Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control over Financial Reporting
Management of SandRidge Energy, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Internal control over financial reporting is a process designed by, or under the supervision of, the Company’s Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with generally accepted accounting principles.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013) (the COSO criteria). Based on management’s assessment using the COSO criteria, management concluded the Company’s internal control over financial reporting was effective as of December 31, 2022.
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/s/ GRAYSON PRANIN | | /s/ SALAH GAMOUDI |
Grayson Pranin President, Chief Executive Officer and Chief Operating Officer | | Salah Gamoudi Executive Vice President, Chief Financial Officer and Chief Accounting Officer |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of SandRidge Energy, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of SandRidge Energy, Inc. and subsidiaries (the “Company”) as of December 31, 2022, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the year then ended and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2022, and the consolidated results of its operations and its cash flows for the year ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2023, expressed an unqualified opinion on the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which those relate.
The Impact of Proved Oil and Natural Gas Reserves on Depletion—Oil and Natural Gas and Forecasts of Taxable Income for the Assessment of the Realizability of Deferred Tax Assets
As described in Note 1, the Company follows the full cost method of accounting, pursuant to which oil and natural gas properties are amortized using the unit-of-production method over total proved reserves. For the year ended December 31, 2022, the Company recorded depletion related to its proved oil and natural gas properties of approximately $7.6 million.
The Company engages an independent reservoir engineering firm, to serve as a management specialist and to estimate substantially all its proved oil and natural gas reserves. To estimate the volume of proved oil and natural gas reserves and associated future net cash flows, management and their specialist make significant estimates and assumptions including forecasting the production decline rate of producing properties. The estimation of proved oil and natural gas reserves is impacted by management’s judgments and estimates regarding the financial performance of wells associated with proved reserves to determine if wells are expected, with reasonable certainty, to be economical under the appropriate pricing assumptions required. Changes in significant assumptions or engineering data could have a significant impact on the amount of depletion for the Company’s proved oil and natural gas properties and conclusions about realization of deferred tax assets. The impact of proved oil and natural gas reserves on forecasts of taxable income for the assessment of the realizability of deferred tax assets is further described below under Accounting for Income Taxes - Valuation Allowance on Deferred Tax Assets.
We identified the impact of proved oil and natural gas reserves on depletion and assessment of realizability of deferred tax assets as a critical audit matter due to use of significant judgment by management, including the use of specialist, when developing the estimates of proved oil and natural gas reserves. This in turn led to a high degree of auditor judgment, subjectivity, and increased extent of effort in performing procedures and evaluating audit evidence related to the significant assumptions used in developing those estimates of proved oil and natural gas reserves.
The primary procedures we performed to address this critical audit matter included:
•Testing the operating effectiveness of controls over the Company’s estimation of oil and natural gas reserve quantities.
•Evaluating the knowledge, skill, and ability of the Company's third-party reservoir engineering specialist and their relationship to the Company, performing inquiries of those reservoir engineers regarding the process followed and judgments made to estimate the proved reserve volumes and reading the reserve report prepared by the reservoir engineering specialist.
•Evaluating significant assumptions used by management and its specialist in developing the estimates of proved oil and natural gas reserves, including pricing differentials, future operations costs, future production rates and capital expenditures. The procedures performed included tests of the data inputs used by specialist for completeness and accuracy and an evaluation of the specialist’s findings. The procedures performed included:
•Testing the data inputs used by specialist for completeness and accuracy;
•Testing the specialist’s findings for mathematical accuracy; and
•Performing analytical procedures on pricing, reserve quantities and cost estimates developed by management and its specialist. Those procedures entailed comparisons of:
◾ prices to historical benchmark prices, adjusted for pricing differentials,
◾ production forecasts to recent historical actual production,
◾ projections of lease operating costs to recent historical costs incurred for a group of properties, and
◾ projected production taxes to recent historical taxes incurred and to statutory tax rates.
•Evaluating the accuracy of revenue and working interest percentages used in the reserve report by comparing a sample of such interests to the land records.
•Performing retrospective review of historical estimates of proved oil and natural gas reserves to identify potential management bias in estimates.
Testing the accuracy of the Company’s depletion calculation that included these proved reserves.
Accounting for Income Taxes – Valuation Allowance on Deferred Tax Assets
As described in Notes 1 and 13, deferred income taxes are recorded for temporary differences between the financial statement and income tax basis of assets and liabilities. Deferred tax assets are recognized for temporary differences that will be deductible in future years’ tax returns and for operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all the deferred tax assets will not be realized. Deferred tax liabilities are recognized for temporary differences that will be taxable in future years’ tax returns. The Company has had a full valuation allowance against its deferred tax assets until December 31, 2022, when management concluded that it is more likely than not that a portion of the deferred tax assets will be realized, resulting in a deferred tax asset of $64.5 million and a deferred tax benefit of $64.5 million.
We identified the Company’s estimate of the portion of deferred tax assets that is more likely than not to be realized as a critical audit matter. Specifically, the Company’s evaluation of positive and negative evidence and estimates of future taxable income to determine the amount of valuation allowance for release involved significant management judgments. This in turn led to a high degree of auditor judgment, subjectivity, and increased extent of effort in performing procedures and evaluating audit evidence related to the weighing of positive and negative evidence and the significant assumptions used in developing estimates of future taxable income.
The primary procedures we performed to address this critical audit matter included:
•Testing the operating effectiveness of controls over management’s determination of whether it is more likely than not that the deferred tax assets will be realized and development of estimates of future taxable income.
•With the assistance of internal income tax specialists:
•Evaluating management's assessment and weighing of the positive and negative evidence utilized to conclude that a portion of a valuation allowance should be released; and
•Assessing reasonableness of management’s conclusion about tax benefits that are more likely than not to be realized after considering forecasted book/tax differences and utilization of net operating losses.
•Testing the reasonableness of the key assumptions and data in the taxable income forecast by:
•Comparing forecasts of oil and natural gas production, pricing differentials, operating costs, production taxes, and ownership interests to the data inputs in Company’s aforementioned proved oil and natural gas reserves;
•Evaluating reasonableness of forecasted commodity pricing;
•Comparing other projected operating costs and interest income to historical costs incurred or income earned; and
•Assessing reasonableness of the forecast period used by management in its estimate of taxable income.
/s/ MOSS ADAMS LLP
Houston, Texas
March 15, 2023
We have served as the Company's auditor since 2022.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of SandRidge Energy, Inc.
Opinion on Internal Control over Financial Reporting
We have audited SandRidge Energy, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheet of SandRidge Energy, Inc. and subsidiaries as of December 31, 2022, the related consolidated statements of operations, changes in stockholders’ equity and cash flows for year then ended, and the related notes (collectively referred to as the “consolidated financial statements”) and our report dated March 15, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting included in Item 9A. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ MOSS ADAMS LLP
Houston, Texas
March 15, 2023
We have served as the Company's auditor since 2022.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of SandRidge Energy, Inc.
Opinion on the Financial Statements
We have audited the consolidated balance sheet of SandRidge Energy, Inc. and subsidiaries (the "Company") as of December 31, 2021, the related consolidated statements of operations, changes in stockholders' equity, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Houston, Texas
March 10, 2022
We began serving as the Company's auditor in 2019. In 2022 we became the predecessor auditor.
SandRidge Energy, Inc. and Subsidiaries
Consolidated Balance Sheets | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (In thousands) |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 255,722 | | | $ | 137,260 | |
| | | |
Restricted cash - other | 1,746 | | | 2,264 | |
Accounts receivable, net | 34,735 | | | 21,505 | |
Derivative contracts | 4,429 | | | — | |
Prepaid expenses | 523 | | | 626 | |
Other current assets | 7,747 | | | 80 | |
| | | |
Total current assets | 304,902 | | | 161,735 | |
Oil and natural gas properties, using full cost method of accounting | | | |
Proved | 1,507,690 | | | 1,454,016 | |
Unproved | 11,516 | | | 12,255 | |
Less: accumulated depreciation, depletion and impairment | (1,380,574) | | | (1,373,217) | |
| 138,632 | | | 93,054 | |
Other property, plant and equipment, net | 92,244 | | | 97,791 | |
Other assets | 190 | | | 332 | |
Deferred tax assets | 64,529 | | | — | |
Total assets | $ | 600,497 | | | $ | 352,912 | |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities | | | |
Accounts payable and accrued expenses | $ | 46,335 | | | $ | 45,779 | |
| | | |
Asset retirement obligations | 16,074 | | | 17,606 | |
Derivative contracts | — | | | 21 | |
Other current liabilities | 870 | | | 627 | |
Total current liabilities | 63,279 | | | 64,033 | |
| | | |
Asset retirement obligations | 47,635 | | | 41,762 | |
Other long-term obligations | 1,661 | | | 1,795 | |
Total liabilities | 112,575 | | | 107,590 | |
Commitments and contingencies (Note 12) | | | |
Stockholders’ Equity | | | |
Common stock, $0.001 par value; 250,000 shares authorized; 36,868 issued and outstanding at December 31, 2022 and 36,675 issued and outstanding at December 31, 2021 | 37 | | | 37 | |
Warrants | — | | | 88,520 | |
Additional paid-in capital | 1,151,689 | | | 1,062,737 | |
Accumulated deficit | (663,804) | | | (905,972) | |
Total stockholders’ equity | 487,922 | | | 245,322 | |
Total liabilities and stockholders’ equity | $ | 600,497 | | | $ | 352,912 | |
The accompanying notes are an integral part of these consolidated financial statements.
SandRidge Energy, Inc. and Subsidiaries
Consolidated Statements of Operations | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands, except per share amounts) |
Revenues | | | | | |
Oil, natural gas and NGL | $ | 254,258 | | | $ | 168,882 | | | $ | 114,450 | |
Other | — | | | — | | | 526 | |
Total revenues | 254,258 | | | 168,882 | | | 114,976 | |
Expenses | | | | | |
Lease operating expenses | 41,286 | | | 35,999 | | | 43,431 | |
Production, ad valorem, and other taxes | 15,880 | | | 9,918 | | | 9,634 | |
Depreciation and depletion—oil and natural gas | 11,542 | | | 9,372 | | | 50,349 | |
Depreciation and amortization—other | 6,342 | | | 6,073 | | | 7,736 | |
Impairment | — | | | — | | | 256,399 | |
General and administrative | 9,449 | | | 9,675 | | | 15,327 | |
| | | | | |
Restructuring expenses | 382 | | | 792 | | | 2,733 | |
| | | | | |
| | | | | |
Employee termination benefits | — | | | 49 | | | 8,433 | |
(Gain) loss on derivative contracts | (5,975) | | | 2,251 | | | (5,765) | |
Gain on sale of assets | — | | | (18,952) | | | (100) | |
Other operating (income) expense | (99) | | | (382) | | | 306 | |
Total expenses | 78,807 | | | 54,795 | | | 388,483 | |
Income (loss) from operations | 175,451 | | | 114,087 | | | (273,507) | |
Other (expense) income | | | | | |
Interest income (expense), net | 1,810 | | | (404) | | | (1,998) | |
| | | | | |
| | | | | |
Other income (expense), net | 378 | | | 3,055 | | | (2,494) | |
Total other income (expense) | 2,188 | | | 2,651 | | | (4,492) | |
Income (loss) before income taxes | 177,639 | | | 116,738 | | | (277,999) | |
Income tax (benefit) | (64,529) | | | — | | | (646) | |
Net income (loss) | $ | 242,168 | | | $ | 116,738 | | | $ | (277,353) | |
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| | | | | |
Net income (loss) per share | | | | | |
Basic | $ | 6.59 | | | $ | 3.21 | | | $ | (7.77) | |
Diluted | $ | 6.52 | | | $ | 3.13 | | | $ | (7.77) | |
Weighted average number of common shares outstanding | | | | | |
Basic | 36,745 | | | 36,393 | | | 35,689 | |
Diluted | 37,154 | | | 37,271 | | | 35,689 | |
The accompanying notes are an integral part of these consolidated financial statements.
