SD 10Q Q2 6.30.14
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
Form 10-Q
__________________________ 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-33784
__________________________ 
SANDRIDGE ENERGY, INC.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
 
20-8084793
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
123 Robert S. Kerr Avenue
Oklahoma City, Oklahoma
 
73102
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(405) 429-5500
Former name, former address and former fiscal year, if changed since last report: Not applicable
__________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
 
Accelerated filer
o
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of the close of business on July 31, 2014, was 494,027,381.
 

Table of Contents


References in this report to the “Company” and “SandRidge” mean SandRidge Energy, Inc., including its consolidated subsidiaries and variable interest entities of which it is the primary beneficiary.

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) of the Company includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements express a belief, expectation or intention and generally are accompanied by words that convey projected future events or outcomes. These forward-looking statements may include projections and estimates concerning the Company’s capital expenditures, liquidity, capital resources and debt profile, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, elements of the Company’s business strategy, compliance with governmental regulation of the oil and natural gas industry, including environmental regulations, acquisitions and divestitures and the effects thereof on the Company’s financial condition and other statements concerning the Company’s operations and financial performance and condition. Forward-looking statements are generally accompanied by words such as “estimate,” “assume,” “target,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “goal,” “should,” “intend” or other words that convey the uncertainty of future events or outcomes. The Company has based these forward-looking statements on its current expectations and assumptions about future events. These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors the Company believes are appropriate under the circumstances. The actual results or developments anticipated may not be realized or, even if substantially realized, may not have the expected consequences to or effects on the Company’s business or results. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. These forward-looking statements speak only as of the date hereof. The Company disclaims any obligation to update or revise these forward-looking statements unless required by law, and it cautions readers not to rely on them unduly. While the Company’s management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties relating to, among other matters, the risks and uncertainties discussed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”).

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SANDRIDGE ENERGY, INC.
FORM 10-Q
Quarter Ended June 30, 2014

INDEX

 
 
 
ITEM 1.
 
 
 
 
 
ITEM 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
ITEM 3.
ITEM 4.
 
 
 
 
 
 
ITEM 1.
ITEM 1A.
ITEM 2.
ITEM 6.

Table of Contents

PART I. Financial Information

ITEM 1. Financial Statements
SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) 
 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
918,758

 
$
814,663

Accounts receivable, net
333,300

 
349,218

Derivative contracts
115

 
12,779

Costs in excess of billings and contract loss
3,435

 
4,079

Prepaid expenses
12,337

 
39,253

Other current assets
21,671

 
21,831

Total current assets
1,289,616

 
1,241,823

Oil and natural gas properties, using full cost method of accounting
 
 
 
Proved
10,807,088

 
10,972,816

Unproved
309,043

 
531,606

Less: accumulated depreciation, depletion and impairment
(6,138,833
)
 
(5,762,969
)
 
4,977,298

 
5,741,453

Other property, plant and equipment, net
564,521

 
566,222

Derivative contracts
2,826

 
14,126

Other assets
78,558

 
121,171

Total assets
$
6,912,819

 
$
7,684,795


The accompanying notes are an integral part of these condensed consolidated financial statements.





















4
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SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
(In thousands, except per share data) 

 
June 30,
2014
 
December 31,
2013
 
(Unaudited)
 
 
LIABILITIES AND EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued expenses
$
631,658

 
$
812,488

Derivative contracts
56,728

 
34,267

Asset retirement obligations
—

 
87,063

Other current liabilities
19,171

 
—

Total current liabilities
707,557

 
933,818

Long-term debt
3,195,165

 
3,194,907

Derivative contracts
5,533

 
20,564

Asset retirement obligations
55,210

 
337,054

Other long-term obligations
19,152

 
22,825

Total liabilities
3,982,617

 
4,509,168

Commitments and contingencies (Note 11)

 

Equity
 
 
 
SandRidge Energy, Inc. stockholders’ equity
 
 
 
Preferred stock, $0.001 par value, 50,000 shares authorized
 
 
 
8.5% Convertible perpetual preferred stock; 2,650 shares issued and outstanding at June 30, 2014 and December 31, 2013; aggregate liquidation preference of $265,000
3

 
3

6.0% Convertible perpetual preferred stock; 2,000 shares issued and outstanding at June 30, 2014 and December 31, 2013; aggregate liquidation preference of $200,000
2

 
2

7.0% Convertible perpetual preferred stock; 3,000 shares issued and outstanding at June 30, 2014 and December 31, 2013; aggregate liquidation preference of $300,000
3

 
3

Common stock, $0.001 par value, 800,000 shares authorized; 495,687 issued and 494,546 outstanding at June 30, 2014 and 491,609 issued and 490,290 outstanding at December 31, 2013
485

 
483

Additional paid-in capital
5,307,814

 
5,298,301

Additional paid-in capital—stockholder receivable
(3,750
)
 
(3,750
)
Treasury stock, at cost
(7,295
)
 
(8,770
)
Accumulated deficit
(3,640,679
)
 
(3,460,462
)
Total SandRidge Energy, Inc. stockholders’ equity
1,656,583

 
1,825,810

Noncontrolling interest
1,273,619

 
1,349,817

Total equity
2,930,202

 
3,175,627

Total liabilities and equity
$
6,912,819

 
$
7,684,795

 
 
 
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

5
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SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(Unaudited)
Revenues
 
 
 
 
 
 
 
Oil, natural gas and NGL
$
339,906

 
$
454,282

 
$
745,222

 
$
932,299

Drilling and services
18,852

 
16,078

 
35,932

 
33,448

Midstream and marketing
14,874

 
15,198

 
32,784

 
28,230

Construction contract
—

 
23,253

 
—

 
23,253

Other
1,082

 
4,176

 
3,832

 
7,447

Total revenues
374,714

 
512,987

 
817,770

 
1,024,677

Expenses
 
 
 
 
 
 
 
Production
58,498

 
116,811

 
157,033

 
249,312

Production taxes
7,840

 
6,564

 
15,647

 
16,003

Cost of sales
10,469

 
15,348

 
22,950

 
31,665

Midstream and marketing
13,254

 
14,927

 
29,254

 
26,730

Construction contract
—

 
23,253

 
—

 
23,253

Depreciation and depletion—oil and natural gas
97,267

 
138,903

 
212,452

 
296,429

Depreciation and amortization—other
15,411

 
16,022

 
30,933

 
31,358

Accretion of asset retirement obligations
1,065

 
9,800

 
6,811

 
19,579

Impairment
3,133

 
15,643

 
167,912

 
15,643

General and administrative
31,102

 
65,541

 
61,531

 
134,587

Employee termination benefits
813

 
107,720

 
8,922

 
118,118

Loss (gain) on derivative contracts
85,292

 
(103,654
)
 
127,783

 
(62,757
)
Loss (gain) on sale of assets
36

 
(349
)
 
17

 
397,825

Total expenses
324,180

 
426,529

 
841,245

 
1,297,745

Income (loss) from operations
50,534

 
86,458

 
(23,475
)
 
(273,068
)
Other income (expense)
 
 
 
 
 
 
 
Interest expense
(61,863
)
 
(61,159
)
 
(123,906
)
 
(147,069
)
Loss on extinguishment of debt
—

 
—

 
—

 
(82,005
)
Other income (expense), net
1,338

 
(106
)
 
3,432

 
505

Total other expense
(60,525
)
 
(61,265
)
 
(120,474
)
 
(228,569
)
(Loss) income before income taxes
(9,991
)
 
25,193

 
(143,949
)
 
(501,637
)
Income tax (benefit) expense
(1,194
)
 
508

 
(1,067
)
 
4,937

Net (loss) income
(8,797
)
 
24,685

 
(142,882
)
 
(506,574
)
Less: net income (loss) attributable to noncontrolling interest
15,642

 
45,121

 
9,572

 
(6,798
)
Net loss attributable to SandRidge Energy, Inc.
(24,439
)
 
(20,436
)
 
(152,454
)
 
(499,776
)
Preferred stock dividends
13,881

 
13,881

 
27,763

 
27,763

Loss applicable to SandRidge Energy, Inc. common stockholders
$
(38,320
)
 
$
(34,317
)
 
$
(180,217
)
 
$
(527,539
)
Loss per share
 
 
 
 
 
 
 
Basic
$
(0.08
)
 
$
(0.07
)
 
$
(0.37
)
 
$
(1.10
)
Diluted
$
(0.08
)
 
$
(0.07
)
 
$
(0.37
)
 
$
(1.10
)
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic
485,318

 
479,154

 
485,059

 
478,494

Diluted
485,318

 
479,154

 
485,059

 
478,494


The accompanying notes are an integral part of these condensed consolidated financial statements.

6
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SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(In thousands) 
 
SandRidge Energy, Inc. Stockholders
 
 
 
 
 
Convertible Perpetual Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Non-controlling Interest
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(Unaudited)
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
7,650

 
$
8

 
490,290

 
$
483

 
$
5,294,551

 
$
(8,770
)
 
$
(3,460,462
)
 
$
1,349,817

 
$
3,175,627

Acquisition of ownership interest
—

 
—

 
—

 
—

 
(2,074
)
 
—

 
—

 
(656
)
 
(2,730
)
Sale of royalty trust units
—

 
—

 
—

 
—

 
4,091

 
—

 
—

 
18,028

 
22,119

Distributions to noncontrolling interest owners
—

 
—

 
—

 
—

 
—

 
—

 
—

 
(103,142
)
 
(103,142
)
Purchase of treasury stock
—

 
—

 
—

 
—

 
—

 
(3,865
)
 
—

 
—

 
(3,865
)
Retirement of treasury stock
—

 
—

 
—

 
—

 
(3,865
)
 
3,865

 
—

 
—

 
—

Stock distributions, net of purchases - retirement plans
—

 
—

 
178

 
—

 
(2,138
)
 
1,475

 
—

 
—

 
(663
)
Stock-based compensation
—

 
—

 
—

 
—

 
13,499

 
—

 
—

 
—

 
13,499

Stock-based compensation excess tax benefit
—

 
—

 
—

 
—

 
2

 
—

 
—

 
—

 
2

Issuance of restricted stock awards, net of cancellations
—

 
—

 
4,078

 
2

 
(2
)
 
—

 
—

 
—

 
—

Net (loss) income
—

 
—

 
—

 
—

 
—

 
—

 
(152,454
)
 
9,572

 
(142,882
)
Convertible perpetual preferred stock dividends
—

 
—

 
—

 
—

 
—

 
—

 
(27,763
)
 
—

 
(27,763
)
Balance at June 30, 2014
7,650

 
$
8

 
494,546

 
$
485

 
$
5,304,064

 
$
(7,295
)
 
$
(3,640,679
)
 
$
1,273,619

 
$
2,930,202


The accompanying notes are an integral part of these condensed consolidated financial statements.

7
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SANDRIDGE ENERGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Six Months Ended June 30,
 
2014
 
2013
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(142,882
)
 
$
(506,574
)
Adjustments to reconcile net loss to net cash provided by operating activities
 
 
 
Depreciation, depletion and amortization
243,385

 
327,787

Accretion of asset retirement obligations
6,811

 
19,579

Impairment
167,912

 
15,643

Debt issuance costs amortization
4,703

 
5,369

Amortization of discount, net of premium, on long-term debt
258

 
789

Loss on extinguishment of debt
—

 
82,005

Deferred income tax provision
—

 
4,015

Loss (gain) on derivative contracts
127,783

 
(62,757
)
Cash paid on settlement of derivative contracts
(52,261
)
 
(6,075
)
Loss on sale of assets
17

 
397,825

Stock-based compensation
11,625

 
72,415

Other
(49
)
 
2,057

Changes in operating assets and liabilities
(136,510
)
 
32,605

Net cash provided by operating activities
230,792

 
384,683

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures for property, plant and equipment
(656,699
)
 
(828,585
)
Acquisition of assets
(16,553
)
 
(8,602
)
Proceeds from sale of assets
707,799

 
2,563,886

Net cash provided by investing activities
34,547

 
1,726,699

CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Repayments of borrowings
—

 
(1,115,500
)
Premium on debt redemption
—

 
(61,997
)
Debt issuance costs
—

 
(91
)
Proceeds from sale of royalty trust units
22,119

 
—

Noncontrolling interest distributions
(103,142
)
 
(98,716
)
Acquisition of ownership interest
(2,730
)
 
—

Stock-based compensation excess tax benefit
2

 
—

Purchase of treasury stock
(5,602
)
 
(28,468
)
Dividends paid — preferred
(27,763
)
 
(27,763
)
Cash (paid) received on settlement of financing derivative contracts
(44,128
)
 
5,728

Net cash used in financing activities
(161,244
)
 
(1,326,807
)
NET INCREASE IN CASH AND CASH EQUIVALENTS
104,095

 
784,575

CASH AND CASH EQUIVALENTS, beginning of year
814,663

 
309,766

CASH AND CASH EQUIVALENTS, end of period
$
918,758

 
$
1,094,341

Supplemental Disclosure of Cash Flow Information
 
 
 
Cash paid for interest, net of amounts capitalized
$
(120,339
)
 
$
(156,800
)
Cash paid for income taxes
$
(1,932
)
 
$
(2,525
)
Supplemental Disclosure of Noncash Investing and Financing Activities
 
 
 
Deposit on pending sale
$
—

 
$
(255,000
)
Change in accrued capital expenditures
$
3,989

 
$
52,715

Asset retirement costs capitalized
$
1,944

 
$
2,421


The accompanying notes are an integral part of these condensed consolidated financial statements.

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SANDRIDGE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Basis of Presentation

Nature of Business. SandRidge Energy, Inc. is an oil and natural gas company with a principal focus on exploration and production activities in the Mid-Continent region of the United States. The Company owns and operates additional interests in west Texas. The Company also operates businesses and infrastructure systems that are complementary to its primary exploration and production activities, including gas gathering and processing facilities, marketing operations, a saltwater gathering system, an electrical transmission system and a drilling and related oil field services business.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned or majority owned subsidiaries and variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Noncontrolling interest represents third-party ownership interests in the Company’s subsidiaries and consolidated VIEs and is included as a component of equity in the consolidated balance sheets and consolidated statement of changes in equity. All significant intercompany accounts and transactions have been eliminated in consolidation.

Variable Interest Entities. An entity is referred to as a VIE if it possesses one of the following criteria: (i) it is thinly capitalized, (ii) the residual equity holders do not control the entity, (iii) the equity holders are shielded from the economic losses, (iv) the equity holders do not participate fully in the entity’s residual economics, or (v) the entity was established with non-substantive voting interests. The Company consolidates a VIE when it has determined it is the primary beneficiary, which requires significant judgment. The primary beneficiary of a VIE is that variable interest holder possessing a controlling financial interest through (i) its power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (ii) its obligation to absorb losses or its right to receive benefits from the VIE that could potentially be significant to the VIE. In order to determine whether the Company owns a variable interest in a VIE and the significance of the variable interest, the Company performs a qualitative analysis of the entity’s design, organizational structure, primary decision makers and related financial agreements. In addition to the VIEs that the Company consolidates, the Company also holds a variable interest in another VIE that is not consolidated as it was determined that the Company is not the primary beneficiary. The Company monitors both consolidated and unconsolidated VIEs to determine if any events have occurred that could cause the primary beneficiary to change. See Note 3 for discussion of the Company’s significant associated VIEs.
Interim Financial Statements. The accompanying unaudited condensed consolidated financial statements as of December 31, 2013 have been derived from the audited financial statements contained in the Company’s 2013 Form 10-K. The unaudited condensed consolidated financial statements have been prepared by the Company in accordance with the accounting policies stated in the audited consolidated financial statements contained in the 2013 Form 10-K. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, all adjustments, which consist only of normal recurring adjustments, necessary to state fairly the information in the Company’s accompanying unaudited condensed consolidated financial statements have been included. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the 2013 Form 10-K.

Significant Accounting Policies. For a description of the Company’s significant accounting policies, see Note 1 of the consolidated financial statements included in the 2013 Form 10-K.

Reclassifications. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications have no effect on the Company’s previously reported results of operations.

Use of Estimates. The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

The more significant areas requiring the use of assumptions, judgments and estimates include: oil, natural gas and natural gas liquids (“NGL”) reserves; cash flow estimates used in the valuation of guarantees; impairment tests of long-lived assets; depreciation, depletion and amortization; asset retirement obligations; assignments of fair value and allocations of purchase price in connection with business combinations; determinations of significant alterations to the full cost pool and related estimates of fair value used to allocate the full cost pool net book value to divested properties, as necessary; income taxes; valuation of derivative

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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


instruments; contingencies; and accrued revenue and related receivables. Although management believes these estimates are reasonable, actual results could differ significantly.

Recent Accounting Pronouncements Not Yet Adopted. In May 2014, the FASB issued Accounting Standards Update 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain of the provisions also amend or supersede existing guidance applicable to the recognition of a gain or loss on transfers of nonfinancial assets that are not an output of an entity’s ordinary activities, including sales of property, plant and equipment and real estate. The requirements of ASU 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period with an option of using either a full retrospective or a modified approach for adoption. The Company is currently evaluating the effect, if any, that the updated standard will have on its consolidated financial statements and related disclosures.

2. Divestitures

Sale of Permian Properties

On February 26, 2013, the Company sold all of its oil and natural gas properties in the Permian Basin in west Texas, excluding the assets attributable to the SandRidge Permian Trust’s (the “Permian Trust”) area of mutual interest, (the “Permian Properties”) for $2.6 billion. This transaction resulted in a significant alteration of the relationship between the Company’s capitalized costs and proved reserves and, accordingly, the Company recorded a $399.1 million loss on the sale for the six-month period ended June 30, 2013. The loss is included in loss (gain) on sale of assets in the accompanying unaudited condensed consolidated statement of operations for the six-month period ended June 30, 2013. The loss was calculated based on a comparison of proceeds received and the asset retirement obligations attributable to the Permian Properties that were assumed by the buyer to the sum of (i) an allocation of the historical net book value of the Company’s proved oil and natural gas properties attributable to the Permian Properties, (ii) the historical cost of unproved acreage sold and (iii) costs incurred by the Company to sell these properties. The allocated net book value attributable to the Permian Properties was calculated based on the relative fair value of the Permian Properties and the remaining proved oil and natural gas properties retained by the Company as of the date of sale. A portion of the loss, totaling $71.7 million, was allocated to noncontrolling interests and is reflected in net income (loss) attributable to noncontrolling interest in the accompanying unaudited condensed consolidated statement of operations for the six-month period ended June 30, 2013.
    
The following table presents revenues and direct operating expenses of the Permian Properties included in the accompanying unaudited condensed consolidated statement of operations for the six-month period ended June 30, 2013 (in thousands):
 
 
Six Months Ended June 30, 2013(1)
Revenues
 
$
68,027

Direct operating expenses
 
$
17,453

__________________
(1)
Includes revenues and direct operating expenses through February 26, 2013, the date of sale.

Sale of Gulf of Mexico and Gulf Coast Properties

On February 25, 2014, the Company sold subsidiaries that owned the Company’s Gulf of Mexico and Gulf Coast oil and natural gas properties (the “Gulf Properties”) for approximately $703.5 million, net of working capital adjustments and post-closing adjustments, and the buyer’s assumption of approximately $366.0 million of related asset retirement obligations to Fieldwood Energy LLC (“Fieldwood”). This transaction did not result in a significant alteration of the relationship between the Company’s capitalized costs and proved reserves and, accordingly, the Company recorded the proceeds as a reduction of its full cost pool with no gain or loss on the sale. See Note 15 for discussion of Fieldwood’s related party affiliation with the Company.

In accordance with the terms of the sale, the Company agreed to guarantee on behalf of Fieldwood certain plugging and abandonment obligations associated with the Gulf Properties for a period of up to one year from the date of closing. The Company

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(Unaudited)


recorded a liability equal to the fair value of these guarantees, or $9.4 million, at the time the transaction closed. As of June 30, 2014, the fair value of the guarantees was approximately $12.0 million. See Note 4 for additional discussion of the determination of the guarantees’ fair value. The guarantees do not include a limit on the potential future payments for which the Company could be obligated; however, Fieldwood has agreed to indemnify the Company for any costs it may incur as a result of the guarantees and to use its best efforts to pay any amounts sought from the Company by the Bureau of Ocean Energy Management that may arise prior to the expiration of the guarantees. Additionally, Fieldwood will maintain, for a period of up to one year from the closing date, restricted deposits totaling approximately $28.0 million held in escrow for plugging and abandonment obligations associated with the Gulf Properties. Upon expiration of the guarantees, the Company will receive payment from Fieldwood for half of such restricted deposits, or approximately $14.0 million. A receivable for this amount is included in other current assets in the accompanying unaudited condensed consolidated balance sheet at June 30, 2014.

The following table presents revenues and expenses, including direct operating expenses, depletion, accretion of asset retirement obligations and general and administrative expenses, for the Gulf Properties included in the accompanying unaudited condensed consolidated statements of operations for the three-month period ended June 30, 2013 and the six-month periods ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2014(1)
 
2013
Revenues
$
170,219

 
$
90,920

 
$
345,275

Expenses
$
122,222

 
$
63,674

 
$
251,392

____________________
(1)
Includes revenues and expenses through February 25, 2014, the date of the sale.


    


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3. Variable Interest Entities

The Company’s significant associated VIEs, including those for which the Company has determined it is the primary beneficiary and those for which it has determined it is not, are described below.
    
Royalty Trusts. SandRidge owns beneficial interests in three Delaware statutory trusts. SandRidge Mississippian Trust I (the “Mississippian Trust I”), the Permian Trust and SandRidge Mississippian Trust II (the “Mississippian Trust II”) (each individually, a “Royalty Trust” and collectively, the “Royalty Trusts”) completed initial public offerings of their common units in April 2011, August 2011 and April 2012, respectively. Concurrent with the closing of each offering, the Company conveyed certain royalty interests to each Royalty Trust in exchange for the net proceeds of the offering and units representing beneficial interests in the Royalty Trust. Royalty interests conveyed to the Royalty Trusts are in existing wells and wells to be drilled on oil and natural gas properties leased by the Company in defined areas of mutual interest. The following table summarizes information about each Royalty Trust:
 
 
Mississippian Trust I
 
Permian Trust
 
Mississippian Trust II
Total outstanding common units
 
21,000,000

 
39,375,000

 
37,293,750

Total outstanding subordinated units
 
7,000,000

 
13,125,000

 
12,431,250

Liquidation date(1)
 
12/31/2030

 
3/31/2031

 
12/31/2031

____________________
(1)
At the time each Royalty Trust terminates, 50% of the royalty interests conveyed to the Royalty Trust will automatically revert to the Company, and the remaining 50% will be sold with the proceeds distributed to the Royalty Trust unitholders.

The Royalty Trusts make quarterly cash distributions to unitholders based on calculated distributable income. In order to provide support for cash distributions on the common units, the Company agreed to subordinate a portion of the units it owns in each Royalty Trust (the “subordinated units”), which constitute 25% of the total outstanding units of each Royalty Trust. The subordinated units are entitled to receive pro rata distributions from the Royalty Trusts each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is no less than the applicable quarterly subordination threshold. If there is not sufficient cash to fund such a distribution on all common units, the distribution made with respect to the subordinated units is reduced or eliminated for such quarter in order to make a distribution, to the extent possible, of up to the subordination threshold amount on all common units, including common units held by the Company. In exchange for agreeing to subordinate a portion of its Royalty Trust units, SandRidge is entitled to receive incentive distributions equal to 50% of the amount by which the cash available for distribution on all of the Royalty Trust units exceeds the applicable quarterly incentive threshold.

