SandRidge Energy also announced that it has signed a definitive agreement to sell the rights to its East Texas leasehold below the Cotton Valley formation (around 23,000 net acres) for $60 million. The transaction is subject to customary adjustments and closing conditions and is expected to close during the second quarter of 2009. SandRidge Energy was advised by Deutsche Bank Securities Inc. and Tristone Capital, LLC on this transaction.
In addition, SandRidge Energy has executed a letter of intent related to a sale of the company’s gathering system in the Pinon field for a cash payment of $200 million, subject to certain adjustments. Details regarding the transaction will be disclosed upon the signing of a definitive agreement. SandRidge Energy is currently being advised by Deutsche Bank Securities Inc. on this transaction.
Tom L. Ward, chief executive officer of SandRidge Energy, commented “We have taken important steps during the last several months toward building the bridge between SandRidge Energy’s present and its future. In 2009, we have already raised around $350 million through the sale of preferred and common shares. Also, we expect the sale of our WTO midstream assets and East Texas deep drilling rights to generate additional capital during the second quarter of 2009. The proceeds realized with these transactions combined with cash flow generated from operations will provide us with the strong balance sheet needed to fill Phase I of the Century Plant in 2010 and Phase II in 2011. This will help us to achieve our longer term goal of producing in excess of 500 MMcfe per day in 2012.”
2009 Financial Results
Declines in natural gas and crude oil prices during the first quarter of 2009 impacted the carrying value of the company’s natural gas and crude oil properties, sales revenue, and derivative contract fair value. Due to a non-cash $1.3 billion ceiling impairment on its natural gas and crude oil properties, the company reported a net loss applicable to common stockholders of $1.2 billion for the first quarter of 2009 compared to a net loss applicable to common stockholders of $66.2 million for the same period in 2008.
Also contributing to the increased loss was a decrease in natural gas and crude oil revenue caused by continued declines in average prices received for production during first quarter 2009. Gains related to natural gas and crude oil derivative contracts partially offset the effects of the impairment and decline in revenue. Excluding the non-cash impairment and unrealized gains on natural gas and crude oil derivatives, which are detailed below, SandRidge Energy had adjusted net income available to common stockholders of $40.3 million in first quarter 2009 compared to adjusted net income available to common stockholders of $26.9 million in 2008.
Ceiling Test Impairment
The company utilizes the full cost method of accounting for its natural gas and crude oil properties. As required by current US Securities and Exchange Commission rules, proved reserve volumes are calculated using fixed prices as of the last day of a period. Due to declines in commodity prices from December 31, 2008, to March 31, 2009, the company recorded a non-cash impairment charge of around $1.3 billion against the carrying value of its natural gas and crude oil properties for the first quarter of 2009.
Because the company utilizes mark-to-market accounting (as opposed to hedge accounting) for its derivative contracts, the $354.9 million fair value benefit of its March 31, 2009 commodity hedge positions was excluded from the ceiling limitation calculation.
Production, Pricing and Operating Costs
Successful drilling throughout 2008 increased natural gas and crude oil production by 25.8% to 28.7 Bcfe for first quarter 2009 from 22.8 Bcfe for the same period in 2008. This increase in total production only partially offset lower average commodity prices received during the period resulting in decreased natural gas and crude oil revenues of $121.2 million for first quarter 2009 compared to $205.5 million for the same period in 2008.
The average price received, excluding the impact of derivative contract settlements, for natural gas decreased 51.3% to $3.83 per Mcf for first quarter 2009 compared to $7.86 per Mcf for first quarter 2008. Additionally, average prices received, excluding the impact of derivative contract settlements, for crude oil production in the first quarter of 2009 decreased 57.2% to $38.44 per barrel compared to $89.81 in the first quarter of 2008.
Total production expense increased to $45.6 million for first quarter 2009 from $34.2 million for the same period in 2008. The increased expenses primarily were due to an increase in the number of wells operated and volumes produced during the 2009 period compared to the 2008 period.
Gains (Losses) on Derivative Contracts
The company enters into natural gas and crude oil swaps and basis swaps for a portion of its production in order to stabilize future cash inflows for planning purposes. In that regard, the decrease in natural gas and crude oil revenue for first quarter 2009 was offset by a net gain of $206.6 million ($108.3 million unrealized gain and $98.3 million realized gain) on derivative commodity contracts. This compares to a $136.8 million loss ($144.1 million unrealized loss and $7.3 million realized gain) for first quarter 2008.