SandRidge Energy, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Warrants | | Additional Paid-In Capital | | Accumulated Deficit | | Total |
| Shares | | Amount | | Shares | | Amount | |
| (In thousands) |
Balance at January 1, 2020 | 35,772 | | | $ | 36 | | | 6,659 | | | $ | 88,520 | | | $ | 1,059,253 | | | $ | (745,357) | | | $ | 402,452 | |
Issuance of stock awards, net of cancellations | 96 | | | — | | | — | | | — | | | — | | | — | | | — | |
Common stock issued for general unsecured claims | 60 | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | — | | | — | | | 3,031 | | | — | | | 3,031 | |
Issuance of warrants for general unsecured claims | — | | | — | | | 75 | | | — | | | — | | | — | | | — | |
Tax withholdings paid in exchange for shares withheld on employee vested stock awards | — | | | — | | | — | | | — | | | (64) | | | — | | | (64) | |
| | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | — | | | (277,353) | | | (277,353) | |
Balance at December 31, 2020 | 35,928 | | | 36 | | | 6,734 | | | 88,520 | | | 1,062,220 | | | (1,022,710) | | | 128,066 | |
Issuance of stock awards, net of cancellations | 547 | | | 1 | | | — | | | — | | | (1) | | | — | | | — | |
Common stock issued for general unsecured claims | 200 | | | — | | | — | | | — | | | — | | | — | | | — | |
Stock-based compensation | — | | | — | | | — | | | — | | | 1,417 | | | — | | | 1,417 | |
Issuance of warrants for general unsecured claims | — | | | — | | | 247 | | | — | | | — | | | — | | | — | |
Tax withholdings paid in exchange for shares withheld on employee vested stock awards | — | | | — | | | — | | | — | | | (899) | | | — | | | (899) | |
| | | | | | | | | | | | | |
Net Income | — | | | — | | | — | | | — | | | — | | | 116,738 | | | 116,738 | |
Balance at December 31, 2021 | 36,675 | | | 37 | | | 6,981 | | | 88,520 | | | 1,062,737 | | | (905,972) | | | 245,322 | |
Issuance of stock awards, net of cancellations | 193 | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
Stock-based compensation | — | | | — | | | — | | | — | | | 1,603 | | | — | | | 1,603 | |
| | | | | | | | | | | | | |
Tax withholdings paid in exchange for shares withheld on employee vested stock awards | | | — | | | — | | | — | | | (1,177) | | | — | | | (1,177) | |
Warrants exercised | — | | | — | | | — | | | (2) | | | 8 | | | — | | | 6 | |
Cancellation of expired warrants | — | | | — | | | (6,981) | | | (88,518) | | | 88,518 | | | — | | | — | |
Net Income | — | | | — | | | — | | | — | | | — | | | 242,168 | | | 242,168 | |
Balance at December 31, 2022 | 36,868 | | | $ | 37 | | | — | | | $ | — | | | $ | 1,151,689 | | | $ | (663,804) | | | $ | 487,922 | |
The accompanying notes are an integral part of these consolidated financial statements.
SandRidge Energy, Inc. and Subsidiaries
Consolidated Statements of Cash Flows | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (In thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net Income (loss) | $ | 242,168 | | | $ | 116,738 | | | $ | (277,353) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | | | |
Provision for doubtful accounts | — | | | (2,329) | | | 3,202 | |
Depreciation, depletion and amortization | 17,884 | | | 15,445 | | | 58,085 | |
Impairment | — | | | — | | | 256,399 | |
| | | | | |
Deferred income taxes | (64,529) | | | — | | | — | |
Debt issuance costs amortization | — | | | 57 | | | 792 | |
| | | | | |
| | | | | |
Write off of debt issuance costs | — | | | 174 | | | — | |
| | | | | |
| | | | | |
| | | | | |
(Gain) loss on derivative contracts | (5,975) | | | 2,251 | | | (5,765) | |
Cash (paid) received on settlement of derivative contracts | 1,525 | | | (2,230) | | | 5,879 | |
| | | | | |
| | | | | |
Gain on sale of assets | — | | | (18,952) | | | (100) | |
Stock-based compensation | 1,526 | | | 1,394 | | | 3,012 | |
Other | 153 | | | 144 | | | 149 | |
Changes in operating assets and liabilities increasing (decreasing) cash | | | | | |
| | | | | |
Receivables | (13,211) | | | 841 | | | 5,867 | |
Prepaid expenses | (1,507) | | | 2,264 | | | 452 | |
Other current assets | (5,378) | | | — | | | 458 | |
Other assets and liabilities, net | (129) | | | (1,212) | | | 1,134 | |
Accounts payable and accrued expenses | (5,246) | | | (2,241) | | | (12,968) | |
Asset retirement obligations | (2,585) | | | (2,084) | | | (3,081) | |
Net cash provided by operating activities | 164,696 | | | 110,260 | | | 36,162 | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
Capital expenditures for property, plant and equipment | (44,085) | | | (11,583) | | | (8,762) | |
Acquisitions of assets | (1,431) | | | (3,545) | | | (3,701) | |
Purchase of other property and equipment | (49) | | | (59) | | | — | |
| | | | | |
Proceeds from sale of assets | 448 | | | 38,160 | | | 37,556 | |
Net cash (used in) provided by investing activities | (45,117) | | | 22,973 | | | 25,093 | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Proceeds from borrowings | — | | | — | | | 59,000 | |
Repayments of borrowings | — | | | (20,000) | | | (96,500) | |
Debt issuance costs | — | | | (75) | | | (160) | |
Reduction of financing lease liability | (541) | | | (1,024) | | | (1,233) | |
| | | | | |
| | | | | |
Proceeds from exercise of stock options | 77 | | | 23 | | | — | |
Tax withholdings paid in exchange for shares withheld on employee vested stock awards | (1,177) | | | (899) | | | (64) | |
| | | | | |
Cash received on warrant exercises | 6 | | | — | | | — | |
Net cash (used in) financing activities | (1,635) | | | (21,975) | | | (38,957) | |
NET INCREASE IN CASH, CASH EQUIVALENTS and RESTRICTED CASH | 117,944 | | | 111,258 | | | 22,298 | |
CASH, CASH EQUIVALENTS and RESTRICTED CASH, beginning of year | 139,524 | | | 28,266 | | | 5,968 | |
CASH, CASH EQUIVALENTS and RESTRICTED CASH, end of year | $ | 257,468 | | | $ | 139,524 | | | $ | 28,266 | |
The accompanying notes are an integral part of these consolidated financial statements.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
1. Summary of Significant Accounting Policies
Nature of Business. SandRidge Energy, Inc. is an oil and natural gas acquisition, development and production company headquartered in Oklahoma City, Oklahoma with a principal focus on developing and producing 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.
Use of Estimates. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 NGL reserves; impairment tests of long-lived assets; the carrying value of unproved oil and natural gas properties; depreciation, depletion and amortization; asset retirement obligations; determinations of significant alterations to the full cost pool and related estimates of fair value used to allocate the full cost pool net book value to divested properties, as necessary; valuation allowances for deferred tax assets; income taxes; valuation of derivative instruments; contingencies; and accrued revenue and related receivables. Although management believes these estimates are reasonable, actual results could differ significantly from those estimates.
Going Concern Consideration. The accompanying consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
Cash and Cash Equivalents. The Company considers all highly-liquid instruments with an original maturity of three months or less to be cash equivalents as these instruments are readily convertible to known amounts of cash and bear insignificant risk of changes in value due to their short maturity period. Additionally, the Company considers demand deposits or accounts that have the general characteristics of demand deposits where we may deposit additional funds at any time and also effectively withdraw funds at any time without prior notice or penalty to be cash equivalents.
Restricted Cash. The Company maintains funds related to collateralized letters of credit and secured credit cards.
Accounts Receivable, Net. The Company has receivables for sales of oil, natural gas and NGLs, as well as receivables related to the drilling, completion, and production of oil and natural gas, which have a contractual maturity of one year or less. An allowance for doubtful accounts has been established based on management’s review of the collectability of the receivables in light of historical experience, the nature and volume of the receivables and other subjective factors. Accounts receivable are charged against the allowance, upon approval by management, when they are deemed uncollectible. Refer to Note 5 for further information on the Company’s accounts receivable and allowance for doubtful accounts.
Fair Value of Financial Instruments. Certain of the Company’s financial assets and liabilities are measured at fair value. Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The Company’s financial instruments, not otherwise recorded at fair value, consist primarily of cash, restricted cash, prepaid expenses, trade receivables, and trade payables and accrued expenses. The carrying values of cash, restricted cash, trade receivables, trade payables and accrued expenses are considered to reflect fair values due to the short-term maturity of these instruments. See Note 4 for further discussion of the Company’s fair value measurements.
Fair Value of Non-financial Assets and Liabilities. The Company also applies fair value accounting guidance to initially, or as events dictate, measure non-financial assets and liabilities such as those obtained through business acquisitions, property, plant and equipment and asset retirement obligations. These assets and liabilities are subject to fair value adjustments only in certain circumstances and are not subject to recurring revaluations. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two as considered appropriate based on the circumstances.
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Under the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and include estimates of future oil and natural gas production or other applicable sales estimates, operational costs and a risk-adjusted discount rate. The Company may use the present value of estimated future cash inflows and/or outflows, third-party offers or prices of comparable assets with consideration of current market conditions to fair value its non-financial assets and liabilities when necessary.
Derivative Financial Instruments. The Company enters into oil and natural gas derivative contracts to manage risks related to fluctuations in prices of its expected oil and natural gas production. The Company considers current and anticipated market conditions, planned capital expenditures, and any debt service requirements when determining whether to enter into oil and gas derivative contracts. The Company may also, from time to time, enter into interest rate swaps in order to manage risk associated with its exposure to variable interest rates.
The Company recognizes its derivative instruments as either assets or liabilities at fair value with changes in fair value recognized in earnings unless designated as a hedging instrument. The Company has elected not to designate price risk management activities as accounting hedges under applicable accounting guidance. The Company nets derivative assets and liabilities whenever it has a legally enforceable master netting agreement with the counterparty to a derivative contract. The related cash flow impact of the Company’s derivative activities are reflected as cash flows from operating activities unless the derivative contract contains a significant financing element, in which case, cash settlements are classified as cash flows from financing activities in the consolidated statements of cash flows. See Note 6 for further discussion of the Company’s derivatives.
Oil and Natural Gas Operations. The Company uses the full cost method to account for its oil and natural gas properties. Under full cost accounting, all costs directly associated with the acquisition, exploration and development of oil, natural gas and NGL reserves are capitalized into a full cost pool. These capitalized costs include costs of unproved properties and internal costs directly related to the Company’s acquisition, development, and exploration activities and capitalized interest. The Company capitalized gross internal costs of $0.3 million, $0.5 million and $0.7 million during the years ended December 31, 2022, 2021 and 2020, respectively. Capitalized costs are amortized using the unit-of-production method. Under this method, depreciation and depletion is computed at the end of each quarter by multiplying total production for the quarter by a depletion rate. The depletion rate is determined by dividing the total unamortized cost base plus future development costs by net equivalent proved reserves at the beginning of the quarter.
Costs associated with unproved properties are excluded from the amortizable cost base until it has been determined that proved reserves exist or a lease is impaired. Unproved properties are reviewed at the end of each quarter to determine whether the costs incurred should be reclassified to the full cost pool and amortized. The costs associated with unproved properties are primarily the costs to acquire unproved acreage. All items classified as unproved property are assessed, on an individual basis or as a group if properties are individually insignificant, on a quarterly basis for possible impairment. The assessment includes consideration of various factors, including, but not limited to, the following: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; assignment of proved reserves; and whether the proved reserves can be developed economically. During any period in which these factors indicate an impairment, all or a portion of the associated leasehold costs are transferred to the full cost pool and become subject to amortization. Costs of seismic data are allocated to unproved leaseholds and transferred to the amortization base with the associated leasehold costs on a specific project basis.
