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 2022 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, 2023 and 2022, 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”). The chart below shows production by product for the three-month periods ended March 31, 2023 and 2022: Total MBoe production for the three-month period ended March 31, 2023 was comprised of approximately 17.4% oil, 54.6% natural gas and 28.0% NGL compared to 13.3% oil, 53.9% natural gas and 32.8% NGL in 2022. 16 Tabl e of Contents Recent Events • Consistent with our 2023 capital development program announced on March 15, 2023, we drilled two wells and completed two wells during the quarter ended March 31, 2023. Outlook We will continue to focus on growing the cash value allocation 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, (3) focused drilling in high-graded areas and (4) limited opportunistic leasing in proven areas around or adjacent to our area of operations that could further bolster future development. Given near term commodity price dynamics, and that our Midcon assets are 99% held by production, which preserves the tenor of our development option, we concluded our drilling activity this quarter, with remaining completions to occur in the second quarter. 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 2023 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 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 NYMEX Oil (per Bbl) $ 75.93 $ 82.79 $ 93.06 $ 108.83 $ 95.02 NYMEX Natural gas (per Mcf) $ 2.74 $ 5.76 $ 8.32 $ 7.75 $ 4.84 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-month periods ended March 31, 2023 and 2022 are presented in the table below (in thousands): Three Months Ended March 31, 2023 2022 Change Oil $ 19,410 $ 19,781 $ (371) NGL 10,347 17,742 (7,395) Natural gas 13,390 19,964 (6,574) Total revenues $ 43,147 $ 57,487 $ (14,340) Oil, Natural Gas and NGL Production and Pricing Our production and pricing information for the three-month periods ended March 31, 2023 and 2022 is shown in the table below: Three Months Ended March 31, 2023 2022 Change Production data Oil (MBbls) 261 214 47 NGL (MBbls) 420 526 (106) Natural gas (MMcf) 4,912 5,195 (283) Total volumes (MBoe) 1,500 1,606 (106) Average daily total volumes (MBoe/d) 16.7 17.8 (1) Average prices—as reported (1) Oil (per Bbl) $ 74.26 $ 92.35 $ (18.09) NGL (per Bbl) $ 24.62 $ 33.73 $ (9.11) Natural gas (per Mcf) $ 2.73 $ 3.84 $ (1.11) Total (per Boe) $ 28.76 $ 35.80 $ (7.04) Average prices—including impact of derivative contract settlements Oil (per Bbl) $ 74.26 $ 92.35 $ (18.09) NGL (per Bbl) $ 24.62 $ 33.14 $ (8.52) Natural gas (per Mcf) $ 3.92 $ 3.69 $ 0.23 Total (per Boe) $ 32.67 $ 35.12 $ (2.45) __________________ (1) Prices represent actual average sales prices for the periods presented and do not include effects of derivative settlements. 18 Tabl e of Contents 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 period ended March 31, 2023 are shown in the table below (in thousands): Three Months Ended March 31, 2023 2022 oil, natural gas and NGL revenues $ 57,487 Change due to production volumes (3,049) Change due to average prices (11,291) 2023 oil, natural gas and NGL revenues $ 43,147 Revenue decreased due to unfavorable realized commodity prices and a decrease in production. See "Item 1A—Risk Factors" included in our 2022 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, 2023 and 2022 consisted of the following (in thousands): Three Months Ended March 31, 2023 2022 Change Lease operating expenses $ 11,694 $ 10,862 $ 832 Production, ad valorem, and other taxes 3,751 4,110 (359) Depreciation and depletion—oil and natural gas 3,454 2,401 1,053 Depreciation and amortization—other 1,618 1,575 43 Total operating expenses $ 20,517 $ 18,948 $ 1,569 Lease operating expenses ($/Boe) $7.79 $6.76 $1.03 Production, ad valorem, and other taxes ($/Boe) $2.50 $2.56 $(0.06) Depreciation and depletion—oil and natural gas ($/Boe) $2.30 $1.50 $0.80 Production, ad valorem, and other taxes (% of oil, natural gas, and NGL revenue) 8.7% 7.1% 1.6% The increase in lease operating expenses was primarily due to inflationary pressures and higher production costs associated with more producing wells driven by our well reactivation and drilling programs. Production, ad valorem, and other taxes decreased primarily due to lower commodity prices and related revenues. Production, ad valorem, and other taxes increased as a percentage of oil, natural gas, and NGL revenue due to an increase in ad valorem taxes as a result of increased valuation assessments on our oil and gas properties. The increase in depreciation and depletion for oil and natural gas properties was primarily the result of capital expenditures for the second quarter of 2022 through the first quarter of 2023 and a decrease in proved reserves at March 31, 2023, primarily as a result of lower SEC prices, 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 March 31, 2023 were $90.97 per barrel of oil and $5.95 per MMBtu of natural gas, before price differential adjustments. 19 Tabl e of Contents The ceiling limitation was not exceeded; therefore, no full cost ceiling limitation impairments were recorded during the three-month periods ended March 31, 2023 or 2022. 