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The Royalty Trusts declared and paid quarterly distributions during the three and six-month periods ended June 30, 2014 and 2013 as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014(1)
 
2013
 
2014(2)
 
2013
Total distributions
 
$
59,672

 
$
68,449

 
$
127,985

 
$
144,810

Distributions to third-party unitholders
 
$
50,024

 
$
47,459

 
$
103,142

 
$
98,716

____________________
(1)
Subordination thresholds were not met for the Mississippian Trust I’s and Mississippian Trust II’s distributions, resulting in reduced distributions to the Company on its subordinated units for this period.
(2)
Subordination thresholds were not met for the Mississippian Trust I’s distributions, resulting in reduced distributions to the Company on its subordinated units for this period.

See Note 19 for discussion of the Royalty Trusts’ distributions announced in July 2014.
    
Pursuant to the trust agreements governing the Royalty Trusts, SandRidge has committed to loan funds to the each Royalty Trust on an unsecured basis, with terms substantially the same as would be obtained in an arm’s length transaction between SandRidge and an unaffiliated party, if at any time the Royalty Trust’s cash is not sufficient to pay ordinary course administrative expenses as they become due. Any funds loaned may not be used to satisfy indebtedness of the Royalty Trust or to make distributions. There were no amounts outstanding under the loan commitments at June 30, 2014 or December 31, 2013.

The Company and one of its wholly owned subsidiaries entered into a development agreement with each Royalty Trust that obligates the Company to drill, or cause to be drilled, a specified number of wells within respective areas of mutual interest, which are also subject to the royalty interests granted to the Mississippian Trust I, the Permian Trust and the Mississippian Trust II, by December 31, 2015, March 31, 2016 and December 31, 2016, respectively. Following the end of the fourth full calendar quarter subsequent to the Company’s satisfaction of its drilling obligation (the “subordination period”), the subordinated units of each Royalty Trust will automatically convert into common units on a one-for-one basis and the Company’s right to receive incentive distributions will terminate. One of the Company’s wholly owned subsidiaries also granted to each Royalty Trust a lien on the Company’s interests in the properties where the development wells will be drilled in order to secure the estimated amount of drilling costs for the Royalty Trust’s interests in the wells. As the Company fulfills its drilling obligation to each Royalty Trust, development wells that have been drilled and perforated for completion are released from the lien and the total amount that may be recovered by each Royalty Trust is proportionately reduced. As of June 30, 2014, the total maximum amount recoverable by the Permian Trust and the Mississippian Trust II under the remaining liens was approximately $48.2 million. The Company fulfilled its drilling obligation to the Mississippian Trust I in the second quarter of 2013 and the related lien was released. See Note 19 for discussion of the conversion of Mississippian Trust I subordinated units to common units.

Additionally, the Company and each Royalty Trust entered into an administrative services agreement, pursuant to which the Company provides certain administrative services to the Royalty Trust, including hedge management services to the Permian Trust and the Mississippian Trust II. The Company also entered into derivatives agreements with each Royalty Trust, pursuant to which the Company provides to the Royalty Trust the economic effects of certain of the Company’s derivative contracts. Substantially concurrent with the execution of the derivatives agreements with the Permian Trust and the Mississippian Trust II, the Company novated certain of the derivative contracts underlying the respective derivatives agreements to each of these Royalty Trusts. The Company novated additional derivative contracts underlying the derivatives agreements to the Permian Trust in April 2012 and to the Permian Trust and the Mississippian Trust II in March 2013. The tables below present the open oil and natural gas commodity derivative contracts at June 30, 2014 underlying the derivatives agreements. The combined volume in the tables below reflects the total volume of the Royalty Trusts’ open oil and natural gas commodity derivative contracts.

Oil Price Swaps Underlying the Royalty Trust Derivatives Agreements
 
Notional (MBbls)
 
Weighted Average
Fixed Price
July 2014 - December 2014
823

 
$
101.01

January 2015 - December 2015
904

 
$
97.78



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Natural Gas Collars Underlying the Royalty Trust Derivatives Agreements
 
Notional (MMcf)
 
Collar Range
July 2014 - December 2014
472

 
$
4.00

—
$
7.78

January 2015 - December 2015
1,010

 
$
4.00

—
$
8.55


Oil Price Swaps Underlying the Derivatives Agreements and Novated to the Royalty Trusts
 
Notional (MBbls)
 
Weighted Average
Fixed Price
July 2014 - December 2014
473

 
$
100.76

January 2015 - March 2015
141

 
$
100.90


See Note 9 for further discussion of the derivatives agreement between the Company and each Royalty Trust.

The Royalty Trusts are considered VIEs due to the lack of voting or similar decision-making rights of the Royalty Trusts’ equity holders regarding activities that have a significant effect on the economic success of the Royalty Trusts. The Company has determined it is the primary beneficiary of the Royalty Trusts as it has (a) the power to direct the activities that most significantly impact the economic performance of the Royalty Trusts through (i) its participation in the creation and structure of the Royalty Trusts, (ii) the manner in which it fulfills its drilling obligations to the Royalty Trusts and (iii) its operation of a majority of the oil and natural gas properties that are subject to the conveyed royalty interests and marketing of the associated production and (b) the obligation to absorb losses and right to receive residual returns, through its variable interests in the Royalty Trusts, including ownership of common and subordinated units, that could potentially be significant to the Royalty Trusts. As a result, the Company consolidates the activities of the Royalty Trusts into its results of operations. Amounts attributable to the common units of the Royalty Trusts owned by third parties are reflected as noncontrolling interest in the consolidated financial statements.

    

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Each Royalty Trust’s assets can be used to settle only that Royalty Trust’s obligations and not other obligations of the Company or another Royalty Trust. The Royalty Trusts’ creditors have no contractual recourse to the general credit of the Company. Although the Royalty Trusts are included in the Company’s consolidated financial statements, the Company’s legal interest in the Royalty Trusts’ assets is limited to its ownership of the Royalty Trusts’ units. At both June 30, 2014 and December 31, 2013, $1.3 billion of noncontrolling interest in the accompanying unaudited condensed consolidated balance sheets was attributable to the Royalty Trusts. The Royalty Trusts’ assets and liabilities, after considering the effects of intercompany eliminations, included in the accompanying unaudited condensed consolidated balance sheets at June 30, 2014 and December 31, 2013 consisted of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
Cash and cash equivalents(1)
$
6,722

 
$
7,912

Accounts receivable, net
18,887

 
22,540

Derivative contracts
—

 
4,983

Total current assets
25,609

 
35,435

Investment in royalty interests(2)
1,325,942

 
1,325,942

Less: accumulated depletion and impairment(3)
(258,186
)
 
(186,095
)
 
1,067,756

 
1,139,847

Derivative contracts
—

 
1,476

Total assets
$
1,093,365

 
$
1,176,758

Accounts payable and accrued expenses
$
2,318

 
$
3,393

Derivative contracts, current
968

 
—

Total liabilities
$
3,286

 
$
3,393

____________________
(1)
Includes $3.0 million held by the trustee at June 30, 2014 and December 31, 2013 as reserves for future general and administrative expenses.
(2)
Investment in royalty interests is included in oil and natural gas properties in the accompanying unaudited condensed consolidated balance sheets.
(3)
Accumulated depletion and impairment at June 30, 2014 includes full cost ceiling limitation impairment allocated to the Royalty Trusts of $42.3 million. There was no full cost ceiling limitation impairment allocated to the Royalty Trusts as of December 31, 2013.
 
During the six-month period ended June 30, 2014, the Company sold Permian Trust common units it owned in a transaction exempt from registration pursuant to Rule 144 under the Securities Act for proceeds of approximately $22.1 million. The sale was accounted for as an equity transaction with no gain or loss recognized. The Company continues to be the primary beneficiary of the Permian Trust after consideration of this transaction and continues to consolidate the activities of the Permian Trust as well as the activities of the Mississippian Trust I and Mississippian Trust II. The Company’s beneficial interests in the Royalty Trusts at June 30, 2014 and December 31, 2013 were as follows:
 
June 30,
2014
 
December 31,
2013
Mississippian Trust I
26.9
%
 
26.9
%
Permian Trust
25.0
%
 
28.5
%
Mississippian Trust II
37.6
%
 
37.6
%

See Note 11 for discussion of the Company’s legal proceedings to which the Mississippian Trust I and Mississippian Trust II are also parties.

Grey Ranch Plant, L.P. Primarily engaged in treating and transportation of natural gas, Grey Ranch Plant, L.P. (“GRLP”) is a limited partnership that operated the Company’s Grey Ranch plant (the “Plant”) located in Pecos County, Texas. As of December 31, 2013, the Company owned a 50% interest in GRLP, which represented a variable interest. Income or loss of GRLP was allocated to the partners based on ownership percentage and any operating or cash shortfalls required contributions from the partners. The Company determined that GRLP qualified as a VIE because certain equity holders lacked the ability to participate in decisions impacting GRLP. Agreements related to the ownership and operation of GRLP provided for GRLP to pay management fees to the

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Company to operate the Plant and lease payments for the Plant. Under the operating agreements, lease payments were reduced if throughput volumes were below those expected. The Company determined that it was the primary beneficiary of GRLP as it had both (i) the power, as operator of the Plant, to direct the activities of GRLP that most significantly impact its economic performance and (ii) the obligation to absorb losses, as a result of the operating and gathering agreements, that could potentially be significant to GRLP and, therefore, consolidated the activity of GRLP in its consolidated financial statements. The 50% ownership interest not held by the Company as of December 31, 2013 is presented as noncontrolling interest in the accompanying unaudited condensed consolidated financial statements. In March 2014, one of the Company’s wholly owned subsidiaries acquired from a third party the remaining 50% ownership interest of GRLP. Because the Company was the primary beneficiary and consolidated GRLP, the acquisition of additional ownership interest was recorded as an equity transaction with no gain or loss recognized. Additionally, as a wholly owned subsidiary of the Company, GRLP is no longer considered a VIE for reporting purposes.

Prior to the Company’s acquisition of the remaining ownership of GRLP in March 2014, GRLP’s assets could only be used to settle its own obligations and not other obligations of the Company and GRLP’s creditors had no recourse to the general credit of the Company. At December 31, 2013, $0.7 million of noncontrolling interest in the accompanying unaudited condensed consolidated balance sheet was related to GRLP. GRLP’s assets and liabilities, after considering the effects of intercompany eliminations, included in the accompanying unaudited condensed consolidated balance sheet at December 31, 2013 consisted of the following (in thousands):
 
December 31,
2013
Cash and cash equivalents
$
132

Accounts receivable, net
16

Prepaid expenses
32

Other current assets
109

Total current assets
289

Other property, plant and equipment, net
1,163

Total assets
$
1,452

 
 
Accounts payable and accrued expenses
$
129

Total liabilities
$
129


     

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Grey Ranch Plant Genpar, LLC. As of December 31, 2013, the Company owned a 50% interest in Grey Ranch Plant Genpar, LLC (“Genpar”), the managing partner and 1% owner of GRLP. The Company served as Genpar’s administrative manager. Genpar’s ownership interest in GRLP was its only asset. As managing partner of GRLP, Genpar had the sole right to manage, control and conduct the business of GRLP. However, Genpar was restricted from making certain major decisions, including the decision to remove the Company as operator of the Plant. The rights afforded the Company under the Plant operating agreement and the restrictions on Genpar limited Genpar’s ability to make decisions on behalf of GRLP. Therefore, Genpar was considered a VIE. Although both the Company and Genpar’s other equity owner shared equally in Genpar’s economic losses and benefits and also had agreements that may be considered variable interests, the Company determined it was the primary beneficiary of Genpar due to (i) its ability, as administrative manager and operator of the Plant, to direct the activities of Genpar that most significantly impact its economic performance and (ii) its obligation or right, as operator of the Plant, to absorb the losses of or receive benefits from Genpar that could potentially be significant to Genpar. As the primary beneficiary, the Company consolidated Genpar’s activity. However, its sole asset, the investment in GRLP, was eliminated in consolidation. Genpar had no liabilities. In March 2014, one of the Company’s wholly owned subsidiaries acquired from a third party the remaining 50% ownership interest of Genpar. Because the Company was the primary beneficiary and consolidated Genpar, the acquisition of additional ownership interest was recorded as an equity transaction with no gain or loss recognized. Additionally, as a wholly owned subsidiary of the Company, Genpar is no longer considered a VIE for reporting purposes.    

Piñon Gathering Company, LLC. The Company has a gas gathering and operations and maintenance agreement with Piñon Gathering Company, LLC (“PGC”) through June 30, 2029. Under the gas gathering agreement, the Company is required to compensate PGC for any throughput shortfalls below a required minimum volume. By guaranteeing a minimum throughput, the Company absorbs the risk that lower than projected volumes will be gathered by the gathering system. Therefore, PGC is a VIE. Other than as required under the gas gathering and operations and maintenance agreements, the Company has not provided any support to PGC. While the Company operates the assets of PGC as directed under the operations and management agreement, the member and managers of PGC have the authority to directly control PGC and make substantive decisions regarding PGC’s activities including terminating the Company as operator without cause. As the Company does not have the ability to control the activities of PGC that most significantly impact PGC’s economic performance, the Company is not the primary beneficiary of PGC and does not consolidate the results of PGC’s activities into its financial statements.

Amounts due from and due to PGC as of June 30, 2014 and December 31, 2013 included in the accompanying unaudited condensed consolidated balance sheets are as follows (in thousands):
 
June 30,
2014
 
December 31,
2013
Accounts receivable due from PGC
$
1,672

 
$
741

Accounts payable due to PGC
$
4,486

 
$
3,634



4. Fair Value Measurements

The Company measures and reports certain assets and liabilities on a fair value basis and has classified and disclosed its fair value measurements using the following levels of the fair value hierarchy:
Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
 
Level 2
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.
 
 
Level 3
Measurement based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., supported by little or no market activity).

Assets and liabilities that are measured at fair value are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels. The determination of the fair values, stated below, considers the market for the Company’s financial assets and liabilities, the associated credit risk and other factors. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis. The

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Company has assets and liabilities classified as Level 1, Level 2 and Level 3 as of June 30, 2014 or December 31, 2013, as described below.

Level 1 Fair Value Measurements

Restricted deposits. The fair value of restricted deposits invested in mutual funds or municipal bonds is based on quoted market prices. For restricted deposits held in savings accounts, carrying value approximates fair value. Restricted deposits are included in other assets in the accompanying unaudited condensed consolidated balance sheet at December 31, 2013. There were no restricted deposits outstanding at June 30, 2014.

Investments. The fair value of investments, consisting of assets attributable to the Company’s non-qualified deferred compensation plan, is based on quoted market prices. Investments are included in other assets in the accompanying unaudited condensed consolidated balance sheets.

Level 2 Fair Value Measurements

Derivative contracts. The fair values of the Company’s oil and natural gas fixed price swaps and collars are based upon inputs that are either readily available in the public market, such as oil and natural gas futures prices, volatility factors and discount rates, or can be corroborated from active markets. Fair value is determined through the use of a discounted cash flow model or option pricing model using the applicable inputs, discussed above. The Company applies a weighted average credit default risk rating factor for its counterparties or gives effect to its credit default risk rating, as applicable, in determining the fair value of these derivative contracts. Credit default risk ratings are based on current published credit default swap rates.

Level 3 Fair Value Measurements

Guarantees. As discussed in Note 2, the Company has guaranteed on Fieldwood’s behalf certain plugging and abandonment obligations associated with the Gulf Properties. The fair value of these guarantees is based on the present value of estimated future payments for plugging and abandonment obligations associated with the Gulf Properties, adjusted for the cumulative probability of Fieldwood’s default prior to expiration of the guarantee by February 25, 2015 (3.71% at June 30, 2014). The discount and probability of default rates are based upon inputs that are readily available in the public market, such as historical option adjusted spreads of the Company’s senior notes, which are publicly traded, and historical default rates of publicly traded companies with credit ratings similar to Fieldwood. The significant unobservable input used in the fair value measurement of the guarantees is the estimate of future payments for plugging and abandonment, which was developed based upon third-party quotes and current actual costs. Significant increases (decreases) in the estimate of these payments could result in a significantly higher (lower) fair value measurement. The significant unobservable input used in the fair value measurement of the Company’s financial guarantee liability at June 30, 2014 is included in the table below (in thousands).

Unobservable Input
 
 
Estimated future payments for plugging and abandonment
 
$
426,661


Derivative contracts. The fair value of the Company’s oil basis swaps outstanding during the six-month period ended June 30, 2013 was based upon quotes obtained from counterparties to the derivative contracts. These values were reviewed internally for reasonableness through the use of a discounted cash flow model using non-exchange traded regional pricing information. Additionally, the Company applied a weighted average credit default risk rating factor for its counterparties or gave effect to its credit risk, as applicable, in determining the fair value of these derivative contracts. The significant unobservable input used in the fair value measurement of the Company’s oil basis swaps was the estimate of future oil basis differentials. Significant increases (decreases) in oil basis differentials could have resulted in a significantly higher (lower) fair value measurement. All of the oil basis swaps outstanding during 2013 contractually matured during the six-month period ended June 30, 2013.


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(Unaudited)


The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis by the fair value hierarchy (in thousands):

June 30, 2014
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
—

 
$
6,490

 
$
—

 
$
(3,549
)
 
$
2,941

Investments
10,740

 
—

 
—

 
—

 
10,740

 
$
10,740

 
$
6,490

 
$
—

 
$
(3,549
)
 
$
13,681

Liabilities
 
 
 
 
 
 
 
 
 
Guarantees
$
—

 
$
—

 
$
12,028

 
$
—

 
$
12,028

Commodity derivative contracts
—

 
65,810

 
—

 
(3,549
)
 
62,261

 
$
—

 
$
65,810

 
$
12,028

 
$
(3,549
)
 
$
74,289


December 31, 2013
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
 
 
Assets
 
 
 
 
 
 
 
 
 
Restricted deposits
$
27,955

 
$
—

 
$
—

 
$
—

 
$
27,955

Commodity derivative contracts
—

 
50,274

 
—

 
(23,369
)
 
26,905

Investments
13,708

 
—

 
—

 
—

 
13,708

 
$
41,663

 
$
50,274

 
$
—

 
$
(23,369
)
 
$
68,568

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$
—

 
$
78,200

 
$
—

 
$
(23,369
)
 
$
54,831

 
$
—

 
$
78,200

 
$
—

 
$
(23,369
)
 
$
54,831

____________________
(1)Represents the impact of netting assets and liabilities for counterparties with which the right of offset exists.

The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for guarantees during the three and six-month periods ended June 30, 2014 (in thousands): 
Level 3 Fair Value Measurements - Guarantees
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
Beginning balance
 
$
9,480

 
$
—

Issuances(1)
 
—

 
9,446

Loss on guarantees
 
2,548

 
2,582

Ending balance
 
$
12,028

 
$
12,028

____________________
(1)
Represents the fair value of the guarantees of certain plugging and abandonment obligations on behalf of Fieldwood as of February 25, 2014, the closing date for the sale of the Gulf Properties.

The fair value of the guarantees is determined quarterly with changes in fair value recorded as an adjustment to the full cost pool. See Note 2 for discussion of the sale of the Gulf Properties. The fair value of the guarantees as of June 30, 2014 is included in other current liabilities in the accompanying unaudited condensed consolidated balance sheet.



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(Unaudited)


The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for commodity derivative contracts during the three and six-month periods ended June 30, 2013 (in thousands): 
Level 3 Fair Value Measurements - Commodity Derivative Contracts
 
Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2013
Beginning balance
 
$
(211
)
 
$
(512
)
Gain (loss) on derivative contracts
 
740

 
(133
)
Settlements (received) paid
 
(529
)
 
645

Ending balance
 
$
—

 
$
—


There were no outstanding Level 3 commodity derivative contracts at June 30, 2014 or 2013.

See Note 9 for further discussion of the Company’s derivative contracts.

The Company recognizes transfers between fair value hierarchy levels as of the end of the reporting period in which the event or change in circumstances causing the transfer occurred. During the three and six-month periods ended June 30, 2014 and 2013, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.

Fair Value of Financial Instruments

The Company measures the fair value of its senior notes using pricing for the senior notes that is readily available in the public market. The Company classifies these inputs as Level 2 in the fair value hierarchy. The estimated fair values and carrying values of the Company’s senior notes at June 30, 2014 and December 31, 2013 were as follows (in thousands):
 
June 30, 2014
 
December 31, 2013
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
8.75% Senior Notes due 2020(1)
$
483,750

 
$
445,062

 
$
486,000

 
$
444,736

7.5% Senior Notes due 2021(2)
1,273,465

 
1,178,708

 
1,230,813

 
1,178,922

8.125% Senior Notes due 2022
825,000

 
750,000

 
795,000

 
750,000

7.5% Senior Notes due 2023(3)
893,063

 
821,395

 
837,375

 
821,249

____________________
(1)Carrying value is net of $4,938 and $5,264 discount at June 30, 2014 and December 31, 2013, respectively.
(2)Carrying value includes a premium, applicable to notes issued in August 2012, of $3,708 and $3,922 at
June 30, 2014 and December 31, 2013, respectively.
(3)Carrying value is net of $3,605 and $3,751 discount at June 30, 2014 and December 31, 2013, respectively.

See Note 8 for discussion of the Company’s long-term debt.


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5. Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands): 
 
June 30,
2014
 
December 31,
2013
Oil and natural gas properties
 
 
 
Proved(1)
$
10,807,088

 
$
10,972,816

Unproved
309,043

 
531,606

Total oil and natural gas properties
11,116,131

 
11,504,422

Less accumulated depreciation, depletion and impairment
(6,138,833
)
 
(5,762,969
)
Net oil and natural gas properties capitalized costs
4,977,298

 
5,741,453

Land
18,270

 
18,423

Non-oil and natural gas equipment(2)
614,198

 
600,603

Buildings and structures(3)
244,076

 
233,405

Total
876,544

 
852,431

Less accumulated depreciation and amortization
(312,023
)
 
(286,209
)
Other property, plant and equipment, net
564,521

 
566,222

Total property, plant and equipment, net
$
5,541,819

 
$
6,307,675

____________________
(1)
Includes cumulative capitalized interest of approximately $29.0 million and $23.4 million at June 30, 2014 and December 31, 2013, respectively.
(2)
Includes cumulative capitalized interest of approximately $4.3 million at both June 30, 2014 and December 31, 2013.
(3)
Includes cumulative capitalized interest of approximately $14.4 million and $12.0 million at June 30, 2014 and December 31, 2013, respectively.

Accumulated depreciation, depletion and impairment on oil and natural gas properties includes cumulative full cost ceiling limitation impairment of $3.7 billion and $3.5 billion at June 30, 2014 and December 31, 2013, respectively. During the six-month period ended June 30, 2014, the Company reduced the net carrying value of its oil and natural gas properties by $164.8 million as a result of its first quarter full cost ceiling analysis.

Drilling Carry Commitments

The Company has agreements with two co-working interest parties, which contain carry commitments to fund a portion of its future drilling, completing and equipping costs within areas of mutual interest. The Company recorded approximately $175.4 million for Repsol E&P USA, Inc.’s (“Repsol”) carry during the six-month period ended June 30, 2014, and a combined $248.3 million for both Atinum MidCon I, LLC’s (“Atinum”) and Repsol’s drilling carries during the six-month periods ended June 30, 2013, which reduced the Company’s capital expenditures for the respective periods. Atinum fully funded its carry commitment in the third quarter of 2013. The Company expects Repsol to fully fund its carry commitment during 2014.

Under the agreement with Repsol, the remaining carry commitment could be reduced if a certain number of wells are not drilled within the area of mutual interest during a twelve-month period and the Company fails to drill such wells following a proposal by Repsol to drill the wells.  During 2013, the Company temporarily reduced its rate of drilling activity. As a result, the Company drilled less than the targeted number of wells for such twelve-month period, which resulted in Repsol having a right to propose additional wells. In June 2014, the Company and Repsol amended their agreement to eliminate Repsol’s right to propose such additional wells in exchange for a commitment by the Company to drill 484 net wells in the area of mutual interest between January 1, 2014 and May 31, 2015, subject to delays due to factors beyond the Company’s control. If the Company does not drill the committed number of wells within such time period, it will be required to carry Repsol’s drilling, completing and equipping costs for subsequent wells drilled in the area of mutual interest, up to a maximum of $75.0 million in carry costs.  As of June 30, 2014, the Company has drilled 143 net wells under this arrangement and currently anticipates satisfying its drilling commitment within the required time period. The Company has no other drilling obligation to Repsol.