Under the full cost method of accounting, total capitalized costs of oil and natural gas properties, net of accumulated depreciation, depletion and impairment, less related deferred income taxes and electrical infrastructure costs may not exceed the ceiling limitation. A ceiling limitation calculation is performed at the end of each quarter. If the ceiling limitation is exceeded, a write-down or impairment of the full cost pool is required. A write-down of the carrying value of the full cost pool is a non-cash charge that reduces earnings and impacts stockholders’ equity and typically results in lower depreciation and depletion expense in future periods. Once incurred, a write-down cannot be reversed at a later date.
The ceiling limitation calculation is prepared using SEC prices adjusted for basis or location differentials, held constant over the life of the reserves. If applicable, these prices would be further adjusted to include the effects of any fixed price arrangements for the sale of oil and natural gas. Derivative contracts that qualify and are designated as cash flow hedges are included in estimated future cash flows, although the Company historically has not designated any of its derivative contracts as cash flow hedges. The future cash outflows associated with future development or abandonment of wells are included in the computation of the discounted present value of future net revenues for purposes of the ceiling limitation calculation.
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Sales and abandonments of oil and natural gas properties being amortized are accounted for as adjustments to the full cost pool, with no gain or loss recognized, unless the adjustments would significantly alter the relationship between capitalized costs and proved oil, natural gas and NGL reserves. A significant alteration would not ordinarily be expected to occur upon the sale of reserves involving less than 25% of the proved reserve quantities of a cost center, unless it results in a greater than 10% change to the depletion rate.
Property, Plant and Equipment, Net. Other capitalized costs, including other property and equipment, such as electrical infrastructure assets and buildings, are carried at cost or fair value established on the Emergence Date less applicable depreciation. Renewals and improvements are capitalized while repairs and maintenance are expensed. Depreciation of such property and equipment is computed using the straight-line method over the estimated useful lives of the assets, which range from 7 to 39 years for buildings and 1 to 27 years for the electrical infrastructure assets and other equipment. When property and equipment components are disposed, the cost and the related accumulated depreciation are removed and any resulting gain or loss is reflected in the consolidated statements of operations.
Realization of the carrying value of property and equipment is reviewed for possible impairment whenever events or changes in circumstances indicate that estimated future net operating cash flows directly related to the asset or asset group including disposal value is less than the carrying amount of the asset or asset group. Impairment is measured as the excess of the carrying amount of the impaired asset or asset group over its fair value. See Note 9 for further discussion of impairments.
Capitalized Interest. Interest is capitalized on assets being made ready for use using a weighted average interest rate based on the Company’s borrowings outstanding during that time. During the year ended December 31, 2022 the Company did not capitalize any interest on unproved properties, while during the year ended December 31, 2021 the Company capitalized interest of approximately $0.3 million on unproved properties that were not currently being depreciated or depleted and on which exploration activities were in progress.
Debt Issuance Costs. The Company includes unamortized debt issuance costs, if any, in other assets in the consolidated balance sheets. Other debt issuance costs related to long-term debt, if any, are presented in the balance sheets as a direct deduction from the associated debt liability, if material. Debt issuance costs are amortized to interest expense over the term of the related debt. When debt is retired, any unamortized costs, if material are written off and included in gain or loss on extinguishment of debt.
Asset Retirement Obligations. The Company owns oil and natural gas assets that require expenditures to plug, abandon and remediate associated property at the end of their productive lives, in accordance with applicable federal and state laws. Liabilities for these asset retirement obligations are recorded at the estimated present value at the time the wells are drilled or acquired, with the offsetting increase to property cost. These property costs are depreciated on a unit-of-production basis within the full cost pool. The liability accretes each period until it is settled or the asset is sold and the liability is removed. Both the accretion and the depreciation are included in the consolidated statements of operations. The Company determines its asset retirement obligations by calculating the present value of estimated expenses related to the liability. Estimating future asset retirement obligations requires management to make estimates and judgments regarding timing, existence of a liability and what constitutes adequate restoration. Inherent in the present value calculation are the timing of settlement and changes in the legal, regulatory, environmental and political environments, which are subject to change. See Note 11 for further discussion of the Company’s asset retirement obligations.
Revenue Recognition and Natural Gas Balancing. Sales of oil, natural gas and NGLs 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, net of royalties, discounts and allowances, as applicable. Additionally, the Company deducts transportation costs from oil, natural gas and NGL revenues. Taxes assessed by governmental authorities on oil, natural gas and NGL sales are included in production, ad valorem and other taxes in the consolidated statements of operations. See Note 15 for further information on the Company's accounting policies related to revenues.
The Company accounts for natural gas production imbalances using the sales method, which recognizes revenue on all natural gas sold even though the natural gas volumes sold may be more or less than the Company's ownership entitles it to sell. Liabilities are recorded for imbalances greater than the Company’s proportionate share of remaining estimated natural gas reserves. The Company has recorded a liability for natural gas imbalance positions of $1.4 million at December 31, 2022 and 2021. The Company includes the gas imbalance positions in other long-term obligations in the consolidated balance sheets.
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Allocation of Share-Based Compensation. Equity compensation provided to employees directly involved in exploration and development activities is capitalized to the Company’s oil and natural gas properties. Equity compensation not capitalized is recognized in general and administrative expenses, production expenses, and other operating expense in the accompanying consolidated statements of operations.
Restructuring expenses. Restructuring expenses represent fees and costs associated with our outsourcing and relocation of certain corporate specific functions that are of a non-recurring nature, expenses related to our predecessor company's 2016 bankruptcy, and our exit from NPB in Colorado.
Income Taxes. Deferred income taxes reflect the net tax effects of temporary differences between the amounts of assets and liabilities reported for financial statement purposes and their tax basis. Deferred tax assets are reduced by a valuation allowance if it is deemed more likely than not that some or all of the deferred tax assets will not be realized.
The Company has elected an accounting policy in which interest and penalties on income taxes resulting from the underpayment or late payment of income taxes due to a taxing authority or relating to income tax contingencies are presented as a component of the income tax provision, rather than as interest expense.
Earnings per Share. Basic earnings per common share is calculated by dividing earnings available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is calculated by dividing earnings available to common stockholders by the weighted average number of diluted common shares outstanding, which includes the effect of potentially dilutive securities. Potentially dilutive securities consist of unvested restricted stock awards, performance share units, warrants, and stock options using the treasury method.
Under the treasury method, the amount of unrecognized compensation expense related to unvested stock-based compensation grants or the proceeds that would be received if the warrants were exercised are assumed to be used to repurchase shares at the average market price. When a loss exists, all potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted earnings per share. See Note 19 for the Company’s earnings per share calculation.
Commitments and Contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation or other sources are recorded when it is probable that a liability has been incurred and the amount can be reasonably estimated. Environmental expenditures are expensed or capitalized, as appropriate, depending on future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Environmental liabilities related to future costs are recorded on an undiscounted basis when assessments and/or remediation activities are probable and costs can be reasonably estimated. See Note 12 for discussion of the Company’s commitments and contingencies.
Concentration of Risk. We regularly maintain cash in excess of federally insured limits at financial institutions. Additionally, all of the Company’s commodity derivative transactions have been carried out in the over-the-counter market, which involves the risk that the counterparties may be unable to meet the financial terms of the transactions. The counterparty for all of the Company’s commodity derivative transactions have an “investment grade” credit rating. The Company monitors the credit ratings of its commodity derivative counterparties on an ongoing basis and considers their credit default risk ratings in determining the fair value of its commodity derivative contracts. Historically, the Company’s commodity derivative contracts have been with multiple counterparties to minimize exposure to any individual counterparty.
The Company enters into master netting agreements with all of its commodity derivative counterparties, which allows the Company to net its commodity derivative assets and liabilities for like commodities and derivative instruments with the same counterparty. As a result of the netting provisions, the Company’s maximum amount of loss under commodity derivative transactions due to credit risk was limited to the net amounts due from the counterparties under the commodity derivative contracts.
The Company operates a substantial portion of its oil and natural gas properties. As the operator of a property, the Company makes full payment for costs associated with the property and seeks reimbursement from the other working interest owners in the property for their share of those costs. The Company’s joint interest partners are primarily independent oil and natural gas producers. If the oil and natural gas exploration and production industry in general was adversely affected, the ability of the joint interest partners to reimburse the Company could be adversely affected.
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Purchasers of the Company’s oil, natural gas and NGL production consist primarily of independent marketers, large oil and natural gas companies and gas pipeline companies. The number of available purchasers and markets in the areas where we sell our production reduces the risk that the loss of a single downstream customer would materially affect our sales. We do not have any material commitments to deliver fixed and determinable quantities of oil and natural gas in the future under existing sales contracts or sales agreements.
The Company had sales exceeding 10% of total revenues to the following oil and natural gas purchasers (in thousands): | | | | | | | | | | | |
| Sales | | % of Revenue |
December 31, 2022 | | | |
Targa Pipeline Mid-Continent West OK LLC | $ | 147,902 | | | 58.2 | % |
Plains Marketing, L.P. | $ | 76,342 | | | 30.0 | % |
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December 31, 2021 | | | |
Targa Pipeline Mid-Continent West OK LLC | $ | 91,066 | | | 53.9 | % |
Plains Marketing, L.P. | $ | 51,204 | | | 30.3 | % |
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December 31, 2020 | | | |
Plains Marketing, L.P. | $ | 40,058 | | | 34.8 | % |
Targa Pipeline Mid-Continent West OK LLC | $ | 38,287 | | | 33.3 | % |
Sinclair Crude Company | $ | 36,375 | | | 31.6 | % |
Recently Adopted Accounting Pronouncements. Accounting Standards Updates ("ASU") 2016-13 - In March 2016, 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 replaced the previously required incurred loss approach with an expected loss model for instruments measured at amortized cost. The Company adopted this ASU on January 1, 2020 using a modified retrospective approach; however, the impact was not material upon adoption.
ASU 2019-12 - In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies various aspects of accounting for income taxes, including requirements related to hybrid tax regimes, the tax basis step-up in goodwill obtained in a transaction that is not a business combination, separate financial statements of entities not subject to tax, the intraperiod tax allocation exception to the incremental approach, ownership changes in investments, interim-period accounting for enacted changes in tax laws, and year-to-date loss limitation in interim-period tax accounting. The standard is effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted, and will be applied on a prospective basis. The ASU is effective for the Company beginning January 1, 2021 and resulted in no material impact on its consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted. The FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, amended by ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This guidance provides optional practical expedients and exceptions for applying United States Generally Accepted Accounting Principles ("US GAAP") provisions to contracts, hedging relationships, and other transactions that reference LIBOR, or other reference rates expected to be discontinued because of reference rate reform, if certain criteria are met. The guidance in this update was effective upon its issuance. If elected, the guidance is to be applied prospectively through December 31, 2024. We are currently evaluating the effect the potential adoption of this ASU will have on our consolidated financial statements, if any.
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
2. Supplemental Cash Flow Information
Supplemental disclosures to the consolidated statements of cash flows are presented below (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Supplemental Disclosure of Cash Flow Information | | | | | |
Cash paid for interest, net of amounts capitalized | $ | (215) | | | $ | (177) | | | $ | (1,260) | |
Cash received for income taxes | $ | — | | | $ | — | | | $ | 616 | |
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Supplemental Disclosure of Noncash Investing and Financing Activities | | | | | |
Purchase of PP&E in accounts payable and accrued expenses | $ | 6,151 | | | $ | 1,029 | | | $ | 396 | |
Right-of-use assets obtained in exchange for financing lease obligations | $ | 713 | | | $ | 1,258 | | | $ | 67 | |
Carrying value of properties exchanged | $ | — | | | $ | — | | | $ | 3,890 | |
Asset retirement obligation capitalized | $ | 86 | | | $ | 18 | | | $ | 309 | |
Asset retirement obligation removed due to divestiture | $ | (623) | | | $ | (7,662) | | | $ | (502) | |
Asset retirement obligation revisions | $ | 2,656 | | | $ | 6,800 | | | $ | (17,192) | |
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3. Acquisitions, Divestitures and Disposal of Assets and Oil and Gas Properties
2021 Acquisitions and Divestitures
On April 22, 2021, we announced the acquisition of all the overriding royalty interest assets of SandRidge Mississippian Trust I (the “Trust”). The gross purchase price was $4.9 million (net $3.6 million, given our 26.9% ownership of the Trust).
