SANDRIDGE ENERGY, INC. Introduction
The following discussion and analysis is intended to help the reader understand our business, financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report, as well as our audited consolidated financial statements and the accompanying notes included in the 201 9 Form 10-K . Our discussion and analysis includes the following subjects: •Overview; •Consolidated Results of Operations; •Liquidity and Capital Resources; and •Critical Accounting Policies and Estimates The financial information with respect to the three-month periods endedMarch 31, 2020 , and 2019, discussed below, is unaudited. In the opinion of management, this information contains all adjustments, which consist only of normal recurring adjustments unless otherwise disclosed, necessary to state fairly the accompanying unaudited condensed consolidated financial statements. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full fiscal year.
Overview
We are an oil and natural gas company with a principal focus on the acquisition,
exploration and development of hydrocarbon resources in
Given current economic conditions, we have further reduced our capital
expenditures budget for 2020 from
The chart below shows production by product for the three-month periods ended
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19-------------------------------------------------------------------------------- Table of Contents Recent Events
•In
•On
•OnApril 7, 2020 , we announced thatBob G. Alexander , a member of the Board of Directors ("the Board") passed away onApril 5, 2020 .Mr. Alexander served on the both theAudit Committee andNominating Committee of the Board. FollowingMr. Alexander's passing, the Board appointed John.J. Lipinski to the Audit Committee and appointedJonathan Christodoro to theNominating and Governance Committee and appointedMr. Lipinski as chairman of the committee.
•Effective
•InApril 2020 , additional personnel and salary reductions were carried out and our capital expenditures guidance was revised in order to further reduce future costs as discussed in "- Outlook" below. •InApril 2020 , the borrowing base on our credit facility was reduced to$75.0 million from$225.0 million during the semi-annual redetermination. The credit facility has a maturity date ofApril 1, 2021 and amounts outstanding afterApril 1, 2020 are considered short-term borrowings. •InDecember 2019 , COVID-19 was identified and subsequently declared a pandemic by theWorld Health Organization inMarch 2020 . As a result, there has been a significant reduction in demand for and prices of crude oil, natural gas and NGL, and we had to close our headquarters and issue a work from home policy to protect our employees and others from potential virus transmission.
Outlook
The COVID-19 pandemic and other pricing volatility caused by the announcement of production increases by theSaudi Arabia -ledOPEC andRussia led to a steep decline in oil prices inMarch 2020 , which further decreased to historic lows inApril 2020 . Although we cannot reasonably estimate the full impact the COVID-19 pandemic and other market volatility will have on our business, we expect it will have a material, adverse impact on near-term future revenues and overall profitability. As a result, we have withdrawn our guidance fromFebruary 2020 and reduced our 2020 capital expenditures budget from$25.9 million to$4.6 million . Additionally, we plan to implement several additional initiatives to maximize free cash flow, reduce our low debt level, maximize our liquidity position and, ultimately realize greater shareholder value. These initiatives include further personnel and salary reductions, the sale of the company headquarters, and entering into additional commodity derivative contracts for natural gas in the second quarter of 2020. 20
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Consolidated Results of Operations
The majority of our consolidated revenues and cash flow are generated from the production and sale of oil, natural gas and NGLs. Our revenues, profitability and future growth depend substantially on prices received for our production, the quantity of oil, natural gas and NGLs we produce, our ability to find and economically develop and produce our reserves, and changes in the fair value of our commodity derivative contracts. Prices for oil, natural gas and NGLs fluctuate widely and are difficult to predict. To provide information on the general trend in pricing, the average NYMEX prices for oil and natural gas during the three-month periods endedMarch 31, 2020 , and 2019 are shown in the table below: Three Months Ended March 31, 2020 2019 Oil (per Bbl)$ 45.80 $ 54.90 Natural gas (per MMBtu)$ 1.87 $ 2.87 To reduce our exposure to price fluctuations, from time to time we enter into commodity derivative contracts for a portion of our anticipated future oil and natural gas production depending on the Company's view of opportunities under then-prevailing market conditions as discussed in " Item 3. Quantitative and Qualitative Disclosures About Market Risk. " Reducing our exposure to price volatility helps mitigate the risk that we will not have adequate funds available for our capital expenditure and other programs. During periods where the strike prices for our commodity derivative contracts are below market prices at the time of settlement, we may not fully benefit from increases in the market price of oil and natural gas. Conversely, during periods of declining oil and natural gas market prices, our commodity derivative contracts may partially offset declining revenues and cash flow to the extent strike prices for our contracts are above market prices at the time of settlement.
