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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol Name of each exchange on which registered
Common Stock, $.001 par value SD New York Stock Exchange
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 every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer

Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☑ No o

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of the close of business on October 31, 2019, was 35,774,611.



References in this report to the “Company,” “SandRidge,” “we,” “our,” and “us” mean SandRidge Energy, Inc., including its consolidated subsidiaries and its proportionately consolidated share of each of SandRidge Mississippian Trust I and SandRidge Mississippian Trust II for periods ending September 30, 2019 and December 31, 2018 and SandRidge Permian Trust for the period ending September 30, 2018 (collectively, the “Royalty Trusts”).

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) of the Company includes “forward-looking statements” as defined by the SEC. These forward-looking statements may include projections and estimates concerning our 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 our business strategy, compliance with governmental regulation of the oil and natural gas industry, including environmental regulations, acquisitions and divestitures and the potential effects on our financial condition and other statements concerning our operations, financial performance and financial 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. These forward-looking statements are based on certain assumptions and analyses based on our experience and perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected. 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 we consider 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, 2018 (the “2018 Form 10-K”) and in Item 1A of this Quarterly Report.




SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 2019

INDEX

ITEM 1.
4
5
6
7
8
ITEM 2.
22
ITEM 3.
32
ITEM 4.
33
ITEM 1.
34
ITEM 1A.
35
ITEM 2.
35
ITEM 3.
35
ITEM 4.
35
ITEM 5.
35
ITEM 6.
36



PART I. Financial Information

ITEM 1. Financial Statements

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data) 
September 30,
2019
December 31, 2018
ASSETS
Current assets
Cash and cash equivalents $ 4,035    $ 17,660   
Restricted cash - other 1,693    1,985   
Accounts receivable, net 31,706    45,503   
Derivative contracts 1,133    5,286   
Prepaid expenses 1,999    2,628   
Other current assets 830    265   
Total current assets 41,396    73,327   
Oil and natural gas properties, using full cost method of accounting
Proved 1,455,609    1,269,091   
Unproved 26,107    60,152   
Less: accumulated depreciation, depletion and impairment (855,765)   (580,132)  
625,951    749,111   
Other property, plant and equipment, net 191,280    200,838   
Other assets 1,325    1,062   
Total assets $ 859,952    $ 1,024,338   

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses $ 79,812    $ 111,797   
Asset retirement obligation 13,968    25,393   
Other current liabilities 1,415    —   
Total current liabilities 95,195    137,190   
Long-term debt 62,000    —   
Asset retirement obligation 45,901    34,671   
Other long-term obligations 5,612    4,756   
Total liabilities 208,708    176,617   
Commitments and contingencies (Note 9)
Stockholders’ Equity
Common stock, $0.001 par value; 250,000 shares authorized; 35,730 issued and outstanding at September 30, 2019 and 35,687 issued and outstanding at December 31, 2018
36    36   
Warrants 88,518    88,516   
Additional paid-in capital 1,058,905    1,055,164   
Accumulated deficit (496,215)   (295,995)  
Total stockholders’ equity 651,244    847,721   
Total liabilities and stockholders’ equity $ 859,952    $ 1,024,338   
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Revenues
Oil, natural gas and NGL $ 58,188    $ 97,491    $ 206,432    $ 263,761   
Other 181    169    561    489   
Total revenues 58,369    97,660    206,993    264,250   
Expenses
Lease operating expenses 23,866    21,913    71,721    65,189   
Production, ad valorem, and other taxes 4,346    7,339    15,303    19,256   
Depreciation and depletion — oil and natural gas 38,871    33,090    114,755    92,048   
Depreciation and amortization — other 2,981    3,036    8,910    9,229   
Impairment 165,507    —    165,507    4,170   
General and administrative 6,238    9,064    26,261    32,823   
Accelerated vesting of employment compensation —    —    —    6,545   
Proxy contest —    (459)   —    7,139   
Employee termination benefits —    23    4,465    32,653   
(Gain) loss on derivative contracts (1,756)   11,329    (1,547)   59,763   
Other operating expense (income) 23    (105)   142    (1,343)  
Total expenses 240,076    85,230    405,517    327,472   
(Loss) income from operations (181,707)   12,430    (198,524)   (63,222)  
Other (expense) income
Interest expense, net (722)   (627)   (2,009)   (2,226)  
Gain on extinguishment of debt —    —    —    1,151   
Other income (expense), net 827    (118)   370    972   
Total other income (expense) 105    (745)   (1,639)   (103)  
(Loss) income before income taxes (181,602)   11,685    (200,163)   (63,325)  
Income tax benefit —    (30)   —    (72)  
Net (loss) income $ (181,602)   $ 11,715    $ (200,163)   $ (63,253)  
(Loss) earnings per share
Basic $ (5.12)   $ 0.33    $ (5.66)   $ (1.81)  
Diluted $ (5.12)   $ 0.33    $ (5.66)   $ (1.81)  
Weighted average number of common shares outstanding
Basic 35,491    35,308    35,390    34,971   
Diluted 35,491    35,330    35,390    34,971   

The accompanying notes are an integral part of these condensed consolidated financial statements.
5

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands) 
Common Stock
Warrants
Additional Paid-In Capital
Accumulated Deficit
Total
Shares
Amount
Shares
Amount
Nine Months Ended September 30, 2019
Balance at December 31, 2018 35,687    $ 36    6,604    $ 88,516    $ 1,055,164    $ (295,995)   $ 847,721   
Stock-based compensation
—    —    —    —    1,073    —    1,073   
Issuance of warrants for general unsecured claims
—    —        (2)   —    —   
Cumulative effect of adoption of ASU 2016-02
—    —    —    —    —    (57)   (57)  
Net loss
—    —    —    —    —    (5,277)   (5,277)  
Balance at March 31, 2019 35,687    36    6,605    88,518    1,056,235    (301,329)   843,460   
Issuance of stock awards, net of cancellations
75    —    —    —    —    —    —   
Stock-based compensation
—    —    —    —    2,170    —    2,170   
Cash paid for tax withholdings on vested stock awards
—    —    —    —    (205)   —    (205)  
Net loss
—    —    —    —    —    (13,284)   (13,284)  
Balance at June 30, 2019 35,762    36    6,605    88,518    1,058,200    (314,613)   832,141   
Cancellations of stock awards, net of issuances
(32)   —    —    —    —    —    —   
Stock-based compensation
—    —    —    —    862    —    862   
Cash paid for tax withholdings on vested stock awards
—    —    —    —    (157)   —    (157)  
Net loss
—    —    —    —    —    (181,602)   (181,602)  
Balance at September 30, 2019 35,730    $ 36    6,605    $ 88,518    $ 1,058,905    $ (496,215)   $ 651,244   

Common Stock
Warrants
Additional Paid-In Capital
Accumulated Deficit
Total
Shares
Amount
Shares
Amount
Nine Months Ended September 30, 2018
Balance at December 31, 2017 35,650    $ 36    6,570    $ 88,500    $ 1,038,324    $ (286,920)   $ 839,940   
Cancellation of stock awards, net of issuances
(90)   —    —    —    —    —    —   
Stock-based compensation
—    —    —    —    16,055    —    16,055   
Cash paid for tax withholdings on vested stock awards
—    —    —    —    (1,661)   —    (1,661)  
Net loss
—    —    —    —    —    (40,894)   (40,894)  
Balance at March 31, 2018 35,560    36    6,570    88,500    1,052,718    (327,814)   813,440   
Cancellation of stock awards, net of issuances
(254)   (1)   —    —      —    —   
Common stock issued for general unsecured claims
26    —    —    —    —    —    —   
Stock-based compensation
—    —    —    —    6,605    —    6,605   
Issuance of warrants for general unsecured claims
—    —    52    14    (14)   —    —   
Cash paid for tax withholdings on vested stock awards
—    —    —    —    (5,715)   —    (5,715)  
Net loss
—    —    —    —    —    (34,074)   (34,074)  
Balance at June 30, 2018 35,332    35    6,622    88,514    1,053,595    (361,888)   780,256   
Issuance of stock awards, net of cancellations 359      —    —    (1)   —    —   
Stock-based compensation
—    —    —    —    564    —    564   
Issuance of warrants for general unsecured claims
—    —    (20)     (3)   —    —   
Net income
—    —    —    —    —    11,715    11,715   
Balance at September 30, 2018 35,691    $ 36    6,602    $ 88,517    $ 1,054,155    $ (350,173)   $ 792,535   