North Park Basin Sale
On February 5, 2021, the Company sold all of its oil and natural gas properties and related assets of the North Park Basin ("NPB"), in Colorado, for a purchase price of $47 million. The sale closed for net proceeds of $39.7 million in cash, which amounts to the purchase price of $47 million net of effective date to close date adjustments. Consequently, the Company allocated a portion of the full cost pool net book value, using the income approach, to the divested oil and gas properties and recognized a reduction of full cost pool assets of $22.0 million and a reduction of $4.6 million to its non-full cost pool assets. As the sale significantly altered the relationship between capitalized costs and proved reserves, the Company recognized a $19.7 million gain related to the assets sold. The gain represents net proceeds of $39.7 million coupled with the release of revenues in suspense of $0.5 million and the relief of asset retirement obligations of $6.1 million offset by the reduction of $26.6 million in oil and gas properties related to NPB. The Company recorded a decrease to the sales price of $0.8 million as a result of post-closing adjustments made during the second half of the year. As a result, Gain on sale of assets decreased to $18.9 million for the year ended December 31, 2021.
2020 Acquisitions and Divestitures
On September 10, 2020, the Company acquired all of the overriding royalty interests held by SandRidge Mississippian Royalty Trust II ("the Trust") for a net purchase price of $3.3 million, given our 37.6% ownership of the Trust. The Company accounted for this transaction as an asset acquisition and allocated the purchase price of the acquisition plus the transactions costs to oil and gas properties.
On August 31, 2020, the Company closed on the previously announced sale of its corporate headquarters building located in Oklahoma City, OK, for net proceeds of approximately $35.4 million. See Note 9 for additional discussion on the sale of the building.
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
4. Fair Value Measurements
The Company measures and reports certain assets and liabilities on a fair value basis and has classified and disclosed its fair value measurements using the levels of the fair value hierarchy noted below. The carrying values of cash, restricted cash, accounts receivable, prepaid expenses, certain other current assets, accounts payable and accrued expenses and other current liabilities and other long-term obligations included in the consolidated balance sheets approximated fair value at December 31, 2022 and December 31, 2021.
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Level 1 | | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. |
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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. |
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Level 3 | | Measurement based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable for objective sources (i.e., supported by little or no market activity). |
Assets and liabilities that are measured at fair value are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value 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 has assets and liabilities classified in Level 2 of the hierarchy as of December 31, 2022 and 2021, 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.
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Fair Value - Recurring Measurement Basis
The following tables summarize the Company’s assets and liabilities measured at fair value on a recurring basis by the fair value hierarchy (in thousands):
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements | | Netting | | Assets at Fair Value |
| Level 1 | | Level 2 | | Level 3 | | |
Assets | | | | | | | | | |
Commodity derivative contracts | $ | — | | | $ | 4,429 | | | $ | — | | | $ | — | | | $ | 4,429 | |
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Total | $ | — | | | $ | 4,429 | | | $ | — | | | $ | — | | | $ | 4,429 | |
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December 31, 2021
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| Fair Value Measurements | | Netting(1) | | Liabilities at Fair Value |
| Level 1 | | Level 2 | | Level 3 | | |
Liabilities | | | | | | | | | |
Commodity derivative contracts | $ | — | | | $ | 200 | | | $ | — | | | $ | 179 | | | $ | 21 | |
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Total | $ | — | | | $ | 200 | | | $ | — | | | $ | 179 | | | $ | 21 | |
(1)Represents the impact of netting assets and liabilities with counterparties where the right of offset exists.
Transfers. During the years ended December 31, 2022, 2021 and 2020, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.
Fair Value of Non-Financial Assets and Liabilities
See Note 9 for discussion of the Company’s impairment valuations.
5. Accounts Receivable
A summary of accounts receivable is as follows (in thousands): | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Oil, natural gas and NGL sales | $ | 21,839 | | | $ | 18,829 | |
Joint interest billing | 11,234 | | | 3,441 | |
Other | 3,689 | | | 1,262 | |
Total accounts receivable | 36,762 | | | 23,532 | |
Less: allowance for doubtful accounts | (2,027) | | | (2,027) | |
Total accounts receivable, net | $ | 34,735 | | | $ | 21,505 | |
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
The following table presents the balance and activity in the allowance for doubtful accounts for the years ended December 31, 2022 and 2021 (in thousands): | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | |
Beginning balance | $ | 2,027 | | | $ | 4,356 | | | |
Additions charged to costs and expenses | — | | | 21 | | | |
Deductions (1) | — | | | (2,350) | | | |
Ending balance | $ | 2,027 | | | $ | 2,027 | | | |
____________________
(1)Deductions represent collections of amounts for which an allowance had previously been established.
6. 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. On occasion, the Company has attempted to manage this risk on a portion of its forecasted oil or natural gas production sales through the use of commodity derivative contracts.
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 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 following table summarizes derivative activity for the years ended December 31, 2022, 2021 and 2020 (in thousands):
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| Year Ended December 31, |
| 2022 | | 2021 | | 2020 | | |
(Gain) loss on derivative contracts | $ | (5,975) | | | $ | 2,251 | | | $ | (5,765) | | | |
Cash paid (received) on settlements | $ | (1,525) | | | $ | 2,230 | | | $ | (5,879) | | | |
Master Netting Agreements and the Right of Offset. As applicable, 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 by commodity type in the 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 December 31, 2022, the counterparty to the Company’s open commodity derivative contracts consisted of one financial institution.
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| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
The following tables summarize (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 positions as of December 31, 2022 and 2021 (in thousands):
December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts | | Gross Amounts Offset | | Amounts Net of Offset | | Financial Collateral | | Net Amount |
Assets | | | | | | | | | | |
Derivative contracts - current | | $ | 4,429 | | | $ | — | | | $ | 4,429 | | | $ | — | | | $ | 4,429 | |
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Total | | $ | 4,429 | | | $ | — | | | $ | 4,429 | | | $ | — | | | $ | 4,429 | |
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December 31, 2021 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gross Amounts | | Gross Amounts Offset | | Amounts Net of Offset | | Financial Collateral | | Net Amount |
Liabilities | | | | | | | | | | |
Derivative contracts - current | | $ | 200 | | | $ | 179 | | | $ | 21 | | | $ | — | | | $ | 21 | |
| | | | | | | | | | |
Total | | $ | 200 | | | $ | 179 | | | $ | 21 | | | $ | — | | | $ | 21 | |
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As of December 31, 2022, the Company's open derivative contracts consisted of natural gas commodity derivative contracts under which we will receive a fixed price for the contract and pay a floating market price to the counterparty over a specified period for a contracted volume. These commodity derivative contracts consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Notional | | Units | | Weighted Average Fixed Price per Unit |
Natural Gas Price Swaps: January 2023 - March 2023 | | 1,044,000 | | | MMBtu | | $ | 8.39 | |
Because we did not designate any of our derivative contracts as hedges for accounting purposes, changes in the fair value of our derivative contracts were recognized as gains and losses in current period earnings. As a result, and as applicable, our current period earnings could have been significantly affected by changes in the fair value of our commodity derivative
contracts. Changes in fair value were principally measured based on a comparison of future prices to the contract price at the
end of the period.
Fair Value of Derivatives
The following table presents the fair value of the Company’s derivative contracts on a net basis with same counterparty netting (in thousands): | | | | | | | | | | | | | | |
| | | | December 31, |
Type of Contract | | Balance Sheet Classification | | 2022 |
Derivative assets | | | | |
Natural Gas | | Current assets - Derivative Contracts | | $ | 4,429 | |
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| | | | |
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| | | | December 31, |
Type of Contract | | Balance Sheet Classification | | 2021 |
Derivative liabilities | | | | |
Natural Gas and NGL price swaps | | Current liabilities - Derivative Contracts | | $ | 21 | |
See Note 4 for additional discussion of the fair value measurement of the Company’s derivative contracts.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
7. Leases
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. 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. The Company recognizes right-of-use assets and current and non-current lease liabilities on the balance sheet for all leases with lease terms of greater than one year. Short-term leases that have an initial term of one year or less are not capitalized. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
Capitalized 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 consolidated balance sheet as of December 31, 2022 and 2021.
The Company had operating and financing leases for vehicles, office space and equipment outstanding during the year ended December 31, 2022 and 2021, which were not significant to the consolidated financial statements.
The components of lease costs recognized for the Company's right-of-use leases are shown below (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2022 | | Year Ended December 31, 2021 | | Year Ended December 31, 2020 |
Short-term lease cost (1) | | $ | 4,208 | | | $ | 892 | | | $ | 1,880 | |
Financing lease cost | | 673 | | | 389 | | | 1,220 | |
Operating lease cost | | 161 | | | 151 | | | 169 | |
Total lease cost | | $ | 5,042 | | | $ | 1,432 | | | $ | 3,269 | |
___________________
(1)During the year ended December 31, 2022, there were $3.3 million in short-term lease costs capitalized associated with our drilling rig lease. Portions of these costs were reimbursed to the Company by other working interest owners. There were no short-term lease costs capitalized as part of oil and natural gas properties during the years ended December 31, 2021 or 2020.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
8. Property, Plant and Equipment
Property, plant and equipment consists of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Oil and natural gas properties | | | |
Proved | $ | 1,507,690 | | | 1,454,016 | |
Unproved | 11,516 | | | 12,255 | |
Total oil and natural gas properties | 1,519,206 | | | 1,466,271 | |
Less accumulated depreciation, depletion and impairment | (1,380,574) | | | (1,373,217) | |
Net oil and natural gas properties capitalized costs | 138,632 | | | 93,054 | |
| | | |
Land | 200 | | | 200 | |
Electrical infrastructure | 121,819 | | | 121,819 | |
Non-oil and natural gas equipment | 1,644 | | | 1,575 | |
Buildings and structures | 3,603 | | | 3,603 | |
Financing Leases | 1,468 | | | 1,384 | |
Total | 128,734 | | | 128,581 | |
Less accumulated depreciation and amortization | (36,490) | | | (30,790) | |
Other property, plant and equipment, net | 92,244 | | | 97,791 | |
Total property, plant and equipment, net | $ | 230,876 | | | $ | 190,845 | |
The average rates used for depreciation and depletion of oil and natural gas properties were $1.18 per Boe in 2022, $0.78 per Boe in 2021 and $5.11 per Boe in 2020.
See Note 9 for discussion of impairment of other property, plant and equipment.
Costs Excluded from Amortization
Costs excluded from amortization were related to unproved properties and were $11.5 million and $12.3 million, at December 31, 2022 and 2021, respectively.
For leases that do not have existing production that would otherwise extend the lease term, the Company estimates that any associated unproved costs will be evaluated and transferred to the amortization base of the full cost pool within a three to five-year period from the original lease date. In addition, the Company’s internal engineers evaluate all properties on a quarterly basis.
9. Impairment
The Company assesses the need to impair its oil and gas properties during its quarterly full cost pool ceiling limitation calculation. The Company analyzes various property, plant and equipment for impairment when certain triggering events occur by comparing the carrying values of the assets to their undiscounted future net cash flows. The full cost pool ceiling limitation and other assets were determined in accordance with the policies discussed in Note 1.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Impairment for the years ended December 31, 2022, 2021 and 2020 consists of the following (in thousands): | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Full cost pool ceiling limitation | | $ | — | | | $ | — | | | $ | 218,399 | |
| | | | | | |
| | | | | | |
| | | | | | |
Other | | — | | | — | | | 38,000 | |
| | $ | — | | | $ | — | | | $ | 256,399 | |
| | | | | | |
During the years ended December 31, 2022 and 2021, the Company did not record a full cost limitation impairment charge. The ceiling limitation impairment charges recorded for the year ended December 31, 2020 resulted from various factors, including a decrease in proved reserve value driven by a significant decline in the trailing twelve-month weighted average oil and natural gas prices in the first, second and third quarters of 2020. See Note 20 for additional discussion of our oil and gas producing properties.
