SANDRIDGE ENERGY INC - FORM 8-K - EX-99.1 - PRO FORMA FINANCIAL INFORMATION - August 8, 2011

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Exhibit 99.1

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION

The following unaudited pro forma condensed financial information reflects the historical results of SandRidge Energy, Inc. (“SandRidge”) adjusted on a pro forma basis to give effect to its conveyance of royalty interests in certain oil and natural gas properties located in Andrews County, Texas (the “Royalty Interests”) to SandRidge Permian Trust. SandRidge’s historical results have also been adjusted to give effect to SandRidge’s July 2010 acquisition of Arena Resources, Inc. (“Arena”). These transactions are described further below.

 

  •  

SandRidge Permian Trust. On May 25, 2011, SandRidge and SandRidge Permian Trust (the “Trust”), a newly formed Delaware trust, filed a registration statement with the U.S. Securities and Exchange Commission (the “SEC”) relating to the initial public offering of common units representing beneficial interests in the Trust. In connection with the offering, SandRidge will convey to the Trust the Royalty Interests in exchange for the net proceeds from the offering and units representing approximately 40% of the beneficial interest of the Trust. The Royalty Interests will entitle the Trust to a percentage of the proceeds from the sale of oil, natural gas and natural gas liquids production from currently producing wells and development wells to be drilled by SandRidge within an area of mutual interest. SandRidge intends to use the net proceeds from the offering to repay borrowings under its senior credit facility and for general corporate purposes.

 

  •  

Arena Acquisition. On July 16, 2010, SandRidge completed the acquisition of all of the outstanding shares of common stock of Arena, referred to herein as the Arena Acquisition. In connection with the acquisition, SandRidge paid $4.50 in cash and issued 4.7771 shares of SandRidge common stock for each share of Arena common stock outstanding for a total value per share of $35.79, based upon the $6.55 closing price of SandRidge common stock on July 16, 2010, the closing date of the acquisition. The consideration received by Arena shareholders was valued at $1.4 billion in the aggregate. SandRidge was the surviving parent company after completion of the acquisition. Arena was an oil and natural gas exploration, development and production company with operations in Texas, Oklahoma, Kansas and New Mexico.

The unaudited pro forma condensed consolidated balance sheet is based on the unaudited June 30, 2011 SandRidge balance sheet and gives effect to the conveyance of the Royalty Interests as if it occurred on that date. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2010 is based on the audited statement of operations of SandRidge for the year ended December 31, 2010 and the unaudited statement of operations of Arena for the period from January 1, 2010 through July 16, 2010, and includes pro forma adjustments to give effect to the Arena Acquisition and the Royalty Interests conveyance as if those transactions occurred on January 1, 2010. The unaudited pro forma condensed consolidated statement of operations for the six-month period ended June 30, 2011 gives effect to the Royalty Interests conveyance as if it occurred on January 1, 2010.

The pro forma adjustments reflecting the Arena Acquisition under the acquisition method of accounting and the Royalty Interests conveyance include the use of estimates and assumptions as described in the related notes. The pro forma adjustments are based on information available to management at the time these pro forma statements were prepared. SandRidge believes the estimates and assumptions used are reasonable and the significant effects of the transactions are properly reflected. To the extent there are significant changes in the amounts associated with the Royalty Interests conveyance, the assumptions and estimates herein could change significantly. The pro forma statement for the year ended December 31, 2010 does not reflect any cost savings or other synergies that resulted from the acquisition.

These unaudited pro forma financial statements are for informational purposes only. They do not purport to present the results that would have actually occurred had the transactions described above been completed on the assumed dates or for the periods presented, or which may be realized in the future. These unaudited pro forma financial statements should be read in conjunction with the accompanying footnotes, SandRidge’s Annual Report on Form 10-K for the year ended December 31, 2010, its Quarterly Report on Form 10-Q for the six months ended June 30, 2011, and the Trust’s Registration Statement on Forms S-1 and S-3 filed by SandRidge with the SEC on May 25, 2011 and subsequent amendments thereto.