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended September 30,
2019 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (200,163)   $ (63,253)  
Adjustments to reconcile net loss to net cash provided by operating activities
Provision for doubtful accounts (90)   (6)  
Depreciation, depletion, and amortization 123,665    101,277   
Impairment 165,507    4,170   
Debt issuance costs amortization 398    352   
Amortization of premiums and discounts on debt —    (47)  
Write off of debt issuance costs 142    —   
Gain on extinguishment of debt —    (1,151)  
(Gain) loss on derivative contracts (1,547)   59,763   
Cash received (paid) on settlement of derivative contracts 5,700    (29,025)  
Stock-based compensation 3,930    22,415   
Other (119)   (1,734)  
Changes in operating assets and liabilities (1,894)   16,407   
Net cash provided by operating activities 95,529    109,168   
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures for property, plant and equipment (170,723)   (146,819)  
Acquisition of assets 236    —   
Proceeds from sale of assets 1,347    14,497   
Net cash used in investing activities (169,140)   (132,322)  
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from borrowings 170,096    —   
Repayments of borrowings (108,096)   (36,304)  
Reduction of financing lease liability (1,034)   —   
Debt issuance costs (910)   —   
Cash paid for tax withholdings on vested stock awards (362)   (7,376)  
Net cash provided by (used in) financing activities 59,694    (43,680)  
NET DECREASE IN CASH, CASH EQUIVALENTS and RESTRICTED CASH (13,917)   (66,834)  
CASH, CASH EQUIVALENTS and RESTRICTED CASH, beginning of year 19,645    101,308   
CASH, CASH EQUIVALENTS and RESTRICTED CASH, end of period $ 5,728    $ 34,474   
Supplemental Disclosure of Cash Flow Information
Cash paid for interest, net of amounts capitalized $ (1,446)   $ —   
Cash received for income taxes $ —    $ 4,381   
Supplemental Disclosure of Noncash Investing and Financing Activities
Purchase of PP&E in accounts payable $ 12,790    $ 20,955   
Right-of-use assets obtained in exchange for financing lease obligations $ 3,237    $ —   
Carrying value of properties exchanged $ 5,384    $ —   

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

7

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation

Nature of Business. SandRidge Energy, Inc. is an oil and natural gas exploration and production company headquartered in Oklahoma City, Oklahoma with a principal focus on the acquisition, exploration and development of hydrocarbon resources in the United States.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned or majority owned subsidiaries, including its proportionate share of the Royalty Trusts. All intercompany accounts and transactions have been eliminated in consolidation.

Interim Financial Statements. The accompanying unaudited condensed consolidated financial statements and notes should be read in conjunction with the audited financial statements and notes contained in the Company’s 2018 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, the financial statements include all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, necessary to fairly state the Company’s unaudited condensed consolidated financial statements.  

Significant Accounting Policies. The unaudited condensed consolidated financial statements were prepared in accordance with the accounting policies stated in the 2018 Form 10-K as well as the items noted below.

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 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; impairment tests of long-lived assets; asset retirement obligations; depreciation, depletion and amortization; income taxes; valuation of derivative instruments; contingencies; and accrued revenue and related receivables. In the second quarter of 2019, the Company revised estimated retirement dates for certain Mid-Continent properties. These revisions resulted in the reclassification of $9.7 million in asset retirement obligations from current liabilities to long-term obligations on the accompanying condensed consolidated balance sheet as of September 30, 2019. Although management believes the estimates used in the areas noted above are reasonable, actual results could differ significantly.

Recent Accounting Pronouncements. In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, “Leases (Topic 842),” and subsequently issued other associated ASU's related to Topic 842 which supersede Accounting Standards Codification ("ASC") 840 and require lessees to recognize right of use ("ROU") lease assets and liabilities on the balance sheet for long-term leases formerly classified as operating leases under ASC 840, and to disclose key information about leasing arrangements. The Company adopted this ASU on January 1, 2019 using a modified retrospective approach for all ROU leases that existed at the period of adoption and did not restate its comparative periods. See Note 5 for additional discussion of the new leasing standard.

Recent Accounting Pronouncements Not Yet Adopted. The FASB issued ASU 2016-13, “Financial Instruments —Credit Losses (Topic 326) Measurement of Credit Losses on Financial Instruments,” which changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the currently required incurred loss approach with an expected loss model for instruments measured at amortized cost. The standard is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted for the interim and annual periods beginning after December 31, 2018, and will be applied using a modified retrospective approach resulting in a cumulative effect adjustment to retained earnings upon adoption. The Company does not plan to early adopt and is currently evaluating the effect the guidance will have on its consolidated financial statements; however, the impact is not expected to be material.

8

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

2. Acquisitions and Divestitures of Oil and Gas Properties

Nonmonetary transaction. During the three-month period ended September 30, 2019, the Company transferred its interest in certain proved oil and natural gas properties located in Comanche, Harper and Sumner counties in Kansas along with associated electrical infrastructure and an insignificant amount of accounts receivable with an aggregate estimated fair value of $5.4 million, for an interest in certain other proved oil and natural gas properties located in Comanche, Harper and Barber counties in Kansas. The fair value of the assets given in the transaction approximated their carrying value, therefore no gain or loss was recognized on the transfer.

3. 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 levels of the fair value hierarchy noted below. The carrying values of cash, restricted cash, accounts receivable, prepaid expenses, certain other current assets and other assets, accounts payable and accrued expenses, other current liabilities and other long-term obligations included in the unaudited condensed consolidated balance sheets approximated fair value at September 30, 2019, and December 31, 2018. Additionally, the carrying amount of debt associated with borrowings outstanding under the credit facility approximates fair value as borrowings bear interest at variable rates. As a result, these financial assets and liabilities are not discussed below. The fair values of property, plant and equipment classified as assets held for sale and related impairments and nonmonetary transactions, which are calculated using Level 3 inputs, are discussed in Note 6.

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 from 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 Company had assets classified in Level 2 of the hierarchy as of September 30, 2019 and December 31, 2018, as described below.

Level 2 Fair Value Measurements

Commodity Derivative Contracts. The fair values of the Company’s oil and natural gas fixed price swaps 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.



9

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

Fair Value - Recurring Measurement Basis

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

September 30, 2019

Fair Value Measurements
Netting(1)
Assets/Liabilities at Fair Value
Level 1
Level 2
Level 3
Assets
Commodity derivative contracts
$ —    $ 1,133    $ —    —    $ 1,133   
$ —    $ 1,133    $ —    $ —    $ 1,133   

December 31, 2018
Fair Value Measurements
Netting(1)
Assets/Liabilities at Fair Value
Level 1
Level 2
Level 3
Assets
Commodity derivative contracts
$ —    $ 5,286    $ —    $ —    $ 5,286   
$ —    $ 5,286    $ —    $ —    $ 5,286   
____________________
1.Represents the effect of netting assets and liabilities for counterparties with which the right of offset exists.

Transfers. The Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements during the three and nine-month periods ended September 30, 2019 and 2018.

4. Derivatives

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, on occasion, has sought to manage this risk through the use of commodity derivative contracts, which allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil and natural gas sales. The Company has not designated any of its derivative contracts as hedges for accounting purposes. All derivative contracts are recorded at fair value with changes in derivative contract fair values recognized as gain or loss on derivative contracts in the unaudited condensed consolidated statements of operations. None of the Company’s commodity 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. Commodity derivative contracts are settled on a monthly basis, and the commodity derivative contract valuations are adjusted to the mark-to-market valuation on a quarterly basis.

The Company entered into two oil swap contracts in July 2019 which consisted of fixed price swaps under which 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. The Board and management of the Company are continuing to evaluate the futures market for oil and natural gas to mitigate exposure to adverse oil and natural gas price changes.

The following table summarizes derivative activity for the three and nine-month periods ended September 30, 2019, and 2018 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(Gain) loss on commodity derivative contracts $ (1,756)   $ 11,329    $ (1,547)   $ 59,763   
Cash (received) paid on settlements $ (622)   $ 11,631    $ (5,700)   $ 29,025   
10

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

Master Netting Agreements and the Right of Offset. The Company has master netting agreements with all of its commodity derivative counterparties and has presented its derivative assets and liabilities with the same counterparty on a net basis in the unaudited condensed consolidated balance sheets. As a result of the netting provisions, the Company's maximum amount of loss under commodity derivative transactions due to credit risk is limited to the net amounts due from its counterparties. As of September 30, 2019, the counterparties to the Company's open commodity derivative contracts consisted of two financial institutions, both of which are also lenders under the Company's credit facility. The Company is not required to post additional collateral under its commodity derivative contracts as all of the counterparties to the Company’s commodity derivative contracts share in the collateral supporting the Company’s credit facility.

The following table summarizes (i) the Company's commodity 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 credit facility as of September 30, 2019 and December 31, 2018 (in thousands):

September 30, 2019

Gross Amounts
Gross Amounts Offset
Amounts Net of Offset
Financial Collateral
Net Amount
Assets
Derivative contracts - current
$ 1,133    $ —    $ 1,133    $ —    $ 1,133   
Total
$ 1,133    $ —    $ 1,133    $ —    $ 1,133   

December 31, 2018
Gross Amounts
Gross Amounts Offset
Amounts Net of Offset
Financial Collateral
Net Amount
Assets
Derivative contracts - current
$ 5,286    $ —    $ 5,286    $ —    $ 5,286   
Total
$ 5,286    $ —    $ 5,286    $ —    $ 5,286   

At September 30, 2019, the Company's open derivative contracts consisted of the following:

Oil Price Swaps

Notional (MBbls) Weighted Average Fixed Price
October 2019 - December 2019 184    $ 60.04   

Fair Value of Derivatives 

The following table presents the fair value of the Company’s derivative contracts as of September 30, 2019 and December 31, 2018, on a gross basis without regard to same-counterparty netting (in thousands):
Type of Contract
Balance Sheet Classification
September 30,
2019
December 31, 2018
Derivative assets
Oil price swaps
Derivative contracts-current $ 1,133    $ —   
Natural gas price swaps Derivative contracts-current —    5,286   
Total net derivative contracts $ 1,133    $ 5,286   

See Note 3 for additional discussion of the fair value measurement of the Company’s derivative contracts.



