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 nine-month periods ended September 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 nine-month periods ended September 30, 2023 and 2022: 18 Tabl e of Contents Total MBoe production for the three-month period ended September 30, 2023 was comprised of approximately 16.8% oil, 55.5% natural gas and 27.7% NGL compared to 15.8% oil, 53.7% natural gas and 30.5% NGL in 2022. The increase in oil production was primarily driven by the newly drilled wells as part of our capital development program. The decrease in total MBoe was primarily driven by a reduction of NGL production, as one of our purchasers elected to retain more ethane in the natural gas stream, which had more favorable market pricing at the time of sales, as well as natural decline of its producing assets. These factors were partially offset by production added during the third quarter from an acquisition that closed on July 11, 2023, which increased our ownership interest in twenty-six wells we operate. Total MBoe production for the nine-month period ended September 30, 2023 was comprised of approximately 17.4% oil, 54.8% natural gas and 27.8% NGL compared to 14.0% oil, 53.8% natural gas and 32.2% NGL in 2022. Recent Events • On July 11, 2023, we closed an acquisition which increased our ownership interest in twenty-six producing wells operated by the Company within the Northwest Stack play for $10.6 million, after customary post-closing adjustments, with an effective date of April 1, 2023. • On August 1, 2023, the Board declared a cash dividend of $0.10 per share of our common stock, payable on August 28, 2023 to shareholders of record on August 14, 2023. The aggregate total payout was $3.7 million. • On November 2, 2023, the Board declared a cash dividend of $0.10 per share of the Company’s common stock, payable on November 27, 2023 to shareholders of record on November 13, 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) artificial lift conversions to more efficient and cost effective systems, (2) a continuation of our well reactivation program and (3) limited opportunistic leasing in proven areas around or adjacent to our area of operations that could further bolster future development. Given the commodity price dynamics during the year, 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: Three-month periods ended September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 NYMEX Oil (per Bbl) $ 82.25 $ 73.54 $ 75.93 $ 82.79 $ 93.06 NYMEX Natural gas (per Mcf) $ 2.69 $ 2.26 $ 2.74 $ 5.76 $ 8.32 19 Tabl e of Contents 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 nine-month periods ended September 30, 2023 and 2022 are presented in the table below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 Change 2023 2022 Change Oil $ 21,333 $ 23,855 $ (2,522) $ 60,327 $ 66,238 $ (5,911) Natural gas 7,183 31,680 (24,497) 27,378 79,349 (51,971) NGL 9,633 15,364 (5,731) 27,010 52,559 (25,549) Total revenues $ 38,149 $ 70,899 $ (32,750) $ 114,715 $ 198,146 $ (83,431) Oil, Natural Gas and NGL Production and Pricing Our production and pricing information for the three and nine-month periods ended September 30, 2023 and 2022 is shown in the table below: Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 Change 2023 2022 Change Production data Oil (MBbls) 267 259 8 816 680 136 Natural gas (MMcf) 5,276 5,286 (10) 15,373 15,712 (339) NGL (MBbls) 440 499 (59) 1,301 1,566 (265) Total volumes (MBoe) 1,586 1,638 (52) 4,679 4,864 (185) Average daily total volumes (MBoe/d) 17.2 17.8 (0.6) 17.1 17.8 (0.7) Average prices—as reported (1) Oil (per Bbl) $ 79.83 $ 92.24 $ (12.41) $ 73.88 $ 97.41 $ (23.53) Natural gas (per Mcf) $ 1.36 $ 5.99 $ (4.63) $ 1.78 $ 5.05 $ (3.27) NGL (per Bbl) $ 21.89 $ 30.79 $ (8.90) $ 20.77 $ 33.56 $ (12.79) Total (per Boe) $ 24.04 $ 43.28 $ (19.24) $ 24.52 $ 40.74 $ (16.22) Average prices—including impact of derivative contract settlements Oil (per Bbl) $ 79.83 $ 92.24 $ (12.41) $ 73.88 $ 97.41 $ (23.53) Natural gas (per Mcf) $ 1.36 $ 6.03 $ (4.67) $ 2.16 $ 5.01 $ (2.85) NGL (per Bbl) $ 21.89 $ 30.79 $ (8.90) $ 20.77 $ 33.36 $ (12.59) Total (per Boe) $ 24.04 $ 43.42 $ (19.38) $ 25.77 $ 40.56 $ (14.79) __________________ (1) Prices represent actual average sales prices for the periods presented and do not include effects of derivative settlements. 