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6. Other Assets

Other assets consist of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
Debt issuance costs, net of amortization
$
57,220

 
$
61,923

Investments
10,740

 
13,708

Deferred tax asset
7,143

 
—

Restricted deposits(1)
—

 
27,955

Notes receivable on asset retirement obligations(1)
—

 
11,640

Other
3,455

 
5,945

Total other assets
$
78,558

 
$
121,171

____________________
(1)
Assets reflected at December 31, 2013 were included in the sale of the Gulf Properties in February 2014, as discussed in Note 2.

7. Construction Contracts

Transmission Expansion Projects. In the second quarter of 2013, the Company substantially completed the construction of a series of electrical transmission expansion and upgrade projects in northern Oklahoma for a third party. The Company constructed these projects for a contract price of $23.3 million, which included agreed upon change orders. Upon substantial completion of the contract, the Company recognized construction contract revenue and costs equal to the revised contract price of $23.3 million, which are included in the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2013.

8. Long-Term Debt

Long-term debt consists of the following (in thousands):
 
June 30,
2014
 
December 31,
2013
Senior credit facility
$
—

 
$
—

Senior notes
 
 
 
 8.75% Senior Notes due 2020, net of $4,938 and $5,264 discount, respectively
445,062

 
444,736

 7.5% Senior Notes due 2021, including premium of $3,708 and $3,922, respectively
1,178,708

 
1,178,922

 8.125% Senior Notes due 2022
750,000

 
750,000

 7.5% Senior Notes due 2023, net of $3,605 and $3,751 discount, respectively
821,395

 
821,249

Total debt
3,195,165

 
3,194,907

Less: current maturities of long-term debt
—

 
—

Long-term debt
$
3,195,165

 
$
3,194,907


Senior Credit Facility

The senior secured revolving credit facility (the “senior credit facility”) is available to be drawn on subject to limitations based on its terms and certain financial covenants, as described below. As of June 30, 2014, the senior credit facility contained financial covenants, including maintenance of agreed upon levels for the (i) ratio of total net debt to EBITDA, which may not exceed 4.5:1.0 at each quarter end, calculated using the last four completed fiscal quarters and (ii) ratio of current assets to current liabilities, which must be at least 1.0:1.0 at each quarter end. If no amounts are drawn under the senior credit facility when calculating the ratio of total net debt to EBITDA, the Company’s debt is reduced by its cash balance in excess of $10.0 million. In the current ratio calculation, any amounts available to be drawn under the senior credit facility are included in current assets, and unrealized

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assets and liabilities resulting from mark-to-market adjustments on the Company’s derivative contracts are disregarded. The senior credit facility matures in March 2017.

The senior credit facility also contains various covenants that limit the ability of the Company and certain of its subsidiaries to: grant certain liens; make certain loans and investments; make distributions; redeem stock; redeem or prepay debt; merge or consolidate with or into a third party; or engage in certain asset dispositions, including a sale of all or substantially all of the Company’s assets. Additionally, the senior credit facility limits the ability of the Company and certain of its subsidiaries to incur additional indebtedness with certain exceptions. As of and during the three and six-month periods ended June 30, 2014, the Company was in compliance with all applicable financial covenants under the senior credit facility.

The obligations under the senior credit facility are guaranteed by certain Company subsidiaries and are secured by first priority liens on all shares of capital stock of certain of the Company’s material present and future subsidiaries, certain intercompany debt of the Company, and substantially all of the Company’s assets, including proved oil, natural gas and NGL reserves representing at least 80.0% of the discounted present value (as defined in the senior credit facility) of proved oil, natural gas and NGL reserves considered by the lenders in determining the borrowing base for the senior credit facility.
    
At the Company’s election, interest under the senior credit facility is determined by reference to (a) the London Interbank Offered Rate (“LIBOR”) plus an applicable margin between 1.75% and 2.75% per annum or (b) the “base rate,” which is the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate published by Bank of America or (iii) the Eurodollar rate (as defined in the senior credit facility) plus 1.00% per annum, plus, in each case under scenario (b), an applicable margin between 0.75% and 1.75% per annum. Interest is payable quarterly for base rate loans and at the applicable maturity date for LIBOR loans, except that if the interest period for a LIBOR loan is six months, interest is paid at the end of each three-month period. Quarterly, the Company pays a commitment fee assessed at an annual rate of 0.5% on any available portion of the senior credit facility.

Borrowings under the senior credit facility may not exceed the lower of the borrowing base or the committed amount. The Company’s borrowing base was reaffirmed at $775.0 million in April 2014 and the next redetermination is expected to take place in October 2014. With respect to each redetermination, the administrative agent and the lenders under the senior credit facility consider several factors, including the Company’s proved reserves and projected cash requirements, and make assumptions regarding, among other things, oil and natural gas prices and production. Because the value of the Company’s proved reserves is a key factor in determining the amount of the borrowing base, changing commodity prices and the Company’s success in developing reserves may affect the borrowing base. The Company at times incurs additional costs related to the senior credit facility as a result of amendments to the credit agreement and changes to the borrowing base.

At June 30, 2014, the Company had no amount outstanding under the senior credit facility and $10.4 million in outstanding letters of credit, which reduce the availability under the senior credit facility on a dollar-for-dollar basis.

Senior Fixed Rate Notes

The Company’s unsecured senior fixed rate notes (“Senior Fixed Rate Notes”) bear interest at a fixed rate per annum, payable semi-annually, with the principal due upon maturity. Certain of the Senior Fixed Rate Notes were issued at a discount or a premium. The discount or premium is amortized to interest expense over the term of the respective series of Senior Fixed Rate Notes. The Senior Fixed Rate Notes are redeemable, in whole or in part, prior to their maturity at specified redemption prices and are jointly and severally guaranteed unconditionally, in full, on an unsecured basis by certain of the Company’s wholly owned subsidiaries. See Note 18 for condensed financial information of the subsidiary guarantors.

Debt issuance costs of $70.2 million incurred in connection with the offerings and subsequent registered exchange offers of the Senior Fixed Rate Notes outstanding at June 30, 2014 are included in other assets in the accompanying unaudited condensed consolidated balance sheets and are being amortized to interest expense over the term of the respective series of Senior Fixed Rate Notes.

2013 Activity. In March 2013, the Company redeemed the outstanding $365.5 million aggregate principal amount of its 9.875% Senior Notes due 2016 and $750.0 million aggregate principal amount of its 8.0% Senior Notes due 2018 for total consideration of $1,061.34 per $1,000 principal amount and $1,052.77 per $1,000 principal amount, respectively. The premium paid to redeem these notes and the expense incurred to write off the remaining associated unamortized debt issuance costs, totaling $82.0 million, were recorded as a loss on extinguishment of debt in the accompanying unaudited condensed consolidated statement of operations for the six-month period ended June 30, 2013.    

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Indentures. Each of the indentures governing the Company’s Senior Fixed Rate Notes contains covenants that restrict the Company’s ability to take a variety of actions, including limitations on the incurrence of indebtedness, payment of dividends, investments, asset sales, certain asset purchases, transactions with related parties and consolidations or mergers. As of and during the three and six-month periods ended June 30, 2014, the Company was in compliance with all of the covenants contained in the indentures governing its outstanding Senior Fixed Rate Notes.


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9. Derivatives

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts at fair value. Changes in derivative contract fair values are recognized in earnings. Cash settlements and valuation gains and losses are included in loss on derivative contracts for commodity derivative contracts and in interest expense for interest rate swaps in the consolidated statements of operations. Commodity derivative contracts are settled on a monthly or quarterly basis. Derivative assets and liabilities arising from the Company’s derivative contracts with the same counterparty that provide for net settlement are reported on a net basis in the consolidated balance sheets.

Commodity Derivatives. The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil and natural gas. The Company seeks to manage this risk through the use of commodity derivative contracts. These derivative contracts allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil and natural gas sales. None of the Company’s derivative contracts may be terminated prior to contractual maturity solely as a result of a downgrade in the credit rating of a party to the contract. At June 30, 2014, the Company’s commodity derivative contracts consisted of fixed price swaps and collars, which are described below:
Fixed price swaps
The Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.
 
 
Collars
Two-way collars contain a fixed floor price (put) and a fixed ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.
 
Three-way collars have two fixed floor prices (a purchased put and a sold put) and a fixed ceiling price (call). The purchased put establishes a minimum price unless the market price falls below the sold put, at which point the minimum price would be New York Mercantile Exchange (“NYMEX”) plus the difference between the purchased put and the sold put strike price. The call establishes a maximum price (ceiling) the Company will receive for the volumes under the contract. If the market price is between the ceiling price and purchased put, no payments are due from either party.
        
Interest Rate Swaps. The Company is exposed to interest rate risk on its long-term fixed rate debt and will be exposed to variable interest rates if it draws on its senior credit facility. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the Company to (i) changes in market interest rates reflected in the fair value of the debt and (ii) the risk that the Company may need to refinance maturing debt with new debt at a higher rate. Variable rate debt, where the interest rate fluctuates, exposes the Company to short-term changes in market interest rates as the Company’s interest obligations on these instruments are periodically redetermined based on prevailing market interest rates, primarily LIBOR and the federal funds rate.

Prior to its maturity on April 1, 2013, the Company had a $350.0 million notional interest rate swap agreement which effectively fixed the variable interest rate on the Senior Floating Rate Notes due 2014 (“Senior Floating Rate Notes”) at an annual rate of 6.69% for periods prior to their repurchase and redemption in the third quarter of 2012. The interest rate swap was not designated as a hedge.

Derivatives Agreements with Royalty Trusts. The Company is party to derivatives agreements with the Mississippian Trust I, Permian Trust and Mississippian Trust II, respectively, that provide each Royalty Trust with the economic effect of certain oil and natural gas derivative contracts entered into by the Company with third parties. The underlying commodity derivative contracts cover volumes of oil and natural gas production through December 31, 2015, March 31, 2015 and December 31, 2014 for the Mississippian Trust I, Permian Trust and Mississippian Trust II, respectively. Under these arrangements, the Company pays the Royalty Trusts amounts it receives from its counterparties in accordance with the underlying contracts, and the Royalty Trusts pay the Company any amounts that the Company is required to pay its counterparties under such contracts.

In accordance with the terms of the respective derivatives agreements, the Company has novated certain of the derivative contracts underlying the derivatives agreements to each of the Permian Trust and the Mississippian Trust II. As a party to these contracts, the Permian Trust and the Mississippian Trust II receive payment directly from the counterparty and pay any amounts owed directly to the counterparty. To secure its obligations under the respective derivative contracts novated to it, each of the Permian Trust and the Mississippian Trust II granted the counterparties liens on the royalty interests held by each respective Royalty Trust. Under the derivatives agreements, as additional development wells are drilled for the benefit of the Permian Trust and the

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Mississippian Trust II, the Company has the right, under certain circumstances, to assign or novate to the Permian Trust and the Mississippian Trust II additional derivative contracts.

All contracts underlying the derivatives agreements with the Royalty Trusts, including those novated to the Permian Trust and the Mississippian Trust II, have been included in the Company’s consolidated derivative disclosures. See Note 3 for the Royalty Trusts’ open derivative contracts.

Fair Value of Derivatives. The following table presents the fair value of the Company’s derivative contracts as of
June 30, 2014 and December 31, 2013 on a gross basis without regard to same-counterparty netting (in thousands):
Type of Contract
 
Balance Sheet Classification
 
June 30,
2014
 
December 31,
2013
Derivative assets
 
 
 
 
 
 
Oil price swaps
 
Derivative contracts-current
 
$
981

 
$
15,887

Natural gas price swaps
 
Derivative contracts-current
 
2,355

 
1,598

Oil collars - three way
 
Derivative contracts-current
 
—

 
706

Natural gas collars
 
Derivative contracts-current
 
135

 
177

Oil price swaps
 
Derivative contracts-noncurrent
 
1,412

 
19,376

Natural gas price swaps
 
Derivative contracts-noncurrent
 
224

 
—

     Oil collars - three way
 
Derivative contracts-noncurrent
 
1,228

 
12,189

Natural gas collars
 
Derivative contracts-noncurrent
 
155

 
341

Derivative liabilities
 
 
 
 
 
 
Oil price swaps
 
Derivative contracts-current
 
(35,033
)
 
(38,396
)
Natural gas price swaps
 
Derivative contracts-current
 
(4,865
)
 
(1,460
)
Oil collars - three way
 
Derivative contracts-current
 
(20,186
)
 
—

Oil price swaps
 
Derivative contracts-noncurrent
 
(4,882
)
 
(38,344
)
Oil collars - three way
 
Derivative contracts-noncurrent
 
(844
)
 
—

Total net derivative contracts
 
$
(59,320
)
 
$
(27,926
)

See Note 4 for additional discussion of the fair value measurement of the Company’s derivative contracts.

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Master Netting Agreements and the Right of Offset. The Company has master netting agreements with all of its derivative counterparties and has presented its derivative assets and liabilities with the same counterparty on a net basis in the consolidated balance sheets. As a result of the netting provisions, the Company's maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from its counterparties. As of June 30, 2014, the counterparties to the Company’s open derivative contracts consisted of 9 financial institutions, all of which are also lenders under the Company’s senior credit facility. The Company is not required to post additional collateral under its derivative contracts as the majority of the counterparties to the Company’s derivative contracts share in the collateral supporting the Company’s senior credit facility. To secure their obligations under the derivative contracts novated by the Company, the Permian Trust and the Mississippian Trust II have each given the counterparties to such contracts a lien on its royalty interests. The following tables summarize (i) the Company's derivative contracts on a gross basis, (ii) the effects of netting assets and liabilities for which the right of offset exists based on master netting arrangements and (iii) for the Company’s net derivative liability positions, the applicable portion of shared collateral under the senior credit facility (for SandRidge's derivative contracts) and under liens granted on royalty interests (for the Permian Trust’s and the Mississippian Trust II’s novated derivative contracts) (in thousands):

June 30, 2014
 
 
Gross Amounts
 
Gross Amounts Offset
 
Amounts Net of Offset
 
Financial Collateral
 
Net Amount
Assets
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
3,471

 
$
(3,356
)
 
$
115

 
$
—

 
$
115

Derivative contracts - noncurrent
 
3,019

 
(193
)
 
2,826

 
—

 
2,826

Total
 
$
6,490

 
$
(3,549
)
 
$
2,941

 
$
—

 
$
2,941

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
60,084

 
$
(3,356
)
 
$
56,728

 
$
(56,728
)
 
$
—

Derivative contracts - noncurrent
 
5,726

 
(193
)
 
5,533

 
(5,533
)
 
—

Total
 
$
65,810

 
$
(3,549
)
 
$
62,261

 
$
(62,261
)
 
$
—


December 31, 2013
 
 
Gross Amounts
 
Gross Amounts Offset
 
Amounts Net of Offset
 
Financial Collateral
 
Net Amount
Assets
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
18,368

 
$
(5,589
)
 
$
12,779

 
$
—

 
$
12,779

Derivative contracts - noncurrent
 
31,906

 
(17,780
)
 
14,126

 
—

 
14,126

Total
 
$
50,274

 
$
(23,369
)
 
$
26,905

 
$
—

 
$
26,905

 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
39,856

 
$
(5,589
)
 
$
34,267

 
$
(34,267
)
 
$
—

Derivative contracts - noncurrent
 
38,344

 
(17,780
)
 
20,564

 
(20,564
)
 
—

Total
 
$
78,200

 
$
(23,369
)
 
$
54,831

 
$
(54,831
)
 
$
—


The Company recorded a loss (gain) on commodity derivative contracts of $85.3 million and $(103.7) million for the three-month periods ended June 30, 2014 and 2013, respectively, as reflected in the accompanying unaudited condensed consolidated statements of operations, which includes net cash payments (receipts) upon settlement of $13.1 million and $(18.1) million, respectively. The Company recorded a loss (gain) on commodity derivative contracts of $127.8 million and $(62.8) million for the six-month periods ended June 30, 2014, and 2013, respectively, which includes net cash payments upon settlement of $96.4 million and $0.3 million, respectively. Included in these net cash payments are $69.6 million and $29.0 million of cash payments related to settlements of commodity derivative contracts with contractual maturities after the period in which they were settled (“early settlements”) primarily as a result of the sale of the Gulf Properties in February 2014 and the Permian Properties in February 2013, respectively.

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At June 30, 2014, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps 
 
Notional (MBbls)
 
Weighted Average
Fixed Price
July 2014 - December 2014
2,054

 
$
99.08

January 2015 - December 2015
5,588

 
$
92.44


Natural Gas Price Swaps 
 
Notional (MMcf)
 
Weighted Average
Fixed Price
July 2014 - December 2014
24,840

 
$
4.28

January 2015 - December 2015
15,400

 
$
4.50


Oil Collars - Three-way
 
Notional (MBbls)
 
Sold Put
Purchased Put
Sold Call
July 2014 - December 2014
4,140

 
$70.00
$90.20
$100.00
January 2015 - December 2015
3,656

 
$74.83
$90.35
$103.50

Natural Gas Collars
 
Notional (MMcf)
 
Collar Range
July 2014 - December 2014
472

 
$4.00
—
$7.78
January 2015 - December 2015
1,010

 
$4.00
—
$8.55

10. Asset Retirement Obligations

A reconciliation of the beginning and ending aggregate carrying amounts of the asset retirement obligations for the period from December 31, 2013 to June 30, 2014 is as follows (in thousands):

Asset retirement obligations at December 31, 2013
$
424,117

Liability incurred upon acquiring and drilling wells
2,382

Revisions in estimated cash flows
(438
)
Liability settled or disposed in current period(1)
(377,662
)
Accretion
6,811

Asset retirement obligations at June 30, 2014
55,210

Less: current portion
—

Asset retirement obligations, net of current
$
55,210

____________________
(1)     Includes $366.0 million associated with the Gulf Properties sold in February 2014.

11. Commitments and Contingencies

Legal Proceedings

On April 5, 2011, Wesley West Minerals, Ltd. and Longfellow Ranch Partners, LP filed suit against the Company and SandRidge Exploration and Production, LLC (collectively, the “SandRidge Entities”) in the 83rd District Court of Pecos County, Texas. The plaintiffs, who have leased mineral rights to the SandRidge Entities in Pecos County, allege that the SandRidge Entities

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have not properly paid royalties on all volumes of natural gas and CO 2 produced from the acreage leased from the plaintiffs. The plaintiffs also allege that the SandRidge Entities have inappropriately failed to pay royalties on CO2 produced from the plaintiffs' acreage that results from the treatment of natural gas at the Century Plant. The plaintiffs seek approximately $45.5 million in actual damages for the period of time between January 2004 and December 2011, punitive damages and a declaration that the SandRidge Entities must pay royalties on CO 2 produced from the plaintiffs' acreage that results from treatment of natural gas at the Century Plant. The Commissioner of the General Land Office of the State of Texas (“GLO”) is named as an additional defendant in the lawsuit as some of the affected oil and natural gas leases described in the plaintiffs' allegations cover mineral classified lands in which the GLO is entitled to one-half of the royalties attributable to such leases. The GLO has filed a cross-claim against the SandRidge Entities asserting the same claims as the plaintiffs with respect to the leases covering mineral classified lands and seeking approximately $13.0 million in actual damages, inclusive of penalties and interest. On February 5, 2013, the Company received a favorable summary judgment ruling that effectively removes a majority of the plaintiffs' and GLO's claims. On April 29, 2013, the court entered an order allowing for an interlocutory appeal of its summary judgment ruling, and on May 15, 2014, oral arguments on the appeal were presented to the Court of Appeals for the Eighth District of Texas. The Company intends to continue to defend the remaining issues in this lawsuit as well as any appellate proceedings. At the time of the ruling on summary judgment, the lawsuit was still in the discovery stage and, accordingly, an estimate of reasonably possible losses associated with the remaining causes of action, if any, cannot be made until all of the facts, circumstances and legal theories relating to such claims and the SandRidge Entities' defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On August 4, 2011, Patriot Exploration, LLC, Jonathan Feldman, Redwing Drilling Partners, Mapleleaf Drilling Partners, Avalanche Drilling Partners, Penguin Drilling Partners and Gramax Insurance Company Ltd. filed a lawsuit against the Company, SandRidge Exploration and Production, LLC (“SandRidge E&P”) and certain current and former directors and senior executive officers of the Company (collectively, the “defendants”) in the U.S. District Court for the District of Connecticut. On October 28, 2011, the plaintiffs filed an amended complaint alleging substantially the same allegations as those contained in the original complaint. The plaintiffs allege that the defendants made false and misleading statements to U.S. Drilling Capital Management LLC and to the plaintiffs prior to the entry into a participation agreement among Patriot Exploration, LLC, U.S. Drilling Capital Management LLC and SandRidge E&P, which provided for the investment by the plaintiffs in certain of SandRidge E&P's oil and natural gas properties. To date, the plaintiffs have invested approximately $16.0 million under the participation agreement. The plaintiffs seek compensatory and punitive damages and rescission of the participation agreement. On November 28, 2011, the defendants filed a motion to dismiss the amended complaint. On June 29, 2013, the court granted in part and denied in part the defendants’ motion. The Company and the other defendants intend to defend this lawsuit vigorously and believe the plaintiffs' claims are without merit. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

Between December 2012 and March 2013, seven putative shareholder derivative actions were filed in state and federal court in Oklahoma:

•
Arthur I. Levine v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on December 19, 2012 in the U.S. District Court for the Western District of Oklahoma
•
Deborah Depuy v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 22, 2013 in the U.S. District Court for the Western District of Oklahoma
•
Paul Elliot, on Behalf of the Paul Elliot IRA R/O, v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 29, 2013 in the U.S. District Court for the Western District of Oklahoma
•
Dale Hefner v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 4, 2013 in the District Court of Oklahoma County, Oklahoma
•
Rocky Romano v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 22, 2013 in the District Court of Oklahoma County, Oklahoma
•
Joan Brothers v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on February 15, 2013 in the U.S. District Court for the Western District of Oklahoma
•
Lisa Ezell, Jefferson L. Mangus, and Tyler D. Mangus v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on March 22, 2013 in the U.S. District Court for the Western District of Oklahoma

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Each lawsuit identified above was filed derivatively on behalf of the Company and names as defendants current and former directors of the Company. The Hefner lawsuit also names as defendants certain current and former directors and senior executive officers of the Company. All seven lawsuits assert overlapping claims - generally that the defendants breached their fiduciary duties, mismanaged the Company, wasted corporate assets, and engaged in, facilitated or approved self-dealing transactions in breach of their fiduciary obligations. The Depuy lawsuit also alleges violations of federal securities laws in connection with the Company allegedly filing and distributing certain misleading proxy statements. The lawsuits seek, among other relief, injunctive relief related to the Company's corporate governance and unspecified damages.

