) 1,772 104% 718 614 104 17% Employee termination benefits — — — —% — 49 (49) (100)% (Gain) loss on derivative contracts (4,258) 4,129 (8,387) (203)% (3,194) 4,129 (7,323) (177)% (Gain) loss on sale of assets — 761 (761) (100)% — (18,952) 18,952 (100)% Other operating income (25) (202) 177 (88)% (140) (315) 175 (56)% Total other operating expenses (income) $(1,825) $5,221 $(7,046) (135)% $4,467 $(7,634) $12,101 (159)% General and administrative expenses were consistent between the three and nine-month periods ended September 30, 2022 and 2021. 20 Tabl e of Contents Restructuring expenses for the three-month period ended September 30, 2022 represent fees and costs associated with the 2016 bankruptcy, while restructuring expenses for the nine-month period ended September 30, 2022 represent fees and costs associated with the 2016 bankruptcy and our exit from NPB in Colorado. The lower restructuring expenses for the three and nine-months ended September 30, 2021 relates primarily to accrued expenses for the 2016 Bankruptcy that were removed as a result of the notice of completion of final distribution being filed in the United States Bankruptcy Court for the Southern District of Texas on July 26, 2021. The following table summarizes derivative activity for the three and nine-month periods ended September 30, 2022 and 2021 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (Gain) loss on derivative contracts $ (4,258) $ 4,129 $ (3,194) $ 4,129 Realized settlement gains (losses) on derivative contracts $ 218 $ — $ (867) $ — 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. Management views the settlement of commodity derivative contracts at contractual maturity as adjustments to the price received for oil, natural gas and NGL 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, natural gas and NGL 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. The loss on sale of assets for the three-months ended September 30, 2021 relates to a reduction to the NPB sales price as a result of post-closing adjustments during the third quarter of 2021. The decreases in gain on sale of assets relate to the gain from sale of NPB in February 2021. See “Note 5 — Acquisitions and Divestitures” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding the sale of NPB. Other Income (Expense) Our other income (expense) for the three and nine-month periods ended September 30, 2022 and 2021 are presented in the table below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Other income (expense) Interest expense, net $ (12) $ (256) $ (191) $ (387) Other income, net 147 2,396 235 2,711 Total other income $ 135 $ 2,140 $ 44 $ 2,324 Interest expense incurred during the three-month period ended September 30, 2022 is primarily comprised of interest related to vehicle leases and letters of credit. Interest expense incurred during the nine-month period ended September 30, 2022 is primarily comprised of interest paid on royalty obligations of $0.1 million, interest on vehicle leases and letters of credit. Interest expense incurred during the three and nine-month periods ended September 30, 2021 is primarily comprised of interest paid on the prior 2020 Credit Facility as discussed in our 2021 10-K and 10-K/A. The Other income, net line item for the three and nine-months ended September 30, 2022 is primarily comprised of gains on the sale of fleet vehicles and the removal of previously accrued liabilities due to a change in estimate. The Other income, net line item for the three and nine-month periods ended September 30, 2021 includes the removal of an allowance for doubtful accounts recorded for the year ended December 31, 2020 as a result of management determining the receivable from a government agency is collectible. 21 Tabl e of Contents Liquidity and Capital Resources As of September 30, 2022, our cash and cash equivalents, including restricted cash was $240.6 million. For the next twelve months, we expect to have ample liquidity with cash on hand and cash from operations. We had no outstanding term or revolving debt obligations as of September 30, 2022. Working Capital and Sources and Uses of Cash Our principal sources of liquidity for the next year include cash flows from operations and cash on hand. Our working capital increased to $206.6 million at September 30, 2022, compared to $97.7 million at December 31, 2021. The positive impact on working capital resulted primarily from an increase in cash and cash equivalents at September 30, 2022 as a result of cash flows from operations, partially offset by increased accrued liabilities due to our increased capital expenditure activity in 2022. Cash Flows Our cash flows from operations are substantially dependent on current and future prices for oil, natural gas and NGL, 