Revenues
Consolidated revenues for the three-month periods ended
Three Months Ended March 31,
2020 2019
Oil $ 28,654 $ 43,159
NGL 5,934 13,111
Natural gas 5,551 16,778
Other 190 188
Total revenues $ 40,329 $ 73,236
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Oil, Natural Gas and NGL Production and Pricing
The Company's production and pricing information for the three-month periods
ended
Three Months Ended March 31,
2020 2019
Production data
Oil (MBbls) 682 849
NGL (MBbls) 769 875
Natural gas (MMcf) 6,695 8,620
Total volumes (MBoe) 2,567 3,161
Average daily total volumes (MBoe/d) 28.2 35.1
Average prices-as reported(1)
Oil (per Bbl) $ 42.01 $ 50.84
NGL (per Bbl) $ 7.72 $ 14.98
Natural gas (per Mcf) $ 0.83 $ 1.95
Total (per Boe) $ 15.64 $ 23.11
Average prices-including impact of derivative contract settlements
Oil (per Bbl) $ 48.01 $ 50.84
NGL (per Bbl) $ 7.72 $ 14.98
Natural gas (per Mcf) $ 0.83 $ 2.54
Total (per Boe) $ 17.23 $ 24.72
__________________1.Prices represent actual average sales prices for the periods presented and do not include effects of derivatives.
The table below presents production by area of operation for the three-month
periods ended
Three Months Ended March 31,
2020 2019
Production (MBoe) % of Total Production (MBoe) % of Total
Mississippian Lime 2,061 80.3 % 2,650 83.8 %
NW STACK 178 6.9 % 236 7.5 %
North Park Basin 328 12.8 % 275 8.7 %
Total 2,567 100.0 % 3,161 100.0 %
Variances in oil, natural gas and NGL revenues attributable to changes in the
average prices received for our production and total production volumes sold for
the three-month periods ended March 31, 2020 , and 2019 are shown in the table
below (in thousands):
Three Months Ended March 31
2019 oil, natural gas and NGL revenues $ 73,048
Change due to production volumes (13,825)
Change due to average prices (19,084)
2020 oil, natural gas and NGL revenues $ 40,139
Revenues from oil, natural gas and NGL sales decreased $32.9 million , or 45.1%
for the first quarter of 2020 compared to the first quarter of 2019. The average
prices for oil, natural gas and NGL's declined significantly during this period,
due largely
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to an increase in anticipated global supplies of these commodities after a
pledged increase in oil production from Saudi Arabia -lead OPEC in March, and
more recently, the reduction in demand stemming from the COVID-19 pandemic. See
" Item 1
The decline in production between the first quarter of 2020 and the first quarter of 2019 largely resulted from natural production declines in our existing producing wells in the Mid-Continent, and to a lesser extent, the NW STACK.