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED BALANCE SHEET

AS OF JUNE 30, 2011

 

     SandRidge
Historical		     SandRidge
Permian  Trust
Pro Forma
Adjustments		     SandRidge
Pro Forma		  
     (In thousands)  
ASSETS       

Current assets

       

Cash and cash equivalents

    $ 4,615      $ 506,700  (a)    $ 511,315   

Accounts receivable, net

      162,976        —          162,976   

Derivative contracts

      2,513        —          2,513   

Inventories

      7,571        —          7,571   

Other current assets

      12,897        —          12,897   
  

 

 

    

 

 

    

 

 

  

Total current assets

      190,572        506,700        697,272   

Oil and natural gas properties, using full cost method of accounting

       

Proved

      8,552,148        —          8,552,148   

Unproved

      624,668        —          624,668   

Less: accumulated depreciation, depletion and impairment

      (4,625,330 )      —          (4,625,330 ) 
  

 

 

    

 

 

    

 

 

  
     4,551,486        —          4,551,486   
  

 

 

    

 

 

    

 

 

  

Other property, plant and equipment, net

      519,364        —          519,364   

Restricted deposits

      27,902        —          27,902   

Goodwill

      235,396        —          235,396   

Other assets

      71,954        —          71,954   
  

 

 

    

 

 

    

 

 

  

Total assets

    $ 5,596,674      $ 506,700      $ 6,103,374   
  

 

 

    

 

 

    

 

 

  
LIABILITIES AND EQUITY       

Current liabilities

       

Current maturities of long-term debt

    $ 1,019      $ —        $ 1,019   

Accounts payable and accrued expenses

      423,971        —          423,971   

Billings and estimated contract loss in excess of costs incurred

      41,232        —          41,232   

Derivative contracts

      149,374        —          149,374   

Asset retirement obligation

      25,360        —          25,360   
  

 

 

    

 

 

    

 

 

  

Total current liabilities

      640,956        —          640,956   

Long-term debt

      2,892,434        (80,000 ) (a)      2,812,434   

Derivative contracts

      162,057        —          162,057   

Asset retirement obligation

      93,780        —          93,780   

Other long-term obligations

      10,762        —          10,762   
  

 

 

    

 

 

    

 

 

  

Total liabilities

      3,799,989        (80,000 )      3,719,989   
  

 

 

    

 

 

    

 

 

  

Commitments and contingencies

       

Equity

       

SandRidge Energy, Inc. stockholders’ equity

       

Preferred stock, $0.001 par value, 50,000 shares authorized

       

8.5% Convertible perpetual preferred stock; 2,650 shares issued and outstanding at June 30, 2011 and December 31, 2010; aggregate liquidation preference of $265,000

      3        —          3   

6.0% Convertible perpetual preferred stock; 2,000 shares issued and outstanding at June 30, 2011 and December 31, 2010; aggregate liquidation preference of $200,000

      2        —          2   

7.0% Convertible perpetual preferred stock; 3,000 shares issued and outstanding at June 30, 2011 and December 31, 2010; aggregate liquidation preference of $300,000

      3        —          3   

Common stock, $0.001 par value, 800,000 shares authorized; 410,498 issued and 409,918 outstanding at June 30, 2011 and 406,830 issued and 406,360 outstanding at December 31, 2010

      398        —          398   

Additional paid-in capital

      4,550,689        —          4,550,689   

Treasury stock, at cost

      (4,525 )      —          (4,525 ) 

Accumulated deficit

      (3,109,725 )      —          (3,109,725 ) 
  

 

 

    

 

 

    

 

 

  

Total SandRidge Energy, Inc. stockholders’ equity

      1,436,845        —          1,436,845   

Noncontrolling interest

      359,840        586,700  (a)      946,540   
  

 

 

    

 

 

    

 

 

  

Total equity

      1,796,685        586,700        2,383,385   
  

 

 

    

 

 

    

 

 

  

Total liabilities and equity

    $ 5,596,674      $ 506,700      $ 6,103,374   
  

 

 

    

 

 

    

 

 

  

The accompanying notes are an integral part of this unaudited pro forma financial information.