The asset impairment charge of $38.0 million recorded for the year ended December 31, 2020 resulted from the write down of the net carrying amount of the office headquarters building assets to their estimated fair value less estimated costs to sell the building. In May 2020, the Company entered into an agreement for the sale of its corporate headquarters building located in Oklahoma City, OK. The building sale closed on August 31, 2020.
In accordance with the applicable accounting guidance, FASB ASC 360-10-45-9, the Company reclassified its corporate headquarters building net carrying amount from Other property, plant and equipment, net, to Assets held for sale on the Consolidated Balance Sheet at June 30, 2020. The Company also reclassified the liabilities associated with the corporate headquarters building from Accounts payable and accrued expenses to Liabilities held for sale on the Consolidated Balance Sheet at June 30, 2020. Further, the Company recorded an impairment charge of $38.0 million in the three-month period ended June 30, 2020 to write down the net carrying amount of the office headquarters building assets to their estimated fair value less estimated costs to sell the building.
Prior to the sale of the corporate headquarters building, the carrying amount of the building was assessed for recoverability and impairment using undiscounted cash flow measures of the consolidated Company as prescribed under ASC 360-10-35, rather than fair value as prescribed under ASC 360-10-45-9.
10. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consist of the following (in thousands): | | | | | | | | | | | | |
| December 31, |
| 2022 | | | 2021 |
Accounts payable and other accrued expenses | $ | 17,989 | | | | $ | 13,727 | |
Production payable | 22,290 | | | | 23,974 | |
Payroll and benefits | 3,471 | | | | 3,942 | |
Taxes payable | 2,585 | | | | 3,902 | |
Drilling advances | — | | | | 234 | |
| | | | |
Total accounts payable and accrued expenses | $ | 46,335 | | | | $ | 45,779 | |
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
11. Asset Retirement Obligations
The following table presents the balance and activity of the Company’s asset retirement obligations (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Beginning balance | $ | 59,368 | | | $ | 57,168 | | | $ | 75,016 | |
Liability incurred upon acquiring and drilling wells | 86 | | | 18 | | | 309 | |
Revisions in estimated cash flows (1) | 2,656 | | | 6,800 | | | (17,192) | |
Liability settled or disposed in current period (2) | (2,296) | | | (8,668) | | | (6,866) | |
Accretion (3) | 3,895 | | | 4,050 | | | 5,901 | |
Ending balance | 63,709 | | | 59,368 | | | 57,168 | |
Less: current portion | 16,074 | | | 17,606 | | | 16,467 | |
Asset retirement obligations, net of current | $ | 47,635 | | | $ | 41,762 | | | $ | 40,701 | |
____________________
(1) Revisions for the years ended December 31, 2022, 2021 and 2020 relate primarily to changes in estimated well lives and changes in plugging cost estimates.
(2) $6.1 million is related to the sale of NPB in February 2021.
(3) Included on the Depreciation and depletion - oil and natural gas line item on the Consolidated Statements of Operations.
12. Commitments and Contingencies
Included below is a discussion of the Company's various future commitments and contingencies as of December 31, 2022. The Company has provided accruals where necessary for contingent liabilities, based on ASC 450, Contingencies, when it has determined that a liability is probable and reasonably estimable. The Company continuously assesses the potential liability related to the Company's pending litigation and revises its estimates when additional information becomes available. Additionally, the Company currently expenses all legal costs as they are incurred. The commitments and contingencies under these arrangements are not recorded in the accompanying consolidated balance sheets.
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 (“In re SandRidge Energy, Inc. Securities Litigation”); 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 (“Lanier Trust”)
Both cases were settled with all defendants except the SandRidge Mississippian Trust I (“the Trust”), which is being sued by a class of purchasers of units 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, based on allegations that the Trust, made misrepresentations or omissions concerning various topics including the performance of wells operated by the Company. The Company is contractually obligated to indemnify the Trust for losses, claims, damages, liabilities and expenses, including reasonable costs of investigation and attorney’s fees and expenses, which it is required to advance. Such indemnification is not covered by insurance . Considering the status of the Lanier Trust matter, and the facts, circumstances and legal theories relating thereto, the Company is not able to determine the likelihood of an outcome or provide an estimate of any reasonably possible loss or range of possible loss related thereto. However, such losses, if incurred, could be material. The Company has not established any liabilities relating to the Lanier Trust matter and believes that the plaintiffs’ claims are without merit.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Separately, the Company had received a demand by two of the settling individual defendants to fund a proposed settlement of $17 million with those defendants. The Company refused and filed an action in Oklahoma state court seeking a declaratory judgment that the defendants were not entitled to any settlement. As a result of the Company’s refusal to fund the settlement, separate insurance was triggered. The insurance carriers funded the settlement of $17 million and are seeking recovery from the Company in the State court action. The Company disputes any liability under this demand and intends to continue to vigorously defend against this claim. Considering the status of this matter, and the facts, circumstances and legal theories thereto, the Company is not able to determine the likelihood of an outcome. The Company has not established any liabilities relating to this matter.
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.
13. Income Taxes
The Company’s income tax (benefit) provision consisted of the following components (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Current | | | | | |
Federal | $ | — | | | $ | — | | | $ | (646) | |
State | — | | | — | | | — | |
| — | | | — | | | (646) | |
Deferred | | | | | |
Federal | (55,796) | | | — | | | — | |
State | (8,733) | | | — | | | — | |
| (64,529) | | | — | | | — | |
Total (benefit) provision | $ | (64,529) | | | $ | — | | | $ | (646) | |
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A reconciliation of the (benefit) provision for income taxes at the statutory federal tax rate to the Company’s actual income tax (benefit) provision is as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Computed at federal statutory rate | $ | 37,304 | | | $ | 24,404 | | | $ | (58,574) | |
State taxes, net of federal benefit | 5,843 | | | 3,012 | | | (10,898) | |
Non-deductible expenses | 3 | | | 83 | | | 18 | |
Stock-based compensation | 23 | | | (541) | | | 643 | |
| | | | | |
| | | | | |
Return to provision adjustments | 1,015 | | | (221) | | | (945) | |
Refund of AMT Sequestration | — | | | — | | | (646) | |
Change in statutory tax rate | 25,499 | | | — | | | — | |
Change in state net operating loss carryforwards | 31,762 | | | — | | | — | |
Change in valuation allowance | (165,978) | | | (26,733) | | | 69,285 | |
Other | — | | | (4) | | | 471 | |
Total (benefit) provision | $ | (64,529) | | | $ | — | | | $ | (646) | |
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
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. In assessing the realizability of the deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future income in periods in which the deferred tax assets can be utilized. In prior years, we determined that the deferred tax assets did not meet the more likely than not threshold of being utilized and thus recorded a valuation allowance. As of December 31, 2022, we have partially released our valuation allowance on our deferred tax assets by $64.5 million. We anticipate being able to utilize these deferred tax assets based on the generation of future income. A change in the estimate of future income could cause the valuation allowance to be adjusted in subsequent periods. As of December 31, 2021 the Company had a full valuation allowance against its deferred tax asset.
Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands): | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 | |
Deferred tax liabilities | | | | |
Investments (1) | $ | — | | | $ | — | | |
Derivative contracts | — | | | — | | |
Total deferred tax liabilities | — | | | — | | |
Deferred tax assets | | | | |
Property, plant and equipment | 89,090 | | | 181,037 | | |
| | | | |
Net operating loss carryforwards | 373,702 | | | 440,332 | | |
| | | | |
Tax credits and other carryforwards | 33,852 | | | 33,861 | | |
Asset retirement obligations | 13,791 | | | 14,842 | | |
Investments (1) | 165 | | | 106 | | |
Other | 1,392 | | | 2,363 | | |
Total deferred tax assets | 511,992 | | | 672,541 | | |
Valuation allowance | (447,463) | | | (672,541) | | |
Net deferred tax asset | $ | 64,529 | | | $ | — | | |
____________________
(1) Includes the Company’s deferred tax liability resulting from its investment in the Royalty Trusts.
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.
As of December 31, 2022, the Company had approximately $1.6 billion of federal NOL carryforwards, net of NOLs expected to expire unused due to the 2016 IRC Section 382 limitation. Of the $1.6 billion of federal NOL carryforwards, $0.7 billion expire during the years 2025 through 2037, while $0.9 billion do not have an expiration date. In addition, the Company had approximately $1.1 billion of state NOL carryforwards, net of NOLs expected to expire unused due to the 2016 IRC Section 382 limitation. Of the $1.1 billion in state NOL carryforwards, approximately $200 million are derived from states the Company currently does not operate in. Of the remaining state NOL carryforwards, $643 million do not have an expiration date and $247 million expire during the years 2026 through 2037. Additionally, the Company had federal tax credits in excess of $33.5 million which begin expiring in 2029.
The Company did not have any unrecognized tax benefits at December 31, 2022, 2021 or 2020.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2018 to present remain open for federal examination. Additionally, tax years 2005 through 2017 remain subject to examination for the purpose of determining the amount of federal NOL and other carryforwards. The number of years open for state tax audits varies, depending on the state, but is generally from three to five years.
14. Equity
Capital Stock and Equity Awards. Our authorized capital stock consists of 300 million shares, which include 250 million shares of common stock, $0.001 par value per share and 50 million shares of preferred stock, par value $0.001 per share. At December 31, 2022, the Company had 36.9 million shares of common stock issued and outstanding, including an immaterial amount of shares of unvested restricted stock awards. The Company also has 0.3 million restricted stock units, an immaterial amount of performance share units and 0.2 million stock options outstanding at December 31, 2022 as discussed further in Note 16. At December 31, 2021, the Company had 36.7 million shares of common stock issued and outstanding, including 0.1 million shares of unvested restricted stock awards. The Company also had 0.4 million of restricted stock units, an immaterial amount of performance share units and 0.3 million stock options outstanding at December 31, 2021. At December 31, 2022 and 2021, there were no shares of preferred stock issued and outstanding.
Warrants. Since the fourth quarter of 2016, the Company issued approximately 4.9 million Series A warrants and 2.1 million Series B warrants to certain holders of general unsecured claims as defined in the 2016 bankruptcy reorganization plan. These warrants were 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. The warrants contained customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions. During the year ended December 31, 2022, warrant holders exercised 103 Series A warrants and 44 Series B warrants for 147 shares of common stock. Upon expiration, the remaining 4.9 million Series A warrants and 2.1 million Series B warrants were cancelled and the carrying value was transferred to Additional paid-in capital in the accompanying consolidated balance sheets.
Share Repurchase Program. In August 2021, our Board of Directors approved the initiation of a share repurchase program (the "Program") authorizing us to purchase up to an aggregate of $25.0 million of our common stock beginning as early as August 16, 2021. The Program is in accordance with Rule 10b-18 of the Exchange Act. Subject to applicable rules and regulations, repurchases under the Program can be made from time to time in open markets at our discretion and in compliance with safe harbor provisions, or in privately negotiated transactions. The Program does not require any specific number of shares to be acquired, and can be modified or discontinued by the Board at any time. We did not repurchase any common stock under the Program during the year ended December 31, 2022.
The Tax Benefits Preservation Plan. On July 1, 2020, the Board declared a dividend distribution of one right (a “Right”) for each outstanding share of Company common stock, par value $0.001 per share to stockholders of record at the close of business on July 13, 2020. Each Right entitles its holder, under certain circumstances, to purchase from the Company one one-thousandth of a share of Series A Junior Participating Preferred Stock of the Company, par value $0.001 per share, at an exercise price of $5.00 per Right, subject to adjustment. The description and terms of the Rights are set forth in the tax benefits preservation plan, dated as of July 1, 2020, between the Company and American Stock Transfer & Trust Company, LLC, as rights agent (and any successor rights agent, the “Rights Agent”).