20 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 and nine-month periods ended September 30, 2023 are shown in the table below (in thousands): Three Months Ended September 30, 2023 Nine Months Ended September 30, 2023 2022 oil, natural gas and NGL revenues $ 70,899 $ 198,146 Change due to production volumes (1,226) (4,536) Change due to average prices (31,524) (78,895) 2023 oil, natural gas and NGL revenues $ 38,149 $ 114,715 Revenue for the three and nine-month periods ended September 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. Operating Expenses Operating expenses for the three and nine-month periods ended September 30, 2023 and 2022 consisted of the following (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 Change 2023 2022 Change Lease operating expenses $ 11,450 $ 9,693 $ 1,757 $ 31,946 $ 30,067 $ 1,879 Production, ad valorem, and other taxes 2,031 4,768 (2,737) 8,522 13,677 (5,155) Depreciation and depletion—oil and natural gas 4,217 3,091 1,126 11,415 8,318 3,097 Depreciation and amortization—other 1,637 1,582 55 4,870 4,720 150 Total operating expenses $ 19,335 $ 19,134 $ 201 $ 56,753 $ 56,782 $ (29) Lease operating expenses ($/Boe) $ 7.22 $ 5.92 $ 1.30 $ 6.83 $ 6.18 $ 0.65 Production, ad valorem, and other taxes ($/Boe) $ 1.28 $ 2.91 $ (1.63) $ 1.82 $ 2.81 $ (0.99) Depreciation and depletion—oil and natural gas ($/Boe) $ 2.66 $ 1.89 $ 0.77 $ 2.44 $ 1.71 $ 0.73 Production, ad valorem, and other taxes (% of oil, natural gas and NGL revenue) 5.3 % 6.7 % (1.4) % 7.4 % 6.9 % 0.5 % The increase in lease operating expenses for the three and nine-month periods ended September 30, 2023 was primarily due to inflationary pressures and higher production costs associated with more producing wells from our well reactivations and prior development program as well as increased ownership interest from our July 2023 acquisition. Production, ad valorem, and other taxes for the three and nine-month periods ended September 30, 2023 decreased primarily due to lower commodity prices and related revenues. Production, ad valorem, and other taxes for the three month period ended September 30, 2023 decreased as a percentage of oil, natural gas and NGL revenue primarily due to recovery of ad valorem tax payments from our working interest partners. Production, ad valorem, and other taxes for the nine-month period ended September 30, 2023 increased as a percentage of oil, natural gas and NGL revenue primarily due to 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. 21 Tabl e of Contents The increase in depreciation and depletion for oil and natural gas properties was primarily the result of capital expenditures for the fourth quarter of 2022 through the third quarter of 2023 and a decrease in proved reserves at September 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 September 30, 2023 were $78.54 per barrel of oil and $3.42 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 nine-month periods ended September 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 September 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. Based on the SEC prices over the trailing ten months ended October 1, 2023, as well as two months of NYMEX strip pricing for November and December of 2023 as of October 25, 2023, we estimate the SEC prices utilized in the December 31, 2023 full cost ceiling test may be $79.52 per barrel of oil and $2.66 per MMBtu 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, 2023 ceiling test, we expect that no full cost ceiling limitation impairment is indicated for the fourth 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 nine-month periods ended September 30, 2023 and 2022 consisted of the following (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 Change 2023 2022 Change General and administrative $ 2,619 $ 2,382 $ 237 $ 8,004 $ 7,083 $ 921 Restructuring expenses 42 76 (34) 343 718 (375) Employee termination benefits — — — 19 — 19 Gain on derivative contracts — (4,258) 4,258 (1,447) (3,194) 1,747 Other operating (income) expense (31) (25) (6) (152) (140) (12) Total other operating expenses $ 2,630 $ (1,825) $ 4,455 $ 6,767 $ 4,467 $ 2,300 The increase in general and administrative expenses for the three months ended September 30, 2023 was primarily the result of an increase in computer software upgrades. The nine months ended September 30, 2022 benefited from 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. Other increases in general and administrative expenses for the nine months ended September 30, 2023 included higher technology, service and personnel costs. 22 Tabl e of Contents The following table summarizes derivative activity for the three and nine-month periods ended September 30, 2023 and 2022 (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Gain on derivative contracts $ — $ (4,258) $ (1,447) $ (3,194) Realized settlement gains (losses) on derivative contracts $ — $ 218 $ 5,876 $ (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. 