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

FOR THE YEAR ENDED DECEMBER 31, 2010

 

     SandRidge
Historical		     Arena
Historical		     Arena
Acquisition
Pro Forma
Adjustments		     SandRidge
as Adjusted
for Arena
Acquisition		     SandRidge
Permian
Trust
Pro Forma
Adjustments		     SandRidge
Pro Forma
Combined		  
     (In thousands, except per share amounts)  

Revenues

             

Oil and natural gas

    $ 774,763      $ 114,833      $ —        $ 889,596      $ —        $ 889,596   

Drilling and services

      28,543        —          —          28,543        —          28,543   

Midstream and marketing

      100,118        —          —          100,118        —          100,118   

Other

      28,312        —          —          28,312        —          28,312   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total revenues

      931,736        114,833        —          1,046,569        —          1,046,569   

Expenses

             

Production

      237,863        12,382        —          250,245        —          250,245   

Production taxes

      29,170        6,014        —          35,184        —          35,184   

Drilling and services

      22,368        —          —          22,368        —          22,368   

Midstream and marketing

      90,149        —          —          90,149        —          90,149   

Depreciation and depletion — oil and natural gas

      275,335        28,853        24,596  (b)      328,784        —          328,784   

Depreciation, depletion and amortization — other

      50,776        243        —          51,019        —          51,019   

General and administrative

      179,565        31,842        (27,587 ) (c)      183,820        1,000  (g)      184,820   

Loss (gain) on derivative contracts

      50,872        (1,124 )      —          49,748        —          49,748   

Loss on sale of assets

      2,424        —          —          2,424        —          2,424   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

      938,522        78,210        (2,991 )      1,013,741        1,000        1,014,741   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

(Loss) income from operations

      (6,786 )      36,623        2,991        32,828        (1,000 )      31,828   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Other income (expense)

             

Interest income

      296        197        —          493        —          493   

Interest expense

      (247,738 )      —          (2,504 ) (d)      (250,242 )      9,549  (h)      (240,693 ) 

Other income, net

      2,558        —          —          2,558        —          2,558   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total other (expense) income

      (244,884 )      197        (2,504 )      (247,191 )      9,549        (237,642 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

(Loss) income before income taxes

      (251,670 )      36,820        487        (214,363 )      8,549        (205,814 ) 

Income tax (benefit) expense

      (446,680 )      23,100        424,400  (e)      820        —          820   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss)

      195,010        13,720        (423,913 )      (215,183 )      8,549        (206,634 ) 

Less: net income attributable to noncontrolling interest

      4,445        —          —          4,445        28,799  (i)      33,244   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Net income (loss) attributable to SandRidge Energy, Inc.

      190,565        13,720        (423,913 )      (219,628 )      (20,250 )      (239,878 ) 

Preferred stock dividends

      37,442        —          —          37,442        —          37,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income available (loss applicable) to SandRidge Energy, Inc. common stockholders

    $ 153,123      $ 13,720      $ (423,913 )    $ (257,070 )    $ (20,250 )    $ (277,320 ) 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Income (loss) per share available (applicable) to SandRidge Energy, Inc. common stockholders

             

Basic

    $ 0.52          $ (0.65 )      $ (0.70 ) 
  

 

 

        

 

 

      

 

 

  

Diluted

    $ 0.52          $ (0.65 )      $ (0.70 ) 
  

 

 

        

 

 

      

 

 

  

Weighted average number of SandRidge Energy, Inc. common shares outstanding

             

Basic

      291,869          102,585  (f)      394,454          394,454   
  

 

 

      

 

 

    

 

 

      

 

 

  

Diluted

      315,349          79,105  (f)      394,454          394,454   
  

 

 

      

 

 

    

 

 

      

 

 

  

The accompanying notes are an integral part of this unaudited pro forma financial information.

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2011

 

     SandRidge
Historical		     Arena
Acquisition
Pro Forma
Adjustments		     SandRidge
Permian
Trust
Pro Forma
Adjustments		     SandRidge
Pro Forma		  
     (In thousands, except per share amounts)  

Revenues

         

Oil and natural gas

    $ 579,053      $ —        $ —        $ 579,053   

Drilling and services

      49,571        —          —          49,571   

Midstream and marketing

      38,570        —          —          38,570   

Other

      10,427        —          —          10,427   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total revenues

      677,621        —          —          677,621   

Expenses

         