The Company adopted the Tax Benefits Preservation Plan, as amended on March 16, 2021, in order to protect shareholder value against a possible limitation on the Company’s ability to use its tax net operating losses (the “NOLs”) and certain other tax benefits to reduce potential future U.S. federal income tax obligations. The NOLs are a valuable asset to the Company, which may inure to the benefit of the Company and its stockholders. However, if the Company experiences an “ownership change,” as defined in Section 382 of the Internal Revenue Code of 1986, as amended (the “Code”), its ability to fully utilize the NOLs and certain other tax benefits will be substantially limited and the timing of the usage of the NOLs and such other benefits could be substantially delayed, which could significantly impair the value of those assets. Generally, an “ownership change” occurs if the percentage of the Company’s stock owned by one or more of its “five-percent shareholders” (as such term is defined in Section 382 of the Code) increases by more than 50 percentage points over the lowest percentage of stock owned by such stockholder or stockholders at any time over a three-year period. The Tax Benefits Preservation Plan is intended to prevent against such an “ownership change” by deterring any person or group from acquiring beneficial ownership of 4.9% or more of the Company’s securities.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Subject to certain exceptions, the Rights become exercisable and trade separately from Common Stock only upon the “Distribution Time,” which occurs upon the earlier of:
•the close of business on the tenth (10th) day after the “Stock Acquisition Date,” which is (a) the first date of public announcement that a person or group of affiliated or associated persons (with certain exceptions, an “Acquiring Person”) has acquired, or obtained the right or obligation to acquire, beneficial ownership of 4.9% or more of the outstanding shares of Common Stock (with certain exceptions) or (b) such other date, as determined by the Board, on which a person or group has become an Acquiring Person, or
•the close of business on the tenth (10th) business day (or later date as may be determined by the Board prior to such time as any person or group becomes an Acquiring Person) following the commencement of a tender offer or exchange offer which, if consummated, would result in a person or group becoming an Acquiring Person.
Any existing stockholder or group that beneficially owns 4.9% or more of Common Stock has been grandfathered at its current ownership level, but the Rights will not be exercisable if, at any time after the announcement of the Tax Benefits Preservation Plan, such stockholder or group increases its ownership of Common Stock by one share of Common Stock. Certain synthetic interests in securities created by derivative positions, whether or not such interests are considered to be ownership of the underlying Common Stock or are reportable for purposes of Regulation 13D of the Securities Exchange Act of 1934, as amended, are treated as beneficial ownership of the number of shares of Common Stock equivalent to the economic exposure created by the derivative position, to the extent actual shares of Common Stock are directly or indirectly held by counterparties to the derivatives contracts.
Until the earlier of the Distribution Time and the Expiration Time, the surrender for transfer of any shares of Common Stock will also constitute the transfer of the Rights associated with those shares. As soon as practicable after the Distribution Time, separate rights certificates will be mailed to holders of record of Common Stock as of the close of business on the Distribution Time. From and after the Distribution Time, the separate rights certificates alone will represent the Rights. Except as otherwise provided in the Tax Benefits Preservation Plan, only shares of Common Stock issued prior to the Distribution Time will be issued with Rights. The Rights are not exercisable until the Distribution Time.
The Tax Benefits Preservation Plan was approved at the 2021 annual meeting of stockholders on May 25, 2021.
In the event that any person or group (other than certain exempt persons) becomes an Acquiring Person (a “Flip-in Event”), each holder of a Right (other than any Acquiring Person and certain related parties, whose Rights automatically become null and void) will have the right to receive, upon exercise, shares of Common Stock having a value equal to two times the exercise price of the Right.
In the event that, at any time following the Stock Acquisition Date, any of the following occurs (each, a “Flip-over Event”):
•the Company consolidates with, or merges with and into, any other entity, and the Company is not the continuing or surviving entity
•any entity engages in a share exchange with or consolidates with, or merges with or into, the Company, and the Company is the continuing or surviving entity and, in connection with such share exchange, consolidation or merger, all or part of the outstanding shares of Common Stock are changed into or exchanged for stock or other securities of any other entity or cash or any other property; or
•the Company sells or otherwise transfers, in one transaction or a series of related transactions, fifty percent (50%) or more of the Company’s assets, cash flow or earning power, each holder of a Right (except Rights which previously have been voided as described above) will have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Shares Withheld for Taxes. The following table shows the number of shares withheld for taxes and the associated value of those shares. These shares were accounted for as treasury stock when withheld, and then immediately retired. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| | (In thousands) |
Number of shares withheld for taxes | | 66 | | 192 | | 51 |
Value of shares withheld for taxes | | $ | 1,177 | | | $ | 899 | | | $ | 64 | |
15. Revenues
The following table disaggregates the Company’s revenue by source for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
Oil (1) | | $ | 87,528 | | | $ | 62,297 | | | $ | 73,621 | |
NGL | | 63,663 | | | 50,836 | | | 17,962 | |
Natural gas | | 103,067 | | | 55,749 | | | 22,867 | |
Other | | — | | | — | | | 526 | |
Total revenues | | $ | 254,258 | | | $ | 168,882 | | | $ | 114,976 | |
(1) Results include revenue from NPB from 2020 through February 5, 2021, the closing date of the NPB sale.
Oil, natural gas and NGL revenues. A majority of the Company’s revenues come from sales of oil, natural gas and NGLs. In accordance with the contracts governing these sales, performance obligations to customers are satisfied and revenues 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 taxes expense in the consolidated statements of operations.
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 on operated properties are typically collected the month after the Company delivers the related production to its customers. As of December 31, 2022 and 2021, the Company had revenues receivable of $21.8 million and $18.8 million., respectively, and we did not record any bad debt expense on revenue receivable as of December 31, 2022 and 2021.
16. Share-Based Compensation
Share-Based Compensation
Omnibus Incentive Plan. The Omnibus Incentive Plan became effective on October 4, 2016 and authorizes the issuance of up to 4.6 million shares of SandRidge common stock.
Persons eligible to receive awards under the Omnibus Incentive Plan include non-employee directors of the Company, employees of the Company or any of its affiliates, and certain consultants and advisors to the Company or any of its affiliates.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
The types of awards that may be granted under the Omnibus Incentive Plan include stock options, restricted stock, performance awards and other forms of awards granted or denominated in shares of common stock, as well as certain cash-based awards. At December 31, 2022, the Company had restricted stock awards, restricted stock units, performance share units and stock options outstanding under the Omnibus Incentive Plan. Forfeitures for these awards are recognized as they occur.
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 at December 31, 2022 will generally vest over either a one-year period or three-year period with a remaining weighted average contractual period of 0.63 years and have $0.2 million of associated unrecognized compensation cost.
The following table presents a summary of the Company’s unvested restricted stock awards:
| | | | | | | | | | | |
| Number of Shares | | Weighted- Average Grant Date Fair Value |
| (In thousands) | | |
Unvested restricted shares outstanding at January 1, 2020 | 233 | | | $ | 12.66 | |
Granted | 105 | | | $ | 2.15 | |
Vested | (174) | | | $ | 11.53 | |
Forfeited / Canceled | (50) | | | $ | 15.97 | |
Unvested restricted shares outstanding at December 31, 2020 | 114 | | | $ | 3.26 | |
Granted | 56 | | | $ | 5.26 | |
Vested | (111) | | | $ | 2.99 | |
Forfeited / Canceled | (2) | | | $ | 16.25 | |
Unvested restricted shares outstanding at December 31, 2021 | 57 | | | $ | 5.26 | |
Granted | 18 | | | $ | 18.93 | |
Vested (1) | (57) | | | $ | 5.26 | |
Forfeited / Canceled | — | | | $ | — | |
Unvested restricted shares outstanding at December 31, 2022 | 18 | | | $ | 18.93 | |
____________________
(1) The aggregate intrinsic value of restricted stock that vested during 2022 was approximately $1.4 million based on the stock price at the time of vesting.
Restricted Stock Units. The Company’s restricted stock units 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 stock units at December 31, 2022 will generally vest over a three-year period with a remaining weighted average contractual period of 1.67 years and have $1.1 million associated unrecognized compensation cost at December 31, 2022.
The following table presents a summary of the Company’s unvested restricted stock units:
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
| | | | | | | | | | | | | | |
| | Number of Units | | Weighted- Average Grant Date Fair Value |
| | (In thousands) | | |
| | | | |
Unvested restricted stock units outstanding at December 31, 2020 | | 1,410 | | | $ | 1.10 | |
Granted | | 178 | | | $ | 7.58 | |
Vested (1) | | (477) | | | $ | 1.14 | |
Forfeited / Canceled | | (705) | | | $ | 0.94 | |
Unvested restricted stock units outstanding at December 31, 2021 | | 406 | | | $ | 4.18 | |
Granted | | 39 | | | $ | 13.51 | |
Vested (1) | | (175) | | | $ | 3.61 | |
Forfeited / Canceled | | (18) | | | $ | 5.51 | |
Unvested restricted stock units outstanding at December 31, 2022 | | 252 | | | $ | 5.93 | |
____________________
(1) The aggregate intrinsic value of restricted stock units that vested during 2022 was approximately $3.3 million based on the stock price at the time of vesting.
Performance Share Units. The Company’s performance share units 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 performance share units at December 31, 2022 will generally vest over a three year period with a remaining weighted average contractual period of 0.20 years and an immaterial amount of unrecognized compensation cost at December 31, 2022.
The following table presents a summary of the Company's performance share units:
| | | | | | | | | | | | | | |
| | Number of Units | | Weighted- Average Grant Date Fair Value |
| | (In thousands) | | |
Unvested performance share units outstanding at January 1, 2020 | | 92 | | | $ | 20.41 | |
Granted | | 205 | | | $ | 1.66 | |
Vested | | (92) | | | $ | 20.41 | |
Forfeited / Canceled | | — | | | |
Unvested performance share units outstanding at December 31, 2020 | | 205 | | | $ | 1.66 | |
Granted | | 39 | | | $ | 5.01 | |
Vested | | (197) | | | $ | 1.70 | |
Forfeited / Canceled | | (13) | | | $ | 2.38 | |
Unvested performance share units outstanding at December 31, 2021 | | 34 | | | $ | 5.01 | |
Granted | | 19 | | | $ | 13.51 | |
Vested (1) | | (34) | | | $ | 5.01 | |
Forfeited / Canceled | | (2) | | | $ | 13.51 | |
Unvested performance share units outstanding at December 31, 2022 | | 17 | | | $ | 13.51 | |
____________________
(1) The aggregate intrinsic value of performance share units that vested during 2022 was approximately $0.5 million.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Stock Options
The fair value of stock options is estimated on the date of the grant using a Black-Scholes valuation model that uses the weighted average assumptions noted in the following table. Expected volatility is based on historical volatility of the Company’s common stock and other factors. The Company uses historical data on the exercise of stock options, post-vesting forfeitures and other factors to estimate the expected term of the stock-based payments granted. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. Generally, stock options granted to employees and
directors vest ratably over three years from the grant date and expire seven years from the date of grant. There were no stock options granted during the year ended December 31, 2022.
| | | | | | | | | | | | | | |
Assumptions | | For the Year Ended December 31, 2021 | | For the Year Ended December 31, 2020 |
Risk-free interest rate | | 0.79 | % | | 1.40 | % |
Expected dividend yield | | — | % | | — | % |
Expected volatility | | 78.2 | % | | 46.2 | % |
Expected term | | 5 years | | 2.75 years |
The following table presents a summary of the Company's stock option activity for the years ended December 31, 2022, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Number of Shares | | Weighted Average Exercise Price per Share | | Weighted Average Remaining Contractual Term(years) | | Aggregate Intrinsic Value (in millions) |
| | (In thousands) | | | | | | |
Outstanding at January 1, 2020 | | — | | | $ | — | | | — | | | $ | — | |
Granted | | 245 | | | — | | | — | | | — | |
| | | | | | | | |
| | | | | | | | |
Forfeited / Canceled | | (154) | | | — | | | — | | | — | |
Outstanding at December 31, 2020 | | 91 | | | $ | — | | | 2.68 | | $ | 0.24 | |
Exercisable at December 31, 2020 | | — | | | $ | — | | | — | | | $ | — | |
| | | | | | | | |
Outstanding at December 31, 2020 | | 91 | | | $ | — | | | 2.68 | | $ | 0.24 | |
Granted | | 250 | | | — | | | — | | | — | |
Exercised | | (9) | | | $ | 6.43 | | | — | | | — | |
Expired | | (1) | | | — | | | — | | | — | |
Forfeited / Canceled | | (7) | | | — | | | — | | | — | |
Outstanding at December 31, 2021 | | 324 | | | $ | — | | | 7.80 | | $ | 0.80 | |
Exercisable at December 31, 2021 | | 24 | | | $ | — | | | 1.59 | | $ | 0.19 | |
| | | | | | | | |
Outstanding at December 31, 2021 | | 324 | | | $ | — | | | 7.80 | | $ | 0.80 | |
Granted | | — | | | — | | | — | | | — | |
Exercised | | (31) | | | $ | 17.53 | | | — | | | — | |
Expired | | — | | | — | | | | | — | |
Forfeited / Canceled | | (7) | | | — | | | — | | | — | |
Outstanding at December 31, 2022 (1) | | 286 | | | $ | — | | | 7.64 | | $ | 2.38 | |
Exercisable at December 31, 2022 | | 68 | | | $ | — | | | 6.49 | | $ | 0.64 | |
____________________
(1) All outstanding stock options as of December 31, 2022 are expected to vest.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
In August 2021 and February 2020, the Company granted nonqualified stock options. As of December 31, 2022, the total unrecognized compensation expense was $1.1 million and will be recognized over a weighted average period of 3.65 years. The Company issues new shares upon stock option exercises.
