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

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8-K - FORM 8-K - SANDRIDGE ENERGY INC	d324538d8k.htm

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 (i) its conveyance of royalty interests in certain oil and natural gas properties located in northern Oklahoma and southern Kansas (the “Mississippian Trust II Royalty Interests”) to SandRidge Mississippian Trust II, (ii) the sale of certain producing properties located in eastern Texas (the “East Texas Properties”) and (iii) its conveyance of royalty interests in certain oil and natural gas properties located in Andrews County, Texas (the “Permian Trust Royalty Interests”) to SandRidge Permian Trust. SandRidge’s historical results have also been adjusted to give effect to final adjustments recorded in 2011 by SandRidge with respect to its July 2010 acquisition of Arena Resources, Inc. (“Arena”) as if they had occurred prior to 2011. These transactions are described further below.

•

SandRidge Mississippian Trust II. On January 5, 2012, SandRidge Mississippian Trust II (the “Mississippian Trust II”), a newly formed Delaware trust, filed a registration statement with the United States Securities and Exchange Commission (the “SEC”) relating to the initial public offering of common units representing beneficial interests in the Mississippian Trust II. In conjunction with the offering, SandRidge will convey the Mississippian Trust II Royalty Interests to the Mississippian Trust II in exchange for the net proceeds from the offering and units representing approximately 47.9% of the beneficial interest of the Mississippian Trust II. The Mississippian Trust II Royalty Interests will entitle the Mississippian Trust II to a percentage of the proceeds from the sale of oil and natural gas 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 for general corporate purposes, which may include the funding of its drilling program.

•

East Texas Sale. On November 14, 2011, SandRidge sold producing properties located on over 23,000 net acres in Gregg, Harrison, Rusk and Panola counties in Texas for an agreed upon price of $231.0 million (“East Texas Sale”). The transaction is subject to customary post-closing adjustments.

•

SandRidge Permian Trust. On August 16, 2011, the SandRidge Permian Trust (the “Permian Trust”), a newly formed Delaware trust, completed its initial public offering of 34,500,000 common units representing beneficial interests in the Permian Trust. Net proceeds to the Permian Trust, after certain offering expenses, were $580.6 million. Concurrent with the closing, SandRidge conveyed Permian Trust Royalty Interests to the Permian Trust in exchange for the net proceeds of the Permian Trust’s initial public offering and 18,000,000 units (4,875,000 common units and 13,125,000 subordinated units), representing approximately 34.3% of the beneficial interest in the Permian Trust. The Permian Trust Royalty Interests conveyed to the Permian Trust are in certain oil and natural gas properties located in the Central Basin Platform of the Permian Basin in Andrews County, Texas and entitle the Permian 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 used a portion of 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. In the second quarter of 2011, SandRidge completed its valuation of assets acquired and liabilities assumed related to the Arena Acquisition.

The unaudited pro forma condensed balance sheet is based on the audited December 31, 2011 SandRidge balance sheet and gives effect to the conveyance of the Mississippian Trust II Royalty Interests as if it occurred on that date. The unaudited pro forma condensed statement of operations for the year ended December 31, 2011 is based on the audited statement of operations of SandRidge for the year ended December 31, 2011 and includes pro forma adjustments to give effect to the Permian Trust Royalty Interests conveyance, the East Texas Sale and the Mississippian Trust II Royalty Interests conveyance as if those transactions occurred on January 1, 2011 and to reflect the effect of the Arena Acquisition, including all related adjustments, as if they had occurred prior to 2011.

The pro forma adjustments reflecting the Arena Acquisition purchase price adjustments, the Permian Trust Royalty Interests conveyance, the East Texas Sale and the Mississippian Trust II 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 Mississippian Trust II Royalty Interests conveyance, the assumptions and estimates herein could change significantly.

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. The 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, 2011, the Permian Trust’s Annual Report on Form 10-K for the year ended December 31, 2011 and the Mississippian Trust II’s Registration Statement on Forms S-1 and S-3 filed by SandRidge with the SEC on January 5, 2012 and subsequent amendments thereto.

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONDENSED BALANCE SHEET

AS OF DECEMBER 31, 2011


	SandRidge Historical			SandRidge Mississippian Trust II			SandRidge Pro Forma
	(in thousands)
ASSETS
Current assets
Cash and cash equivalents	$	207,681		$	465,200	(a)	$	672,881
Accounts receivable, net		206,336			—			206,336
Derivative contracts		4,066			—			4,066
Inventories		6,903			—			6,903
Other current assets		16,854			—			16,854

Total current assets		441,840			465,200			907,040
Oil and natural gas properties, using full cost method of accounting
Proved (includes development and project costs excluded from amortization of $231.3 million)		8,969,296			—			8,969,296
Unproved		689,393			—			689,393
Less: accumulated depreciation, depletion and impairment		(4,791,534	)		—			(4,791,534	)

		4,867,155			—			4,867,155

Other property, plant and equipment, net		522,269			—			522,269
Restricted deposits		27,912			—			27,912
Derivative contracts		26,415			—			26,415
Goodwill		235,396			—			235,396
Other assets		98,622			—			98,622

Total assets	$	6,219,609		$	465,200		$	6,684,809

LIABILITIES AND EQUITY
Current liabilities
Current maturities of long-term debt	$	1,051		$	—		$	1,051
Accounts payable and accrued expenses		506,784			—			506,784
Billings and estimated contract loss in excess of costs incurred		43,320			—			43,320
Derivative contracts		115,435			—			115,435
Asset retirement obligation		32,906			—			32,906

Total current liabilities		699,496			—			699,496
Long-term debt		2,813,125			—			2,813,125
Derivative contracts		49,695			—			49,695
Asset retirement obligation		95,210			—			95,210
Other long-term obligations		13,133			—			13,133