Production

      155,791        —          —          155,791   

Production taxes

      23,242        —          —          23,242   

Drilling and services

      33,099        —          —          33,099   

Midstream and marketing

      38,156        —          —          38,156   

Depreciation and depletion — oil and natural gas

      150,072        —          —          150,072   

Depreciation and amortization — other

      26,368        —          —          26,368   

General and administrative

      72,091        —          500  (g)      72,591   

Loss on derivative contracts

      107,640        —          —          107,640   

Gain on sale of assets

      (725 )      —          —          (725 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Total expenses

      605,734        —          500        606,234   
  

 

 

    

 

 

    

 

 

    

 

 

  

Income from operations

      71,887        —          (500 )      71,387   
  

 

 

    

 

 

    

 

 

    

 

 

  

Other income (expense)

         

Interest income

      43        —          —          43   

Interest expense

      (121,167 )      —          2,535  (h)      (118,632 ) 

Loss on extinguishment of debt

      (38,232 )      —          —          (38,232 ) 

Other income, net

      1,335        —          —          1,335   
  

 

 

    

 

 

    

 

 

    

 

 

  

Total other expense

      (158,021 )      —          2,535        (155,486 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Loss before income taxes

      (86,134 )      —          2,035        (84,099 ) 

Income tax (benefit) expense

      (6,967 )      6,986  (e)      —          19   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net loss

      (79,167 )      (6,986 )      2,035        (84,118 ) 

Less: net income attributable to noncontrolling interest

      13,161        —          22,150  (i)      35,311   
  

 

 

    

 

 

    

 

 

    

 

 

  

Net loss attributable to SandRidge Energy, Inc.

      (92,328 )      (6,986 )      (20,115 )      (119,429 ) 

Preferred stock dividends

      27,821        —          —          27,821   
  

 

 

    

 

 

    

 

 

    

 

 

  

Loss applicable to SandRidge Energy, Inc. common stockholders

    $ (120,149 )    $ (6,986 )    $ (20,115 )    $ (147,250 ) 
  

 

 

    

 

 

    

 

 

    

 

 

  

Loss per share

         

Basic

    $ (0.30 )        $ (0.37 ) 
  

 

 

        

 

 

  

Diluted

    $ (0.30 )        $ (0.37 ) 
  

 

 

        

 

 

  

Weighted average number of common shares outstanding

         

Basic

      398,343            398,343   
  

 

 

        

 

 

  

Diluted

      398,343            398,343   
  

 

 

        

 

 

  

The accompanying notes are an integral part of this unaudited pro forma financial information.

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS

 

1. Basis of Presentation

The unaudited pro forma condensed balance sheet as of June 30, 2011 is based on the SandRidge Energy, Inc. (“SandRidge”) unaudited June 30, 2011 balance sheet and assumes conveyance of royalty interests in certain oil and natural gas properties located in Andrews County, Texas by SandRidge to SandRidge Permian Trust (the “Trust”), a Delaware statutory trust formed in May 2011 by SandRidge, on that date. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2010 is based on the audited statement of operations of SandRidge for the year ended December 31, 2010 and the unaudited statement of operations of Arena Resources, Inc. (“Arena”) for the period from January 1, 2010 through July 16, 2010, and includes pro forma adjustments to give effect to SandRidge’s acquisition of Arena (“Arena Acquisition”) in July 2010 and SandRidge’s conveyance of the royalty interests described above as if those transactions occurred on January 1, 2010. The unaudited pro forma condensed consolidated statement of operations for the six months ended June 30, 2011 is based on the unaudited statement of operations of SandRidge for the six months ended June 30, 2011 and gives effect to SandRidge’s conveyance of the royalty interests as if it occurred on January 1, 2010.

Consolidation of the Trust by SandRidge. In accordance with Accounting Standards Codification Topic 810, including the guidance in ASU 2009-17, SandRidge consolidates the activities of variable interest entities of which it is the primary beneficiary. SandRidge has determined that it is the primary beneficiary of the Trust and that it will consolidate the activities of the Trust with its results for periods subsequent to the Trust’s initial public offering (“IPO”). In consolidation, the Trust’s net income attributable to common units of the Trust owned by third parties will be reflected as noncontrolling interest. Accordingly, the pro forma impact of the royalty interest conveyance primarily is limited to giving effect to noncontrolling interest accounting.