11

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

5. Leases

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” and subsequently issued other associated ASU's related to Topic 842 which supersede ASC 840 and require lessees to recognize ROU lease assets and liabilities on the balance sheet for long-term leases formerly classified as operating leases under ASC 840, and to disclose key information about leasing arrangements. Leases to explore for or produce oil and natural gas were not impacted by this guidance. This ASU became effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company adopted this ASU on January 1, 2019 using a modified retrospective approach for all ROU leases that existed at the period of adoption and did not restate its comparative periods.

Topic 842 provides practical expedients to assist with the transition to the new standard. The Company elected the 'package of practical expedients,' and therefore did not have to reassess prior conclusions about lease identification, lease classification and initial indirect costs. The Company also elected the land easement practical expedient and short-term lease recognition exemption, under which leases with initial terms less than 12 months are not required to be presented on the balance sheet. The Company further elected the practical expedient to combine lease and non-lease components for asset classes including drilling rigs, compressors and various office equipment.

The Company determines if an arrangement is or contains a lease at inception. A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. Lease liabilities were recognized based on the present value of the lease payments not yet paid over the lease term at January 1, 2019 for existing leases and at the commencement date for any new leases entered into subsequent to January 1, 2019. As most of the Company's leases do not provide an implicit rate, the Company's incremental borrowing rate was used as the discount rate when determining the present value of future payments. Lease assets are recognized based on the lease liability plus any prepaid lease payments and excluding lease incentives and initial direct costs incurred for the same periods. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that option will be exercised. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

Adoption of this standard resulted in additional ROU lease assets and lease liabilities of approximately $2.3 million and $2.4 million, respectively, as of January 1, 2019, which did not materially impact the Company's consolidated financial statements. The difference between the net lease assets and liabilities was recognized as a cumulative-effect adjustment to the opening balance of retained earnings. Operating leases are included in other assets, other current liabilities and other long-term obligations, and finance leases are included in other property, plant and equipment, other current liabilities and other long-term obligations on the accompanying condensed consolidated balance sheet as of September 30, 2019. The Company had no significant capital or operating leases with terms longer than 12 months at December 31, 2018.

The Company had operating and financing leases for vehicles, drilling rigs and equipment outstanding during the three and nine-month periods ended September 30, 2019, which were not significant to the consolidated financial statements.

The components of lease costs recognized for the Company's ROU leases are shown below (in thousands):

Three Months Ended September 30, 2019 Nine Months Ended September 30, 2019
Short-term lease cost (1) $ 1,258    $ 9,342   
Financing lease cost 407    1,052   
Operating lease cost 33    133   
Total lease cost $ 1,698    $ 10,527   
___________________
1.$(0.2) million and $4.9 million of short-term lease cost was capitalized as part of oil and natural gas properties during the three and nine-month periods ended September 30, 2019, respectively. Portions of these costs were reimbursed to the Company by other working interest owners.

12

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

6. Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands): 
September 30,
2019
December 31, 2018
Oil and natural gas properties
Proved
$ 1,455,609    $ 1,269,091   
Unproved
26,107    60,152   
Total oil and natural gas properties
1,481,716    1,329,243   
Less accumulated depreciation, depletion and impairment
(855,765)   (580,132)  
Net oil and natural gas properties
625,951    749,111   
Land 4,400    4,400   
Electrical infrastructure 126,482    131,176   
Other non-oil and natural gas equipment 13,083    13,458   
Buildings and structures 77,148    77,148   
Financing leases 2,305    —   
Total 223,418    226,182   
Less accumulated depreciation and amortization
(32,138)   (25,344)  
Other property, plant and equipment, net
191,280    200,838   
Total property, plant and equipment, net
$ 817,231    $ 949,949   

Impairments. The Company recorded impairment to its oil and natural gas properties of $165.5 million during the three and nine-month periods ended September 30, 2019 as a result of its quarterly full cost ceiling test.

Nonmonetary transaction. The Company utilized the income approach to estimate discounted cash flows as the basis for determining the fair value of proved properties divested in nonmonetary transactions. See Note 2.

During the first quarter of 2018, the Company classified its remaining midstream generator assets as held for sale. These assets had a carrying value of $5.7 million which exceeded the estimated net realizable value of $1.6 million based on expected sales prices obtained from third parties. As a result, the Company recorded an impairment of $4.1 million for the nine-month period ended September 30, 2018. The midstream generator assets were sold during the second quarter of 2018 with no gain or loss recognized on the sale. No significant assets were classified as held for sale at September 30, 2019 or December 31, 2018.

7. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in thousands):
September 30,
2019
December 31, 2018
Accounts payable and other accrued expenses
$ 36,740    $ 62,733   
Payroll and benefits 9,458    12,891   
Production payable 25,109    28,253   
Taxes payable 7,395    5,350   
Drilling advances 554    2,031   
Accrued interest 556    539   
Total accounts payable and accrued expenses
$ 79,812    $ 111,797   

13

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

8. Debt

Credit Facility. On June 21, 2019, the Company amended and restated its existing $600.0 million reserve-based revolving credit facility. The initial borrowing base of the restated credit facility is $300.0 million, which was reduced from $350.0 million under the previous credit facility and is subject to semiannual redeterminations. The facility is also subject to an initial aggregate elected commitment of $270.0 million, which the Company may reduce or seek to increase in future periods in accordance with the terms of the restated credit facility. The restatement extended the credit facility maturity date to April 1, 2021 from March 31, 2020.

The interest rate on outstanding borrowings was reduced from a pricing grid tied to the borrowing base utilization rate of (a) LIBOR plus an applicable margin that varies from 3.00% to 4.00% per annum, or (b) the base rate plus an applicable margin that varies from 2.00% to 3.00% per annum under the previous credit facility to a pricing grid tied to borrowing base utilization of (a) LIBOR plus an applicable margin that varies from 2.00% to 3.00% per annum, or (b) the base rate plus an applicable margin that varies from 1.00% to 2.00% per annum under the restated credit facility. Interest on base rate borrowings is payable quarterly in arrears and interest on LIBOR borrowings is payable every one, two, three or six months, at the election of the Company. Quarterly, the Company pays commitment fees assessed at annual rates of 0.50% on any available portion of the credit facility. During the three and nine-month periods ended September 30, 2019, the weighted average interest rates on the credit facility were approximately 4.5% and 5.1%, respectively.

The Company has the right to prepay loans under the credit facility at any time without a prepayment penalty, other than customary “breakage” costs with respect to LIBOR loans.

The restated credit facility is secured by (i) first-priority mortgages on at least 85% of the PV-9 valuation of all proved reserves included in the most recently delivered reserve report of the Company, (ii) a first-priority perfected pledge of substantially all of the capital stock owned by each credit party and equity interests in the Royalty Trusts that are owned by a credit party and (iii) a first-priority perfected security interest in substantially all the cash, cash equivalents, deposits, securities and other similar accounts, and other tangible and intangible assets of the credit parties (including but not limited to as-extracted collateral, accounts receivable, inventory, equipment, general intangibles, investment property, intellectual property, real property and the proceeds of the foregoing). Other than reducing the proportion of the Company’s proved reserves required to be subject to first-priority mortgages to 85% from 95%, these terms are materially similar to those contained in the previously existing credit facility.

The restated facility includes events of default and certain customary affirmative and negative covenants which are materially similar to those under the previous credit facility. The Company must also continue to maintain certain financial covenants including (i) a maximum consolidated total net leverage ratio, measured as of the end of any fiscal quarter, of no greater than 3.50 to 1.00 and (ii) a minimum consolidated interest coverage ratio, measured as of the end of any fiscal quarter, of no less than 2.25 to 1.00. As of September 30, 2019, the Company was in compliance with all applicable covenants and had a consolidated total net leverage ratio of 0.38 and consolidated interest coverage ratio of 48.00.

The Company had $62.0 million outstanding under the credit facility at September 30, 2019, and $6.0 million in outstanding letters of credit, which reduce availability under the restated credit facility on a dollar-for-dollar basis.

Building Note. In February 2018, the Company fully repaid a note secured by a mortgage on the Company's downtown Oklahoma City real estate (the "Building Note") in the amount of $36.3 million, which was comprised of an initial principal amount of $35.0 million and $1.3 million in in-kind interest costs that were previously added to the principal. An unamortized premium of $1.2 million was recognized as a gain on extinguishment of debt in the unaudited condensed consolidated statement of operations for the nine-month period ended September 30, 2018 in connection with the repayment.

14

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

9. Commitments and Contingencies

Legal Proceedings. As previously disclosed, on May 16, 2016, the Company and certain of its direct and indirect subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Bankruptcy Court confirmed the joint plan of organization (the "Plan") of the Debtors on September 9, 2016, and the Debtors subsequently emerged from bankruptcy on October 4, 2016.

Pursuant to the Plan, claims against the Company were discharged without recovery in each of the following consolidated cases (the “Cases”):

In re SandRidge Energy, Inc. Securities Litigation, Case No. 5:12-cv-01341-LRW, USDC, Western District of Oklahoma; and

Ivan Nibur, Lawrence Ross, Jase Luna, Matthew Willenbucher, and the Duane & Virginia Lanier Trust v. SandRidge Mississippian Trust I, et al., Case No. 5:15-cv-00634-SLP, USDC, Western District of Oklahoma

The lead plaintiffs in both In re SandRidge Energy, Inc. Securities Litigation and Lanier Trust assert claims on behalf of themselves and (i) in In re SandRidge Energy, Inc. Securities Litigation, a class of all purchasers of SandRidge common stock from February 24, 2011 and November 8, 2012 under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and (ii) in Lanier Trust, a putative class of purchasers of SandRidge Mississippian Trust I and SandRidge Mississippian Trust II common units between April 7, 2011 and November 8, 2012 under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, both based on allegations that defendants, which include certain former officers of the Company and the SandRidge Mississippian Trust I, made misrepresentations or omissions concerning various topics including the performance of wells operated by the Company in the Mississippian region.