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. Other Income (Expense) Our other income (expense) for the three and nine-month periods ended September 30, 2023 and 2022 are presented in the table below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Other income (expense) Interest income (expense), net $ 2,455 $ (12) $ 7,782 $ (191) Other income, net 31 147 88 235 Total other income $ 2,486 $ 135 $ 7,870 $ 44 Interest income (expense), net during the three and nine-month periods ended September 30, 2023 is primarily comprised of interest income received from cash deposits. Interest expense incurred during the three and nine-month ended September 30, 2022 is primarily comprised of interest related to vehicle leases and letters of credit. Liquidity and Capital Resources As of September 30, 2023, our cash and cash equivalents, including restricted cash was $232.2 million. We expect our cash on hand and cash from operations to be adequate to meet our short and long-term liquidity needs. We had no outstanding term or revolving debt obligations as of September 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. Dividend payments to shareholders of $77.8 million, $25.7 million in capital expenditures, and $11.2 million related to an acquisition of proved reserves were the primary drivers in the reduction of working capital to $205.1 million at September 30, 2023 compared to $241.6 million at December 31, 2022. This activity was partially 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 $73.8 million. Additionally, in May 2023, the Board announced plans for a regular quarterly dividend of $0.10 per share, subject to quarterly approval by the Board. In August 2023, the Board declared a cash dividend of $0.10 per share of the Company’s common stock, which was paid on August 28, 2023 to shareholders of record as of the close of business on August 14, 2023. The aggregate total payout was $3.7 million. In addition to the quarterly dividend payments, the Company paid $0.3 million in cash dividends on vested stock awards during the three and nine-month periods ended September 30, 2023. 23 Tabl e of Contents 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, 2023 and 2022 are presented in the following table and discussed below (in thousands): Nine Months Ended September 30, 2023 2022 Cash flows provided by operating activities $ 89,359 $ 134,630 Cash flows used in investing activities (35,531) (32,161) Cash flows used in financing activities (79,053) (1,390) Net (decrease) increase in cash and cash equivalents and restricted cash $ (25,225) $ 101,079 Cash Flows from Operating Activities The $45.3 million decrease in cash flows from operations for the nine-month period ended September 30, 2023 compared to the same period in 2022 is primarily due to a decrease in revenues from lower commodity prices. Cash Flows from Investing Activities Our cash flows used in investing activities during the nine-month period ended September 30, 2023 reflects capital expenditures of $25.7 million primarily related to capital expenditures made for drilling, capital workovers, and well reactivations and $11.2 million related to an acquisition of proved reserves, which increased ownership interests in properties operated by the Company. We received $1.4 million of proceeds from the sale of equipment related to our oil and gas assets. 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 $1.4 million related to an acquisition of proved reserves, which increased ownership interests in properties operated by the Company. Cash outflows were partially offset by $0.4 million of proceeds from the sale of assets. Capital expenditures for the nine-month periods ended September 30, 2023 and 2022 are summarized below (in thousands): Nine Months Ended September 30, 2023 2022 Capital Expenditures Drilling and completion $ 18,181 $ 29,705 Capital workovers 3,592 7,951 Leasehold and geophysical (109) 597 Capital expenditures (on an accrual basis) 21,664 38,253 Acquisitions 11,232 1,431 Capital expenditures, including acquisitions 32,896 39,684 Changes in accounts payable and accrued expenses 5,263 (7,124) Inventory material transfers to oil and natural gas properties (1,246) — Total cash paid for capital expenditures, including acquisitions $ 36,913 $ 32,560 24 Tabl e of Contents Cash Flows from Financing Activities Cash used in financing activities for the nine-month period ended September 30, 2023 consisted primarily of $77.8 million in cash dividends, $0.9 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 $0.4 million. Cash used in financing activities for the nine-month period ended September 30, 2022 consisted primarily of $1.2 million of cash used to pay employee tax obligations for vested stock awards that were settled by net exercise and $0.3 million in finance lease payments, 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 September 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. 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 nine months of 2023. 25 Tabl e of Contents