On April 10, 2013, the U.S. District Court for the Western District of Oklahoma consolidated the Levine, Depuy, Elliot, Brothers, and Ezell actions (the “Federal Shareholder Derivative Litigation”) under the caption “In re SandRidge Energy, Inc. Shareholder Derivative Litigation,” appointed a lead plaintiff and lead counsel, and ordered the lead plaintiff to file a consolidated complaint by May 1, 2013. On June 3, 2013, the Company and the individual defendants filed their respective motions to dismiss the consolidated complaint. On September 11, 2013, the court granted the defendants’ respective motions to dismiss the consolidated complaint without prejudice, and granted plaintiffs leave to file an amended consolidated complaint. The plaintiffs filed an amended consolidated complaint on October 9, 2013, in which plaintiffs allege that: (i) the Company’s former Chief Executive Officer (“CEO”), Tom Ward, breached his fiduciary duties by usurping corporate opportunities, (ii) certain of the Company’s current and former directors breached their fiduciary duties of care, (iii) Mr. Ward and certain of the Company’s current and former directors wasted corporate assets, (iv) certain entities allegedly affiliated with Mr. Ward aided and abetted Mr. Ward’s breaches of fiduciary duties, (v) Mr. Ward and entities allegedly affiliated with Mr. Ward misappropriated the Company’s confidential and proprietary information, and (vi) entities allegedly affiliated with Mr. Ward were unjustly enriched. The defendants have filed respective motions to dismiss the amended consolidated complaint, which are pending before the court.

The Company and the individual defendants in the Hefner and Romano actions (the “State Shareholder Derivative Litigation”) moved to stay each of the actions in favor of the Federal Shareholder Derivative Litigation, in order to avoid duplicative proceedings, and also requested, in the alternative, the dismissal of the State Shareholder Derivative Litigation.

On June 19, 2013, the court stayed the Hefner action until at least November 29, 2013. The court subsequently lifted its stay for purposes of hearing and deciding the defendants’ respective motions to dismiss. On September 18, 2013, the court denied the defendants’ motions to dismiss.

On May 8, 2013, the court stayed the Romano action pending further order of the court. On October 31, 2013, the plaintiff filed a motion to lift the stay, which was denied by the court on February 7, 2014.

Because the Federal Shareholder Derivative Litigation and the State Shareholder Derivative Litigation are in the early stages, an estimate of reasonably possible losses associated with each of them, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to these actions.

On December 5, 2012, James Glitz and Rodger A. Thornberry, on behalf of themselves and all other similarly situated stockholders, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against SandRidge Energy, Inc. and certain current and former executive officers of the Company. On January 4, 2013, Louis Carbone, on behalf of himself and all other similarly situated stockholders, filed a substantially similar putative class action complaint in the same court and against the same defendants. On March 6, 2013, the court consolidated these two actions under the caption “In re SandRidge Energy, Inc. Securities Litigation” (the “Securities Litigation”) and appointed a lead plaintiff and lead counsel. On July 23, 2013, plaintiffs filed a consolidated amended complaint, which asserts a variety of federal securities claims against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class of (a) purchasers of SandRidge common stock during the period from February 24, 2011 to November 8, 2012, (b) purchasers of common units of the Mississippian Trust I in or traceable to its initial public offering on or about April 12, 2011, and (c) purchasers of common units of the Mississippian Trust II (together with the Mississippian Trust I, the “Mississippian Trusts”) in or traceable to its initial public offering on or about April 23, 2012. The claims are based on allegations that the Company, certain of its current and former officers and directors, and the Mississippian Trusts, among other defendants, are responsible for making false and misleading statements, and omitting material information, concerning a variety of subjects, including oil and natural gas reserves, the Company's capital expenditures, and certain transactions entered into by companies allegedly affiliated with the Company's former CEO Tom Ward. The defendants have filed respective motions to dismiss the consolidated amended complaint, which are pending before the court. Because the Securities Litigation is in the early stages, an estimate of reasonably possible losses associated with it, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and defendants’

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defenses are fully disclosed and analyzed. The Company has not established any reserves relating to the Securities Litigation. Each of the Mississippian Trusts has requested that the Company indemnify it for any losses it may incur in connection with the Securities Litigation.
    
On July 15, 2013, James Hart and fifteen other named plaintiffs filed an Amended Complaint in the United States District Court for the District of Kansas in an action undertaken individually and on behalf of others similarly situated against SandRidge Energy, Inc., SandRidge Operating Company, SandRidge E&P, SandRidge Midstream, Inc., and Lariat Services, Inc. In their Amended Complaint, plaintiffs allege that the defendants failed to properly calculate overtime pay for the plaintiffs and for other similarly situated current and former employees. The plaintiffs further allege that the defendants required the plaintiffs and other similarly situated current and former employees to engage in work-related activities without pay. The plaintiffs assert claims against the defendants for (i) violations of the Fair Labor Standards Act, (ii) violations of the Kansas Wage Payment Act, (iii) breach of contract, and (iv) fraud, and seek to recover unpaid wages and overtime pay, liquidated damages, statutory penalties, economic damages, compensatory and punitive damages, attorneys’ fees and costs, and both pre- and post-judgment interest.

On October 3, 2013, the plaintiffs filed a Motion for Conditional Collective Action Certification and for Judicial Notice to the Class and a Motion to Toll the Statute of Limitations. On October 11, 2013, the defendants filed a Motion to Dismiss and a Motion to Transfer Venue to the United States District Court for the Western District of Oklahoma.

On April 2, 2014, the court granted the defendants’ Motion to Dismiss and granted plaintiffs leave to file an amended complaint by April 16, 2014, which they did on such date. On July 1, 2014, the court granted plaintiffs’ Motion for Conditional Collective Action Certification and for Judicial Notice to the Class, and denied plaintiffs’ Motion to Toll the Statute of Limitations. The Company and the other defendants intend to defend this lawsuit vigorously. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On December 18, 2013, the Company received a subpoena duces tecum from the U.S. Department of Justice in connection with an ongoing investigation of possible violations of antitrust laws in connection with the purchase or lease of land, oil or gas rights.  The Company is cooperating with the investigation.

In addition to the litigation described above, the Company is a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, cash flows or liquidity.

Treating Agreement Commitment

The Company is party to a 30-year treating agreement with Occidental Petroleum Corporation (“Occidental”) for the removal of CO2 from the Company’s delivered natural gas production. Under the agreement, the Company is required to deliver a total of approximately 3,200 Bcf of CO2 during the agreement period. The Company is obligated to pay Occidental $0.25 per Mcf to the extent minimum annual CO2 volume requirements are not met. Additionally, if CO2 volumes delivered by the Company over the term of the agreement do not reach 3,200 Bcf, the Company is obligated to pay Occidental $0.70 per Mcf for such undelivered CO2 volumes at the end of the agreement term in 2042. Based on current projected natural gas production levels, the Company estimates approximately 2,800 Bcf of CO2 will remain to be delivered under the contract, net of any accrued annual shortfalls, as of December 31, 2014 and expects to accrue between approximately $30.0 million and $37.0 million during the year ended December 31, 2014 for amounts related to the Company’s anticipated shortfall in meeting its 2014 annual delivery obligation. Due to the sensitivity of drilling activity to market prices for natural gas, the Company is unable to estimate additional amounts it may be required to pay under the agreement in subsequent periods; however, if natural gas prices remain low, drilling activity will likely remain very limited, which would result in additional shortfall payments in future periods.

Guarantees of Plugging and Abandonment Obligations

Under the equity purchase agreement associated with the sale of Gulf Properties, the Company has guaranteed on behalf of Fieldwood certain plugging and abandonment obligations associated with the Gulf Properties for a period of up to one year from the date of closing. See Note 2 for additional information regarding the guarantees.

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Risks and Uncertainties

The Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil and natural gas prices historically have been volatile, and may be subject to significant fluctuations in the future. The Company enters into derivative arrangements in order to mitigate a portion of the effect of this price volatility on the Company’s cash flows. See Note 9 for the Company’s open oil and natural gas derivative contracts.
    
Production targets contained in certain gathering and treating agreements require the Company to incur capital expenditures or make associated shortfall payments. Additionally, the Company has a drilling obligation to each of the Permian Trust and the Mississippian Trust II. See Note 3 for discussion of these drilling obligations. The Company depends on cash flows from operating activities, funding commitments from third parties for drilling carries, and, as necessary, borrowings under its senior credit facility to fund its capital expenditures. Additionally, the Company may use proceeds from the issuance of equity and debt securities in the capital markets and from the sales or other monetizations of assets to fund its capital expenditures. Based on current cash balances, including proceeds received from the sale of the Gulf Properties, cash flows from operating activities and funding commitments from third parties for drilling carries, the Company expects to be able to fund its planned capital expenditures budget, debt service requirements and working capital needs for the remainder of 2014. However, a substantial or extended decline in oil or natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced, which could adversely impact the Company’s ability to comply with the financial covenants under its senior credit facility. See Note 8 for discussion of the financial covenants in the senior credit facility.


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12. Equity

Preferred Stock Dividends

All dividend payments to date on the Company’s 8.5%, 6.0% and 7.0% convertible perpetual preferred stock have been paid in cash. Paid and unpaid dividends included in the calculation of loss applicable to the Company’s common stockholders and the Company’s basic loss per share calculation for the three and six-month periods ended June 30, 2014 and 2013 as presented in the accompanying unaudited condensed consolidated statements of operations, are included in the tables below (in thousands):
 
Three Months Ended June 30,
 
2014
 
2013
 
Dividends Paid
 
Dividends Unpaid
 
Total
 
Dividends Paid
 
Dividends Unpaid
 
Total
8.5% Convertible perpetual preferred stock
$
—

 
$
5,631

 
$
5,631

 
$
—

 
$
5,631

 
$
5,631

6.0% Convertible perpetual preferred stock
—

 
3,000

 
3,000

 
—

 
3,000

 
3,000

7.0% Convertible perpetual preferred stock
2,625

 
2,625

 
5,250

 
2,625

 
2,625

 
5,250

Total
$
2,625

 
$
11,256

 
$
13,881

 
$
2,625

 
$
11,256

 
$
13,881

 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30,
 
2014
 
2013
 
Dividends Paid
 
Dividends Unpaid
 
Total
 
Dividends Paid
 
Dividends Unpaid
 
Total
8.5% Convertible perpetual preferred stock
$
2,816

 
$
8,447

 
$
11,263

 
$
2,816

 
$
8,447

 
$
11,263

6.0% Convertible perpetual preferred stock
500

 
5,500

 
6,000

 
500

 
5,500

 
6,000

7.0% Convertible perpetual preferred stock
7,875

 
2,625

 
10,500

 
7,875

 
2,625

 
10,500

Total
$
11,191

 
$
16,572

 
$
27,763

 
$
11,191

 
$
16,572

 
$
27,763


Treasury Stock

The Company makes required statutory tax payments on behalf of employees when their restricted stock awards vest and then withholds a number of vested shares of common stock having a value on the date of vesting equal to the tax obligation. The following table shows the number of shares withheld for taxes and the associated value of those shares for the six-month periods ended June 30, 2014 and 2013. These shares were accounted for as treasury stock when withheld and then immediately retired.
    
 
Six Months Ended June 30,
 
2014
 
2013
 
(In thousands)
Number of shares withheld for taxes
637

 
5,107

Value of shares withheld for taxes
$
3,865

 
$
27,196


Stockholder Receivable

The Company is party to a settlement agreement relating to a third-party claim against its former CEO under Section 16(b) of the Securities Exchange Act of 1934, as amended. Under the settlement agreement, the Company’s former CEO agreed to pay to the Company $5.0 million in four installments over four years commencing October 2013 and to waive his rights under his indemnification agreement with the Company with respect to the Section 16(b) action. The Company agreed to pay the fees of the plaintiff’s lawyers and paid the former CEO’s legal expenses as required under his indemnification agreement.

Based on the nature of the settlement as well as the former CEO’s position as an officer of the Company at the time of the settlement, the receivable is classified as a component of additional paid-in capital in the accompanying unaudited condensed consolidated balance sheets. The amount receivable under the agreement as of June 30, 2014 and December 31, 2013 was $3.8 million.

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Restricted Common Stock

Equity compensation provided to employees directly involved in exploration and development activities is capitalized to the Company’s oil and natural gas properties. Equity compensation not capitalized is recognized in general and administrative expenses, production expenses, cost of sales and midstream and marketing expenses in the consolidated statements of operations.
For the three and six-month periods ended June 30, 2014, the Company recognized equity compensation expense of $6.1 million, and $13.5 million, net of $1.8 million and $3.0 million capitalized, respectively, related to restricted common stock. For the three and six-month periods ended June 30, 2013, the Company recognized equity compensation expense of $51.7 million, and $70.7 million, net of $1.3 million and $2.9 million capitalized, respectively, related to restricted common stock. The three and six-month periods ended June 30, 2013 include approximately $40.9 million and $48.5 million, respectively, of equity compensation expense recognized in connection with the separation of certain former executives from the Company.

See Note 16 for discussion of the Company’s performance units.

13. Income Taxes

The Company estimates for each interim reporting period the effective tax rate expected for the full fiscal year and uses that estimated rate in providing for income taxes on a current year-to-date basis. The (benefit) provision for income taxes consisted of the following components for the three and six-month periods ended June 30, 2014 and 2013 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Current
 
 
 
 
 
 
 
Federal
$
—

 
$
(344
)
 
$
—

 
$
4,015

State
(1,194
)
 
852

 
(1,067
)
 
922

 
(1,194
)
 
508

 
(1,067
)
 
4,937

Deferred
 
 
 
 
 
 
 
Federal
—

 
—

 
—

 
—

State
—

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Total (benefit) provision
(1,194
)
 
508

 
(1,067
)
 
4,937

Less: income tax provision attributable to noncontrolling interest
88

 
71

 
170

 
146

Total (benefit) provision attributable to SandRidge Energy, Inc.
$
(1,282
)
 
$
437

 
$
(1,237
)
 
$
4,791


Deferred income taxes are provided to reflect the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. The Company’s deferred tax assets have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred assets will not be realized based on the weight of all available evidence. The Company continues to closely monitor and weigh all available evidence, including both positive and negative, in making its determination whether to maintain a valuation allowance. As a result of the significant weight placed on the Company's cumulative negative earnings position, the Company continued to maintain the full valuation allowance against its net deferred tax asset at June 30, 2014.    
    
Internal Revenue Code (“IRC”) Section 382 addresses company ownership changes and specifically limits the utilization of certain deductions and other tax attributes on an annual basis following an ownership change. The Company experienced ownership changes within the meaning of IRC Section 382 during 2008 and 2010 that subjected certain of the Company’s tax attributes, including $923.0 million of federal net operating loss carryforwards, to the IRC Section 382 limitation. These limitations could result in a material amount of existing loss carryforwards expiring unused. None of these limitations resulted in a current federal tax liability at June 30, 2014.


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At June 30, 2014 and December 31, 2013, the Company had a liability of approximately $0.1 million and $1.4 million, respectively, for unrecognized tax benefits. Included in the $1.4 million liability for unrecognized tax benefits at December 31, 2013 was $0.1 million for interest and penalties relating to uncertain tax positions.

The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2010 to present remain open for federal examination. Additionally, various tax years remain open beginning with tax year 2005 due to federal net operating loss carryforwards. The number of years open for state tax audits varies, depending on the state, but are generally from three to five years. The Company does not expect a significant change in its gross unrecognized tax benefits balance within the next twelve months.    


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14. Earnings (Loss) per Share

The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted loss per share, for the three and six-month periods ended June 30, 2014 and 2013:

 
Net Loss
 
Weighted Average Shares
 
Loss Per Share
 
(In thousands, except per share amounts)
Three Months Ended June 30, 2014
 
 
 
 
 
Basic loss per share
$
(38,320
)
 
485,318

 
$
(0.08
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock(1)
—

 
—

 
 
Convertible preferred stock(2)
—

 
—

 
 
Diluted loss per share
$
(38,320
)
 
485,318

 
$
(0.08
)
Three Months Ended June 30, 2013
 
 
 
 
 
Basic loss per share
$
(34,317
)
 
$
479,154

 
$
(0.07
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock(1)
—

 
—

 
 
Convertible preferred stock(2)
—

 
—

 
 
Diluted loss per share
$
(34,317
)
 
479,154

 
$
(0.07
)
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
 
 
Basic loss per share
$
(180,217
)
 
485,059

 
$
(0.37
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock(1)
—

 
—

 
 
Convertible preferred stock(2)
—

 
—

 
 
Diluted loss per share
$
(180,217
)
 
485,059

 
$
(0.37
)
Six Months Ended June 30, 2013
 
 
 
 
 
Basic loss per share
$
(527,539
)
 
478,494

 
$
(1.10
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock(1)
—

 
—

 
 
Convertible preferred stock(2)
—

 
—

 
 
Diluted loss per share
$
(527,539
)
 
478,494

 
$
(1.10
)
____________________
(1)
Restricted stock awards covering 2.0 million and 2.6 million shares for the three and six-month periods ended June 30, 2014, respectively, and 0.2 million and 3.6 million shares for the three and six-month periods ended June 30, 2013, respectively, were excluded from the computation of loss per share because their effect would have been antidilutive.
(2)
Potential common shares related to the Company’s outstanding 8.5%, 6.0% and 7.0% convertible perpetual preferred stock covering 90.1 million shares for the three and six-month periods ended June 30, 2014 and 2013 were excluded from the computation of loss per share because their effect would have been antidilutive under the if-converted method.

See Note 12 for discussion of preferred stock dividends.


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15. Related Party Transactions

Former Chairman and CEO Severance. On June 28, 2013, the Company’s then current CEO, Tom Ward, separated employment from the Company. In accordance with the terms of Mr. Ward’s employment agreement, the Company incurred $58.2 million in salary and bonus expense and $36.8 million associated with the accelerated vesting of 6.3 million shares of restricted stock awards during the three and six-month periods ended June 30, 2013. As of June 30, 2014, the remaining amounts due under the terms of his employment agreement include $3.9 million to be paid in monthly installments through December 2016. These amounts are included in other current liabilities and other long-term obligations in the accompanying unaudited condensed consolidated balance sheet. See Note 12 for discussion of the stockholder receivable due from Mr. Ward.

Other Employee Termination Benefits. Certain employees received termination benefits, including severance and accelerated stock vesting, upon separation of service from the Company during the six-month periods ended June 30, 2014 and 2013. For the six-month period ended June 30, 2014 employee termination benefits were $8.9 million primarily as a result of the sale of the Gulf Properties. For the six-month period ended June 30, 2013, employee termination benefits, excluding amounts attributable to the Company’s former chairman and CEO, were $23.1 million primarily as a result of other executives’ separation from employment and the sale of the Permian Properties.

2014 Divestiture. See Note 2 for discussion of the sale of the Gulf Properties to Fieldwood and the Company’s guarantee on behalf of Fieldwood of certain associated plugging and abandonment obligations associated with the Gulf Properties. Fieldwood is a portfolio company of Riverstone Holdings LLC, affiliates of which own a significant number of shares of the Company’s common stock.

Acquisition of Ownership Interest. In March 2014, the Company purchased the additional ownership interest owned by its partner in GRLP and Genpar, which was deemed a related party at the time. See Note 3 for additional discussion.

16. Performance Units

The Company periodically grants performance units to certain members of senior management under the Company’s existing long-term incentive plan which vest over a performance period of approximately three years. The value, and ultimate payout, of the performance units is determined based upon the Company’s total shareholder return relative to that of a predetermined peer group over a specific performance period. If performance exceeds established minimum thresholds, payout percentages could range from 50% to 200% of specified target values. If minimum target thresholds are not met, the payout is reduced to zero.

The performance units are valued for accounting purposes using a Monte Carlo simulation based on certain assumptions, including (i) a volatility assumption based on the historical realized price volatility of the Company’s common stock and the common stock of the predetermined peer group for each grant year and (ii) a risk-free interest rate based on the U.S. Treasury bond yields for a term commensurate with the approximate remaining vesting period for each grant. As of June 30, 2014 and December 31, 2013, the Company’s liability associated with performance units totaled $3.8 million and $1.8 million, respectively. The liability represents the fair value of the portion of performance units for which requisite service has been completed. The following table presents a summary of the fair value of the performance units and the related assumptions for all outstanding units as of June 30, 2014.
 
 
 
 
Expected price volatility range
22.8
%
-
54.6%
Weighted-average risk-free interest rate
 
 
0.5%
Weighted-average fair value per unit
 
 
$98.74
        

17. Business Segment Information

The Company has three business segments: exploration and production, drilling and oil field services and midstream services. These segments represent the Company’s three main business units, each offering different products and services. The exploration and production segment is engaged in the exploration and production of oil and natural gas properties and includes the activities of the Royalty Trusts. The drilling and oil field services segment is engaged in the contract drilling of oil and natural gas wells and provides various oil field services. The midstream services segment is engaged in the purchasing, gathering, treating and selling of natural gas and coordinates the delivery of electricity to the Company’s exploration and production operations in

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


the Mid-Continent. The All Other column in the tables below includes items not related to the Company’s reportable segments, including the Company’s corporate operations.




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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Management evaluates the performance of the Company’s business segments based on income (loss) from operations. Summarized financial information concerning the Company’s segments is shown in the following table (in thousands):
 
Exploration and Production(1)
 
Drilling and Oil Field Services(2)
 
Midstream Services
 
All Other
 
Consolidated Total
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Revenues
$
339,906

 
$
51,891

 
$
38,420

 
$
1,105

 
$
431,322

Inter-segment revenue
—

 
(33,062
)
 
(23,546
)
 
—

 
(56,608
)
Total revenues
$
339,906

 
$
18,829

 
$
14,874

 
$
1,105

 
$
374,714

 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
$
78,237

 
$
(2,347
)
 
$
(2,345
)
 
$
(23,011
)
 
$
50,534

Interest expense
(4
)
 
—

 
—

 
(61,859
)
 
(61,863
)
Other (expense) income, net
(49
)
 
(75
)
 
—

 
1,462

 
1,338

Income (loss) before income taxes
$
78,184

 
$
(2,422
)
 
$
(2,345
)
 
$
(83,408
)
 
$
(9,991
)
Capital expenditures(3)
$
356,568

 
$
6,654

 
$
5,808

 
$
7,907

 
$
376,937

Depreciation, depletion, amortization, accretion and impairment
$
98,357

 
$
10,794

 
$
2,509

 
$
5,216

 
$
116,876

Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Revenues
$
458,374

 
$
47,100

 
$
64,291

 
$
778

 
$
570,543

Inter-segment revenue
(81
)
 
(31,011
)
 
(26,464
)
 
—

 
(57,556
)
Total revenues
$
458,293

 
$
16,089

 
$
37,827

 
$
778

 
$
512,987

 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
$
241,666

 
$
(19,443
)
 
$
(7,956
)
 
$
(127,809
)
 
$
86,458

Interest income (expense)
317

 
—

 
(84
)
 
(61,392
)
 
(61,159
)
Other (expense) income, net
(330
)
 
—

 
135

 
89

 
(106
)
Income (loss) before income taxes
$
241,653

 
$
(19,443
)
 
$
(7,905
)
 
$
(189,112
)
 
$
25,193

Capital expenditures(3)
$
358,582

 
$
883

 
$
15,111

 
$
12,582

 
$
387,158

Depreciation, depletion, amortization, accretion and impairment
$
148,884

 
$
19,478

 
$
4,017

 
$
7,989

 
$
180,368

 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Revenues
$
747,244

 
$
98,971

 
$
84,715

 
$
2,075

 
$
933,005

Inter-segment revenue
—

 
(63,039
)
 
(52,196
)
 
—

 
(115,235
)
Total revenues
$
747,244

 
$
35,932

 
$
32,519

 
$
2,075

 
$
817,770

 
 
 
 
 
 
 
 
 
 
Income (loss) from operations
$
30,082

 
$
(5,449
)
 
$
(3,756
)
 
$
(44,352
)
 
$
(23,475
)
Interest income (expense), net
139

 
—

 
—

 
(124,045
)
 
(123,906
)
Other (expense) income, net
(234
)
 
(473
)
 
—

 
4,139

 
3,432

Income (loss) before income taxes
$
29,987

 
$
(5,922
)
 
$
(3,756
)
 
$
(164,258
)
 
$
(143,949
)
Capital expenditures(3)
$
620,809

 
$
7,275

 
$
11,766

 
$
12,860

 
$
652,710

Depreciation, depletion, amortization, accretion and impairment
$
384,176

 
$
18,506

 
$
4,950

 
$
10,476

 
$
418,108

At June 30, 2014
 
 
 
 
 
 
 
 
 
Total assets
$
5,288,478

 
$
142,858

 
$
193,867

 
$
1,287,616

 
$
6,912,819

 
 
 
 
 
 
 
 
 
 

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(Unaudited)


 
Exploration and Production(1)
 
Drilling and Oil Field Services(2)
 
Midstream Services
 
All Other
 
Consolidated Total
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Revenues
$
939,784

 
$
96,837

 
$
101,125

 
$
1,631

 
$
1,139,377

Inter-segment revenue
(162
)
 
(63,378
)
 
(51,160
)
 
—

 
(114,700
)
Total revenues
$
939,622

 
$
33,459

 
$
49,965

 
$
1,631

 
$
1,024,677

 
 
 
 
 
 
 
 
 
 
Loss from operations
$
(60,042
)
 
$
(28,408
)
 
$
(10,415
)
 
$
(174,203
)
 
$
(273,068
)
Interest income (expense), net
635

 
—

 
(209
)
 
(147,495
)
 
(147,069
)
Loss on extinguishment of debt
—

 
—

 
—

 
(82,005
)
 
(82,005
)
Other income (expense), net
298

 
—

 
(664
)
 
871

 
505

Loss before income taxes
$
(59,109
)
 
$
(28,408
)
 
$
(11,288
)
 
$
(402,832
)
 
$
(501,637
)
Capital expenditures(3)
$
716,173

 
$
1,515

 
$
30,332

 
$
27,850

 
$
775,870

Depreciation, depletion, amortization, accretion and impairment
$
316,397

 
$
28,292

 
$
5,705

 
$
12,615

 
$
363,009

At December 31, 2013
 
 
 
 
 
 
 
 
 
Total assets
$
6,157,225

 
$
158,737

 
$
188,165

 
$
1,180,668

 
$
7,684,795

____________________
(1)
Income (loss) from operations includes a full cost ceiling limitation impairment of $164.8 million for the six-month period ended June 30, 2014, and a loss on the sale of the Permian Properties of $399.1 million for the six-month period ended June 30, 2013.
(2)
Income (loss) from operations includes an impairment of $3.1 million and $10.6 million on certain drilling assets held for sale for the three and six-month periods ended June 30, 2014 and June 30, 2013, respectively.
(3)
On an accrual basis and exclusive of acquisitions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


18. Condensed Consolidating Financial Information

The Company provides condensed consolidating financial information for its subsidiaries that are guarantors of its registered debt. As of June 30, 2014, the subsidiary guarantors, which are 100% owned by the Company, have jointly and severally guaranteed, on a full, unconditional and unsecured basis, the Company’s outstanding Senior Fixed Rate Notes. The subsidiary guarantees (i) rank equally in right of payment with all of the existing and future senior debt of the subsidiary guarantors; (ii) rank senior to all of the existing and future subordinated debt of the subsidiary guarantors; (iii) are effectively subordinated in right of payment to any existing or future secured obligations of the subsidiary guarantors to the extent of the value of the assets securing such obligations; (iv) are structurally subordinated to all debt and other obligations of the subsidiaries of the guarantors who are not themselves subsidiary guarantors; and (v) are only released under certain customary circumstances. The Company’s subsidiary guarantors guarantee payments of principal and interest under the Company’s registered notes.
    