Discovery in each of the Cases closed on June 19, 2019. Following a hearing on class certification in each of the Cases on September 6, 2019, the court granted class certification in In re SandRidge Energy, Inc. Securities Litigation on September 30, 2019. The motion for class certification in Lanier Trust remains pending.

In each of the Cases, lead plaintiffs seek to recover unspecified damages, interest, costs and expenses incurred in the litigation on behalf of themselves and class members. Although the claims against the Company in each Case have been discharged pursuant to the Plan, the Company remains a nominal defendant in each of the Cases to the extent necessary to allow recovery from applicable insurance policies or proceeds. In addition, the Company owes indemnity obligations and/or the obligation to advance legal fees, to certain former officers who remain as defendants in each action. The Company may also be contractually obligated to indemnify the SandRidge Mississippian Trust I against losses, claims, damages, liabilities and expenses, including reasonable costs of investigation and attorney’s fees and expenses, arising out of the Cases, and such indemnification is not covered by insurance.

In light of the status of the Cases, and the facts, circumstances and legal theories relating thereto, the Company is not able to determine the likelihood of an outcome in either case or provide an estimate of any reasonably possible loss or range of possible loss related thereto. However, considering the erosion of insurance coverage available to the Company, such losses, if incurred, could be material. The Company has not established any liabilities relating to the Cases and believes that the plaintiffs’ claims are without merit. The Company intends to continue to vigorously defend against the Cases in its capacity as a nominal defendant.

In addition to the matters described above, the Company is involved in various lawsuits, claims and proceedings which are being handled and defended by the Company in the ordinary course of business.






15

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

10. Income Taxes

For each interim reporting period, the Company estimates 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.

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 a full valuation allowance against its net deferred tax asset at September 30, 2019. Thus, the Company had no federal or state income tax expense or benefit for the three and nine-month periods ended September 30, 2019, and an insignificant amount of federal and state income tax expense or benefit for the three and nine-month periods ended September 30, 2018.

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. As a result of the Chapter 11 reorganization and related transactions, the Company experienced an ownership change within the meaning of IRC Section 382 during 2016 that subjected certain of the Company’s tax attributes, including net operating losses ("NOLs"), to an IRC Section 382 limitation. This limitation has not resulted in cash taxes for any period subsequent to the ownership change. Since the 2016 ownership change, the Company has generated additional NOLs and other tax attributes that are not currently subject to an IRC Section 382 limitation. The Company's ability to use NOLs and other tax attributes to reduce taxable income and income taxes could be materially impacted by a future IRC 382 ownership change. Future transactions involving the Company's stock, including those outside of the Company's control, could cause an IRC 382 ownership change resulting in a limitation on tax attributes currently not limited and a more restrictive limitation on tax attributes currently subject to the previous IRC 382 limitation.

The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2016 to present remain open for federal examination. Additionally, tax years 2005 through 2015 remain subject to examination for determining the amount of remaining federal net operating loss and other carryforwards. The number of years open for state tax audits varies, depending on the state, but are generally from three to five years.
        
11. Equity

Common Stock, Performance Share Units, and Stock Options. At September 30, 2019, the Company had approximately 35.7 million shares of common stock, par value $0.001 per share, issued and outstanding, including 0.2 million shares of unvested restricted stock awards, 0.3 million unvested stock options, 0.1 million unvested performance share units, and 250.0 million shares of common stock authorized. See Note 13 for further discussion of the Company’s restricted stock awards, performance share units, and stock options.

Warrants. The Company has issued approximately 4.6 million Series A warrants and 2.0 million Series B warrants that are exercisable until October 4, 2022 for one share of common stock per warrant at initial exercise prices of $41.34 and $42.03 per share, respectively, subject to adjustments pursuant to the terms of the warrants, to certain holders of general unsecured claims as defined in the Plan. The warrants contain customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions. 


16

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

12. Revenues

The following table disaggregates the Company’s revenue by source for the three and nine-month periods ended September 30, 2019 and 2018:
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(In thousands)
Oil
$ 44,072    $ 63,994    $ 142,846    $ 166,548   
NGL
6,362    18,776    28,886    52,111   
Natural gas
7,754    14,721    34,700    45,102   
Other
181    169    561    489   
Total revenues
$ 58,369    $ 97,660    206,993    $ 264,250   

Oil, natural gas and NGL revenues. A majority of the Company’s revenues come from sales of oil, natural gas and NGLs and are recorded at a point in time when control of the oil, natural gas and NGL production passes to the customer at the inlet of the processing plant or pipeline, or the delivery point for onloading to a delivery truck. As the Company’s customers obtain control of the production prior to selling it to other end customers, the Company presents its revenues on a net basis, rather than on a gross basis.

Pricing for the Company’s oil, natural gas and NGL contracts is variable and is based on volumes sold multiplied by either an index price, net of deductions, or a percentage of the sales price obtained by the customer, which is also based on index prices. The transaction price is allocated on a pro-rata basis to each unit of oil, natural gas or NGL sold based on the terms of the contract. Oil, natural gas and NGL revenues are also recorded net of royalties, discounts and allowances, and transportation costs, as applicable. Taxes assessed by governmental authorities on oil, natural gas and NGL sales are presented separately from revenues and are included in production, ad valorem, and other tax expense in the consolidated statements of operations. Payment terms are typically within 30 days of control being transferred. The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed.

Revenues Receivable. The Company records an asset in accounts receivable, net on its consolidated balance sheet for revenues receivable from contracts with customers at the end of each period. Pricing for revenues receivable is estimated using current month crude oil, natural gas and NGL prices, net of deductions. Revenues receivable are typically collected the month after the Company delivers the related production to its customers. As of September 30, 2019, and December 31, 2018, the Company had revenues receivable of $22.2 million and $31.8 million, respectively, and did not record any bad debt expense on revenues receivable during the three and nine-month periods ended September 30, 2019.


17

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

13. Share and Incentive-Based Compensation

Share-Based Compensation

Omnibus Incentive Plan. The Company's Omnibus Incentive Plan authorizes the issuance of up to 4.6 million shares of SandRidge common stock to eligible persons including non-employee directors of the Company, employees of the Company or any of its affiliates, and certain consultants and advisers to the Company or any of its affiliates. At September 30, 2019, the Company had restricted stock awards and an immaterial amount of performance share units and stock options outstanding under the Omnibus Incentive Plan. Vesting for certain restricted stock awards and performance share units was accelerated in connection with the departure of certain executives and reductions in force which occurred during the nine-month period ended September 30, 2019 and the nine-month period ended September 30, 2018. Vesting for certain restricted stock awards, performance share units and performance units was accelerated in the second quarter of 2018 in connection with the change in the composition of the Board after the 2018 annual meeting.

Restricted Stock Awards. The Company’s restricted stock awards are equity-classified awards and are valued based upon the market value of the Company’s common stock on the date of grant. Outstanding restricted shares will generally vest over either a one-year period or three-year period. As of September 30, 2019, the Company had approximately 0.2 million unvested restricted shares outstanding at a weighted average grant date fair value of $12.79 per share, and unrecognized compensation cost related to these awards totaled $2.4 million. The remaining weighted average contractual period over which this compensation cost may be recognized is 1.5 years.

The following tables summarize share and incentive-based compensation for the three and nine-month periods ended September 30, 2019, and 2018 (in thousands):

Recurring Compensation Expense(1)
Executive Terminations(2) Reduction in Force(2) Accelerated Vesting(3)
Total
Three Months Ended September 30, 2019
Equity-classified awards:
Restricted stock awards
$ 478    $ —    $ (1)   $ —    $ 477   
Performance share units 168    —    —    —    168   
Stock options 195    —    —    —    195   
Total share-based compensation expense 841    —    (1)   —    840   
Less: Capitalized compensation expense (34)   —    —    —    (34)  
Share-based compensation expense, net $ 807    $ —    $ (1)   $ —    $ 806   
Three Months Ended September 30, 2018
Equity-classified awards:
Restricted stock awards $ 523    $ —    $ —    $ —    $ 523   
Performance share units 41    —    —    —    41   
Total share-based compensation expense 564    —    —    —    564   
Less: Capitalized compensation expense (58)   —    —    —    (58)  
Share-based compensation expense, net $ 506    $ —    $ —    $ —    $ 506   
____________________
1.Recorded in general and administrative expense in the accompanying consolidated statements of operations.
2.Recorded in employee termination benefits in the accompanying consolidated statements of operations.
3.Recorded in accelerated vesting of employment compensation in the accompanying consolidated statements of
operations.

