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 and six-month periods ended June 30, 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 and six-month periods ended June 30, 2023 and 2022: 18 Tabl e of Contents Total MBoe production for the three-month period ended June 30, 2023 was comprised of approximately 18.1% oil, 54.2% natural gas and 27.7% NGL compared to 12.8% oil, 53.8% natural gas and 33.4% NGL in 2022. The increase in oil production was primarily driven by the newly drilled wells as part of the Company’s capital development program. The decrease in total MBoe was primarily driven by a reduction of NGL production, as one of the Company’s purchasers elected to retain more ethane in the natural gas stream, which had more favorable market pricing at the time of sales. Total MBoe production for the six-month period ended June 30, 2023 was comprised of approximately 17.8% oil, 54.4% natural gas and 27.8% NGL compared to 13.1% oil, 53.8% natural gas and 33.1% NGL in 2022. Recent Events • In May 2023, the Board approved a one-time cash dividend of $2.00 per share of the Company’s common stock, which was paid on June 7, 2023 to shareholders of record as of the close of business on May 24, 2023. The aggregate total payout was approximately $73.8 million. Additionally, in May 2023, the Board announced that it plans a regular quarterly dividend of $0.10 per share of the Company’s common stock, to commence after the second quarter and to be first payable in August 2023, subject to quarterly approval by the Board. • In May 2023, the Board approved a stock buyback program authorizing the repurchase of up to $75 million of the Company’s outstanding common stock in open market transactions. • On July 12, 2023, the Company announced the closing of an acquisition which increases its interest in twenty-six producing wells operated by the Company within the Northwest Stack play for approximately $11.3 million, with an effective date of April 1, 2023. Average net production associated with the acquired interests for the first quarter of 2023 was approximately 500 barrels of oil equivalent per day (~30% oil). We expect the low decline profile and oilier content associated with these properties and interests further strengthen the Company’s commodity price realizations, operating margins and cash flow. • On August 1, 2023, the Board declared a cash dividend of $0.10 per share of the Company’s common stock, payable on August 28, 2023 to shareholders of record on August 14, 2023. Outlook We will continue to focus on growing the cash value 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) 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 Mid-Con assets are 99% held by production, which preserves the tenor of our development option, we concluded our drilling and completion program in the second quarter of 2023. 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: 19 Tabl e of Contents Three-month periods ended June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 NYMEX Oil (per Bbl) $ 73.54 $ 75.93 $ 82.79 $ 93.06 $ 108.83 NYMEX Natural gas (per Mcf) $ 2.26 $ 2.74 $ 5.76 $ 8.32 $ 7.76 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. Revenues Consolidated revenues for the three and six-month periods ended June 30, 2023 and 2022 are presented in the table below (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Change 2023 2022 Change Oil $ 19,584 $ 22,602 $ (3,018) $ 38,994 $ 42,383 $ (3,389) Natural gas 6,805 27,705 (20,900) 20,195 47,669 (27,474) NGL 7,030 19,453 (12,423) 17,377 37,195 (19,818) Total revenues $ 33,419 $ 69,760 $ (36,341) $ 76,566 $ 127,247 $ (50,681) 20 Tabl e of Contents Oil, Natural Gas and NGL Production and Pricing Our production and pricing information for the three and six-month periods ended June 30, 2023 and 2022 is shown in the table below: Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Change 2023 2022 Change Production data Oil (MBbls) 288 207 81 549 421 128 Natural gas (MMcf) 5,185 5,231 (46) 10,097 10,426 (329) NGL (MBbls) 441 541 (100) 861 1,067 (206) Total volumes (MBoe) 1,593 1,620 (27) 3,093 3,226 (133) Average daily total volumes (MBoe/d) 17.5 17.8 (0.3) 17.1 17.8 (0.7) Average prices—as reported (1) Oil (per Bbl) $ 68.02 $ 109.06 $ (41.04) $ 70.99 $ 100.57 $ (29.58) Natural gas (per Mcf) $ 1.31 $ 5.30 $ (3.99) $ 2.00 $ 4.57 $ (2.57) NGL (per Bbl) $ 15.97 $ 35.96 $ (19.99) $ 20.19 $ 34.86 $ (14.67) Total (per Boe) $ 20.99 $ 43.07 $ (22.08) $ 24.76 $ 39.45 $ (14.69) Average prices—including impact of derivative contract settlements Oil (per Bbl) $ 68.02 $ 109.06 $ (41.04) $ 70.99 $ 100.57 $ (29.58) Natural gas (per Mcf) $ 1.31 $ 5.30 $ (3.99) $ 2.58 $ 4.50 $ (1.92) NGL (per Bbl) $ 15.97 $ 35.96 $ (19.99) $ 20.19 $ 34.57 $ (14.38) Total (per Boe) $ 20.99 $ 43.07 $ (22.08) $ 26.66 $ 39.11 $ (12.45) __________________ (1) Prices represent actual average sales prices for the periods presented and do not include effects of derivative settlements. 