Certain of the Company’s wholly owned subsidiaries that were sold in February 2014, as discussed in Note 2, guaranteed the Company’s registered debt. Upon the closing of the sale, these subsidiaries were released from their guarantees. The condensed consolidating financial information in the tables below reflects these subsidiaries’ financial information through the date of the sale.

The following condensed consolidating financial information represents the financial information of SandRidge Energy, Inc., its wholly owned subsidiary guarantors and its non-guarantor subsidiaries, prepared on the equity basis of accounting. The non-guarantor subsidiaries, including consolidated VIEs, majority owned subsidiaries and certain immaterial wholly owned subsidiaries, are included in the non-guarantors column in the tables below. The financial information may not necessarily be indicative of the financial position, results of operations or cash flows had the subsidiary guarantors operated as independent entities.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Condensed Consolidating Balance Sheets
 
 
June 30, 2014
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
910,633

 
$
1,249

 
$
6,876

 
$
—

 
$
918,758

Accounts receivable, net
—

 
315,004

 
18,296

 
—

 
333,300

Intercompany accounts receivable
278,510

 
1,347,065

 
57,708

 
(1,683,283
)
 
—

Derivative contracts
—

 
2,179

 
115

 
(2,179
)
 
115

Prepaid expenses
—

 
12,345

 
—

 
(8
)
 
12,337

Other current assets
1,388

 
23,703

 
15

 
—

 
25,106

Total current assets
1,190,531

 
1,701,545

 
83,010

 
(1,685,470
)
 
1,289,616

Property, plant and equipment, net
—

 
4,435,593

 
1,106,226

 
—

 
5,541,819

Investment in subsidiaries
6,027,298

 
18,366

 
—

 
(6,045,664
)
 
—

Derivative contracts
—

 
3,473

 
1,568

 
(2,215
)
 
2,826

Other assets
64,364

 
20,077

 
19

 
(5,902
)
 
78,558

Total assets
$
7,282,193

 
$
6,179,054

 
$
1,190,823

 
$
(7,739,251
)
 
$
6,912,819

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
201,911

 
$
425,968

 
$
3,787

 
$
(8
)
 
$
631,658

Intercompany accounts payable
1,341,438

 
303,834

 
38,011

 
(1,683,283
)
 
—

Derivative contracts
—

 
55,875

 
3,032

 
(2,179
)
 
56,728

Other current liabilities
7,144

 
12,027

 
—

 
—

 
19,171

Total current liabilities
1,550,493

 
797,704

 
44,830

 
(1,685,470
)
 
707,557

Investment in subsidiaries
873,956

 
146,639

 
—

 
(1,020,595
)
 
—

Long-term debt
3,201,067

 
—

 
—

 
(5,902
)
 
3,195,165

Derivative contracts
—

 
7,101

 
647

 
(2,215
)
 
5,533

Asset retirement obligations
—

 
55,210

 
—

 
—

 
55,210

Other long-term obligations
94

 
19,058

 
—

 
—

 
19,152

Total liabilities
5,625,610

 
1,025,712

 
45,477

 
(2,714,182
)
 
3,982,617

Equity
 
 
 
 
 
 
 
 
 
SandRidge Energy, Inc. stockholders’ equity
1,656,583

 
5,153,342

 
1,145,346

 
(6,298,688
)
 
1,656,583

Noncontrolling interest
—

 
—

 
—

 
1,273,619

 
1,273,619

Total equity
1,656,583

 
5,153,342

 
1,145,346

 
(5,025,069
)
 
2,930,202

Total liabilities and equity
$
7,282,193

 
$
6,179,054

 
$
1,190,823

 
$
(7,739,251
)
 
$
6,912,819


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


 
December 31, 2013 (Revised)
 
Parent(1)
 
Guarantors(2)
 
Non-Guarantors
 
Eliminations(1)(2)
 
Consolidated
 
(In thousands)
ASSETS
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
805,505

 
$
1,013

 
$
8,145

 
$
—

 
$
814,663

Accounts receivable, net
—

 
326,345

 
22,873

 
—

 
349,218

Intercompany accounts receivable
153,325

 
982,524

 
70,107

 
(1,205,956
)
 
—

Derivative contracts
—

 
7,796

 
14,748

 
(9,765
)
 
12,779

Prepaid expenses
—

 
39,165

 
88

 
—

 
39,253

Other current assets
1,376

 
24,410

 
124

 
—

 
25,910

Total current assets
960,206

 
1,381,253

 
116,085

 
(1,215,721
)
 
1,241,823

Property, plant and equipment, net
—

 
5,125,543

 
1,182,132

 
—

 
6,307,675

Investment in subsidiaries
6,009,603

 
49,418

 
—

 
(6,059,021
)
 
—

Derivative contracts
—

 
12,650

 
9,585

 
(8,109
)
 
14,126

Other assets
61,923

 
65,123

 
27

 
(5,902
)
 
121,171

Total assets
$
7,031,732

 
$
6,633,987

 
$
1,307,829

 
$
(7,288,753
)
 
$
7,684,795

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
Accounts payable and accrued expenses
$
207,572

 
$
601,074

 
$
3,842

 
$
—

 
$
812,488

Intercompany accounts payable
967,365

 
181,573

 
57,018

 
(1,205,956
)
 
—

Derivative contracts
—

 
44,032

 
—

 
(9,765
)
 
34,267

Asset retirement obligations
—

 
87,063

 
—

 
—

 
87,063

Total current liabilities
1,174,937

 
913,742

 
60,860

 
(1,215,721
)
 
933,818

Investment in subsidiaries
828,794

 
152,266

 
—

 
(981,060
)
 
—

Long-term debt
3,200,809

 
—

 
—

 
(5,902
)
 
3,194,907

Derivative contracts
—

 
28,673

 
—

 
(8,109
)
 
20,564

Asset retirement obligations
—

 
337,054

 
—

 
—

 
337,054

Other long-term obligations
1,382

 
21,443

 
—

 
—

 
22,825

Total liabilities
5,205,922

 
1,453,178

 
60,860

 
(2,210,792
)
 
4,509,168

Equity
 
 
 
 
 
 
 
 
 
SandRidge Energy, Inc. stockholders’ equity
1,825,810

 
5,180,809

 
1,246,969

 
(6,427,778
)
 
1,825,810

Noncontrolling interest
—

 
—

 
—

 
1,349,817

 
1,349,817

Total equity
1,825,810

 
5,180,809

 
1,246,969

 
(5,077,961
)
 
3,175,627

Total liabilities and equity
$
7,031,732

 
$
6,633,987

 
$
1,307,829

 
$
(7,288,753
)
 
$
7,684,795

____________________
(1)
Amounts presented as Investment in subsidiaries have been revised to present negative investments in certain subsidiaries, totaling $828.8 million, as liabilities and to present $55.6 million Parent loss on sale of subsidiary with full cost pool assets in 2012 as a reduction to Guarantor full cost pool (property, plant and equipment, net) and a reduction to Parent equity. Loss on sale of subsidiary was previously classified as an adjustment to the consolidated full cost pool through elimination in the condensed consolidating balance sheets. The impact of these revisions was not material to any previously issued financial statements.
(2)
Amounts presented as Investment in subsidiaries have been revised to present negative investments in certain subsidiaries, totaling $152.3 million, as liabilities. Property, plant and equipment, net has been revised to present $55.6 million Parent loss on sale of subsidiary with full cost pool assets in 2012 as a reduction to the Guarantor full cost pool (property, plant and equipment, net) and a reduction to Guarantor equity. Loss on sale of subsidiary was previously classified as an adjustment to the consolidated full cost pool through elimination in the condensed consolidating balance sheets. The impact of these revisions was not material to any previously issued financial statements.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Condensed Consolidating Statements of Operations
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Total revenues
$
—

 
$
314,521

 
$
60,205

 
$
(12
)
 
$
374,714

Expenses
 
 
 
 
 
 
 
 
 
Direct operating expenses
—

 
85,142

 
4,931

 
(12
)
 
90,061

General and administrative
71

 
30,481

 
1,363

 
—

 
31,915

Depreciation, depletion, amortization and accretion
—

 
99,237

 
14,506

 
—

 
113,743

Impairment
—

 
3,133

 
—

 
—

 
3,133

Loss on derivative contracts
—

 
67,509

 
17,783

 
—

 
85,292

Loss on sale of assets
—

 
36

 
—

 
—

 
36

Total expenses
71

 
285,538

 
38,583

 
(12
)
 
324,180

(Loss) income from operations
(71
)
 
28,983

 
21,622

 
—

 
50,534

Equity earnings from subsidiaries
36,180

 
5,863

 
—

 
(42,043
)
 
—

Interest expense
(61,859
)
 
(4
)
 
—

 
—

 
(61,863
)
Other income, net
—

 
1,338

 
—

 
—

 
1,338

(Loss) income before income taxes
(25,750
)
 
36,180

 
21,622

 
(42,043
)
 
(9,991
)
Income tax (benefit) expense
(1,311
)
 
—

 
117

 
—

 
(1,194
)
Net (loss) income
(24,439
)
 
36,180

 
21,505

 
(42,043
)
 
(8,797
)
Less: net income attributable to noncontrolling interest
—

 
—

 
—

 
15,642

 
15,642

Net (loss) income attributable to SandRidge Energy, Inc.
$
(24,439
)
 
$
36,180

 
$
21,505

 
$
(57,685
)
 
$
(24,439
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Total revenues
$
—

 
$
425,319

 
$
81,956

 
$
5,712

 
$
512,987

Expenses
 
 
 
 
 
 
 
 
 
Direct operating expenses
—

 
165,467

 
6,156

 
5,280

 
176,903

General and administrative
88

 
171,652

 
1,089

 
432

 
173,261

Depreciation, depletion, amortization and accretion
—

 
141,299

 
23,426

 
—

 
164,725

Impairment
—

 
12,703

 
2,940

 
—

 
15,643

Gain on derivative contracts
—

 
(88,653
)
 
(15,001
)
 
—

 
(103,654
)
Gain on sale of assets
—

 
(340
)
 
(9
)
 
—

 
(349
)
Total expenses
88

 
402,128

 
18,601

 
5,712

 
426,529

(Loss) income from operations
(88
)
 
23,191

 
63,355

 
—

 
86,458

Equity earnings from subsidiaries
41,450

 
18,233

 
—

 
(59,683
)
 
—

Interest (expense) income
(61,392
)
 
233

 
—

 
—

 
(61,159
)
Other (expense) income, net
—

 
(207
)
 
101

 
—

 
(106
)
(Loss) income before income taxes
(20,030
)
 
41,450

 
63,456

 
(59,683
)
 
25,193

Income tax expense
406

 
—

 
102

 
—

 
508

Net (loss) income
(20,436
)
 
41,450

 
63,354

 
(59,683
)
 
24,685

Less: net income attributable to noncontrolling interest
—

 
—

 
—

 
45,121

 
45,121

Net (loss) income attributable to SandRidge Energy, Inc.
$
(20,436
)
 
$
41,450

 
$
63,354

 
$
(104,804
)
 
$
(20,436
)
 
 
 
 
 
 
 
 
 
 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Total revenues
$
—

 
$
693,570

 
$
124,299

 
$
(99
)
 
$
817,770

Expenses
 
 
 
 
 
 
 
 
 
Direct operating expenses
—

 
215,242

 
9,741

 
(99
)
 
224,884

General and administrative
220

 
67,426

 
2,807

 
—

 
70,453

Depreciation, depletion, amortization and accretion
—

 
219,814

 
30,382

 
—

 
250,196

Impairment
—

 
125,599

 
42,313

 
—

 
167,912

Loss on derivative contracts
—

 
101,611

 
26,172

 
—

 
127,783

Loss on sale of assets
—

 
17

 
—

 
—

 
17

Total expenses
220

 
729,709

 
111,415

 
(99
)
 
841,245

(Loss) income from operations
(220
)
 
(36,139
)
 
12,884

 
—

 
(23,475
)
Equity earnings from subsidiaries
(29,483
)
 
3,086

 
—

 
26,397

 
—

Interest (expense) income
(124,045
)
 
139

 
—

 
—

 
(123,906
)
Other income, net
—

 
3,431

 
1

 
—

 
3,432

(Loss) income before income taxes
(153,748
)
 
(29,483
)
 
12,885

 
26,397

 
(143,949
)
Income tax (benefit) expense
(1,294
)
 
—

 
227

 
—

 
(1,067
)
Net (loss) income
(152,454
)
 
(29,483
)
 
12,658

 
26,397

 
(142,882
)
Less: net income attributable to noncontrolling interest
—

 
—

 
—

 
9,572

 
9,572

Net (loss) income attributable to SandRidge Energy, Inc.
$
(152,454
)
 
$
(29,483
)
 
$
12,658

 
$
16,825

 
$
(152,454
)
 
 
 
 
 
 
 
 
 
 

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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
Total revenues
$
—

 
$
865,636

 
$
159,484

 
$
(443
)
 
$
1,024,677

Expenses
 
 
 
 
 
 
 
 
 
Direct operating expenses
—

 
329,018

 
18,388

 
(443
)
 
346,963

General and administrative
175

 
248,470

 
4,060

 
—

 
252,705

Depreciation, depletion, amortization and accretion
—

 
301,188

 
46,178

 
—

 
347,366

Impairment
—

 
12,703

 
2,940

 
—

 
15,643

Gain on derivative contracts
—

 
(57,753
)
 
(5,004
)
 
—

 
(62,757
)
Loss on sale of assets
—

 
290,616

 
107,209

 
—

 
397,825

Total expenses
175

 
1,124,242

 
173,771

 
(443
)
 
1,297,745

Loss from operations
(175
)
 
(258,606
)
 
(14,287
)
 
—

 
(273,068
)
Equity earnings from subsidiaries
(265,374
)
 
(8,409
)
 
—

 
273,783

 
—

Interest (expense) income
(147,495
)
 
426

 
—

 
—

 
(147,069
)
Loss on extinguishment of debt
(82,005
)
 
—

 
—

 
—

 
(82,005
)
Other income (expense), net
—

 
1,215

 
(710
)
 
—

 
505

Loss before income taxes
(495,049
)
 
(265,374
)
 
(14,997
)
 
273,783

 
(501,637
)
Income tax expense
4,727

 
—

 
210

 
—

 
4,937

Net loss
(499,776
)
 
(265,374
)
 
(15,207
)
 
273,783

 
(506,574
)
Less: net loss attributable to noncontrolling interest
—

 
—

 
—

 
(6,798
)
 
(6,798
)
Net loss attributable to SandRidge Energy, Inc.
$
(499,776
)
 
$
(265,374
)
 
$
(15,207
)
 
$
280,581

 
$
(499,776
)

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Table of Contents
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Condensed Consolidating Statements of Cash Flows
 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
263,677

 
$
(153,823
)
 
$
126,424

 
$
(5,486
)
 
$
230,792

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures for property, plant, and equipment
—

 
(656,699
)
 
—

 
—

 
(656,699
)
Proceeds from sale of assets
—

 
707,799

 
—

 
—

 
707,799

Other
—

 
(104,286
)
 
1,061

 
86,672

 
(16,553
)
Net cash (used in) provided by
 investing activities
—

 
(53,186
)
 
1,061

 
86,672

 
34,547

Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Distributions to unitholders
—

 
—

 
(127,985
)
 
24,843

 
(103,142
)
Intercompany (advances) borrowings, net
(125,185
)
 
124,804

 
381

 
—

 
—

Other
(33,364
)
 
82,441

 
(1,150
)
 
(106,029
)
 
(58,102
)
Net cash (used in) provided by
 financing activities
(158,549
)
 
207,245

 
(128,754
)
 
(81,186
)
 
(161,244
)
Net increase (decrease) in cash and cash equivalents
105,128

 
236

 
(1,269
)
 
—

 
104,095

Cash and cash equivalents at beginning of year
805,505

 
1,013

 
8,145

 
—

 
814,663

Cash and cash equivalents at end of period
$
910,633

 
$
1,249

 
$
6,876

 
$
—

 
$
918,758

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


 
Parent
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Consolidated
 
(In thousands)
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(162,836
)
 
$
420,672

 
$
120,672

 
$
6,175

 
$
384,683

Cash flows from investing activities
 
 
 
 
 
 
 
 
 
Capital expenditures for property, plant, and equipment
—

 
(828,585
)
 
—

 
—

 
(828,585
)
Proceeds from sale of assets
—

 
2,563,791

 
95

 
—

 
2,563,886

Other
—

 
31,015

 
37

 
(39,654
)
 
(8,602
)
Net cash provided by investing activities
—

 
1,766,221

 
132

 
(39,654
)
 
1,726,699

Cash flows from financing activities
 
 
 
 
 
 
 
 
 
Repayments of borrowings
(1,115,500
)
 
—

 
—

 
—

 
(1,115,500
)
Distribution to unitholders
—

 
—

 
(144,810
)
 
46,094

 
(98,716
)
Premium on debt redemption
(61,997
)
 
—

 
—

 
—

 
(61,997
)
Intercompany borrowings (advances), net
2,181,850

 
(2,192,164
)
 
10,314

 
—

 
—

Other
(56,322
)
 
5,728

 
12,615

 
(12,615
)
 
(50,594
)
Net cash provided by (used in) financing activities
948,031

 
(2,186,436
)
 
(121,881
)
 
33,479

 
(1,326,807
)
Net increase (decrease) in cash and cash equivalents
785,195

 
457

 
(1,077
)
 
—

 
784,575

Cash and cash equivalents at beginning of year
300,228

 
922

 
8,616

 
—

 
309,766

Cash and cash equivalents at end of period
$
1,085,423

 
$
1,379

 
$
7,539

 
$
—

 
$
1,094,341


49
Table of Contents
SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


19. Subsequent Events

Royalty Trust Distributions. On July 31, 2014, the Royalty Trusts announced quarterly distributions for the three-month period ended June 30, 2014. The following distributions are expected to be paid on or before August 29, 2014 to holders of record as of the close of business on August 14, 2014 (in thousands):
Royalty Trust
 
Total Distribution
 
Amount to be Distributed to Third-Party Unitholders
Mississippian Trust I
 
$
7,512

 
$
7,323

Permian Trust
 
30,555

 
24,885

Mississippian Trust II
 
18,125

 
15,090

Total
 
$
56,192

 
$
47,298



Conversion of Mississippian Trust I Subordinated Units. On July 1, 2014, the Mississippian Trust I’s subordinated units, all of which were held by SandRidge, converted to common units. The newly-converted units remain subject to the distribution subordination thresholds through the Mississippian Trust I’s August 29, 2014 distribution; however, beginning with the distribution to be made in November 2014, all of the Mississippian Trust I’s common units will share equally in its distribution. After this conversion, the Company will continue to consolidate the activities of the Mississippian Trust I as its primary beneficiary due to the Company’s original participation in the design of the Mississippian Trust I and continued (a) power to direct the activities that most significantly impact the economic performance of the Royalty Trust and (b) obligation to absorb losses and right to receive residual returns through its variable interests in the Royalty Trust, including ownership of common units, that could potentially be significant to the Mississippian Trust I.    

50
Table of Contents

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 the Company’s business, financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the Company’s accompanying unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report, as well as the Company’s audited consolidated financial statements and the accompanying notes included in the 2013 Form 10-K. The Company’s discussion and analysis includes the following subjects:
•
Overview;
•
Results by Segment;
•
Consolidated Results of Operations;
•
Liquidity and Capital Resources;
•
Critical Accounting Policies and Estimates; and
•
Valuation Allowance.

The financial information with respect to the three and six-month periods ended June 30, 2014 and 2013, discussed below, is unaudited. In the opinion of management, this information contains all adjustments, which consist only of normal recurring adjustments, 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

SandRidge Energy, Inc. is an oil and natural gas company with a principal focus on exploration and production activities in the Mid-Continent region of the United States. The Company owns and operates additional interests in west Texas and owned interests in the Gulf of Mexico and Gulf Coast until February 2014, as discussed under “2014 Developments and Outlook” below. The Company also operates businesses and infrastructure systems that are complementary to its primary exploration and production activities, including gas gathering and processing facilities, marketing operations, a saltwater gathering system, an electrical transmission system and a drilling and related oil field services business.

SandRidge’s mission is to be a high-return, growth-oriented resource conversion company focused in the Mid-Continent region of the United States. During the Company’s 2013 capital allocation process, management identified competitive advantages, such as its industry leading cost structure, subsurface knowledge, existing infrastructure and broader infrastructure capabilities and size and scale, all in the Mid-Continent area. As a result of that process, the decision was made to enhance the Company’s focus in the Mid-Continent, divest the Gulf Properties, and redeploy capital into onshore areas where the Company has a more extensive opportunity set and over a ten-year inventory of high-return drilling locations.