18

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

Recurring Compensation Expense(1)
Executive Terminations(2) Reduction in Force(2) Accelerated Vesting(3)
Total
Nine Months Ended September 30, 2019
Equity-classified awards:
Restricted stock awards $ 2,052    $ 197    $ 500    $ —    $ 2,749   
Performance share units 555    281    —    —    836   
Stock options 518    —    —    —    518   
Total share-based compensation expense 3,125    478    500    —    4,103   
Less: Capitalized compensation expense
(173)   —    —    —    (173)  
Share-based compensation expense, net $ 2,952    $ 478    $ 500    $ —    $ 3,930   
Nine Months Ended September 30, 2018
Equity-classified awards:
Restricted stock awards $ 3,902    $ 8,140    $ 3,777    $ 5,181    $ 21,000   
Performance share units 400    1,056    158    610    2,224   
Total share-based compensation expense 4,302    9,196    3,935    5,791    23,224   
Liability-classified awards:
Performance units 776    2,151    558    1,309    4,794   
Total share and incentive-based compensation expense 5,078    11,347    4,493    7,100    28,018   
Less: Capitalized compensation expense
(392)   —    —    (555)   (947)  
Share and incentive-based compensation expense, net $ 4,686    $ 11,347    $ 4,493    $ 6,545    $ 27,071   
____________________
1.Recorded in general and administrative expense in the accompanying consolidated statements of operations.
2.Recorded in employee termination benefits in the accompanying consolidated statements of operations.
3.Recorded in accelerated vesting of employment compensation in the accompanying consolidated statements of
operations.




19

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

14. Employee Termination Benefits

There were no significant employee termination benefits paid during the three-month periods ended September 30, 2019 and 2018. The following table presents a summary of employee termination benefits for the nine-month periods ended September 30, 2019 and 2018 (in thousands):
Cash
Share-Based Compensation (5)
Number of Shares
Total Employee Termination Benefits
Nine Months Ended September 30, 2019
Executive Employee Termination Benefits (1) $ 879    $ 478    37    $ 1,357   
Other Employee Termination Benefits (2) 2,608    500    44    3,108   
$ 3,487    $ 978    81    $ 4,465   
Nine Months Ended September 30, 2018
Executive Employee Termination Benefits (3) $ 11,945    $ 9,196    554    $ 21,141   
Other Employee Termination Benefits (4) 7,577    3,935    209    11,512   
$ 19,522    $ 13,131    763    $ 32,653   
____________________
1.On June 14, 2019, the Company’s then current Executive Vice President, General Counsel and Corporate Secretary, Philip Warman, separated employment from the Company. As a result, the Company paid cash severance costs and incurred share-based compensation costs associated with this separation during the second quarter of 2019.
2.As a result of a reduction in workforce in the second quarter of 2019, certain employees received termination benefits including cash severance and accelerated share-based compensation upon separation of service from the Company.
3.On February 8, 2018, the Company’s then current chief executive officer ("CEO"), James Bennett, separated employment from the Company, and on February 22, 2018, the Company’s then current chief financial officer ("CFO"), Julian Bott, also separated employment from the Company. As a result, the Company paid cash severance costs and incurred share-based compensation costs associated with these separations during the first quarter of 2018.
4.As a result of a reduction in workforce in the first quarter of 2018, certain employees received termination benefits including cash severance and accelerated share-based and incentive compensation upon separation of service from the Company.
5.Share-based compensation recognized in connection with the accelerated vesting of restricted stock awards and performance share units upon the departure of certain executives and the reductions in workforce in the first quarter of 2018 and second quarter of 2019 reflects the remaining unrecognized compensation expense associated with these awards at the date of termination. The unrecognized compensation expense was calculated using the grant date fair value for restricted stock awards and performance share units. One share of the Company’s common stock was issued per performance share unit.

See Note 13 for additional discussion of the Company’s share-based compensation awards.


20

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

15. (Loss) Earnings per Share

The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted (loss) earnings per share:
Net (Loss) Earnings
Weighted Average Shares
(Loss) Earnings Per Share
(In thousands, except per share amounts)
Three Months Ended September 30, 2019
Basic loss per share
$ (181,602)   35,491    $ (5.12)  
Effect of dilutive securities
Restricted stock awards(1) —    —   
Performance share units(1) —    —   
Warrants(1) —    —   
Stock options(1) —    —   
Diluted loss per share
$ (181,602)   35,491    $ (5.12)  
Three Months Ended September 30, 2018
Basic earnings per share $ 11,715    35,308    $ 0.33   
Effect of dilutive securities
Restricted stock awards —    22   
Performance share units(2) —    —   
Warrants(2) —    —   
Diluted earnings per share $ 11,715    35,330    $ 0.33   
Nine Months Ended September 30, 2019
Basic loss per share
$ (200,163)   35,390    $ (5.66)  
Effect of dilutive securities
Restricted stock awards(1) —    —   
Performance share units(1) —    —   
Warrants(1) —    —   
Stock options(1) —    —   
Diluted loss per share
$ (200,163)   35,390    $ (5.66)  
Nine Months Ended September 30, 2018
Basic loss per share $ (63,253)   34,971    $ (1.81)  
Effect of dilutive securities
Restricted stock awards(3) —    —   
Performance share units(2) —    —   
Warrants(2) —    —   
Diluted loss per share $ (63,253)   34,971    $ (1.81)  
____________________
1.No incremental shares of potentially dilutive restricted stock awards, performance share units, warrants or stock options were included for the three and nine-month periods ended September 30, 2019, as their effect was antidilutive under the treasury stock method.
2.No incremental shares of potentially dilutive performance share units or warrants were included for the three and nine-month periods ended September 30, 2018, as their effect was antidilutive under the treasury stock method.
3.No incremental shares of potentially dilutive restricted stock awards were included for the nine-month period ended September 30, 2018, as their effect was antidilutive under the treasury stock method.

See Note 13 for discussion of the Company’s share-based compensation awards.

21

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report, as well as our audited consolidated financial statements and the accompanying notes included in the 2018 Form 10-K. Our discussion and analysis includes the following subjects:
Overview;
Consolidated Results of Operations;
Liquidity and Capital Resources; and
Critical Accounting Policies and Estimates

The financial information with respect to the three and nine-month periods ended September 30, 2019, and 2018, discussed below, is unaudited. In the opinion of management, this information contains all adjustments, which consist only of normal recurring adjustments unless otherwise disclosed, necessary to state fairly the accompanying unaudited condensed consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full fiscal year.

Overview

We are an oil and natural gas company with a principal focus on the acquisition, exploration and development of hydrocarbon resources in the United States.

Operational activities for the three and nine-month periods ended September 30, 2019, and 2018 include the following:

Three Months Ended September 30,
2019 2018
Gross Wells Drilled(2) Net Wells Drilled(2) Average Rigs Drilling Gross Wells Drilled(2) Net Wells Drilled(2) Average Rigs Drilling
Area
Mid-Continent (1) —    —    —      2.1    1.9   
North Park Basin —    —    —    —    —    0.3   
Total —    —    —      2.1    2.2   

Nine Months Ended September 30,
2019 2018
Gross Wells Drilled(2) Net Wells Drilled(2)
Average Rigs Drilling
Gross Wells Drilled(2) Net Wells Drilled(2)
Average Rigs Drilling
Area
Mid-Continent (1)
11    3.5    0.8    15    4.3    1.5   
North Park Basin
10    10.0    0.6      6.0    0.6   
Total
21    13.5    1.4    21    10.3    2.1   
____________________
1.Eight wells were drilled under our drilling participation agreement in the NW STACK during the nine-month period ended September 30, 2019. Three and 12 wells, respectively, were drilled under our drilling participation agreement in the NW STACK during the three and nine-month periods ended September 30, 2018. Under this agreement, we receive a 20% net working interest after funding 10% of the drilling and completion costs related to the subject wells. The last well under this agreement was completed in the second quarter of 2019.
2.Includes wells with a rig release date during the three and nine-month periods ended September 30, 2019 or 2018, respectively.


22

The chart below shows production by product for the three and nine-month periods ended September 30, 2019 and 2018:
SD-20190930_G1.JPG
Outlook

In the fourth quarter of 2019, we will continue to monitor the producing rates from the wells we completed during the third quarter in the North Park Basin. These six wells were drilled in the second quarter and completed early in the third quarter with production initialized during September. The initial flow back results are in line with our expectations. The technical teams will integrate the learnings from this and the other ongoing spacing tests as we develop plans for next year’s drilling program and ultimately, the full development of the field. The majority of our budgeted drilling capital for our North Park Basin and Mid-Continent drilling programs was spent during the first half of 2019. If pursued, any selective drilling projects in the remainder of the year will fall within our public capital expenditure guidance range as we stay focused on capital discipline. We will continue to pursue accretive acquisitions of strategic assets that provide high quality production and development upside as well as other mergers and acquisitions opportunities that create value for our shareholders. Remaining focused on cost reductions, margin improvements and opportunistic divestment of core and non-core properties will also be a part of our plan moving forward. Based on these strategic objectives, we intend to spend between $160.0 million and $170.0 million as part of our 2019 capital budget plan. We will continue to monitor the changing market conditions and the results of our operations and will take measures to help achieve our strategic objectives, enhance shareholder value and improve our competitiveness in the marketplace.

Consolidated Results of Operations

The majority of our consolidated revenues and cash flow are generated from the production and sale of oil, natural gas and NGLs. Our revenues, profitability and future growth depend substantially on prices received for our production, the quantity of oil, natural gas and NGLs we produce, our ability to find and economically develop and produce our reserves, and changes in the fair value of our 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 nine-month periods ended September 30, 2019, and 2018 are shown in the table below:
        
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Oil (per Bbl)
$ 56.44    $ 69.43    $ 57.10    $ 66.79   
Natural gas (per MMBtu)
$ 2.33    $ 2.86    $ 2.56    $ 2.85   

To reduce our exposure to price fluctuations, we have historically entered into commodity derivative contracts for a portion of our anticipated future oil and natural gas production depending on management's view of opportunities under then-prevailing market conditions as discussed in “Item 3. Quantitative and Qualitative Disclosures About Market Risk.” Reducing our exposure to price volatility helps mitigate the risk that we will not have adequate funds available for our capital expenditure programs. During periods where the strike prices for our commodity derivative contracts are below market prices at the time of
23

settlement, we may not fully benefit from increases in the market price of oil and natural gas. Conversely, during periods of declining oil and natural gas market prices, our commodity derivative contracts may partially offset declining revenues and cash flow to the extent strike prices for our contracts are above market prices at the time of settlement.