SandRidge believes that the assumptions used provide a reasonable basis for presenting the effects directly attributable to these transactions. These unaudited pro forma financial statements should be read in conjunction with the Trust’s Registration Statement filed on Forms S-1 and S-3 with the United States Securities and Exchange Commission by SandRidge on May 25, 2011 and subsequent amendments thereto, SandRidge’s Annual Report on Form 10-K for the year ended December 31, 2010, and its Quarterly Report on Form 10-Q for the six months ended June 30, 2011.

 

2. Pro Forma Adjustments

The following adjustments were made in the preparation of the unaudited pro forma financial information:

 

  (a) Adjustment to reflect estimated proceeds from the Trust’s issuance of 31,500,000 common units to third parties through its IPO at an assumed price of $20 per unit net of estimated underwriting fees and offering expenses. Net proceeds will be used to reduce amounts outstanding under SandRidge’s senior credit facility and for general and corporate purposes, which may include funding of SandRidge’s drilling obligation to the Trust. Amounts outstanding under the senior credit facility totaled $80.0 million at June 30, 2011.

 

  (b) Adjustment to recognize additional depletion attributable to the Arena Acquisition properties for the year ended December 31, 2010, using the unit of production method under the full cost method of accounting, as if the acquisition had taken place on January 1, 2010.

 

  (c) Adjustment to reflect the elimination of non-recurring expenses related to the Arena Acquisition that are reflected in the historical SandRidge or Arena income statement for the year ended December 31, 2010 (in thousands):

 

00000

Acquisition costs(1)

    $ 19,017   

Stock compensation expense(2)

      4,626   

Cancelled options(3)

      3,944   
  

 

 

  

Total non-recurring expenses

    $ 27,587   
  

 

 

  

 

  (1) Expenses incurred by both SandRidge and Arena related to the Arena Acquisition, including professional fees and employee severance.
  (2) Stock compensation expense related to restricted stock awards of Arena common stock granted immediately prior to and in conjunction with the Arena Acquisition that were assumed by SandRidge.
  (3) Expense related to out-of-the-money Arena options that vested and cancelled at the time of the merger.

 

  (d) Adjustment to recognize additional interest expense related to the $177.9 million drawn on SandRidge’s senior credit facility to fund the cash portion of the Arena Acquisition purchase price. Additional interest expense was based upon the average annual interest rate paid on amounts outstanding under SandRidge’s senior credit facility during the period from January 1, 2010 to July 16, 2010.

 

  (e) Adjustment to reverse Arena’s historical income tax provision for the period from January 1, 2010 through July 16, 2010 and reverse the release of a portion of SandRidge’s valuation allowance for the year ended December 31, 2010 and six months ended June 30, 2011. A deferred tax liability resulted from the step-up in basis on the property acquired from Arena. This deferred tax liability was offset with SandRidge’s existing net deferred tax asset, resulting in the release of $447.5 million and $7.0 million of valuation allowance against SandRidge’s existing net deferred tax asset for the year ended December 31, 2010 and the six months ended June 30, 2011, respectively. The release of the valuation allowance is considered non-recurring and therefore reversed in the pro forma condensed combined statements of operations for the year ended December 31, 2010 and the six months ended June 30, 2011.

 

  (f) Total shares issued in connection with the Arena Acquisition consisted of (i) approximately 188.9 million shares issued in exchange for 39.5 million shares of outstanding Arena common stock and (ii) 1.4 million shares issued in exchange for outstanding options to purchase Arena common stock considered in-the-money (based on the closing price of $35.98 per share of Arena common stock on July 16, 2010) that converted into shares of SandRidge common stock in accordance with the merger agreement.

  (g) The Trust’s general and administrative expenses are estimated at $1.3 million annually and include an annual administrative services fee of $0.3 million payable by the Trust to SandRidge that will be eliminated in consolidation.

 

  (h) Adjustment to reflect reduction of interest expense due to repayment of amounts outstanding under SandRidge’s senior credit facility with proceeds from the Trust’s IPO.

 

  (i) Reflects net income of the Trust attributable to an assumed third party beneficial ownership of 60%. Such amounts were estimated based on pro forma income of the Trust of $60.6 million less estimated depletion of $12.6 million for the year ended December 31, 2010 and on pro forma income of $44.4 million less estimated depletion of $7.5 million for the six months ended June 30, 2011.

SANDRIDGE ENERGY INC Reports