The following tables summarize the Company's share and incentive-based compensation for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Recurring Compensation Expense (1) | | Executive Terminations (2) | | Reduction in Force (2) | | | | Total |
Year Ended December 31, 2022 | | | | | | | | | | |
Equity-classified awards: | | | | | | | | | | |
Restricted stock awards and units | | $ | 997 | | | $ | — | | | $ | — | | | | | $ | 997 | |
Performance share units | | 215 | | | — | | | — | | | | | 215 | |
Stock options | | 314 | | | — | | | — | | | | | 314 | |
Total share-based compensation expense | | 1,526 | | | — | | | — | | | | | 1,526 | |
Less: Capitalized compensation expense | | — | | | — | | | — | | | | | — | |
Share and incentive-based compensation expense, net | | $ | 1,526 | | | $ | — | | | $ | — | | | | | $ | 1,526 | |
Year Ended December 31, 2021 | | | | | | | | | | |
Equity-classified awards: | | | | | | | | | | |
Restricted stock awards and units | | $ | 773 | | | $ | — | | | $ | 11 | | | | | $ | 784 | |
Performance share units | | 476 | | | — | | | 6 | | | | | 482 | |
Stock options | | 128 | | | — | | | — | | | | | 128 | |
Total share-based compensation expense | | 1,377 | | | — | | | 17 | | | | | 1,394 | |
Less: Capitalized compensation expense | | — | | | — | | | — | | | | | — | |
Share and incentive-based compensation expense, net | | $ | 1,377 | | | $ | — | | | $ | 17 | | | | | $ | 1,394 | |
Year Ended December 31, 2020 | | | | | | | | | | |
Equity-classified awards: | | | | | | | | | | |
Restricted stock awards | | $ | 974 | | | $ | 508 | | | $ | 40 | | | | | $ | 1,522 | |
Performance share units | | 211 | | | 1,276 | | | — | | | | | 1,487 | |
Stock options | | 22 | | | — | | | — | | | | | 22 | |
Total share-based compensation expense | | 1,207 | | | 1,784 | | | 40 | | | | | 3,031 | |
Less: Capitalized compensation expense | | (19) | | | — | | | — | | | | | (19) | |
Share and incentive-based compensation expense, net | | $ | 1,188 | | | $ | 1,784 | | | $ | 40 | | | | | $ | 3,012 | |
____________________
(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.
17. Incentive and Deferred Compensation Plans
Annual Incentive Plan. The Annual Incentive Plan ("AIP") incorporates quantitative performance measures, strategic qualitative goals and competitive target award levels for management and employees for the 2022 and 2021 performance years. Incentive bonus awards for 2022 will be provided based on performance measures related to health, safety and environment, production, operating expenses, capital expenditures, general and administrative expenses, among other metrics and will be paid in 2023 at the discretion of the Board of Directors. As of December 31, 2022 and 2021, the Company accrued approximately $1.5 million and $2.1 million, respectively for AIP. AIP Payments totaling $2.1 million were paid in 2022 for the 2021 performance year and $2.1 million were paid in 2021 for the 2020 performance year.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
401(k) Plan. The Company maintains a 401(k) retirement plan for its employees. Under this plan, eligible employees may elect to defer a portion of their earnings up to the maximum allowed by the IRS. For the years ended December 31, 2022, 2021 and 2020, the Company made matching contributions to the plan equal to 100% on the first 10% of employee deferred wages, excluding incentive compensation, totaling $0.8 million, $0.8 million and $1.1 million, respectively. Participants in the plan are immediately 100% vested in the discretionary employee contributions and related earnings on those contributions. The Company's matching contributions and related earnings vest based on years of service, with full vesting occurring on the fourth anniversary of employment.
18. Employee Termination Benefits
The following table presents a summary of employee termination benefits for the years ended December 31, 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cash | | Share-Based Compensation (2) | | Number of Shares | | Total Employee Termination Benefits |
Year Ended December 31, 2022 | | | | | | | | |
Executive Employee Termination Benefits | | $ | — | | | $ | — | | | — | | | $ | — | |
Other Employee Termination Benefits | | — | | | — | | | — | | | — | |
| | $ | — | | | $ | — | | | — | | | $ | — | |
Year Ended December 31, 2021 | | | | | | | | |
Executive Employee Termination Benefits | | $ | — | | | $ | — | | | — | | | $ | — | |
Other Employee Termination Benefits | | 32 | | | 17 | | | — | | | 49 | |
| | $ | 32 | | | $ | 17 | | | — | | | $ | 49 | |
Year Ended December 31, 2020 | | | | | | | | |
Executive Employee Termination Benefits (1) | | $ | 1,009 | | | $ | 1,784 | | | 159 | | | $ | 2,793 | |
Other Employee Termination Benefits | | 5,600 | | | 40 | | | 4 | | | 5,640 | |
| | $ | 6,609 | | | $ | 1,824 | | | 163 | | | $ | 8,433 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
____________________
(1) On July 1, 2020, the Company's then current Chief Financial Officer, Michael A. Johnson and Chief Operating Officer, John Suter, 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 2020.
(2) Share-based compensation recognized in connection with the accelerated vesting of restricted stock awards due to the sale of the North Park assets for the year ended December 31, 2021 and performance share units upon the departure of certain executives and the reductions in workforce in 2020 reflects the remaining unrecognized compensation expense associated with these awards at the date of termination was recorded as employee termination benefits. 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.
As of December 31, 2020, there were no longer any legacy employment contracts.
See Note 16 for additional discussion of the Company’s share-based compensation awards.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
19. Earnings (Loss) per Share
The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted earnings (loss) per share: | | | | | | | | | | | | | | | | | |
| Net Earnings (Loss) | | Weighted Average Shares | | Earnings (Loss) Per Share |
| (In thousands, except per share amounts) |
Year Ended December 31, 2022 | | | | | |
Basic earnings per share | $ | 242,168 | | | 36,745 | | | $ | 6.59 | |
Effect of dilutive securities | | | | | |
Restricted stock awards (1) | — | | | 20 | | | |
Restricted share units (1) | — | | | 285 | | | |
Performance share units (1) | — | | | 20 | | | |
Stock Options (1) | — | | | 84 | | | |
Warrants | — | | | — | | | |
Diluted earnings per share | $ | 242,168 | | | 37,154 | | | $ | 6.52 | |
Year Ended December 31, 2021 | | | | | |
Basic earnings per share | $ | 116,738 | | | 36,393 | | | $ | 3.21 | |
Effect of dilutive securities | | | | | |
Restricted stock awards (1) | — | | | 58 | | | |
Restricted share units (1) | — | | | 689 | | | |
Performance share units (1) | — | | | 83 | | | |
Stock Options (1) | — | | | 48 | | | |
Warrants (2) | — | | | — | | | |
Diluted earnings per share | $ | 116,738 | | | 37,271 | | | $ | 3.13 | |
Year Ended December 31, 2020 | | | | | |
Basic loss per share | $ | (277,353) | | | 35,689 | | | $ | (7.77) | |
Effect of dilutive securities | | | | | |
Restricted stock awards (2) | — | | | — | | | |
Restricted share units (2) | — | | | — | | | |
Performance share units (2) | — | | | — | | | |
Stock Options (2) | — | | | — | | | |
Warrants (2) | — | | | — | | | |
Diluted loss per share | $ | (277,353) | | | 35,689 | | | $ | (7.77) | |
____________________
(1)The incremental shares of potentially dilutive restricted stock awards, restricted stock units, performance share units and stock options were included for the years ended December 31, 2022 and 2021 as their effect was dilutive under the treasury stock method.
(2)No incremental shares of potentially dilutive restricted stock awards, restricted share units, performance share units, stock options or warrants were included for the year ended December 31, 2020, as their effect was antidilutive under the treasury stock method.
See Note 16 for discussion of the Company’s share-based compensation awards.
20. Supplemental Information on Oil and Natural Gas Producing Activities (Unaudited)
The supplemental information below includes capitalized costs related to oil and natural gas producing activities; costs incurred in oil and natural gas property acquisition, exploration and development; and the results of operations for oil and natural gas producing activities. Supplemental information is also provided for oil, natural gas and NGL production and average sales prices; the estimated quantities of proved oil, natural gas and NGL reserves; the standardized measure of discounted future net cash flows associated with proved oil, natural gas and NGL reserves; and a summary of the changes in the standardized measure of discounted future net cash flows associated with proved oil, natural gas and NGL reserves.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Capitalized Costs Related to Oil and Natural Gas Producing Activities
The Company’s capitalized costs for oil and natural gas activities consisted of the following (in thousands): | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
Oil and natural gas properties | | | |
Proved | $ | 1,507,690 | | | $ | 1,454,016 | |
Unproved | 11,516 | | | 12,255 | |
Total oil and natural gas properties | 1,519,206 | | | 1,466,271 | |
Less accumulated depreciation, depletion and impairment | (1,380,574) | | | (1,373,217) | |
Net oil and natural gas properties capitalized costs | $ | 138,632 | | | $ | 93,054 | |
Costs Incurred in Oil and Natural Gas Property Acquisition, Exploration and Development
Costs incurred in oil and natural gas property acquisition, exploration and development activities which have been capitalized are summarized as follows (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Acquisitions of properties | | | | | |
Proved | $ | 1,431 | | | $ | 3,545 | | | $ | 3,701 | |
Unproved | — | | | — | | | — | |
Exploration (1) | 809 | | | 905 | | | 1,005 | |
Development | 48,399 | | | 10,045 | | | 3,563 | |
Total cost incurred | $ | 50,639 | | | $ | 14,495 | | | $ | 8,269 | |
____________________
(1) Includes land, geological, geophysical and leasehold costs.
Results of Operations for Oil and Natural Gas Producing Activities
The following table presents the Company’s results of operations from oil and natural gas producing activities (in thousands), which exclude any interest costs or indirect general and administrative costs and, therefore, are not necessarily indicative of the impact the Company’s operations have on actual net earnings. | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Revenues | $ | 254,258 | | | $ | 168,882 | | | $ | 114,450 | |
Expenses | | | | | |
Production costs | 57,221 | | | 46,309 | | | 53,474 | |
Depreciation and depletion | 11,542 | | | 9,372 | | | 50,349 | |
Impairment | — | | | — | | | 218,399 | |
Total expenses | 68,763 | | | 55,681 | | | 322,222 | |
Income (loss) before income taxes | 185,495 | | | 113,201 | | | (207,772) | |
Income tax expense (benefit) (1) | 45,055 | | | 26,734 | | | (51,750) | |
Results of operations for oil and natural gas producing activities (excluding corporate overhead and interest costs) | $ | 140,440 | | | $ | 86,467 | | | $ | (156,022) | |
____________________
(1) Income tax (benefit) expense is hypothetical and is calculated by applying the Company’s statutory tax rate to (loss) income before income taxes attributable to our oil and natural gas producing activities, after giving effect to permanent differences and tax credits.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Oil, Natural Gas and NGL Reserve Quantities
Proved oil, natural gas and NGL reserves are those quantities, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible, based on oil, natural gas and NGL prices used to estimate reserves, from a given date forward from known reservoirs, and under existing economic conditions, operating methods, and government regulation prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain.