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 nine-month periods ended September 30, 2022 and 2021 are presented in the following table and discussed below (in thousands): Nine Months Ended September 30, 2022 2021 Cash flows provided by operating activities $ 134,630 $ 66,315 Cash flows provided by (used in) investing activities (32,161) 25,867 Cash flows used in financing activities (1,390) (21,446) Net increase in cash and cash equivalents and restricted cash $ 101,079 $ 70,736 Cash Flows from Operating Activities The $68.3 million increase in cash flows from operations for the nine-month period ended September 30, 2022 compared to the same period in 2021, is primarily due to higher revenues as a result of improved commodity prices as discussed above, offset by a slight decrease in production. The changes in operating assets and liabilities do not include changes in accounts payable or accrued expenses attributable to capital expenditures noted in the capital expenditure table below. Cash Flows from Investing Activities Our cash flows used in investing activities during the nine-month period ended September 30, 2022 reflects capital expenditures of $31.1 million primarily related to capital expenditures made for drilling, capital workovers, well reactivations, inventory purchases and an acreage acquisition for $1.4 million. Cash outflows were partially offset by $0.4 million of proceeds from the sale of assets. During the nine-month period ended September 30, 2021, cash flows from investing activities primarily reflects $38.1 million of net cash proceeds from the sale of assets offset by capital expenditures of $8.6 million and acquisition of overriding royalty interests for $3.6 million. See "Note 5 — Acquisitions and Di vestitures" to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report for additional information. 22 Tabl e of Contents Capital expenditures for the nine-month periods ended September 30, 2022 and 2021 are summarized below (in thousands): Nine Months Ended September 30, 2022 2021 Capital Expenditures Drilling, completion and capital workovers (1) $ 37,656 $ 6,374 Leasehold and geophysical 597 467 Capital expenditures, excluding acquisitions (on an accrual basis) 38,253 6,841 Acquisitions 1,431 3,604 Capital expenditures, including acquisitions 39,684 10,445 Changes in accounts payable and accrued expenses (7,124) 1,774 Total cash paid for capital expenditures $ 32,560 $ 12,219 (1) We capitalized $4.7 million in inventory purchases, net of inventory utilized during 2022 on drilling, completion, capital workover and well reactivation activities. Cash Flows from Financing Activities Cash used in financing activities for the nine-month period ended September 30, 2022 consisted primarily of $1.2 million of cash used for tax withholdings paid in exchange for shares withheld on employee vested stock awards that were settled by net exercise, and finance lease payments of $0.3 million offset by immaterial proceeds from the exercise of stock options. Cash used in financing activities for the nine-month period ended September 30, 2021 consisted primarily of repayments of borrowings under the prior 2020 Credit Facility of $20.0 million, finance lease payments of $0.5 million and cash paid for tax withholdings paid in exchange for shares withheld on employee vested stock awards that were settled by net exercise of $0.9 million. Net exercises of stock awards allows the holder of a stock award to tender back to us a number of shares at fair value upon the vesting of such stock award, that equals the employee payroll tax obligation due. We then remit a cash payment to the relevant taxing authority on behalf of the employee for their payroll tax obligations resulting from the vesting of their stock award. Indebtedness Credit Facility On September 2, 2021, we repaid our $20.0 million term loan in full and terminated all commitments and obligations under the 2020 Credit Facility, between us, as Borrower, IEP Energy Holding LLC, as Lender, and Icahn Agency Services LLC, as Administrative Agent. Our payment to the Lender under the Credit Agreement satisfied all of our term debt and revolving debt obligations. We did not incur any early termination penalties as a result of the repayment of indebtedness or termination of the Credit Agreement. See Item 7 — “Liquidity and Capital Resources” in the Company’s 2021 Form 10-K and 10-K/A. Contractual Obligations and Off-Balance Sheet Arrangements At September 30, 2022, our contractual obligations included asset retirement obligations, 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 2021 Form 10-K and 10-K/A. 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 2021 Form 10-K and 10-K/A . 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 nine months of 2022. 23 Tabl e of Contents