Operational Highlights

Operational highlights for the three and six-month periods ended June 30, 2014 include the following:
•
Drilled 123 and 212 wells, excluding salt water disposal wells, in the Mid-Continent area during the three and six-month periods ended June 30, 2014, respectively. Mid-Continent properties contributed approximately 5.3 MMBoe or 83.0% and 10.0 MMBoe or 74.1% of the Company’s total production, for the three and six-month periods ended June 30, 2014, respectively, compared to approximately 4.5 MMBoe or 54.1% and 8.3 MMBoe, or 47.7% for the three and six-month periods ended June 30, 2013, respectively.
•
Gulf of Mexico properties contributed production of approximately 1.3 MMBoe, or 9.8%, of the Company’s total production, for the six-month period ended June 30, 2014 compared to approximately 5.5 MMBoe, or 31.9% of total production, for the six-month period ended June 30, 2013.
•
Total production for the three-month period ended June 30, 2014 was comprised of approximately 37.7% oil, 50.5% natural gas and 11.8% NGLs compared to 42.9% oil, 50.5% natural gas and 6.6% NGLs in the same period of 2013. Total production for the six-month period ended June 30, 2014 was comprised of approximately 39.2% oil, 50.5% natural gas and 10.3% NGLs compared to 43.5% oil, 50.6% natural gas and 5.9% NGLs in the same period of 2013.
 

51
Table of Contents

2013 Transactions

Sale of Permian Properties. On February 26, 2013, the Company sold the Permian Properties for $2.6 billion. The Company used a portion of the sale proceeds to fund the redemption of approximately $1.1 billion aggregate principal amount of outstanding Senior Fixed Rate Notes, discussed below, and has used and expects to use the remaining proceeds to fund its capital expenditures in the Mid-Continent and for general corporate purposes. The Company recorded a non-cash loss on the sale of $399.1 million during the six-month period ended June 30, 2013, of which $71.7 million was allocated to noncontrolling interests. Additionally, the Company settled a portion of its existing oil derivative contracts in February 2013 prior to their respective maturities to reduce volumes hedged in proportion to the anticipated reduction in daily production volumes due to the sale, which resulted in cash payments of approximately $29.6 million.
Production, revenues and direct operating expenses of the Permian Properties included in the Company’s results for the six-month period ended June 30, 2013 were as follows:
 
Six Months Ended June 30, 2013(1)
Production (MBoe)
1,148

Revenues (in thousands)
$
68,027

Direct operating expenses (in thousands)
$
17,453

_______________
(1) Includes activity through February 26, 2013, the date of sale.

Redemption of Senior Fixed Rate Notes. In March 2013, the Company redeemed the outstanding $365.5 million aggregate principal amount of its 9.875% Senior Notes due 2016 and the outstanding $750.0 million aggregate principal amount of its 8.0% Senior Notes due 2018 for total consideration of $1,061.34 per $1,000 principal amount and $1,052.77 per $1,000 principal amount, respectively. The premium paid to redeem these notes and the expense incurred to write off the remaining associated unamortized debt issuance costs resulted in a loss on extinguishment of debt of $82.0 million for the six-month period ended June 30, 2013.
    
2014 Developments and Outlook

Sale of Gulf of Mexico and Gulf Coast Properties. On February 25, 2014, the Company sold subsidiaries that owned the Gulf Properties, for approximately $703.5 million, net of working capital adjustments and post-closing adjustments, and Fieldwood’s assumption of approximately $366.0 million of related asset retirement obligations. The Company retained a 2.0% overriding royalty interest in certain exploration prospects. The Company is using the proceeds from the sale to fund its drilling in the Mid-Continent. Additionally, the Company settled a portion of its existing oil derivative contracts in January and February 2014 prior to their respective maturities to reduce volumes hedged in proportion to the anticipated reduction in daily production volumes due to the sale, which resulted in cash payments of approximately $69.6 million. Without regard to same-counterparty netting, these derivative contracts were in a liability position at December 31, 2013 of $72.4 million.

Production, revenues and expenses, including direct operating expenses, depletion, accretion of asset retirement obligations and general and administrative expenses, for the Gulf Properties included in the Company’s results for the three-month period ended June 30, 2013 and the six-month periods ended June 30, 2014 and 2013 were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2013
 
2014(1)
 
2013
Production (MBoe)
2,616

 
1,321

 
5,532

Revenues (in thousands)
$
170,219

 
$
90,920

 
$
345,275

Expenses (in thousands)
$
122,222

 
$
63,674

 
$
251,392

_______________
(1) Includes activity through February 25, 2014, the date of sale.
 

52
Table of Contents

Outlook
    
In 2014, the Company is focused on the execution of its highest return projects, enhanced capital discipline and the utilization of its identified competitive advantages. The Company’s 2014 capital expenditures budget is approximately $1.5 billion, with approximately $1.4 billion designated for exploration and production activities.


53
Table of Contents

Results by Segment

The Company operates in three business segments: exploration and production, drilling and oil field services and midstream services. These segments represent the Company’s three main business units, each offering different products and services. The exploration and production segment is engaged in the exploration and production of oil and natural gas properties and includes the activities of the Royalty Trusts. The drilling and oil field services segment is engaged in the contract drilling of oil and natural gas wells and provides various oil field services. The midstream services segment is engaged in the purchasing, gathering, treating and selling of natural gas and coordinates the delivery of electricity for the Company’s exploration and production operations in the Mid-Continent.

Management evaluates the performance of the Company’s business segments based on income (loss) from operations. Results of these measurements provide important information to the Company about the activity, profitability and contributions of each of the Company’s lines of business. The results of the Company’s business segments for the three and six-month periods ended June 30, 2014 and 2013 are discussed below.

Exploration and Production Segment

The Company generates the majority of its consolidated revenues and cash flow from the production and sale of oil, natural gas and NGLs. The Company’s revenues, profitability and future growth depend substantially on prevailing prices for oil, natural gas and NGLs and on the Company’s ability to find, economically develop and produce its reserves. The primary factors affecting the financial results of the Company’s exploration and production segment are the prices the Company receives for its oil, natural gas and NGL production, the quantity of oil, natural gas and NGLs it produces and changes in the fair value of commodity derivative contracts. Prices for oil, natural gas and NGLs fluctuate widely and are difficult to predict. To provide information on the general trend in pricing, the average NYMEX prices for oil and natural gas during the three and six-month periods ended June 30, 2014 and 2013 are shown in the following table: 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Oil (per Bbl)
 
$
102.99

 
$
94.17

 
$
100.84

 
$
94.26

Natural gas (per Mcf)
 
$
4.58

 
$
4.02

 
$
4.65

 
$
3.76


In order to reduce the Company’s exposure to price fluctuations, the Company enters into commodity derivative contracts for a portion of its anticipated future oil and natural gas production as discussed in “Item 3. Quantitative and Qualitative Disclosures About Market Risk.” Reducing the Company’s exposure to price volatility mitigates the risk that it will not have adequate funds available for its capital expenditure programs.

Saltwater Gathering System. Included within the Company’s full cost pool is a produced water disposal system that included over 900 miles of gathering lines and 178 active disposal wells at June 30, 2014. This system assists in the economically efficient production of oil and natural gas by reducing the overall cost of water disposal, which directly reduces production costs. The system has a current injection capacity of over 2.1 million barrels of water per day.



54
Table of Contents

Set forth in the table below is financial, production and pricing information for the exploration and production segment for the three and six-month periods ended June 30, 2014 and 2013.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Results (in thousands)
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
Oil
$
239,857

 
$
341,712

 
$
519,786

 
$
715,665

NGL
27,233

 
18,110

 
54,822

 
34,481

Natural gas
72,816

 
94,460

 
170,614

 
182,153

Other
—

 
4,092

 
2,022

 
7,485

Inter-segment revenue
—

 
(81
)
 
—

 
(162
)
Total revenues
339,906

 
458,293

 
747,244

 
939,622

Operating expenses
 
 
 
 
 
 
 
Production
59,076

 
117,581

 
158,241

 
251,023

Production taxes
7,840

 
6,564

 
15,647

 
16,003

Depreciation and depletion—oil and natural gas
97,267

 
138,903

 
212,452

 
296,429

Accretion of asset retirement obligations
1,065

 
9,800

 
6,811

 
19,579

Impairment
—

 
—

 
164,779

 
—

Loss (gain) on derivative contracts
85,292

 
(103,654
)
 
127,783

 
(62,757
)
(Gain) loss on sale of assets
(22
)
 
(16
)
 
(22
)
 
399,049

Other operating expenses
11,151

 
47,449

 
31,471

 
80,338

Total operating expenses
261,669

 
216,627

 
717,162

 
999,664

Income (loss) from operations
$
78,237

 
$
241,666

 
$
30,082

 
$
(60,042
)
 
 
 
 
 
 
 
 
Production data
 
 
 
 
 
 
 
Oil (MBbls)
2,398

 
3,568

 
5,283

 
7,530

NGL (MBbls)
748

 
551

 
1,390

 
1,031

Natural gas (MMcf)
19,240

 
25,233

 
40,833

 
52,554

Total volumes (MBoe)
6,353

 
8,325

 
13,479

 
17,320

Average daily total volumes (MBoe/d)
69.8

 
91.5

 
74.5

 
95.7

Average prices—as reported(1)
 
 
 
 
 
 
 
Oil (per Bbl)
$
100.02

 
$
95.77

 
$
98.39

 
$
95.04

NGL (per Bbl)
$
36.41

 
$
32.87

 
$
39.44

 
$
33.44

Natural gas (per Mcf)
$
3.78

 
$
3.74

 
$
4.18

 
$
3.47

Total (per Boe)
$
53.50

 
$
54.57

 
$
55.29

 
$
53.83

Average prices—including impact of derivative contract settlements(2)
 
 
 
 
 
 
 
Oil (per Bbl)
$
96.91

 
$
100.99

 
$
96.34

 
$
99.37

NGL (per Bbl)
$
36.41

 
$
32.87

 
$
39.44

 
$
33.44

Natural gas (per Mcf)
$
3.49

 
$
3.68

 
$
3.78

 
$
3.43

Total (per Boe)
$
51.44

 
$
56.62

 
$
53.30

 
$
55.59

__________________
(1)
Prices represent actual average sales prices for the periods presented and do not include effects of derivative transactions.
(2)
Excludes settlements of commodity derivative contracts prior to their contractual maturity.

    

55
Table of Contents

The table below presents production by area of operation for the three and six-month periods ended June 30, 2014 and 2013 and illustrates the impact of (i) the Company’s continued development of its Mid-Continent assets, (ii) the sale of the Gulf Properties in February 2014 and (iii) the sale of the Permian Properties in February 2013.
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
Production (MBoe)
 
% of Total
 
Production (MBoe)
 
% of Total
 
Production (MBoe)
 
% of Total
 
Production (MBoe)
 
% of Total
Mid-Continent
5,273

 
83.0
%
 
4,504

 
54.1
%
 
9,988

 
74.1
%
 
8,255

 
47.7
%
Gulf of Mexico / Gulf Coast
—

 
—
%
 
2,616

 
31.4
%
 
1,321

 
9.8
%
 
5,532

 
31.9
%
Permian Basin
540

 
8.5
%
 
547

 
6.6
%
 
1,078

 
8.0
%
 
2,195

 
12.7
%
Other - west Texas
540

 
8.5
%
 
658

 
7.9
%
 
1,092

 
8.1
%
 
1,338

 
7.7
%
Total
6,353

 
100.0
%
 
8,325

 
100.0
%
 
13,479

 
100.0
%
 
17,320

 
100.0
%
    
Revenues

Exploration and production segment revenues from oil, natural gas and NGL sales decreased $114.4 million, or 25.2%, for the three-month period ended June 30, 2014, from the same period in 2013. The total net decrease was mainly attributable to a decrease of approximately $128.0 million resulting from a 2.0 MMBoe, or 23.7%, decrease in combined production, primarily due to the sale of the Gulf Properties in February 2014. This decrease was partially offset by an increase of $13.6 million primarily due to an increase in the average prices received for oil production. Exploration and production segment revenues from oil, natural gas and NGL sales decreased $187.1 million, or 20.1%, for the six-month period ended June 30, 2014 from the same period in 2013. The total net decrease was mainly attributable to a decrease of approximately $242.1 million resulting from a 3.8 MMBoe, or 22.2%, decrease in combined production primarily due to the sale of the Gulf Properties in February 2014 and the sale of the Permian Properties in February 2013. This decrease was partially offset by an increase of $55.0 million due to an increase in the average prices received for oil, natural gas and NGL production. As illustrated in the table above, the decrease in volumes in the Gulf of Mexico/Gulf Coast areas for the three and six-month periods ended June 30, 2014 and the decrease in volumes for the Permian area for the six-month period ended June 30, 2014 were partially offset by increased production from the Mid-Continent area, as the Company focused on its development of this area.

Operating Expenses

Production expense includes the costs associated with the Company’s exploration and production activities, including, but not limited to, lease operating expense and treating costs. Production expenses decreased $58.5 million, or 49.8%, and $92.8 million, or 37.0%, for the three and six-month periods ended June 30, 2014, respectively, compared to the same periods in 2013 primarily due to the decrease in total production and a decrease in production costs per Boe. During the three and six-month periods ended June 30, 2014, production expense was $9.30 and $11.74 per Boe, respectively, down from the comparable 2013 period rates of $14.12 and $14.49 per Boe, primarily as a result of the sale of the Gulf Properties in February 2014, which had higher production costs inherent with offshore operations.

Production taxes increased by $1.3 million, or 19.4%, and decreased by $0.4 million, or 2.2%, for the three and six-month periods ended June 30, 2014, compared to the same periods in 2013, respectively, primarily as a result of an increase in oil, natural gas and NGL revenue from production in the Mid-Continent area. Production taxes as a percentage of oil, natural gas and NGL revenue increased to approximately 2.3% for the three month period ended June 30, 2014 from 1.4% for the same period of 2013 and to approximately 2.1% for the six-month period ended June 30, 2014 from 1.7% for the same period of 2013 as taxable production from the Mid-Continent partially replaced non-taxable production from the Gulf Properties sold in February 2014.

Depreciation and depletion for the Company’s oil and natural gas properties decreased by $41.6 million and $84.0 million for the three and six-month periods ended June 30, 2014, respectively, compared to the same periods in 2013. These decreases are largely a result of the decrease in the Company’s combined production volumes for the respective periods as well as a decrease in the depreciation and depletion rate per Boe to $15.31 and $15.76 for the three and six-month periods ended June 30, 2014, respectively, from $16.69 and $17.11 for the three and six-month periods ended June 30, 2013, respectively. The decrease in the depreciation and depletion rates is primarily due to the sale of the Gulf Properties in February 2014 and, to a lesser extent, the sale of the Permian Properties in 2013.

Accretion of asset retirement obligations decreased $8.7 million and $12.8 million for the three and six-month periods ended June 30, 2014, respectively, compared to the same periods in 2013, primarily due to the assumption by Fieldwood of asset

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retirement obligations associated with the Gulf Properties sold in February 2014.

The Company incurred an impairment of $164.8 million for the six-month period ended June 30, 2014 due to a full cost ceiling limitation resulting from the divestiture of the Gulf Properties, as the present value of future net revenues associated with the Gulf Properties exceeded the associated reduction to the full cost pool. There was no full cost ceiling impairment for the three-month period ended June 30, 2014 or the three and six-month periods ended June 30, 2013.

The Company recorded a loss (gain) on commodity derivative contracts of $85.3 million and $(103.7) million for the three-month periods ended June 30, 2014 and 2013, respectively, which includes net cash payments (receipts) upon settlement of $13.1 million and $(18.1) million, respectively. The Company recorded a loss (gain) on commodity derivative contracts of $127.8 million and $(62.8) million for the six-month periods ended June 30, 2014, and 2013, respectively, which includes net cash payments upon settlement of $96.4 million and $0.3 million, respectively. Included in these net cash payments are $69.6 million and $29.0 million of payments for early settlements of commodity derivative contracts primarily as a result of the sale of the Gulf Properties in February 2014 and the Permian Properties in February 2013, respectively.

The Company’s derivative contracts are not designated as accounting hedges and, as a result, gains or losses on commodity derivative contracts are recorded each quarter as a component of operating expenses. Internally, management views the settlement of derivative contracts at contractual maturity as adjustments to the price received for oil and natural gas production to determine “effective prices.” Gains or losses on early settlements and losses related to amendments of contracts are not considered in the calculation of 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 the Company’s oil and natural gas price swaps, and cash is paid on settlement of contracts due to higher oil and natural gas prices at the time of settlement compared to the contract price for the Company’s oil and natural gas price swaps.

The company recorded a loss on the sale of assets of $399.1 million for the six-month period ended June 30, 2013 as a result of the sale of the Permian Properties in February 2013. No gain or loss was recognized for the sale of the Gulf Properties in February 2014. See “Note 2 - Divestitures” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional discussion of the sale of the Gulf Properties.

See “Consolidated Results of Operations” below for a discussion of other operating expenses.

Drilling and Oil Field Services Segment

The financial results of the Company’s drilling and oil field services segment depend primarily on demand and prices that can be charged for its services. On a consolidated basis, drilling and oil field service revenues earned and expenses incurred in performing services for third parties, including third-party working interests in wells the Company operates, are included in drilling and services revenues and cost of sales. Drilling and oil field service revenues earned and expenses incurred in performing services for the Company’s own account are eliminated in consolidation. The primary factors affecting the results of the Company’s drilling and oil field services segment are the rates received on rigs drilling for third parties, the number of days drilling for third parties and the amount of oil field services provided to third parties.

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Set forth in the table below is financial and operational information for the drilling and oil field services segment for the three and six-month periods ended June 30, 2014 and 2013.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Results (in thousands)
 
 
 
 
 
 
 
 
Revenues
 
$
51,891

 
$
47,100

 
$
98,971

 
$
96,837

Inter-segment revenue
 
(33,062
)
 
(31,011
)
 
(63,039
)
 
(63,378
)
Total revenues
 
18,829

 
16,089

 
35,932

 
33,459

Operating expenses
 
18,043

 
24,944

 
38,248

 
51,279

Impairment
 
3,133

 
10,588

 
3,133

 
10,588

Loss from operations
 
$
(2,347
)
 
$
(19,443
)
 
$
(5,449
)
 
$
(28,408
)
 
 
 
 
 
 
 
 
 
Drilling rig statistics
 
 
 
 
 
 
 
 
Average number of operational rigs owned during the period
 
27.0

 
27.0

 
27.0

 
28.5

Average number of rigs working for third parties
 
4.7

 
3.3

 
5.1

 
3.4

Number of days drilling for third parties
 
429

 
284

 
923

 
601

Average drilling revenue per day per rig drilling for third parties(1)
 
$
14,674

 
$
15,630

 
$
14,906

 
$
15,371

 
 
 
 
 
 
 
 
 
Rig status - June 30
 
 
 
 
 
2014
 
2013
Working for SandRidge
 
12

 
9

Working for third parties
 
5

 
4

Idle(2)
 
10

 
14

Total operational
 
27

 
27

Non-operational(3)
 
3

 
3

Total rigs
 
30

 
30

____________________
(1)
Represents revenues from rigs working for third parties, excluding stand-by revenue, divided by the total number of days such drilling rigs were used by third parties during the period. Excludes revenues for related rental equipment.
(2)
The Company’s rigs are primarily intended to drill for its own account; as such, the number of idle rigs does not significantly impact the consolidated results of operations.
(3)
Non-operational rigs at June 30, 2014 and June 30, 2013 are held for sale.

Drilling and oil field services segment revenues increased $2.7 million and $2.5 million for the three and six-month periods ended June 30, 2014, respectively, compared to the same periods in 2013 primarily due to increased revenues from third parties during the three-month period ended June 30, 2014, which were partially offset by decreases in revenue from oil field services supplies due to the sale of the northwest Oklahoma location in 2013. Drilling and oil field services segment operating expenses decreased $6.9 million during the three-month period ended June 30, 2014, compared to the same period in 2013 due primarily to an increased focus on capital discipline by management. Drilling and oil field services segment operating expenses decreased $13.0 million during the six-month periods ended June 30, 2014, compared to the same period in 2013 due primarily to costs incurred in the first quarter of 2013 associated with maintenance performed on rigs that were stacked as a result of the sale of the Permian Properties, as well as an increased focus on capital discipline by management. During the three and six-month periods ended June 30, 2014 and 2013, the Company recorded impairment of approximately $3.1 million and $10.6 million, respectively, on certain drilling assets identified for sale in order to adjust their carrying values to fair value.



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Midstream Services Segment

Midstream services segment revenues consist mostly of revenue from gas marketing, which is a very low-margin business, and revenues from coordinating the delivery of electricity to the Company’s exploration and production operations in the Mid-Continent area.

Gas Marketing. On a consolidated basis, midstream and marketing revenues include natural gas sold to third parties and the fees the Company charges to gather, compress and treat this natural gas. Gas marketing operating costs represent payments made to third parties for the proceeds from the sale of natural gas owned by such parties, net of any applicable margin, and actual costs the Company incurs to gather, compress and treat the natural gas. In general, natural gas purchased and sold by the Company’s midstream services segment is priced at a published daily or monthly index price. Midstream gas services are primarily undertaken to realize incremental margins on natural gas purchased at the wellhead and to provide value-added services to customers.

Electrical Provision. The Company owns an electrical transmission system in the Mid-Continent that coordinates the delivery of electricity for use in the Company’s exploration and production operations at a lower cost than electricity provided by on-site generation. On a consolidated basis, revenues and expenses from the electrical transmission system relate to electricity for third-party working interest owners in Company operated wells in the Mid-Continent.

The primary factors affecting the results of the Company’s midstream services segment are the quantity of natural gas the Company gathers, treats and markets and the prices it pays and receives for natural gas as well as the fees charged and volumes delivered by the electrical transmission system.

Set forth in the table below is financial and operational information for the midstream services segment for the three and six-month periods ended June 30, 2014 and 2013.

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Results (in thousands)
 
 
 
 
 
 
 
 
Operating revenues
 
$
38,420

 
$
41,038

 
$
84,715

 
$
77,872

Construction contract
 
—

 
23,253

 
—

 
23,253

Inter-segment revenue
 
(23,546
)
 
(26,464
)
 
(52,196
)
 
(51,160
)
Total revenues
 
14,874

 
37,827

 
32,519

 
49,965

Operating expenses
 
17,219

 
22,530

 
36,275

 
37,127

Construction contract
 
—

 
23,253

 
—

 
23,253

Loss from operations
 
$
(2,345
)
 
$
(7,956
)
 
$
(3,756
)
 
$
(10,415
)
 
 
 
 
 
 
 
 
 
Gas Marketed
 
 
 
 
 
 
 
 
Volumes (MMcf)
 
1,888

 
1,961

 
3,701

 
4,009

Average price
 
$
4.53

 
$
4.16

 
$
4.62

 
$
3.75


Midstream services segment revenues and expenses, excluding construction contract revenue and expense, increased $0.3 million and decreased $5.3 million, respectively, for the three-month period ended June 30, 2014 compared to the same period in 2013. Segment revenues and expenses, excluding construction contract revenue and expense increased $5.8 million and decreased $0.9 million, respectively, for the six-month period ended June 30, 2014 compared to the same period in 2013. The increases in revenue were due primarily to an increase in electrical transmission services provided to third-party working interest owners in the Mid-Continent during the first six months of 2014 compared to 2013, as well as an increase in gas compressor and generator rentals for the respective periods. During the second quarter of 2014, the fee structure for electric usage was revised, which resulted in decreasing revenues for electrical transmission services for the remainder of the second quarter of 2014 and decreasing expenses for electrical transmission for the three and six-month periods ended June 30, 2014. Additionally, operating expenses for the three and six-month periods ended June 30, 2013 include an impairment of $2.1 million on certain midstream pipe inventory and natural gas compressors due to the determination that their future use was limited. No impairment was taken during the three and six-month periods ended June 30, 2014.