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, 2023 are shown in the table below (in thousands): Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 2022 oil, natural gas and NGL revenues $ 69,760 $ 127,247 Change due to production volumes (588) (3,318) Change due to average prices (35,753) (47,363) 2023 oil, natural gas and NGL revenues $ 33,419 $ 76,566 Revenue for the three and six-month periods ended June 30, 2023 decreased almost entirely due to a reduction in commodity prices. 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. 21 Tabl e of Contents Operating Expenses Operating expenses for the three and six-month periods ended June 30, 2023 and 2022 consisted of the following (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Change 2023 2022 Change Lease operating expenses $ 8,802 $ 9,512 $ (710) $ 20,496 $ 20,374 $ 122 Production, ad valorem, and other taxes 2,740 4,799 (2,059) 6,491 8,909 (2,418) Depreciation and depletion—oil and natural gas 3,744 2,826 918 7,198 5,227 1,971 Depreciation and amortization—other 1,615 1,563 52 3,233 3,138 95 Total operating expenses $ 16,901 $ 18,700 $ (1,799) $ 37,418 $ 37,648 $ (230) Lease operating expenses ($/Boe) $ 5.53 $ 5.87 $ (0.34) $ 6.63 $ 6.32 $ 0.31 Production, ad valorem, and other taxes ($/Boe) $ 1.72 $ 2.96 $ (1.24) $ 2.10 $ 2.76 $ (0.66) Depreciation and depletion—oil and natural gas ($/Boe) $ 2.35 $ 1.74 $ 0.61 $ 2.33 $ 1.62 $ 0.71 Production, ad valorem, and other taxes (% of oil, natural gas and NGL revenue) 8.2 % 6.9 % 1.3 % 8.5 % 7.0 % 1.5 % The decrease in lease operating expenses for the three-month period ended June 30, 2023 was primarily due to a reduction in utility costs and lower workover expenses. Despite market driven inflationary pressures and higher production costs associated with more producing wells from the Company’s well reactivation and development programs, lease operating expenses for the six-month period ended June 30, 2023 were kept relatively consistent, compared to the same period in 2022. Production, ad valorem, and other taxes for the three and six-month periods ended June 30, 2023 decreased primarily due to lower commodity prices and related revenues. Production, ad valorem, and other taxes for the three and six-month periods ended June 30, 2023 increased as a percentage of oil, natural gas and NGL revenue due to an increase in ad valorem taxes as a result of higher oil and gas property valuation assessments by local jurisdictions who use historical commodity price averages that were higher than current commodity prices, when determining ad valorem tax assessments. The increase in depreciation and depletion for oil and natural gas properties was primarily the result of capital expenditures for the third quarter of 2022 through the second quarter of 2023 and a decrease in proved reserves at June 30, 2023, primarily as a result of lower SEC prices (as defined below), 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 June 30, 2023 were $82.82 per barrel of oil and $4.76 per MMBtu 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 six-month periods ended June 30, 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 June 30, 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. 22 Tabl e of Contents Based on the SEC prices over the trailing ten months ended July 31, 2023, as well as two months of NYMEX strip pricing for August and September of 2023 as of July 18, 2023, we estimate the SEC prices utilized in the September 30, 2023 full cost ceiling test may be $77.22 per barrel of oil and $3.43 per MMBtu 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 our June 30, 2023 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the third 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 Other operating expenses for the three and six-month periods ended June 30, 2023 and 2022 consisted of the following (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 Change 2023 2022 Change General and administrative $ 2,476 $ 2,171 $ 305 $ 5,385 $ 4,701 $ 684 Restructuring expenses 262 433 (171) 301 642 (341) Employee termination benefits — — — 19 — 19 (Gain) loss on derivative contracts — — — (1,447) 1,064 (2,511) Other operating (income) expense (27) (51) 24 (121) (115) (6) Total other operating expenses $ 2,711 $ 2,553 $ 158 $ 4,137 $ 6,292 $ (2,155) The change in general and administrative expenses for the three and six-month periods ended June 30, 2023 is primarily due to a one-time $0.4 million legal retainer refund received in the second quarter of 2022, related to the 2016 bankruptcy, which lowered general and administrative expenses for the three and six-month periods ended June 30, 2022. The following table summarizes derivative activity for the three and six-month periods ended June 30, 2023 and 2022 (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 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. 