The term “reasonable certainty” implies a high degree of confidence that the quantities of oil, natural gas and NGLs actually recovered will equal or exceed the estimate. To achieve reasonable certainty, the Company’s engineers and independent petroleum consultants relied on technologies that have been demonstrated to yield results with consistency and repeatability. The technologies and economic data used to estimate the Company’s proved reserves include, but are not limited to, well logs, geologic maps, seismic data, well test data, production data, historical price and cost information and property ownership interests. The accuracy of the reserve estimates is dependent on many factors, including the following:
•the quality and quantity of available data and the engineering and geological interpretation of that data;
•estimates regarding the amount and timing of future costs, which could vary considerably from actual costs;
•the accuracy of mandated economic assumptions; and
•the judgment of the personnel preparing the estimates.
Proved developed reserves are proved reserves expected to be recovered through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared with the cost of a new well. Proved undeveloped reserves are reserves that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively large major expenditure is required for recompletion.
Approximately 95% of the Company’s proved reserves estimates have been prepared by independent reservoir engineers and geoscience professionals and the remaining 5% of proved reserves are estimated internally are reviewed by members of the Company’s senior management to ensure that the Company consistently applies rigorous professional standards and the reserve definitions prescribed by the SEC.
Cawley, Gillespie & Associates, independent oil and natural gas consultants, prepared the estimates of proved reserves of oil, natural gas and NGLs for approximately 95% of the Company’s net interest in oil and natural gas properties as of the years ended December 31, 2022 and 2021. Cawley, Gillespie & Associates are independent petroleum engineers, geologists, geophysicists and petrophysicists and do not own an interest in the Company or its properties and are not employed on a contingent basis. The remaining proved reserves were based on Company estimates.
The Company believes the geoscience and engineering data examined provides reasonable assurance that the proved reserves are economically producible in future years from known reservoirs, and under recent, past or historical economic conditions, operating methods and governmental regulations. Estimates of proved reserves are subject to change, either positively or negatively, as additional information is available and contractual and economic conditions change.
2022 Activity. Proved reserves increased from 71.3 MMBoe at December 31, 2021 to 74.3 MMBoe at December 31, 2022, primarily as a result of positive revisions of 9.1 MMBoe associated with the increase in year-end SEC commodity prices for oil and natural gas, 1.8 MMBoe related to the Company's well reactivation program, and 1.0 MMBoe associated with other commercial improvements. Further, extensions added 1.2 MMBoe and purchases added 0.2 MMBoe of proved reserves. These increases were offset by 2022 production totaling 6.5 MMBoe, a decrease of 1.0 MMBoe due to higher operating expenses in the trailing twelve month period used in the projections, and a decrease of 2.8 MMBoe attributable to other revisions.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
2021 Activity. Proved reserves increased from 36.9 MMBoe at December 31, 2020 to 71.3 MMBoe at December 31, 2021, primarily as a result of positive revisions of 27.3 MMBoe associated with the increase in year-end SEC commodity prices for oil and natural gas, 13.6 MMBoe associated with reduction in expenses and other commercial improvements, 3.7 MMBoe related to a well reactivation program, and purchases of 1.4 MMBoe of proved reserves. The Company also recorded 2021 production totaling 6.8 MMBoe and a decrease of 3.6 MMBoe due to sales and 1.2 MMBoe attributable to well shut-ins, and other revisions.
2020 Activity. Proved reserves decreased from 89.9 MMBoe at December 31, 2019 to 36.9 MMBoe at December 31, 2020, primarily as a result of downward revisions of 45.0 MMBoe associated with the decrease in year-end SEC commodity prices for oil and natural gas consisting of (27.8 MMBoe from removing PUDs, and 17.3 MMBoe from remaining proved reserves). The Company also recorded 2020 production totaling 8.7 MMBoe and a decrease of 9.0 MMBoe attributable to well shut-ins, sales and other revisions. These reductions were partially offset by an 8.6 MMBoe increase associated with reduction in expenses and other commercial improvements, and purchases of 1.1 MMBoe of proved reserves.
The summary below presents changes in the Company’s estimated reserves. NPB is included in 2021, 2020 and 2019. | | | | | | | | | | | | | | | | | | | | | | | |
| Oil | | NGL | | Natural Gas | | Total |
| (MBbls) | | (MBbls) | | (MMcf) (1) | | MBoe |
Proved developed and undeveloped reserves | | | | | | | |
As of December 31, 2019 | 35,308 | | | 15,859 | | | 232,307 | | | 89,885 | |
Revisions of previous estimates (2) | (24,650) | | | (2,246) | | | (107,426) | | | (44,800) | |
Acquisitions of new reserves | 74 | | | 437 | | | 3,391 | | | 1,076 | |
| | | | | | | |
Sales of reserves in place | (163) | | | (111) | | | (1,827) | | | (579) | |
Production | (2,084) | | | (2,694) | | | (23,552) | | | (8,703) | |
As of December 31, 2020 | 8,485 | | | 11,245 | | | 102,893 | | | 36,879 | |
Revisions of previous estimates (2) | 3,627 | | | 14,924 | | | 148,736 | | | 43,340 | |
Acquisitions of new reserves | 135 | | | 438 | | | 5,235 | | | 1,446 | |
| | | | | | | |
Sales of reserves in place | (3,440) | | | (28) | | | (716) | | | (3,587) | |
Production | (957) | | | (2,266) | | | (21,417) | | | (6,793) | |
As of December 31, 2021 | 7,850 | | | 24,313 | | | 234,731 | | | 71,285 | |
Revisions of previous estimates (2) | 971 | | | 2,825 | | | 25,841 | | | 8,102 | |
Acquisitions of new reserves | 39 | | | 65 | | | 528 | | | 192 | |
Extensions and discoveries | 510 | | | 227 | | | 2,823 | | | 1,208 | |
| | | | | | | |
Production | (949) | | | (1,997) | | | (21,101) | | | (6,463) | |
As of December 31, 2022 | 8,421 | | | 25,433 | | | 242,822 | | | 74,324 | |
Proved developed reserves | | | | | | | |
As of December 31, 2019 | 14,078 | | | 14,532 | | | 200,853 | | | 62,086 | |
As of December 31, 2020 | 8,485 | | | 11,245 | | | 102,893 | | | 36,879 | |
As of December 31, 2021 | 7,850 | | | 24,313 | | | 234,731 | | | 71,285 | |
As of December 31, 2022 | 8,421 | | | 25,433 | | | 242,822 | | | 74,324 | |
Proved undeveloped reserves | | | | | | | |
As of December 31, 2019 | 21,230 | | | 1,327 | | | 31,454 | | | 27,799 | |
As of December 31, 2020 | — | | | — | | | — | | | — | |
As of December 31, 2021 | — | | | — | | | — | | | — | |
As of December 31, 2022 | — | | | — | | | — | | | — | |
_________________
(1) Natural gas reserves are computed at 14.65 pounds per square inch absolute and 60 degrees Fahrenheit.
(2) Revisions include changes due to previous quantity estimates, pricing, productions costs, and other commercial factors.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
Standardized Measure of Discounted Future Net Cash Flows (Unaudited)
The standardized measure of discounted cash flows and summary of the changes in the standardized measure computation from year to year are prepared in accordance with ASC Topic 932, Extractive Activities—Oil and Gas, ("ASC Topic 932"). The assumptions underlying the computation of the standardized measure of discounted cash flows may be summarized as follows:
•the standardized measure includes the Company’s estimate of proved oil, natural gas and NGL reserves and projected future production volumes based upon economic conditions;
•pricing is applied based upon SEC prices at December 31, 2022, 2021 and 2020, adjusted for fixed or determinable contracts that are in existence at year-end.
The calculated weighted average per unit prices for the Company’s proved reserves and future net revenues were as follows: | | | | | | | | | | | | | | | | | |
| |
| At December 31, |
| 2022 | | 2021 | | 2020 |
Oil (per Bbl) | $ | 93.73 | | | $ | 64.95 | | | $ | 36.54 | |
NGL (per Bbl) | $ | 33.42 | | | $ | 19.26 | | | $ | 6.40 | |
Natural gas (per Mcf) | $ | 4.76 | | | $ | 2.56 | | | $ | 0.87 | |
•future development and production costs are determined based on trailing 12 month average cost at year-end;
•the standardized measure includes projections of future abandonment costs based upon actual costs at year-end; and
•a discount factor of 10% per year is applied annually to the future net cash flows.
The summary below presents the Company’s future net cash flows relating to proved oil, natural gas and NGL reserves based on the standardized measure in ASC Topic 932 (in thousands). | | | | | | | | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 | | 2020 |
Future cash inflows from production | $ | 2,795,762 | | | $ | 1,579,734 | | | $ | 471,038 | |
Future production costs (1) | (1,131,145) | | | (735,904) | | | (270,512) | |
Future development costs (2) | (36,730) | | | (66,732) | | | (81,687) | |
Future income tax expenses (3) | (17,780) | | | — | | | — | |
Undiscounted future net cash flows | 1,610,107 | | | 777,098 | | | 118,839 | |
10% annual discount | (803,242) | | | (344,184) | | | (13,853) | |
Standardized measure of discounted future net cash flows (4) | $ | 806,865 | | | $ | 432,914 | | | $ | 104,986 | |
____________________
(1) Consists of severance taxes, ad valorem taxes, and lease operating expenses.
(2) Includes abandonment costs.
(3) The future income tax expenses have been computed using statutory tax rates, giving effect to allowable tax deductions and tax credits under current laws, including expected tax benefits to be realized from the utilization of net operating loss carryforwards.
(4) NPB is included in 2020.
| | | | | | | | |
| SandRidge Energy, Inc. and Subsidiaries Notes to Consolidated Financial Statements | |
The following table represents the Company’s estimate of changes in the standardized measure of discounted future net cash flows from proved reserves (in thousands): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
Beginning present value | $ | 432,914 | | | $ | 104,986 | | | $ | 364,290 | |
Changes during the year | | | | | |
Revenues less production | (197,419) | | | (122,964) | | | (61,407) | |
Net changes in prices, production and other costs | 465,116 | | | 380,026 | | | (135,652) | |
Development costs incurred | 846 | | | 83 | | | — | |
Net changes in future development costs (1) | 3,028 | | | 446 | | | (2,167) | |
Extensions and discoveries | 36,984 | | | — | | | — | |
Revisions of previous quantity estimates (1) | 98,579 | | | 112,926 | | | (99,533) | |
Accretion of discount | 34,138 | | | 6,016 | | | 36,429 | |
Net change in income taxes | (3,798) | | | — | | | — | |
Purchases of reserves in-place | 3,039 | | | 15,541 | | | 4,744 | |
Sales of reserves in-place | — | | | (29,792) | | | (1,067) | |
Timing differences and other (2) | (66,562) | | | (34,354) | | | (651) | |
Net change for the year | 373,951 | | | 327,928 | | | (259,304) | |
Ending present value (3) (4) | $ | 806,865 | | | $ | 432,914 | | | $ | 104,986 | |
____________________
(1) The change in estimated future development costs and revisions of previous quantity estimates primarily reflect increases from the well reactivation program as a result of more producing wells and extended reserve life due to increase in pricing.
(2) The change in timing differences and other are related to revisions in the Company's estimated time of production and development.
(3) Standardized Measure was determined using SEC prices, and does not reflect actual prices received or current market prices.
(4) NPB is included in 2020.