Operating Expenses
Operating expenses for the three-month periods ended
Three Months Ended March 31,
2020 2019
Lease operating expenses $ 15,642 $ 22,779
Production, ad valorem, and other taxes 3,199 5,080
Depreciation and depletion-oil and natural gas 24,855 36,465
Depreciation and amortization-other 2,634 2,943
Total operating expenses $ 46,330 $ 67,267
Lease operating expenses ($/Boe) $ 6.09 $ 7.21
Production, ad valorem, and other taxes ($/Boe) $ 1.25 $ 1.61
Depreciation and depletion-oil and natural gas ($/Boe) $ 9.68 $ 11.54
Production, ad valorem, and other taxes (% of oil, natural gas, and
NGL revenue) 8.0 % 7.0 %
Lease operating expenses decreased by $7.1 million or $1.12 /Boe for the first
quarter of 2020, compared to the first quarter of 2019. This decrease primarily
resulted from additional wells being shut-in due to natural production declines
and deteriorating pricing.
Production, ad valorem, and other taxes have continued to decrease primarily due
to declining production and revenues as discussed above. Further, they have
increased as a percentage of oil, natural gas, and NGL revenue for the first
quarter of 2020 compared to the first quarter of 2019, primarily due to negative
adjustments recorded in the first quarter of 2019 for certain ad valorem taxes
accrued in 2018.
The average depreciation and depletion rate for our oil and natural gas
properties for the first quarter of 2020 decreased by
Impairment
We recorded a full cost ceiling limitation impairment of$8.0 million atMarch 31, 2020 , which resulted from various factors including a decrease in the trailing twelve-month weighted average natural gas price in the first quarter of 2020. Calculation of the full cost ceiling test is based on, among other factors, average prices for the trailing twelve-month period determined by reference to the first-day-of-the-month index prices ("SEC prices") as adjusted for price differentials and other contractual arrangements. TheSEC prices utilized in the calculation of proved reserves included in the full cost ceiling test atMarch 31, 2020 were$55.77 per barrel of oil and$2.30 per Mcf of natural gas, before price differential adjustments. Based on theSEC prices over the eleven months endedMay 1, 2020 , as well as the short-term pricing outlook for the remainder of the second quarter 2020, we anticipate theSEC prices utilized in theJune 30, 2020 full cost ceiling test may be$46.29 per barrel of oil and$2.11 per Mcf of natural gas, (the "estimated second quarter prices"). Applying these estimated second quarter prices, and holding all other inputs constant to those used in the calculation of ourMarch 31, 2020 ceiling test, we expect to incur an additional impairment of approximately$150.0 million in the second quarter of 2020.
Any actual full cost ceiling limitation impairment recognized in future quarters
may fluctuate significantly from projected amounts based on the outcome of
numerous other factors such as additional declines in the actual trailing
twelve-month
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prices, lower NGL pricing, changes in estimated future development costs and
operating expenses, and other adjustments to our levels of proved reserves. Any
such ceiling test impairments in 2020 could be material to our net earnings.
Full cost impairments have no impact to our cash flow or liquidity.
Non-Operating Expenses
Non-operating expenses for the three-month periods ended
Three Months Ended March 31,
2020 2019
General and administrative $ 5,483 $ 9,939
Employee termination benefits 3,254 -
(Gain) loss on derivative contracts (10,226) 209
Other operating expense (income) 277 82 Total non-operating expenses$ (1,212) $ 10,230 The$4.5 million decrease in general and administrative expenses for the first quarter of 2020 compared to the same period in 2019 resulted primarily from a$4.2 million reduction in compensation related costs after completing reductions in force during the second quarter of 2019 and the first quarter of 2020. The remainder of the decrease is due to reductions in professional costs such as legal expenses, audit fees and consulting services. Employee termination benefits for the three-month period endedMarch 31, 2020 , include cash and share-based severance costs incurred for the reduction in force in the first quarter of 2020. See " Note 12 - Employee Termination Benefits " in the accompanying unaudited condensed consolidated financial statements for additional discussion of these expenses.