Revenues

Consolidated revenues for the three and nine-month periods ended September 30, 2019, and 2018 are presented in the table below (in thousands):

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Oil $ 44,072    $ 63,994    $ 142,846    $ 166,548   
NGL 6,362    18,776    28,886    52,111   
Natural gas 7,754    14,721    34,700    45,102   
Other 181    169    561    489   
Total revenues $ 58,369    $ 97,660    $ 206,993    $ 264,250   

Variances in oil, natural gas and NGL revenues attributable to changes in the average prices received for our production and total production volumes sold for the three and nine-month periods ended September 30, 2019, and 2018 are shown in the table below (in thousands):

Three Months Ended September 30 Nine Months Ended September 30
2018 oil, natural gas and NGL revenues $ 97,491    $ 263,761   
Change due to production volumes (10,980)   4,521   
Change due to average prices (28,323)   (61,850)  
2019 oil, natural gas and NGL revenues $ 58,188    $ 206,432   

Revenues from oil, natural gas and NGL sales decreased $39.3 million, or 40.3% and $57.3 million, or 21.7% for the three and nine-month periods ended September 30, 2019, respectively, compared to the same periods in 2018, due primarily to a decrease in average prices received for our oil, natural gas and NGL production during the 2019 periods.

As shown in the tables below, production decreased for the third quarter of 2019 compared to the third quarter of 2018 as a result of the sale of our Permian Basin properties in the fourth quarter of 2018 and natural production declines in our existing producing wells in the Mid-Continent.

Revenues from production increased for the nine-month period ended September 30, 2019 compared to the nine-month period ended September 30, 2018 due to an increase in oil and NGL production, partially offset by a decrease in gas production. This increase was largely due to successful drilling on our North Park Basin acreage, which was partially offset by the sale of our Permian Basin properties in the fourth quarter of 2018. Additionally, we added production from the purchase of additional interest in certain oil and natural gas properties in the Mississippian Lime and NW STACK areas of Oklahoma and Kansas in the fourth quarter of 2018, which is offsetting natural production declines in our existing producing wells in the Mid-Continent.









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Oil, Natural Gas and NGL Production and Pricing

The Company's production and pricing information for the three and nine-month periods ended September 30, 2019, and 2018 is shown in the table below:
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Production data
Oil (MBbls)
835    956    2,668    2,637   
NGL (MBbls)
629    710    2,335    2,110   
Natural gas (MMcf)
8,318    8,757    25,414    27,221   
Total volumes (MBoe) 2,850    3,126    9,239    9,284   
Average daily total volumes (MBoe/d) 31.0    34.0    33.8    34.0   
Average prices—as reported(1)
Oil (per Bbl)
$ 52.78    $ 66.94    $ 53.54    $ 63.16   
NGL (per Bbl)
$ 10.11    $ 26.45    $ 12.37    $ 24.70   
Natural gas (per Mcf)
$ 0.93    $ 1.68    $ 1.37    $ 1.66   
Total (per Boe) $ 20.42    $ 31.19    $ 22.34    $ 28.41   
Average prices—including impact of derivative contract settlements
Oil (per Bbl)
$ 53.53    $ 53.99    $ 53.77    $ 50.81   
NGL (per Bbl)
$ 10.11    $ 26.45    $ 12.37    $ 24.70   
Natural gas (per Mcf)
$ 0.93    $ 1.77    $ 1.57    $ 1.79   
Total (per Boe) $ 20.64    $ 27.47    $ 22.96    $ 25.28   
__________________
1.Prices represent actual average sales prices for the periods presented and do not include effects of derivatives.

The table below presents production by area of operation for the three and nine-month periods ended September 30, 2019, and 2018:

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Production (MBoe)
% of Total
Production (MBoe)
% of Total
Production (MBoe)
% of Total
Production (MBoe)
% of Total
Mississippian Lime 2,213    77.7  % 2,414    77.2  % 7,331    79.3  % 7,482    80.5  %
NW STACK 274    9.6  % 221    7.1  % 820    8.9  % 743    8.0  %
North Park Basin 363    12.7  % 379    12.1  % 1,088    11.8  % 720    7.8  %
Permian Basin(1) —    —  % 112    3.6  % —    —  % 339    3.7  %
Total
2,850    100.0  % 3,126    100.0  % 9,239    100.0  % 9,284    100.0  %
__________________
1.The Permian Basin properties were sold in the fourth quarter of 2018.


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Operating Expenses

Operating expenses for the three and nine-month periods ended September 30, 2019, and 2018 consisted of the following (in thousands): 
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Lease operating expenses $ 23,866    $ 21,913    $ 71,721    $ 65,189   
Production, ad valorem, and other taxes 4,346    7,339    15,303    19,256   
Depreciation and depletion—oil and natural gas 38,871    33,090    114,755    92,048   
Depreciation and amortization—other 2,981    3,036    8,910    9,229   
Total operating expenses $ 70,064    $ 65,378    $ 210,689    $ 185,722   
Lease operating expenses ($/Boe) $ 8.37    $ 7.01    $ 7.76    $ 7.02   
Production, ad valorem, and other taxes ($/Boe) $ 1.52    $ 2.35    $ 1.66    $ 2.07   
Depreciation and depletion—oil and natural gas ($/Boe) $ 13.64    $ 10.59    $ 12.42    $ 9.91   
Production, ad valorem, and other taxes (% of oil, natural gas, and NGL revenue) 7.5  % 7.5  % 7.4  % 7.3  %

Lease operating expenses increased by $2.0 million or $1.36/Boe for the three-month period ended September 30, 2019, compared to the same period in 2018. This increase primarily resulted from additional maintenance workovers performed in the Mid-Continent during July and August 2019. Activity returned to normal levels in September 2019.

Lease operating expense increased by $6.5 million or $0.74/Boe for the nine-month period ended September 30, 2019, compared to the same period in 2018. The increase is primarily due to increased production from bringing on several multi-well pads in the North Park Basin during 2019 which resulted in additional expenditures for trucking produced water to disposal wells in the first and second quarters of 2019. Numerous pipeline infrastructure projects as well as increased salt water treatment and disposal capacity within the system are in various stages of development and reduced these produced water disposal costs in the third quarter of 2019 and for future periods. As discussed above, workover expense also increased in 2019 compared to 2018 primarily due to artificial lift repairs in the Mid-Continent.

Production, ad valorem, and other taxes as a percentage of oil, natural gas, and NGL revenue remained consistent for the three and nine-month periods ended September 30, 2019, compared to the same 2018 periods.

Depreciation and depletion for our oil and natural gas properties increased by $5.8 million or $3.05/Boe and $22.7 million or $2.51/Boe for the three and nine-month periods ended September 30, 2019, compared to the same periods in 2018. This rate increase is a result of development activities in areas where our finding and development costs are higher than historical depreciation and depletion rates. This rate increase is also a result of a decrease in the twelve-month weighted average oil and natural gas prices during the 2019 periods which resulted in a decrease in reserve volumes.

Impairment

Impairment for the three and nine-month periods ended September 30, 2019, and 2018 consisted of the following (in thousands): 

Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Proved property impairment $ 165,507    $ —    $ 165,507    $ —   
Other property, plant and equipment impairment —    —    —    4,170   
Total impairment $ 165,507    $ —    $ 165,507    $ 4,170   

Impairment for the three and nine-month periods ended September 30, 2019, reflects full cost ceiling limitation impairment which largely resulted from a decrease in the trailing twelve-month weighted average oil and natural gas prices in the third
26

quarter of 2019, lower NGL prices, changes in expected operating expenses including future electrical costs, and other less significant inputs.

Calculation of the full cost ceiling test is based on, among other factors, average prices for the trailing twelve-month period determined by reference to the first-day-of-the-month index prices ("SEC prices") as adjusted for price differentials and other contractual arrangements. The SEC prices utilized in the calculation of proved reserves included in the full cost ceiling test at September 30, 2019 were $57.69 per barrel of oil and $2.87 per Mcf of natural gas, before price differential adjustments.

Based on the SEC prices over the eleven months ended November 1, 2019, as well as the short-term pricing outlook for the remainder of 2019, we anticipate the SEC prices utilized in the December 31, 2019 full cost ceiling test may be $55.68 per barrel of oil and $2.60 per Mcf of natural gas, (the "estimated fourth quarter prices"). Applying these estimated fourth quarter prices, and holding all other inputs constant to those used in the calculation of our September 30, 2019 ceiling test, an additional full cost ceiling limitation impairment of approximately $130.0 million is indicated for the fourth quarter of 2019, which will be material to net earnings.

The actual full cost ceiling limitation impairment realized in the fourth quarter of 2019 could be greater or less than the projected amount utilizing estimated fourth quarter pricing, depending on the impact of any acquisitions, divestitures and numerous other factors. Further write-downs in subsequent quarters could occur if actual SEC prices continue to decline compared to the commodity prices used in prior quarters as declining commodity prices also impact estimated quantities of proved reserves.