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 March 31, 2023 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 April 30, 2023, as well as two months of NYMEX strip pricing for May and June of 2023 as of April 25, 2023, we estimate the SEC prices utilized in the June 30, 2023 full cost ceiling test may be $83.50 per barrel of oil and $4.79 per MMBtu 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, 2023 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the second quarter of 2023. 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-month periods ended March 31, 2023 and 2022 consisted of the following (in thousands): Three Months Ended March 31, 2023 2022 Change General and administrative $ 2,909 $ 2,530 $ 379 Restructuring expenses 39 209 (170) Employee termination benefits 19 — 19 (Gain) loss on derivative contracts (1,447) 1,064 (2,511) Other operating income (94) (64) (30) Total other operating expenses $ 1,426 $ 3,739 $ (2,313) General and administrative expenses increased primarily due to an increase in professional service fees for the three-month periods ended March 31, 2023 as compared to same period in 2022. The following table summarizes derivative activity for the three-month periods ended March 31, 2023 and 2022 (in thousands): Three Months Ended March 31, 2023 2022 (Gain) loss on derivative contracts $ (1,447) $ 1,064 Realized settlement gains (losses) on derivative contracts $ 5,876 $ (1,085) 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, 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. 20 Tabl e of Contents Other Income (Expense) Our other income (expense) for the three-month periods ended March 31, 2023 and 2022 are presented in the table below (in thousands): Three Months Ended March 31, 2023 2022 Other income (expense) Interest income (expense), net $ 2,499 $ (152) Other income, net 55 76 Total other income (expense) $ 2,554 $ (76) Interest income incurred during the three-month period ended March 31, 2023 is primarily comprised of interest income received from cash deposits. Interest expense incurred during the three-month period ended March 31, 2022 is primarily comprised of interest paid on royalty obligations of $0.1 million. Liquidity and Capital Resources As of March 31, 2023, our cash and cash equivalents, including restricted cash was $287.6 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 March 31, 2023. 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 $257.7 million at March 31, 2023, compared to $241.6 million at December 31, 2022. The positive impact on working capital resulted primarily from an increase in cash and cash equivalents at March 31, 2023 as a result of cash flows from operations. 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 three-month periods ended March 31, 2023 and 2022 are presented in the following table and discussed below (in thousands): Three Months Ended March 31, 2023 2022 Cash flows provided by operating activities $ 39,847 $ 32,193 Cash flows used in investing activities (9,408) (5,619) Cash flows used in financing activities (343) (320) Net increase in cash and cash equivalents and restricted cash $ 30,096 $ 26,254 Cash Flows from Operating Activities The $7.7 million increase in cash flows from operations for the three-month period ended March 31, 2023 compared to the same period in 2022 is primarily due to changes in operating assets and liabilities, offset by a decrease in revenues from lower commodity prices and production. 21 Tabl e of Contents Cash Flows from Investing Activities Our cash flows used in investing activities during the three-month period ended March 31, 2023 reflects capital expenditures of $9.4 million primarily related to capital expenditures made for drilling, capital workovers, and well reactivations. Our cash flows used in investing activities during the three-month period ended March 31, 2022 reflects capital expenditures of $5.6 million primarily related to purchases of inventory in preparation of the drilling program and workovers related to the well reactivation program. Capital expenditures for the three-month periods ended March 31, 2023 and 2022 are summarized below (in thousands): Three Months Ended March 31, 2023 2022 Capital Expenditures Drilling and completion $ 10,243 $ 3,343 Capital workovers 1,836 2,348 Leasehold and geophysical 141 287 Capital expenditures (on an accrual basis) 12,220 5,978 Changes in accounts payable and accrued expenses (2,753) (349) Inventory material transfers to oil and natural gas properties (75) — Total cash paid for capital expenditures $ 9,392 $ 5,629 Cash Flows from Financing Activities Cash used in financing activities for the three-month period ended March 31, 2023 consisted primarily of $0.2 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 $0.1 million. Cash used in financing activities for the three-month period ended March 31, 2022 consisted primarily of cash paid for tax obligations on employee vested stock awards of $0.2 million and finance lease payments of $0.1 million offset by immaterial proceeds from the exercise of stock options. 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. Contractual Obligations and Off-Balance Sheet Arrangements At March 31, 2023, 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 2022 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 2022 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 2023. 22 Tabl e of Contents