23 Tabl e of Contents Other Income (Expense) Our other income (expense) for the three and six-month periods ended June 30, 2023 and 2022 are presented in the table below (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Other income (expense) Interest income (expense), net $ 2,828 $ (27) $ 5,327 $ (179) Other income, net 2 12 57 88 Total other income (expense) $ 2,830 $ (15) $ 5,384 $ (91) Interest income (expense), net during the three and six-month periods ended June 30, 2023 is primarily comprised of interest income received from cash deposits. Interest expense incurred during the three and six-month ended June 30, 2022 is primarily comprised of interest related to letters of credit and interest paid on royalty obligations. Liquidity and Capital Resources As of June 30, 2023, our cash and cash equivalents, including restricted cash was $224.0 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 June 30, 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 decreased to $198.7 million at June 30, 2023, compared to $241.6 million at December 31, 2022. The decrease in working capital was primarily the result of a decrease in cash and cash equivalents due to our dividend payment to shareholders of $73.8 million and $24.3 million in capital expenditures, offset by cash flows from operations. In May 2023, the Board approved a one-time cash dividend of $2.00 per share of the Company’s common stock, which was paid on June 7, 2023 to shareholders of record as of the close of business on May 24, 2023. The aggregate total payout was approximately $73.8 million. Additionally, in May 2023, the Board announced that it plans a regular quarterly dividend of $0.10 per share of the Company’s common stock, to commence after the second quarter and to be first payable in August 2023, subject to quarterly approval by the Board. 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 six-month periods ended June 30, 2023 and 2022 are presented in the following table and discussed below (in thousands): Six Months Ended June 30, 2023 2022 Cash flows provided by operating activities $ 63,852 $ 79,156 Cash flows used in investing activities (23,024) (13,133) Cash flows used in financing activities (74,269) (362) Net (decrease) increase in cash and cash equivalents and restricted cash $ (33,441) $ 65,661 Cash Flows from Operating Activities The $15.3 million decrease in cash flows from operations for the six-month period ended June 30, 2023 compared to the same period in 2022 is primarily due to a decrease in revenues from lower commodity prices and production. 24 Tabl e of Contents Cash Flows from Investing Activities Our cash flows used in investing activities during the six-month period ended June 30, 2023 reflects capital expenditures of $24.3 million primarily related to capital expenditures made for drilling, capital workovers, and well reactivations. We received $1.3 million of proceeds from the sale of equipment related to our oil and gas assets. Our cash flows used in investing activities during the six-month period ended June 30, 2022 reflects capital expenditures of $12.0 million primarily related to capital expenditures made for drilling, capital workovers, well reactivations, inventory purchases and $1.4 million related to an acquisition of proved reserves, which increased interests in properties operated by the Company. We received $0.3 million of proceeds from the sale of assets. Capital expenditures for the six-month periods ended June 30, 2023 and 2022 are summarized below (in thousands): Six Months Ended June 30, 2023 2022 Capital Expenditures Drilling and completion $ 18,481 $ 16,185 Capital workovers 2,866 4,974 Leasehold and geophysical (191) 629 Capital expenditures (on an accrual basis) 21,156 21,788 Acquisitions — 1,431 Capital expenditures, including acquisitions 21,156 23,219 Changes in accounts payable and accrued expenses 4,376 (9,829) Inventory material transfers to oil and natural gas properties (1,205) — Total cash paid for capital expenditures $ 24,327 $ 13,390 Cash Flows from Financing Activities Cash used in financing activities for the six-month period ended June 30, 2023 consisted primarily of $73.8 million in cash dividends, $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 $0.3 million. Cash used in financing activities for the six-month period ended June 30, 2022 consisted primarily of $0.2 million of cash used to pay employee tax obligations, for vested stock awards that were settled by net exercise, and finance lease payments of $0.2 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 June 30, 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. 25 Tabl e of Contents 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 six months of 2023. 26 Tabl e of Contents