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During the second quarter of 2013, the Company substantially completed the construction of a series of electrical transmission expansion and upgrade projects for a third party and, as a result, recognized construction contract revenue and costs equal to $23.3 million. For more information about these projects, see “Note 7 - Construction Contracts” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report.

Consolidated Results of Operations

Revenues

The Company’s consolidated revenues for the three and six-month periods ended June 30, 2014 and 2013 are presented in the table below.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Revenues
 
 
 
 
 
 
 
 
Oil, natural gas and NGL
 
$
339,906

 
$
454,282

 
$
745,222

 
$
932,299

Drilling and services
 
18,852

 
16,078

 
35,932

 
33,448

Midstream and marketing
 
14,874

 
15,198

 
32,784

 
28,230

Construction contract
 
—

 
23,253

 
—

 
23,253

Other
 
1,082

 
4,176

 
3,832

 
7,447

Total revenues(1)
 
$
374,714

 
$
512,987

 
$
817,770

 
$
1,024,677

___________________
(1)
Includes $41.8 million and $53.8 million of revenues attributable to noncontrolling interests in consolidated VIEs, after considering the effects of intercompany eliminations, for the three-month periods ended June 30, 2014 and 2013, respectively. Includes $86.1 million and $99.5 million of revenues attributable to noncontrolling interests in consolidated VIEs, after considering the effects of intercompany eliminations, for the six-month periods ended June 30, 2014 and 2013, respectively.

The Company’s primary sources of revenue are discussed in “Results by Segment.” See discussion of oil, natural gas and NGL revenues under “Results by Segment—Exploration and Production Segment,” discussion of drilling and services revenues under “Results by Segment—Drilling and Oil Field Services Segment” and discussion of midstream and marketing and construction contract revenues under “Results by Segment—Midstream Services Segment.”

Other revenues decreased for the three and six-month periods ended June 30, 2014 compared to the same periods in 2013 due primarily to a decrease in revenues from the Bullwinkle and other offshore platforms, which were included in the sale of the Gulf Properties in February 2014.


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Expenses

The Company’s consolidated expenses for the three and six-month periods ended June 30, 2014 and 2013 are presented below.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Expenses
 
 
 
 
 
 
 
 
Production
 
$
58,498

 
$
116,811

 
$
157,033

 
$
249,312

Production taxes
 
7,840

 
6,564

 
15,647

 
16,003

Cost of sales
 
10,469

 
15,348

 
22,950

 
31,665

Midstream and marketing
 
13,254

 
14,927

 
29,254

 
26,730

Construction contract
 
—

 
23,253

 
—

 
23,253

Depreciation and depletion—oil and natural gas
 
97,267

 
138,903

 
212,452

 
296,429

Depreciation and amortization—other
 
15,411

 
16,022

 
30,933

 
31,358

Accretion of asset retirement obligations
 
1,065

 
9,800

 
6,811

 
19,579

Impairment
 
3,133

 
15,643

 
167,912

 
15,643

General and administrative
 
31,102

 
65,541

 
61,531

 
134,587

Employee termination benefits
 
813

 
107,720

 
8,922

 
118,118

Loss (gain) on derivative contracts
 
85,292

 
(103,654
)
 
127,783

 
(62,757
)
Loss (gain) on sale of assets
 
36

 
(349
)
 
17

 
397,825

Total expenses(1)
 
$
324,180

 
$
426,529

 
$
841,245

 
$
1,297,745

___________________
(1)
Includes $26.0 million and $8.5 million of expenses attributable to noncontrolling interests in consolidated VIEs, after considering the effects of intercompany eliminations, for the three-month periods ended June 30, 2014 and 2013, respectively. Includes $76.0 million and $105.5 million of expenses attributable to noncontrolling interests in consolidated VIEs, after considering the effects of intercompany eliminations, for the six-month periods ended June 30, 2014 and 2013, respectively. Expenses attributable to noncontrolling interests in consolidated VIEs for the six-month periods ended June 30, 2014 and 2013 include $29.9 million of allocated full cost ceiling impairment and $71.7 million of allocated loss on sale of assets associated with the sale of the Permian Properties, respectively.

See discussion of production expenses, production taxes, depreciation and depletion—oil and natural gas, accretion of asset retirement obligations, impairment, loss (gain) on derivative contracts and loss (gain) on sale of assets under “Results by Segment—Exploration and Production Segment,” discussion of cost of sales and impairment under “Results by Segment— Drilling and Oil Field Services Segment” and discussion of midstream and marketing expense under “Results by Segment—Midstream Services Segment.”

General and administrative expenses decreased $34.4 million, or 52.5%, for the three-month period ended June 30, 2014 from the same period in 2013 due primarily to decreases of $20.7 million in compensation, largely resulting from changes to the Company’s annual incentive plan in the second quarter of 2013 and a decrease in headcount during 2014, and $7.3 million in costs related to a stockholder consent solicitation that occurred in 2013. General and administrative expenses decreased $73.1 million, or 54.3%, for the six-month period ended June 30, 2014 from the same period in 2013 due primarily to a decrease of $20.6 million in costs related to a stockholder consent solicitation that occurred in 2013 and decreases of $31.0 million in compensation, $5.8 million in professional services costs and $4.1 million in promotional and advertising costs, primarily as a result of corporate cost cutting measures and a decrease in headcount during 2014.
    
Employee termination benefits in the six-month period ended June 30, 2014 represent severance costs of $8.9 million incurred in conjunction with the sale of the Gulf Properties. Employee termination benefits of $107.7 million and $118.1 million for the three and six-month periods ended June 30, 2013 represent severance costs associated with former Company executives. Of the total employee termination benefits for each 2013 period, approximately $95.0 million, including amounts associated with the accelerated vesting of restricted stock awards, were attributable to the Company’s former Chairman and CEO.

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Other Income (Expense), Taxes and Net Income (Loss) Attributable to Noncontrolling Interest

The Company’s other income (expense), taxes and net income (loss) attributable to noncontrolling interest for the three and six-month periods ended June 30, 2014 and 2013 are presented in the table below.
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Other income (expense)
 
 
 
 
 
 
 
 
Interest expense
 
$
(61,863
)
 
$
(61,159
)
 
$
(123,906
)
 
$
(147,069
)
Loss on extinguishment of debt
 
—

 
—

 
—

 
(82,005
)
Other income (expense), net
 
1,338

 
(106
)
 
3,432

 
505

Total other expense
 
(60,525
)
 
(61,265
)
 
(120,474
)
 
(228,569
)
(Loss) income before income taxes
 
(9,991
)
 
25,193

 
(143,949
)
 
(501,637
)
Income tax (benefit) expense
 
(1,194
)
 
508

 
(1,067
)
 
4,937

Net (loss) income
 
(8,797
)
 
24,685

 
(142,882
)
 
(506,574
)
Less: net income (loss) attributable to noncontrolling interest
 
15,642

 
45,121

 
9,572

 
(6,798
)
Net loss attributable to SandRidge Energy, Inc.
 
$
(24,439
)
 
$
(20,436
)
 
$
(152,454
)
 
$
(499,776
)

Interest expense for the three and six-month periods ended June 30, 2014 and 2013 consisted of the following:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2014
 
2013
 
2014
 
2013
 
 
(In thousands)
Interest expense
 
 
 
 
 
 
 
 
Interest expense on debt
 
$
63,509

 
$
63,046

 
$
126,887

 
$
149,282

Amortization of debt issuance costs, discounts and premium
 
2,471

 
2,478

 
4,961

 
6,158

Interest rate swap loss
 
—

 
—

 
—

 
14

Capitalized interest
 
(4,117
)
 
(4,365
)
 
(7,942
)
 
(8,385
)
Total interest expense
 
$
61,863

 
$
61,159

 
$
123,906

 
$
147,069


Total interest expense decreased $23.2 million for the six-month period ended June 30, 2014 compared to the same period in 2013, primarily due to a reduction in interest expense associated with the senior notes repurchased and redeemed in the first quarter of 2013. See “Note 8 - Long-Term Debt” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional discussion of the Company’s long-term debt transactions in 2013.

The Company recognized a loss on extinguishment of debt of $82.0 million for the six-month period ended June 30, 2013 in connection with the redemption and repurchase of certain of its senior notes. This loss represents the premium paid to redeem the notes and the expense incurred to write off the remaining unamortized debt issuance costs associated with the notes.
    
The Company’s tax expense and effective tax rate for the three and six-month periods ended June 30, 2014 continue to be low as a result of the valuation allowance against its net deferred tax asset. The Company’s income tax benefit of $1.1 million for the six-month period ending June 30, 2014 is primarily related to a reduction in the Company’s gross unrecognized tax benefits following a favorable outcome pertaining to the Company’s state audits. The Company's income tax expense of $4.9 million for the six-month period ending June 30, 2013 is primarily related to federal alternative minimum tax (“AMT”), associated with the tax year ending December 31, 2013. The Company recorded a current liability and a corresponding deferred tax asset each in the amount of $4.0 million for the six-month period ended June 30, 2013 for the AMT. As a result of recording a deferred tax asset, the Company increased its valuation allowance against its net deferred tax asset by $4.0 million.

Net income (loss) attributable to noncontrolling interest represents the portion of net income (loss) attributable to third-party ownership in the Company’s consolidated VIEs and subsidiaries. Net income attributable to noncontrolling interest decreased to $15.6 million for the three-month period ended June 30, 2014 from $45.1 million during the same period in 2013, primarily due to losses from changes in fair value recognized on the Royalty Trusts’ derivative contracts as well as losses on contracts that settled in the three-month period ended June 30, 2014 compared to gains recognized from changes in fair value as well as gains

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on contracts that settled during the same period in 2013. Income for the six-month period ended June 30, 2014 includes the full cost ceiling impairment attributable to noncontrolling interest of $29.9 million compared to the loss on the sale of the Permian Properties attributable to noncontrolling interest of $71.7 million included in the six-month period ended June 30, 2013. Additionally, net income attributable to noncontrolling interest includes the impact of an increase in losses from changes in fair value recognized on the Royalty Trusts’ derivative contracts for the six-month period ended June 30, 2014 compared to the same period in 2013.

Liquidity and Capital Resources

The Company’s primary sources of liquidity and capital resources are cash on hand, cash flows from operating activities, proceeds from monetizations of assets, borrowings under the senior credit facility, funding commitments from third parties for drilling carries and the issuance of equity and debt securities in the capital markets. As described in “2014 Developments and Outlook,” the Company received proceeds of approximately $703.5 million, net of working capital adjustments and post-closing adjustments, for the sale of its Gulf Properties in February 2014.

The Company’s primary uses of capital are expenditures related to its oil and natural gas properties, such as costs related to the drilling and completion of wells, including to fulfill its drilling commitments to the Royalty Trusts, the acquisition of oil and natural gas properties and other fixed assets, the payment of dividends on its outstanding convertible perpetual preferred stock, interest payments on its outstanding debt and, from time to time, the repayment of long-term debt. The Company maintains access to funds that may be needed to meet capital funding requirements through its senior credit facility.
    
    The Company’s 2014 budget for capital expenditures, including expenditures related to the Company’s drilling programs for the Permian Trust and Mississippian Trust II and net of $205.6 million in drilling carries estimated to be received in 2014, is approximately $1.5 billion. See “Note 5 - Property, Plant and Equipment” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for discussion of the drilling carries. The Company expects to fund its near term capital and debt service requirements and working capital needs with cash on hand ($0.9 billion at June 30, 2014), cash flow from operations and available borrowing capacity under its $775.0 million senior credit facility, which is undrawn, other than $10.4 million in letters of credit secured by the senior credit facility that reduce availability on a dollar for dollar basis, at June 30, 2014. The Company has no maturities of long-term debt prior to 2020, and may choose to issue new long-term debt, subject to market availability, as an alternative to borrowing under its senior credit facility. Alternatively, the Company may issue equity or other non-debt securities in the capital markets, depending on market conditions, to address its funding requirements. In the longer term, the Company expects an increasing portion of its funding needs to be covered by increased cash flows from operations, resulting from its drilling program combined with cost cutting initiatives implemented in 2013, and may issue long-term debt or equity or monetize non-core assets to cover any difference between cash flow from operations and capital needs. Further, the majority of the Company’s capital expenditures is discretionary and could be curtailed if the Company’s cash flows decline from expected levels.

The Company and one of its wholly owned subsidiaries are parties to development agreements with the Permian Trust and Mississippian Trust II that obligate the Company to drill, or cause to be drilled, a specified number of wells within specific areas of mutual interest for each Royalty Trust by March 31, 2016 and December 31, 2016, respectively. In addition, production targets contained in certain gathering and treating arrangements require the Company to incur capital expenditures or make associated shortfall payments.

A substantial or extended decline in oil or natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced, which could adversely impact the Company’s ability to comply with the financial covenants under its senior credit facility, which in turn would limit borrowings to fund capital expenditures. The Company may increase or decrease planned capital expenditures depending on oil and natural gas prices and the availability of funding from the sources described above.

The Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future. The Company’s derivative arrangements serve to mitigate a portion of the effect of this price volatility on its cash flows. To this end, collars and fixed price swap contracts are in place for portions of expected oil and natural gas production in both 2014 and 2015. Currently, no collars or fixed price swap contracts are in place for any of the Company’s oil and natural gas production beyond 2015.


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The Company may from time to time seek to retire or purchase its outstanding debt securities through cash purchases and/or exchanges in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors.

As of June 30, 2014, the Company’s cash and cash equivalents were $0.9 billion, including $6.7 million attributable to the Company’s consolidated VIEs which is available to satisfy only obligations of the VIEs. The Company had approximately $3.2 billion in total debt outstanding and $10.4 million in outstanding letters of credit with no amount outstanding under its senior credit facility at June 30, 2014. As of and during the three and six-month period ended June 30, 2014, the Company was in compliance with applicable covenants under its senior credit facility and outstanding Senior Fixed Rate Notes. As of August 1, 2014, the Company’s cash and cash equivalents were approximately $806.4 million, including $6.4 million attributable to the Company’s consolidated VIEs. Additionally, there was no amount outstanding under the Company’s senior credit facility and $10.4 million in outstanding letters of credit which reduced the availability under the senior credit facility to $764.6 million.

Working Capital

The Company’s working capital balance fluctuates as a result of changes in the fair value of its outstanding commodity derivative instruments and due to fluctuations in the timing and amount of its collection of receivables and payment of expenditures related to its exploration and production operations.

At June 30, 2014, the Company had a working capital surplus of $582.1 million compared to a surplus of $308.0 million at December 31, 2013. Current assets increased by $47.8 million and current liabilities decreased by $226.3 million at June 30, 2014, compared to December 31, 2013. The increase in current assets is primarily due to a $104.1 million increase in cash and cash equivalents that resulted from the receipt of proceeds from the sale of the Gulf Properties in February 2014, partially offset by cash used for operating activities and capital expenditures. This increase was further offset by decreases of $26.9 million in prepaid expenses and $15.9 million in accounts receivable, also due primarily to the sale of the Gulf Properties as well as fluctuations in the timing and amount of collections of receivables, and a decrease of $12.7 million in the net asset position of the Company’s current derivative contracts due to an increase in the future market prices for oil and natural gas compared to contract prices since December 31, 2013, and the settlement of derivative contracts during the six-month period ended June 30, 2014. The decrease in current liabilities is primarily due to a decrease of $180.8 million in accounts payable and accrued expenses and a decrease of $87.1 million in the current asset retirement obligation, primarily due to the sale of the Gulf Properties. Additionally, accounts payable and accrued expenses further decreased due to distributions paid to noncontrolling interest owners, the payment of accrued 2013 bonuses and other changes due primarily to fluctuations in the timing and amount of the payment of expenditures related to exploration and production operations during the six-month period ended June 30, 2014. These decreases in current liabilities were slightly offset by an increase of $22.5 million in the net liability position of the Company’s current derivative contracts and a liability of $12.0 million recognized as a result of the Company’s guarantee on behalf of Fieldwood of certain plugging and abandonment obligations as of June 30, 2014.


Cash Flows

The Company’s cash flows for the six-month periods ended June 30, 2014 and 2013 are presented in the following table and discussed below:
 
Six Months Ended June 30,
 
2014
 
2013
 
(In thousands)
Cash flows provided by operating activities
$
230,792

 
$
384,683

Cash flows provided by investing activities
34,547

 
1,726,699

Cash flows used in financing activities
(161,244
)
 
(1,326,807
)
Net increase in cash and cash equivalents
$
104,095

 
$
784,575


Cash Flows from Operating Activities

The Company’s operating cash flow is primarily influenced by the prices the Company receives for its oil, natural gas and NGL production, the quantity of oil, natural gas and NGLs it produces, settlements of derivative contracts, and third-party demand for its drilling rigs and oil field services and the rates it is able to charge for these services. The Company’s cash flows from operating activities are also impacted by changes in working capital.

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Net cash provided by operating activities for the six-month period ended June 30, 2014 decreased from the comparable period in 2013 due primarily to a decrease in oil and natural gas production as a result of the sale of the Gulf Properties in February 2014, which was slightly offset by an increase in prices for oil and natural gas and an increase in production in the Mid-Continent area. Also contributing to the decrease were changes in operating assets and liabilities during 2014, primarily related to the decrease in accounts payable and accrued expenses and an increase in cash paid on the settlement of derivative contracts, including payments for early settlements of commodity derivative contracts as a result of the sale of the Gulf Properties in February 2014.

Cash Flows from Investing Activities

The Company dedicates and expects to continue to dedicate a substantial portion of its capital expenditure program toward the exploration for and production of oil and natural gas. These capital expenditures are necessary to offset inherent declines in production and proven reserves, which is typical in the capital-intensive oil and natural gas industry.

Cash flows provided by investing activities were $34.5 million for the six-month period ended June 30, 2014 compared to $1.7 billion for the same period in 2013. During the six-month period ended June 30, 2014, the Company received proceeds from the sale of assets of $707.8 million primarily as a result of the sale of the Gulf Properties, which were largely offset by capital expenditures during the period. During the six-month period ended June 30, 2013, the Company received proceeds of $2.6 billion from the sale of the Permian Properties, which were partially offset by capital expenditures during the period.
    
Capital Expenditures. The Company’s capital expenditures, on an accrual basis, by segment for the six-month periods ended June 30, 2014 and 2013 are summarized below:
 
Six Months Ended June 30,
 
2014
 
2013
 
(In thousands)
Capital Expenditures
 
 
 
Exploration and production
$
620,809

 
$
716,173

Drilling and oil field services
7,275

 
1,515

Midstream services
11,766

 
30,332

Other
12,860

 
27,850

Capital expenditures, excluding acquisitions
652,710

 
775,870

Acquisitions
16,553

 
8,602

Total
$
669,263

 
$
784,472


Capital expenditures, excluding acquisitions, decreased by $123.2 million for the six-month period ended June 30, 2014 from the same period in 2013 primarily due to an increased focus on capital discipline by the Company’s management.

Cash Flows from Financing Activities

The Company’s financing activities used $161.2 million of cash for the six-month period ended June 30, 2014 compared to $1.3 billion in the same period in 2013. The decrease is due primarily to the redemption of $1.1 billion of senior notes as well as the $62.0 million premium paid in connection with the redemption of these notes during the six-month period ended June 30, 2013. During the six-month period ended June 30, 2014, the Company paid $44.1 million for the early settlement of financing derivatives as a result of the sale of the Gulf Properties. Partially offsetting these payments were decreases of $22.9 million in treasury stock purchases as a result of a decrease in shares of restricted stock that were traded for taxes upon vesting during the six-month period ended June 30, 2014 compared to the same period in 2013 and proceeds from the sale of Royalty Trust units of $22.1 million during the six-month period ended June 30, 2014.


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Indebtedness

Long-term debt consists of the following at June 30, 2014 (in thousands): 
8.75% Senior Notes due 2020, net of $4,938 discount
$
445,062

7.5% Senior Notes due 2021, including premium of $3,708
1,178,708

8.125% Senior Notes due 2022
750,000

7.5% Senior Notes due 2023, net of $3,605 discount
821,395

Total debt
$
3,195,165


The indentures governing the Senior Fixed Rate Notes contain covenants imposing certain restrictions on the Company’s activities, including, but not limited to, limitations on the incurrence of indebtedness, payment of dividends, investments, asset sales, certain asset purchases, transactions with related parties and consolidations or mergers. As of and during the three and six-month periods ended June 30, 2014, the Company was in compliance with all of the covenants contained in the indentures governing its outstanding Senior Fixed Rate Notes.

Maturities of Long-Term Debt. As of June 30, 2014, there are no maturities of long-term debt until January 2020. 

Senior Credit Facility. The amount the Company may borrow under its senior credit facility is limited to a borrowing base, and is subject to periodic redeterminations. The Company’s borrowing base is generally redetermined in April and October of each year, and was reaffirmed at $775.0 million in April 2014. The next redetermination is expected to take place in October 2014. Quarterly, the Company pays a commitment fee assessed at an annual rate of 0.5% on any available portion of the senior credit facility. The borrowing base is determined based upon the discounted present value of future cash flows attributable to the Company’s proved reserves. Because the value of the Company’s proved reserves is a key factor in determining the amount of the borrowing base, changing commodity prices and the Company’s success in developing reserves may affect the borrowing base.

At June 30, 2014, the Company had no amount outstanding under the senior credit facility and $10.4 million in outstanding letters of credit, which reduced the availability under the senior credit facility to $764.6 million. As of and during the three and six-month periods ended June 30, 2014, the Company was in compliance with all applicable financial covenants under the senior credit facility.

For more information about the senior credit facility and the Senior Fixed Rate Notes, see “Note 8 - Long-Term Debt” to the unaudited condensed consolidated financial statements included in this Quarterly Report.

Contractual Obligations and Off-Balance Sheet Arrangements

The Company’s contractual obligations include long-term debt obligations, a gas gathering agreement, transportation and throughput agreements, third-party drilling rig agreements, asset retirement obligations, operating leases and other individually insignificant obligations. From time to time, the Company enters into transactions that give rise to significant contractual obligations or otherwise result in significant changes to existing contractual obligations. The sale of the Gulf Properties in February 2014 resulted in the following changes to contractual obligations presented in the 2013 Form 10-K.

•
Asset Retirement Obligations. As of February 25, 2014, the date of the sale, asset retirement obligations associated with the divested Gulf Properties were assumed by Fieldwood. The total obligation assumed was $366.0 million, with approximately $81.4 million due in 2014, $34.2 million due in 2015, $51.8 million due in 2016, $52.4 million due in 2017, $11.7 million due in 2018, and $134.5 million due thereafter.

•
Guarantees. As of June 30, 2014, the fair value of the Company’s guarantees of plugging and abandonment obligations associated with the Gulf Properties was $12.0 million. For additional information about the guarantees, which could extend through February 2015, see “Note 2 - Divestitures” to the unaudited condensed consolidated financial statements included in this Quarterly Report.
    
Critical Accounting Policies and Estimates
    
For a description of the Company’s critical accounting policies and estimates, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2013 Form 10-K. For a discussion of recent

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accounting pronouncements not yet adopted, see “Note 1 - Basis of Presentation” to the Company’s accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report.