Additionally, based on a comparison of the current strip prices for oil and natural gas in 2020 to the quarterly 2019 SEC prices that will be rolling-off during 2020 in the calculation of our proved reserves, we may incur additional ceiling test impairments in 2020, and any such impairments could be material to our net earnings.

Our full cost impairments will have no impact to our cash flow or liquidity.

Impairment for the nine-month period ended September 30, 2018, primarily reflects the write-down of midstream generator assets classified as held for sale to estimated net realizable value.

Non-Operating Expenses

Non-operating expenses for the three and nine-month periods ended September 30, 2019, and 2018 consisted of the following (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
General and administrative $ 6,238    $ 9,064    $ 26,261    $ 32,823   
Accelerated vesting of employment compensation —    —    —    6,545   
Proxy contest —    (459)   —    7,139   
Employee termination benefits —    23    4,465    32,653   
(Gain) loss on derivative contracts (1,756)   11,329    (1,547)   59,763   
Other operating expense (income) 23    (105)   142    (1,343)  
Total non-operating expenses $ 4,505    $ 19,852    $ 29,321    $ 137,580   

General and administrative expenses decreased $2.8 million, or 31.2% for the three-month period ended September 30, 2019, compared to the same period in 2018. General and administrative expenses are lower in the 2019 period primarily due to receiving a reimbursement from insurance policies of $1.5 million for legal fees incurred in the second quarter of 2019. These legal fees related to indemnification obligations discussed in "Part II, Item 1. Legal Proceedings." The remainder of the decrease is due largely to lower compensation-related costs resulting from reductions in headcount.

General and administrative expenses decreased $6.6 million, or 20.0% for the nine-month period ended September 30, 2019, from the same period in 2018 due primarily to a $5.2 million decrease in compensation-related costs largely resulting from a reduction in force during the first quarter of 2018 as well as additional declines in headcount throughout 2018 and 2019. The remainder of the decrease resulted largely from a reduction in other headcount related costs such as corporate office and technology expenses.

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Accelerated vesting of employment compensation costs incurred during the nine-month period ended September 30, 2018 includes compensation costs recognized for certain share and incentive-based awards granted to our employees and directors which vested when the composition of the Board changed after the 2018 annual meeting.

Proxy contest costs for the nine-month period ended September 30, 2018 include legal, consulting and advisory fees incurred in the proxy contest and strategic alternatives review which were initiated in response to shareholder actions in 2018. A $0.5 million reimbursement of certain proxy contests costs was received from applicable insurance policies in the third quarter of 2018.

Employee termination benefits for the nine-month periods ended September 30, 2019, include cash and share-based severance costs incurred related to a reduction in force in the second quarter of 2019. See "Note 14 - Employee Termination Benefits" in the accompanying unaudited condensed consolidated financial statements for additional discussion of these expenses.

Employee termination benefits for the nine-month period ended September 30, 2018, include cash and share-based severance costs incurred for (i) the reduction in force in the first quarter of 2018 and (ii) severance costs associated with the departure of executive officers and other senior officers. See "Note 14 - Employee Termination Benefits" in the accompanying unaudited condensed consolidated financial statements for additional discussion of these expenses.

The following table summarizes derivative activity for the three and nine-month periods ended September 30, 2019, and 2018 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(Gain) loss on commodity derivative contracts $ (1,756)   $ 11,329    $ (1,547)   $ 59,763   
Cash (received) paid on settlements $ (622)   $ 11,631    $ (5,700)   $ 29,025   

On November 14, 2017, we entered into an Agreement and Plan of Merger (the "merger") with Bonanza Creek Energy, Inc. ("Bonanza Creek") which was subsequently terminated in December 2017. In contemplation of the proposed merger with Bonanza Creek, which would have been partially financed with debt, we entered into several oil derivative contracts in November 2017. We recorded losses on these oil derivatives of $6.5 million and $22.9 million for the three and nine-month periods ended September 30, 2018, which include net cash payments upon settlement of $2.4 million and $5.8 million, respectively.

Our derivative contracts are not designated as accounting hedges and, as a result, changes in their fair value are recorded each quarter as a component of operating expenses. Internally, management views the settlement of commodity derivative contracts at contractual maturity as adjustments to the price received for oil and natural gas production to determine “effective prices.” In general, cash is received on settlement of contracts due to lower oil and natural gas prices at the time of settlement compared to the contract price for our commodity derivative contracts, and cash is paid on settlement of contracts due to higher oil and natural gas prices at the time of settlement compared to the contract price for our commodity derivative contracts.

Other Income (Expense)

The Company’s other income (expense) for the three and nine-month periods ended September 30, 2019, and 2018 are presented in the table below (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
Other (expense) income
Interest expense, net
$ (722)   $ (627)   $ (2,009)   $ (2,226)  
Gain on extinguishment of debt
—    —    —    1,151   
Other income (expense), net
827    (118)   370    972   
Total other income (expense)
$ 105    $ (745)   $ (1,639)   $ (103)  

Gain on extinguishment of debt was recognized for the nine-month period ended September 30, 2018, as a result of writing off the unamortized premium associated with the Building Note when it was repaid during the first quarter of 2018.
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Liquidity and Capital Resources

As of September 30, 2019, we had cash and cash equivalents, excluding restricted cash, of $4.0 million. On June 21, 2019, we amended and restated our credit facility. The elected commitment under the restated credit facility is currently $270.0 million. At September 30, 2019, we had $62.0 million of long term debt outstanding under our restated credit facility and $6.0 million in outstanding letters of credit, which reduce the amount available under the credit facility to $202.0 million.

As of October 31, 2019, we had approximately $1.6 million in cash and cash equivalents, excluding restricted cash, $61.0 million outstanding under our amended credit facility, and $6.0 million in outstanding letters of credit.

Working Capital and Sources and Uses of Cash

Our principal sources of liquidity for the next year include cash flow from operations, cash on hand and amounts available under our credit facility, which terminates on April 1, 2021, as discussed in “—Credit Facility” below.

Our working capital deficit decreased to $53.8 million at September 30, 2019, compared to $63.9 million at December 31, 2018, largely due to fluctuations in the timing and amount of payments of accounts payable and accrued expenses, the reclassification of certain asset retirement obligations from current liabilities to long-term obligations in the second quarter of 2019 and a decrease in open commodity derivative contracts at September 30, 2019. These were partially offset by a decrease in cash and accounts receivable largely due to declining revenues.

We intend to spend between $160.0 million and $170.0 million in our 2019 capital budget plan, with the majority of those expenditures being allocated to drilling and completion activities. We intend to fund capital expenditures and other commitments for the next 12 months using cash flow from our operations, borrowings under our credit facility and cash on hand. We will endeavor to keep our capital spending within or very close to our projected cash flows from operations subject to changing industry conditions or events.

Cash Flows

Our cash flows from operations, which impact our ability to fund our capital expenditures, are substantially dependent on current and future prices for oil and natural gas, which historically have been, and may continue to be, volatile. Cash flows from operations are also affected by timing of cash receipts and disbursements and changes in other working capital assets and liabilities.

Our cash flows for the nine-month periods ended September 30, 2019, and 2018 are presented in the following table and discussed below (in thousands):
Nine Months Ended September 30,
2019 2018
Cash flows provided by operating activities $ 95,529    $ 109,168   
Cash flows used in investing activities (169,140)   (132,322)  
Cash flows provided by (used in) financing activities 59,694    (43,680)  
Net decrease in cash and cash equivalents $ (13,917)   $ (66,834)  

Cash Flows from Operating Activities

The $13.6 million decrease in operating cash flows for the nine-month period ended September 30, 2019, compared to the same period in 2018, is primarily due to a decrease in revenues, an increase in lease operating expenses and the changes in working capital discussed above. The decreases were partially offset by reductions in employee termination benefits, general and administrative costs and proxy contest costs. Additionally, we received $5.7 million in derivative settlements in the nine-month period ended September 30, 2019, compared to paying $29.0 million in derivative settlements in the same period in 2018. See “—Consolidated Results of Operations” for further analysis of these changes.

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Cash Flows from Investing Activities

During the nine-month periods ended September 30, 2019 and 2018, cash flows used in investing activities primarily consisted of capital expenditures for drilling and completion activities. Our capital expenditure program focuses on the development of our highest return projects while maintaining capital discipline and developing additional knowledge of our asset bases.

Capital expenditures for the nine-month periods ended September 30, 2019, and 2018 are summarized below (in thousands):
Nine Months Ended September 30,
2019 2018
Capital Expenditures
Drilling and completion $ 145,715    $ 107,382   
Leasehold and geophysical 3,319    9,842   
Other - operating —    410   
Other - corporate 245    44   
Capital expenditures, excluding acquisitions (on an accrual basis) 149,279    117,678   
Acquisitions(1) (236)   —   
2019 capital expenditures, including acquisitions 149,043    117,678   
Change in capital accruals(2) 21,444    29,141   
Total cash paid for capital expenditures $ 170,487    $ 146,819   
__________________
1.Excludes $5.4 million for the nine-month period ended September 30, 2019 related to a nonmonetary transaction.
2.Reflects cash paid during the period presented for expenditures related to the prior year's capital program.