The following table summarizes derivative activity for the three-month periods
ended
Three Months Ended
2020 2019
(Gain) loss on commodity derivative contracts$ (10,226) $ 209 Cash received paid on settlements$ (4,087)
Our derivative contracts are not designated as accounting hedges and, as a result, changes in their fair value are recorded each quarter as a component of operating expenses. Internally, management views the settlement of commodity derivative contracts at contractual maturity as adjustments to the price received for oil and natural gas production to determine "effective prices." In general, cash is received on settlement of contracts due to lower oil and natural gas prices at the time of settlement compared to the contract price for our commodity derivative contracts, and cash is paid on settlement of contracts due to higher oil and natural gas prices at the time of settlement compared to the contract price for our commodity derivative contracts. InApril 2020 , we entered into additional natural gas commodity derivative contracts as discussed in " Item 3. Quantitative and Q ualitative Disclosures about Market Risk " included in Part I of this Quarterly Report.
Other Income (Expense)
The Company's other income (expense) for the three-month periods ended
Three Months Ended March 31,
2020 2019
Other income (expense)
Interest expense, net $ (637) $ (585)
Other income (expense), net 76 (431)
Total other expense $ (561) $ (1,016)
24-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As ofMarch 31, 2020 , we had cash and cash equivalents, excluding restricted cash, of$6.3 million . Additionally, we had$46.0 million outstanding under our$225.0 million credit facility which matures onApril 1, 2021 , and$2.9 million in outstanding letters of credit, which reduce the amount available under the credit facility on a dollar-for dollar basis. As ofMay 12, 2020 , we had approximately$1.8 million in cash and cash equivalents, excluding restricted cash,$48.0 million outstanding under our credit facility, and$2.9 million in outstanding letters of credit. The borrowing base on our credit facility was reduced to$75.0 million during theApril 2020 semi-annual redetermination. Amounts outstanding afterApril 1, 2020 are classified as short-term borrowings. We currently project that we will not have sufficient cash on hand or available liquidity to repay the outstanding debt balance at maturity. These conditions and events raise substantial doubt about our ability to continue as a going concern. Failure to repay the outstanding borrowings at maturity or otherwise restate or amend our current credit facility terms prior to maturity could result in the potential foreclosure on the collateral securing the credit facility. As discussed in " - Recent Events " and "- Outlook" above, we have undertaken several initiatives in the second quarter of 2020 which we believe have the potential to positively impact our ability to repay our outstanding credit facility borrowings at or before maturity. These initiatives are also expected to maximize free cash flow, maximize our liquidity position and, ultimately realize greater shareholder value to address the negative impact of the COVID-19 pandemic and commodity price volatility on our financial position and future liquidity. These initiatives include further personnel and salary reductions, the planned sale of the company headquarters, and entering into additional commodity derivative contracts for natural gas in the second quarter of 2020. We are unable to project the full impact the COVID-19 pandemic will have on our financial position and results of operations at this time, but these measures, along with amounts available to be drawn on our credit facility, cash on hand, and other cash flows from operations are expected to provide ample liquidity for the next 12 months. As such, we have concluded that our plans are probable of being achieved to alleviate substantial doubt about our ability to continue as a going concern.
Working Capital and Sources and Uses of Cash
Our principal sources of liquidity for the next year include cash flows from operations, cash on hand and amounts available under our credit facility. As discussed in " - Outlook " above and in " Note 14 - Subsequent Events " to the accompanying unaudited condensed consolidated financial statements and " Item 1A. Risk Factors " included in Part II of this Quarterly Report, we expect the COVID-19 pandemic and other market volatility factors including production decisions made byOPEC and its affiliate countries to have a material, adverse impact on future revenue growth and overall profitability for the foreseeable future. Our working capital deficit decreased to$39.4 million atMarch 31, 2020 , compared to$49.8 million atDecember 31, 2019 , largely due to fluctuations in the timing and amount of payments of accounts payable and accrued expenses as capital expenditures continue to decrease, and an increase in our short-term derivatives assets atMarch 31, 2020 resulting from a significant decrease in the market price for oil compared to contract prices for our open oil derivatives atMarch 31, 2020 . These increases in working capital were partially offset by a decrease in accounts receivable for oil and gas sales as revenues continue to decline. Cash Flows Our cash flows from operations, which impact our ability to fund our capital expenditures, are substantially dependent on current and future prices for oil and natural gas, which historically have been, and may continue to be, volatile. Cash flows from operations are also affected by timing of cash receipts and disbursements and changes in other working capital assets and liabilities.