Valuation Allowance

In 2008 and 2009, the Company recorded full cost ceiling impairments totaling $3.5 billion on its oil and natural gas assets, resulting in the Company being in a net deferred tax asset position. Management considered all available evidence and concluded that it was more likely than not that some or all of the deferred tax assets would not be realized and established a valuation allowance against the Company’s net deferred tax asset for the period ended December 31, 2008. This valuation allowance has been maintained since 2008. See “Note 13 - Income Taxes” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for more discussion on maintaining the valuation allowance against the Company’s net deferred tax asset.
Management continues to closely monitor all available evidence in considering whether to maintain a valuation allowance on its net deferred tax asset. Factors considered are, but not limited to, the reversal periods of existing deferred tax liabilities and deferred tax assets, the historical earnings of the Company and the prospects of future earnings. For purposes of the valuation allowance analysis, “earnings” is defined as pre-tax earnings as adjusted for permanent tax adjustments.
The Company was in a cumulative negative earnings position until the 36-month period ended December 31, 2012 at which time it reached cumulative positive earnings. However, as a result of the Company closing the sale of the Permian Properties on February 26, 2013, the Company reverted back to a cumulative negative earnings position for the 36-month period ended March 31, 2013. See “Note 2 - Divestitures” to the Company’s unaudited condensed consolidated financial statements included in this Quarterly Report for discussion of the sale of the Permian Properties. Based on net book value, historical costs and proved reserves as of February 26, 2013, the Company recorded a loss on the sale of $398.9 million, which caused the Company to report a loss for the year ended December 31, 2013. The Company remains in a cumulative negative earnings position through the 36-month period ended June 30, 2014. The resulting cumulative negative earnings are not a definitive factor in determining to maintain a valuation allowance as all available evidence should be considered, but it is a significant piece of negative evidence in management’s analysis.
The Company’s revenue, profitability and future growth are substantially dependent upon prevailing and future prices for oil and natural gas. The markets for these commodities continue to be volatile. Relatively modest drops in prices can significantly affect the Company’s financial results and impede its growth. Changes in oil and natural gas prices have a significant impact on the value of the Company’s reserves and on its cash flow. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes in the supply of and demand for oil and natural gas and a variety of additional factors that are beyond the Company’s control. Due to these factors, management has placed a lower weight on the prospects of future earnings in its overall analysis of the valuation allowance.

In determining whether to maintain the valuation allowance, management concluded that the objectively verifiable negative evidence of cumulative negative earnings for the 36-month period ending June 30, 2014, is difficult to overcome with any forms of positive evidence that may exist. Accordingly, management has not changed its judgment regarding the need for a full valuation allowance against its net deferred tax asset. The valuation allowance against the Company’s net deferred tax asset at December 31, 2013 was $702.7 million.

Additionally, at December 31, 2013, the Company had valuation allowances totaling $50.8 million against specific deferred tax assets for which management has determined it is more likely than not that such deferred tax assets will not be realized for various reasons. The valuation allowance against these specific deferred tax assets would not be impacted by the foregoing discussion.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

General

This discussion provides information about the financial instruments the Company uses to manage commodity prices, including instruments used to manage commodity prices for production attributable to the Royalty Trusts. All contracts are settled in cash and do not require the actual delivery of a commodity at settlement. Additionally, the Company’s use of interest rate swaps to manage its variable interest rate debt in prior periods is also discussed.

Commodity Price Risk. The Company’s most significant market risk relates to the prices it receives for its oil, natural gas and NGL production. Due to the historical price volatility of these commodities, the Company periodically has entered into, and expects in the future to enter into, derivative arrangements for the purpose of reducing the variability of oil and natural gas prices the Company receives for its production. From time to time, the Company enters into commodity pricing derivative contracts for a portion of its anticipated oil and natural gas production volumes depending upon management’s view of opportunities under the then-prevailing current market conditions. The Company’s senior credit facility limits its ability to enter into derivative transactions to 85% of expected production volumes from estimated proved reserves.

The Company uses, and may continue to use, a variety of commodity-based derivative contracts, including fixed price swaps, collars and basis swaps. At June 30, 2014, the Company’s commodity derivative contracts consisted of fixed price swaps and collars, which are described below:
Fixed price swaps
The Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.
 
 
Collars
Two-way collars contain a fixed floor price (put) and a fixed ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.
 
Three-way collars have two fixed floor prices (a purchased put and a sold put) and a fixed ceiling price (call). The purchased put establishes a minimum price unless the market price falls below the sold put, at which point the minimum price would be NYMEX plus the difference between the purchased put and the sold put strike price. The call establishes a maximum price (ceiling) the Company will receive for the volumes under the contract. If the market price is between the ceiling price and the purchased put, no payments are due from either party.
The Company’s oil fixed price swap transactions are settled based upon the average daily prices for the calendar month or quarter of the contract period. The Company’s three-way oil collars are settled based upon the arithmetic average of NYMEX oil prices during the calculation period for the relevant contract. The Company’s natural gas fixed price swap transactions are settled based upon the NYMEX prices on the final commodity business day for the relevant contract, and the Company’s natural gas collars are settled based upon the NYMEX prices on the penultimate commodity business day for the relevant contract. Settlement for oil derivative contracts occurs in the succeeding month or quarter and natural gas derivative contracts are settled in the production month or quarter.

At June 30, 2014, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps 
 
Notional (MBbls)
 
Weighted Average
Fixed Price
July 2014 - December 2014
2,054

 
$
99.08

January 2015 - December 2015
5,588

 
$
92.44


Natural Gas Price Swaps 
 
Notional (MMcf)
 
Weighted Average
Fixed Price
July 2014 - December 2014
24,840

 
$
4.28

January 2015 - December 2015
15,400

 
$
4.50




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Oil Collars - Three-way
 
Notional (MBbls)
 
Sold Put
Purchased Put
Sold Call
July 2014 - December 2014
4,140

 
$70.00
$90.20
$100.00
January 2015 - December 2015
3,656

 
$74.83
$90.35
$103.50

Natural Gas Collars
 
Notional (MMcf)
 
Collar Range
July 2014 - December 2014
472

 
$4.00
—
$7.78
January 2015 - December 2015
1,010

 
$4.00
—
$8.55

Because the Company has not designated any of its derivative contracts as hedges for accounting purposes, changes in fair values of the Company’s derivative contracts are recognized as gains and losses in current period earnings. As a result, the Company’s current period earnings may be significantly affected by changes in the fair value of its commodity derivative contracts. Changes in fair value are principally measured based on future prices as of period-end compared to the contract price.

The Company recorded a loss (gain) on commodity derivative contracts of $85.3 million and $(103.7) million for the three-month periods ended June 30, 2014 and 2013, respectively, which includes net cash payments (receipts) upon settlement of $13.1 million and $(18.1) million, respectively. The Company recorded a loss (gain) on commodity derivative contracts of $127.8 million and $(62.8) million for the six-month periods ended June 30, 2014, and 2013, respectively, which includes net cash payments upon settlement of $96.4 million and $0.3 million, respectively. Included in these net cash payments are $69.6 million and $29.0 million of payments for early settlements of commodity derivative contracts primarily as a result of the sale of the Gulf Properties in February 2014 and the Permian Properties in February 2013, respectively.

See “Note 9 - Derivatives” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding the Company’s commodity derivatives.

Credit Risk. All of the Company’s derivative transactions have been carried out in the over-the-counter market. The use of derivative transactions in over-the-counter markets involves the risk that the counterparties may be unable to meet the financial terms of the transactions. The counterparties for all of the Company’s derivative transactions have an “investment grade” credit rating. The Company monitors on an ongoing basis the credit ratings of its derivative counterparties and considers its counterparties’ credit default risk ratings in determining the fair value of its derivative contracts. The Company’s derivative contracts are with multiple counterparties to minimize its exposure to any individual counterparty.
    
A default by the Company under its senior credit facility constitutes a default under its derivative contracts with counterparties that are lenders under the senior credit facility. The Company does not require collateral or other security from counterparties to support derivative instruments. The Company has master netting agreements with all of its derivative contract counterparties, which allow the Company to net its derivative assets and liabilities with the same counterparty. As a result of the netting provisions, the Company’s maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the derivative contracts. The Company’s loss is further limited as any amounts due from a defaulting counterparty that is a lender under the senior credit facility can be offset against amounts owed, if any, to such counterparty under the Company’s senior credit facility. As of June 30, 2014, all of the Company’s open derivative contracts are with counterparties that share in the collateral supporting the Company’s senior credit facility. As a result, the Company is not required to post additional collateral under its derivative contracts. To secure their obligations under the derivative contracts novated by the Company, the Permian Trust and Mississippian Trust II have each given the counterparties to such contracts a lien on their royalty interests. See “Note 3 - Variable Interest Entities” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional information on the Permian Trust’s and the Mississippian Trust II’s derivative contracts.

The Company’s ability to fund its capital expenditures budget is partially dependent upon the availability of funds under its senior credit facility. In order to mitigate the credit risk associated with individual financial institutions committed to participate in the senior credit facility, the Company’s bank group currently consists of 23 financial institutions with commitments ranging from 1.00% to 6.00% of the borrowing base.


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Interest Rate Risk. The Company is exposed to interest rate risk on its long-term fixed rate debt and will be exposed to variable interest rates if it draws on its senior credit facility. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the Company to (i) changes in market interest rates reflected in the fair value of the debt and (ii) the risk that the Company may need to refinance maturing debt with new debt at a higher rate. Variable rate debt, where the interest rate fluctuates, exposes the Company to short-term changes in market interest rates as the Company’s interest obligations on these instruments are periodically redetermined based on prevailing market interest rates, primarily LIBOR and the federal funds rate. The Company had no outstanding variable rate debt as of June 30, 2014.

Prior to its maturity on April 1, 2013, the Company had a $350.0 million notional interest rate swap agreement, which effectively fixed the variable interest rate on the Senior Floating Rate Notes at an annual rate of 6.69% for periods prior to their repurchase and redemption in the third quarter of 2012. The interest rate swap was not designated as a hedge.

The Company recorded a loss on its interest rate swap of $0.01 million for the six-month period ended June 30, 2013, respectively, which is included in interest expense in the consolidated statements of operations. Included in the loss for the six-month period ended June 30, 2013, are cash payments upon contract settlement of $2.4 million.


    


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ITEM 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of the end of the period covered by this Quarterly Report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2014 to provide reasonable assurance that the information required to be disclosed by the Company in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and such information is accumulated and communicated to management, as appropriate to allow timely decisions regarding required disclosure.

There was no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II. Other Information

ITEM 1. Legal Proceedings

On April 5, 2011, Wesley West Minerals, Ltd. and Longfellow Ranch Partners, LP filed suit against the Company and SandRidge Exploration and Production, LLC (collectively, the “SandRidge Entities”) in the 83rd District Court of Pecos County, Texas. The plaintiffs, who have leased mineral rights to the SandRidge Entities in Pecos County, allege that the SandRidge Entities have not properly paid royalties on all volumes of natural gas and CO 2 produced from the acreage leased from the plaintiffs. The plaintiffs also allege that the SandRidge Entities have inappropriately failed to pay royalties on CO2 produced from the plaintiffs’ acreage that results from the treatment of natural gas at the Century Plant. The plaintiffs seek approximately $45.5 million in actual damages for the period of time between January 2004 and December 2011, punitive damages and a declaration that the SandRidge Entities must pay royalties on CO 2 produced from the plaintiffs’ acreage that results from treatment of natural gas at the Century Plant. The Commissioner of the General Land Office of the State of Texas (“GLO”) is named as an additional defendant in the lawsuit as some of the affected oil and natural gas leases described in the plaintiffs’ allegations cover mineral classified lands in which the GLO is entitled to one-half of the royalties attributable to such leases. The GLO has filed a cross-claim against the SandRidge Entities asserting the same claims as the plaintiffs with respect to the leases covering mineral classified lands and seeking approximately $13.0 million in actual damages, inclusive of penalties and interest. On February 5, 2013, the Company received a favorable summary judgment ruling that effectively removes a majority of the plaintiffs’ and GLO’s claims. On April 29, 2013, the court entered an order allowing for an interlocutory appeal of its summary judgment ruling, and on May 15, 2014, oral arguments on the appeal were presented to the Court of Appeals for the Eighth District of Texas. The Company intends to continue to defend the remaining issues in this lawsuit as well as any appellate proceedings. At the time of the ruling on summary judgment, the lawsuit was still in the discovery stage and, accordingly, an estimate of reasonably possible losses associated with the remaining causes of action, if any, cannot be made until all of the facts, circumstances and legal theories relating to such claims and the SandRidge Entities’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On August 4, 2011, Patriot Exploration, LLC, Jonathan Feldman, Redwing Drilling Partners, Mapleleaf Drilling Partners, Avalanche Drilling Partners, Penguin Drilling Partners and Gramax Insurance Company Ltd. filed a lawsuit against the Company, SandRidge Exploration and Production, LLC (“SandRidge E&P”) and certain current and former directors and senior executive officers of the Company (collectively, the “defendants”) in the U.S. District Court for the District of Connecticut. On October 28, 2011, the plaintiffs filed an amended complaint alleging substantially the same allegations as those contained in the original complaint. The plaintiffs allege that the defendants made false and misleading statements to U.S. Drilling Capital Management LLC and to the plaintiffs prior to the entry into a participation agreement among Patriot Exploration, LLC, U.S. Drilling Capital Management LLC and SandRidge E&P, which provided for the investment by the plaintiffs in certain of SandRidge E&P’s oil and natural gas properties. To date, the plaintiffs have invested approximately $16.0 million under the participation agreement. The plaintiffs seek compensatory and punitive damages and rescission of the participation agreement. On November 28, 2011, the defendants filed a motion to dismiss the amended complaint. On June 29, 2013, the court granted in part and denied in part the defendants’ motion. The Company and the other defendants intend to defend this lawsuit vigorously and believe the plaintiffs’ claims are without merit. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs' claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

Between December 2012 and March 2013, seven putative shareholder derivative actions were filed in state and federal court in Oklahoma:

•
Arthur I. Levine v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on December 19, 2012 in the U.S. District Court for the Western District of Oklahoma
•
Deborah Depuy v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 22, 2013 in the U.S. District Court for the Western District of Oklahoma
•
Paul Elliot, on Behalf of the Paul Elliot IRA R/O, v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 29, 2013 in the U.S. District Court for the Western District of Oklahoma
•
Dale Hefner v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 4, 2013 in the District Court of Oklahoma County, Oklahoma
•
Rocky Romano v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 22, 2013 in the District Court of Oklahoma County, Oklahoma

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•
Joan Brothers v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on February 15, 2013 in the U.S. District Court for the Western District of Oklahoma
•
Lisa Ezell, Jefferson L. Mangus, and Tyler D. Mangus v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on March 22, 2013 in the U.S. District Court for the Western District of Oklahoma

Each lawsuit identified above was filed derivatively on behalf of the Company and names as defendants current and former directors of the Company. The Hefner lawsuit also names as defendants certain current and former senior executive officers of the Company. All seven lawsuits assert overlapping claims - generally that the defendants breached their fiduciary duties, mismanaged the Company, wasted corporate assets, and engaged in, facilitated or approved self-dealing transactions in breach of their fiduciary obligations. The Depuy lawsuit also alleges violations of federal securities laws in connection with the Company allegedly filing and distributing certain misleading proxy statements. The lawsuits seek, among other relief, injunctive relief related to the Company’s corporate governance and unspecified damages.

On April 10, 2013, the U.S. District Court for the Western District of Oklahoma consolidated the Levine, Depuy, Elliot, Brothers, and Ezell actions (the “Federal Shareholder Derivative Litigation”) under the caption “In re SandRidge Energy, Inc. Shareholder Derivative Litigation,” appointed a lead plaintiff and lead counsel, and ordered the lead plaintiff to file a consolidated complaint by May 1, 2013. On June 3, 2013, the Company and the individual defendants filed their respective motions to dismiss the consolidated complaint. On September 11, 2013, the court granted the defendants’ respective motions to dismiss the consolidated complaint without prejudice, and granted plaintiffs leave to file an amended consolidated complaint. The plaintiffs filed an amended consolidated complaint on October 9, 2013, in which plaintiffs allege that: (i) the Company’s former CEO, Tom Ward, breached his fiduciary duties by usurping corporate opportunities, (ii) certain of the Company’s current and former directors breached their fiduciary duties of care, (iii) Mr. Ward and certain of the Company’s current and former directors wasted corporate assets, (iv) certain entities allegedly affiliated with Mr. Ward aided and abetted Mr. Ward’s breaches of fiduciary duties, (v) Mr. Ward and entities allegedly affiliated with Mr. Ward misappropriated the Company’s confidential and proprietary information, and (vi) entities allegedly affiliated with Mr. Ward were unjustly enriched. The defendants have filed respective motions to dismiss the amended consolidated complaint, which are pending before the court.

The Company and the individual defendants in the Hefner and Romano actions (the “State Shareholder Derivative Litigation”) moved to stay each of the actions in favor of the Federal Shareholder Derivative Litigation, in order to avoid duplicative proceedings, and also requested, in the alternative, the dismissal of the State Shareholder Derivative Litigation.

On June 19, 2013, the court stayed the Hefner action until at least November 29, 2013. The court subsequently lifted its stay for purposes of hearing and deciding the defendants’ respective motions to dismiss. On September 18, 2013, the court denied the defendants’ motions to dismiss.

On May 8, 2013, the court stayed the Romano action pending further order of the court. On October 31, 2013, the plaintiff filed a motion to lift the stay, which was denied by the court on February 7, 2014.

Because the Federal Shareholder Derivative Litigation and the State Shareholder Derivative Litigation are in the early stages, an estimate of reasonably possible losses associated with each of them, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to these actions.

On December 5, 2012, James Glitz and Rodger A. Thornberry, on behalf of themselves and all other similarly situated stockholders, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against SandRidge Energy, Inc. and certain current and former executive officers of the Company. On January 4, 2013, Louis Carbone, on behalf of himself and all other similarly situated stockholders, filed a substantially similar putative class action complaint in the same court and against the same defendants. On March 6, 2013, the court consolidated these two actions under the caption “In re SandRidge Energy, Inc. Securities Litigation” (the “Securities Litigation”) and appointed a lead plaintiff and lead counsel. On July 23, 2013, plaintiffs filed a consolidated amended complaint, which asserts a variety of federal securities claims against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class of (a) purchasers of SandRidge common stock during the period from February 24, 2011 to November 8, 2012, (b) purchasers of common units of the Mississippian Trust I in or traceable to its initial public offering on or about April 12, 2011, and (c) purchasers of common units of the Mississippian Trust II (together with the Mississippian Trust I, the “Mississippian Trusts”) in or traceable to its initial public offering on or about April 23, 2012. The claims are based on allegations that the Company, certain of its current and former officers and directors, and the Mississippian Trusts, among other defendants, are responsible for making false and misleading statements, and omitting material information, concerning a variety of subjects, including oil and natural gas reserves, the Company’s capital expenditures, and certain transactions entered into by companies allegedly affiliated with the Company’s former Chief Executive Officer (“CEO”) Tom Ward. The defendants have filed respective motions to dismiss the consolidated

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amended complaint, which are pending before the court. Because the Securities Litigation is in the early stages, an estimate of reasonably possible losses associated with it, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to the Securities Litigation. Each of the Mississippian Trusts has requested that the Company indemnify it for any losses it may incur in connection with the Securities Litigation.

On July 15, 2013, James Hart and fifteen other named plaintiffs filed an amended complaint in the United States District Court for the District of Kansas in an action undertaken individually and on behalf of others similarly situated against SandRidge Energy, Inc., SandRidge Operating Company, SandRidge E&P, SandRidge Midstream, Inc., and Lariat Services, Inc. In their amended complaint, plaintiffs allege that the defendants failed to properly calculate overtime pay for the plaintiffs and for other similarly situated current and former employees. The plaintiffs further allege that the defendants required the plaintiffs and other similarly situated current and former employees to engage in work-related activities without pay. The plaintiffs assert claims against the defendants for (i) violations of the Fair Labor Standards Act, (ii) violations of the Kansas Wage Payment Act, (iii) breach of contract, and (iv) fraud, and seek to recover unpaid wages and overtime pay, liquidated damages, statutory penalties, economic damages, compensatory and punitive damages, attorneys’ fees and costs, and both pre- and post-judgment interest.

On October 3, 2013, the plaintiffs filed a Motion for Conditional Collective Action Certification and for Judicial Notice to the Class and a Motion to Toll the Statute of Limitations. On October 11, 2013, the defendants filed a Motion to Dismiss and a Motion to Transfer Venue to the United States District Court for the Western District of Oklahoma. All of these motions are pending before the court.

On April 2, 2014, the court granted the defendants’ Motion to Dismiss and granted plaintiffs leave to file an amended complaint by April 16, 2014, which they did on such date. On July 1, 2014, the court granted plaintiffs’ Motion for Conditional Collective Action Certification and for Judicial Notice to the Class, and denied plaintiffs’ Motion to Toll the Statute of Limitations. The Company and the other defendants intend to defend this lawsuit vigorously. This lawsuit is in the early stages and, accordingly, an estimate of reasonably possible losses associated with this action, if any, cannot be made until the facts, circumstances and legal theories relating to the plaintiffs’ claims and the defendants’ defenses are fully disclosed and analyzed. The Company has not established any reserves relating to this action.

On December 18, 2013, the Company received a subpoena duces tecum from the U.S. Department of Justice in connection with an ongoing investigation of possible violations of antitrust laws in connection with the purchase or lease of land, oil or natural gas rights.  The Company is cooperating with the investigation.

In addition to the litigation described above, the Company is a defendant in lawsuits from time to time in the normal course of business. While the results of litigation and claims cannot be predicted with certainty, the Company believes the reasonably possible losses of such matters, individually and in the aggregate, are not material. Additionally, the Company believes the probable final outcome of such matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, cash flows or liquidity.

ITEM 1A. Risk Factors

There has been no material change to the risk factors previously discussed in Item 1A—Risk Factors in the Company’s 2013 Form 10-K.


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ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

As part of the Company’s restricted stock program, the Company makes required tax payments on behalf of employees when their stock awards vest and then withholds a number of vested shares of common stock having a value on the date of vesting equal to the tax obligation. The shares withheld are initially recorded as treasury shares, then immediately retired. During the quarter ended June 30, 2014, the following shares were withheld in satisfaction of tax withholding obligations arising from the vesting of restricted stock:
Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1, 2014 — April 30, 2014
8,796

 
$
6.47

 
N/A
 
N/A
May 1, 2014 — May 31, 2014
17,260

 
$
6.60

 
N/A
 
N/A
June 1, 2014 — June 30, 2014
2,319

 
$
7.20

 
N/A
 
N/A

ITEM 6. Exhibits

See the Exhibit Index accompanying this Quarterly Report.


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
SandRidge Energy, Inc.
 
 
 
 
By:
/s/    EDDIE M. LEBLANC
 
 
Eddie M. LeBlanc
Executive Vice President and Chief Financial Officer
Date: August 7, 2014

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EXHIBIT INDEX

 
 
Incorporated by Reference
 
 
Exhibit
No.
Exhibit Description
Form
 
SEC
File No.
 
Exhibit
 
Filing Date
 
Filed
Herewith
3.1
Certificate of Incorporation of SandRidge Energy, Inc.
S-1
 
333-148956
 
3.1
 
1/30/2008
 
 
3.2
Certificate of Amendment to the Certificate of Incorporation of SandRidge Energy, Inc., dated July 16, 2010
10-Q
 
001-33784
 
3.2
 
8/9/2010
 
 
3.3
Amended and Restated Bylaws of SandRidge Energy, Inc.
8-K
 
001-33784
 
3.1
 
3/9/2009
 
 
31.1
Section 302 Certification—Chief Executive Officer
 
 
 
 
 
 
 
 
*
31.2
Section 302 Certification—Chief Financial Officer
 
 
 
 
 
 
 
 
*
32.1
Section 906 Certifications of Chief Executive Officer and Chief Financial Officer
 
 
 
 
 
 
 
 
*
101.INS
XBRL Instance Document
 
 
 
 
 
 
 
 
*
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
 
 
 
 
 
 
*
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
  
 
  
 
  
 
  
*
101.DEF
XBRL Taxonomy Extension Definition Document
 
  
 
  
 
  
 
  
*
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
  
 
  
 
  
 
  
*
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
 
  
 
  
 
  
 
  
*

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