Cash Flows from Financing Activities

Cash provided by financing activities for the nine-month period ended September 30, 2019 consisted primarily of net borrowings under the credit facility. Cash used in financing activities during the nine-month period ended September 30, 2018 consisted of the repayment of the Building Note and cash paid for employee tax obligations in connection with the withholding of common shares upon vesting of employee share-based compensation awards.

Indebtedness

Credit Facility

As noted above, the Company amended and restated its existing reserve-based revolving credit facility on June 21, 2019. See “Note 8 - Debt” to the accompanying unaudited condensed consolidated financial statements for additional discussion of the Company’s debt and covenant restrictions.

Contractual Obligations and Off-Balance Sheet Arrangements

At December 31, 2018, our contractual obligations included third-party drilling rig agreements, asset retirement obligations, operating leases and other individually insignificant obligations. Additionally, we have certain financial instruments representing potential commitments that were incurred in the normal course of business to support our operations, including standby letters of credit and surety bonds. The underlying liabilities insured by these instruments are reflected in our balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds.

Our long-term debt outstanding increased by $62.0 million at September 30, 2019 compared to December 31, 2018, due to net borrowings on the Company's credit facility, which matures in April 2021. Additionally, $9.7 million in asset retirement obligations were reclassified from current liabilities to long-term obligations on the accompanying condensed consolidated balance sheet as of September 30, 2019, due to timing revisions in estimated retirement dates for certain Mid-Continent properties. We also had no drilling rig agreements outstanding at September 30, 2019. There were no other significant changes in total contractual obligations and off-balance sheet arrangements from those reported in the 2018 Form 10-K.


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Critical Accounting Policies and Estimates

For a description of our critical accounting policies and estimates, refer to Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2018 Form 10-K. For a discussion of recent accounting pronouncements, newly adopted and recent accounting pronouncements not yet adopted, see “Note 1 - Basis of Presentation” to the accompanying unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report. We did not have any material changes in critical accounting policies, estimates, judgments and assumptions during the first nine months of 2019.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

General

This discussion provides information about the financial instruments we use to manage commodity prices. All contracts are settled in cash and do not require the actual delivery of a commodity at settlement. Additionally, our exposure to credit risk and interest rate risk is also discussed.

Commodity Price Risk. Our most significant market risk relates to the prices we receive for our oil, natural gas and NGLs. Due to the historical price volatility of these commodities, from time to time, depending upon our view of opportunities under the then-prevailing current market conditions, we enter into commodity price derivative contracts for a portion of our anticipated production volumes for the purpose of reducing variability of oil and natural gas prices we receive. Our credit facility limits our ability to enter into derivative transactions to 90% of expected production volumes from estimated proved reserves over the period covered by the transactions.

Historically, we have used a variety of commodity-based derivative contracts, including fixed price swaps, basis swaps and collars. At September 30, 2019, our commodity derivative contracts consisted of fixed price swaps under which we receive a fixed price for the contract and pay a floating market price to the counterparty over a specified period for a contracted volume.

The following table summarizes derivative activity for the three and nine-month periods ended September 30, 2019, and 2018 (in thousands):
Three Months Ended September 30, Nine Months Ended September 30,
2019 2018 2019 2018
(Gain) loss on commodity derivative contracts $ (1,756)   $ 11,329    $ (1,547)   $ 59,763   
Cash (received) paid on settlements $ (622)   $ 11,631    $ (5,700)   $ 29,025   

See “Note 4 - Derivatives” to the accompanying unaudited condensed consolidated financial statements included in this Quarterly Report for additional information regarding our commodity derivatives.

Credit Risk. We are exposed to credit risk related to counterparties to our derivative financial contracts. All of our 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 our derivative transactions have had an “investment grade” credit rating. We monitor the credit ratings of our derivative counterparties and consider our counterparties’ credit default risk ratings in determining the fair value of our derivative contracts. Our derivative contracts are with multiple counterparties to minimize exposure to any individual counterparty.

We do not require collateral or other security from counterparties to support derivative instruments. We have master netting agreements with each of our derivative contract counterparties, which allow us to net our derivative assets and liabilities by commodity type with the same counterparty. This limits our maximum amount of loss under derivative transactions due to credit to the net amounts due from the counterparties under any outstanding commodity derivative contracts. Our loss is further limited as any amounts due from a defaulting counterparty that is also a lender under the credit facility can be offset against amounts owed, if any, to such counterparty. As of September 30, 2019, the counterparties to our open commodity derivative contracts consisted of two financial institutions, both of which are also lenders under our credit facility. As a result, we are not required to post additional collateral under our commodity derivative contracts.

We are also exposed to credit risk related to the collection of receivables from our joint interest partners for their proportionate share of expenditures made on projects we operate. Historically, our credit losses on joint interest receivables have been immaterial.

Interest Rate Risk. We are exposed to interest rate risk on our credit facility. This variable interest rate on our credit facility fluctuates and exposes us to short-term changes in market interest rates as our interest obligation on this instrument is based on prevailing market interest rates, primarily LIBOR and the federal funds rate. We had $62.0 million in outstanding variable rate debt as of September 30, 2019.
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ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s CEO and CFO, 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 CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2019, 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.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
33

PART II. Other Information

ITEM 1. Legal Proceedings

As previously disclosed, on May 16, 2016, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the Bankruptcy Court. The Bankruptcy Court confirmed the Plan on September 9, 2016, and the Debtors subsequently emerged from bankruptcy on October 4, 2016.

Pursuant to the Plan, claims against the Company were discharged without recovery in each of the following consolidated Cases:

In re SandRidge Energy, Inc. Securities Litigation, Case No. 5:12-cv-01341-LRW, USDC, Western District of Oklahoma; and

Ivan Nibur, Lawrence Ross, Jase Luna, Matthew Willenbucher, and the Duane & Virginia Lanier Trust v. SandRidge Mississippian Trust I, et al., Case No. 5:15-cv-00634-SLP, USDC, Western District of Oklahoma

The lead plaintiffs in both In re SandRidge Energy, Inc. Securities Litigation and Lanier Trust assert claims on behalf of themselves and (i) in In re SandRidge Energy, Inc. Securities Litigation, a class of all purchasers of SandRidge common stock from February 24, 2011 and November 8, 2012 under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, and (ii) in Lanier Trust, a putative class of purchasers of SandRidge Mississippian Trust I and SandRidge Mississippian Trust II common units between April 7, 2011 and November 8, 2012 under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, both based on allegations that defendants, which include certain former officers of the Company and the SandRidge Mississippian Trust I, made misrepresentations or omissions concerning various topics including the performance of wells operated by the Company in the Mississippian region.

Discovery in each of the Cases closed on June 19, 2019. Following a hearing on class certification in each of the Cases on September 6, 2019, the court granted class certification in In re SandRidge Energy, Inc. Securities Litigation on September 30, 2019. The motion for class certification in Lanier Trust remains pending.

In each of the Cases, lead plaintiffs seek to recover unspecified damages, interest, costs and expenses incurred in the litigation on behalf of themselves and class members. Although the claims against the Company in each Case have been discharged pursuant to the Plan, the Company remains a nominal defendant in each of the Cases to the extent necessary to allow recovery from applicable insurance policies or proceeds. In addition, the Company owes indemnity obligations and/or the obligation to advance legal fees, to certain former officers who remain as defendants in each action. The Company may also be contractually obligated to indemnify the SandRidge Mississippian Trust I against losses, claims, damages, liabilities and expenses, including reasonable costs of investigation and attorney’s fees and expenses, arising out of the Cases, and such indemnification is not covered by insurance.

In light of the status of the Cases, and the facts, circumstances and legal theories relating thereto, the Company is not able to determine the likelihood of an outcome in either case or provide an estimate of any reasonably possible loss or range of possible loss related thereto. However, considering the erosion of insurance coverage available to the Company, such losses, if incurred, could be material. The Company has not established any liabilities relating to the Cases and believes that the plaintiffs’ claims are without merit. The Company intends to continue to vigorously defend against the Cases in its capacity as a nominal defendant.

In addition to the matters described above, the Company is involved in various lawsuits, claims and proceedings which are being handled and defended by the Company in the ordinary course of business.
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ITEM 1A. Risk Factors

There have been no material changes to the risk factors previously discussed in Item 1A—Risk Factors in the Company's 2018 Form 10-K.

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

The following table presents a summary of share repurchases made by the Company during the three-month period ended September 30, 2019.

Period Total Number of Shares Purchased(1) Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Program Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
(in Millions)
July 1, 2019 - July 31, 2019 22,707    $ 6.90    N/A    N/A   
August 1, 2019 - August 31, 2019 —    $ —    N/A    N/A   
September 1, 2019 - September 30, 2019 —    $ —    N/A    N/A   
Total 22,707    —   
___________________
1.Includes shares of common stock tendered by employees in order to satisfy tax withholding requirements upon vesting of their stock awards. Shares withheld are initially recorded as treasury shares, then immediately retired.

ITEM 3. Defaults upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

None.

ITEM 5. Other Information

None.
35

ITEM 6. Exhibits

Incorporated by Reference
Exhibit
No.
Exhibit Description Form
SEC
File No.
Exhibit Filing Date
Filed
Herewith
2.1   


8-A 001-33784 2.1    10/4/2016
3.1   

8-A 001-33784 3.1    10/4/2016
3.2   

8-A 001-33784 3.2    10/4/2016
31.1    *
31.2    *
32.1    *
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL 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 *
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) *


36

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/    Michael A. Johnson
Michael A. Johnson
Senior Vice President and Chief Financial Officer
Date: November 12, 2019
37
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