Our cash flows for the three-month periods ended
Three Months Ended
2020 2019
Cash flows provided by operating activities $ 18,103 $ 31,570
Cash flows used in investing activities (4,463) (61,587)
Cash flows (used in) provided by financing activities (11,867) 19,707
Net increase (decrease) in cash and cash equivalents $ 1,773 $ (10,310)
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Cash Flows from Operating Activities
The$13.5 million decrease in cash flows from operating activities for the three-month period endedMarch 31, 2020 compared to the same period in 2019, is primarily due to the significant decline in revenues, which was partially offset by reductions in general and administrative costs and lease operating expenses as well as the other changes in working capital discussed above.
Cash Flows from Investing Activities
Our cash flows used in investing activities during the three-month period endedMarch 31, 2020 primarily reflects cash payments made for capital expenditures accrued atDecember 31, 2019 as shown in the table below. As previously discussed, we have significantly reduced our 2020 capital expenditures program due to current commodity price and demand volatility. During the three-month period endedMarch 31, 2019 , cash flows used in investing activities primarily consisted of capital expenditures for drilling and completion activities. Our capital expenditure program focuses on the development of our highest return projects while maintaining capital discipline and developing additional knowledge of our asset bases.
Capital expenditures for the three-month periods ended
Three Months Ended March 31,
2020 2019
Capital Expenditures
Drilling and completion $ 1,425 $ 70,232
Leasehold and geophysical 503 1,069
Other - corporate - 143Capital expenditures, excluding acquisitions (on an accrual basis) 1,928
71,444
Acquisitions - (326)
Capital expenditures, including acquisitions 1,928 71,118
Change in capital accruals(1) 3,524 (9,190)
Total cash paid for capital expenditures $ 5,452 $ 61,928 __________________
1.Reflects cash paid or adjustments to accruals during the period presented for expenditures related to the prior year's capital program.
Cash Flows from Financing Activities
Cash provided by financing activities for the three-month period ended
Indebtedness
See "- Recent Events," " Note 7 - Debt " to the accompanying unaudited condensed consolidated financial statements for additional discussion of our credit facility's terms and covenant restrictions.
Contractual Obligations and Off-Balance Sheet Arrangements
AtDecember 31, 2019 , our contractual obligations included asset retirement obligations, long-term debt obligations and leases and other individually insignificant obligations. Additionally, we have certain financial instruments representing potential commitments that were incurred in the normal course of business to support our operations, including standby letters of credit and surety bonds. The underlying liabilities insured by these instruments are reflected in our balance sheets, where applicable. Therefore, no additional liability is reflected for the letters of credit and surety bonds. Our long-term debt outstanding decreased by$11.5 million atMarch 31, 2020 compared toDecember 31, 2019 , due to repayments of a portion of the borrowings previously drawn on the Company's credit facility, which matures inApril 2021 . There were no other significant changes in total contractual obligations and off-balance sheet arrangements from those reported in the 2019 Form 10-K. 26
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Critical Accounting Policies and Estimates
For a description of our critical accounting policies and estimates, refer to
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the 201 9 Form 10-K . For a discussion
of recent accounting pronouncements, newly adopted and recent accounting
pronouncements not yet adopted, see "Note 1 - Basis of Presentation" to the
accompanying unaudited condensed consolidated financial statements included in
Item 1 of this Quarterly Report. We did not have any material changes in
critical accounting policies, estimates, judgments and assumptions during the
first three months of 2020.
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