Total liabilities		3,670,659			—			3,670,659

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 December 31, 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 December 31, 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 December 31, 2011 and December 31, 2010; aggregate liquidation preference of $300,000		3			—			3
Common stock, $0.001 par value, 800,000 shares authorized; 412,829 issued and 411,953 outstanding at December 31, 2011 and 406,830 issued and 406,360 outstanding at December 31, 2010		399			—			399
Additional paid-in capital		4,568,856			—			4,568,856
Treasury stock, at cost		(6,158	)		—			(6,158	)
Accumulated deficit		(2,937,094	)		—			(2,937,094	)

Total SandRidge Energy, Inc. stockholders’ equity		1,626,011			—			1,626,011
Noncontrolling interest		922,939			465,200	(a)		1,388,139

Total equity		2,548,950			465,200			3,014,150

Total liabilities and equity	$	6,219,609		$	465,200		$	6,684,809

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 YEAR ENDED DECEMBER 31, 2011


	SandRidge Historical			Arena Acquisition			SandRidge Permian Trust			East Texas Sale			SandRidge Mississippian Trust II			SandRidge Pro Forma
	(in thousands, except per share amounts)
Revenues
Oil and natural gas	$	1,226,794		$	—		$	—		$	(39,535	)(g)	$	—		$	1,187,259
Drilling and services		103,298			—			—			—			—			103,298
Midstream and marketing		66,690			—			—			—			—			66,690
Other		18,431			—			—			—			—			18,431

Total revenues		1,415,213			—			—			(39,535	)		—			1,375,678
Expenses
Production		322,877			—			—			(13,510	)(g)		—			309,367
Production taxes		46,069			—			—			(1,219	)(g)		—			44,850
Drilling and services		65,654			—			—			—			—			65,654
Midstream and marketing		66,007			—			—			—			—			66,007
Depreciation and depletion — oil and natural gas		326,614			—			—			(5,940	)(h)		—			320,674
Depreciation and amortization — other		53,630			—			—			—			—			53,630
Impairment		2,825			—			—			—			—			2,825
General and administrative		148,643			—			500	(d)		—			1,000	(d)		150,143
Gain on derivative contracts		(44,075	)		—			—			—			—			(44,075	)
Gain on sale of assets		(2,044	)		—			—			—			—			(2,044	)

Total expenses		986,200			—			500			(20,669	)		1,000			967,031

Income (loss) from operations		429,013			—			(500)			(18,866)			(1,000)			408,647

Other income (expense)
Interest income		240			—			—			—			—			240
Interest expense		(237,572	)		—			3,132	(e)		—			—			(234,440	)
Loss on extinguishment of debt		(38,232	)		—			—			—			—			(38,232	)
Other income (expense), net		3,122			(2,152	)(b)		—			—			—			970

Total other (expense) income		(272,442	)		(2,152	)		3,132			—			—			(271,462	)

Income (loss) before income taxes		156,571			(2,152	)		2,632			(18,866	)		(1,000	)		137,185
Income tax (benefit) expense		(5,817	)		6,247	(c)		—			(53	)(i)		—			377

Net income (loss)		162,388			(8,399	)		2,632			(18,813	)		(1,000	)		136,808
Less: net income attributable to noncontrolling interest		54,323			—			26,612	(f)		—			14,401	(j)		95,336

Net income (loss) attributable to SandRidge Energy, Inc.		108,065			(8,399	)		(23,980	)		(18,813	)		(15,401	)		41,472
Preferred stock dividends		55,583			—			—			—			—			55,583

Income available (loss applicable) to SandRidge Energy, Inc. common stockholders	$	52,482		$	(8,399	)	$	(23,980	)	$	(18,813	)	$	(15,401	)	$	(14,111	)

Income (loss) per share applicable to SandRidge Energy, Inc. common stockholders
Basic	$	0.13														$	(0.04	)

Diluted	$	0.13														$	(0.04	)

Weighted average number of SandRidge Energy, Inc. common shares outstanding
Basic		398,851															398,851

Diluted		406,645												(7,794	)(k)		398,851

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 December 31, 2011 is based on the audited December 31, 2011 balance sheet of SandRidge and assumes its conveyance of Mississippian Trust II Royalty Interests to the Mississippian Trust II on that date. The unaudited pro forma condensed statement of operations for the year ended December 31, 2011 is based on the audited statement of operations of SandRidge for the year ended December 31, 2011, and includes pro forma adjustments to give effect to SandRidge’s conveyance of the Permian Trust Royalty Interests to the Permian Trust, the East Texas Sale and the conveyance of the Mississippian Trust II Royalty Interests to the Mississippian Trust II as if those transactions occurred on January 1, 2011, and to reflect the effects of final adjustments for the Arena Acquisition.

Consolidation of the Trusts by SandRidge. In accordance with Accounting Standards Codification Topic 810, including the guidance in Accounting Standards Update 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 Permian Trust and began consolidating the activities of the Permian Trust with its results for periods subsequent to the Permian Trust’s initial public offering (“IPO”) in August 2011. Additionally, SandRidge has determined that it is the primary beneficiary of the Mississippian Trust II and that it will consolidate the activities of the Mississippian Trust II with its results for periods subsequent to the Mississippian Trust II’s IPO. In consolidation, the royalty trust net income attributable to common units of the royalty trusts owned by third parties is reflected as noncontrolling interest. Accordingly, the pro forma impact of the Permian and Mississippian Trust II Royalty Interest conveyances primarily are 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. The unaudited pro forma financial statements should be read in conjunction with SandRidge’s Annual Report on Form 10-K for the year ended December 31, 2011, the Permian Trust’s Annual Report on Form 10-K for the year ended December 31, 2011 and the Mississippian Trust II’s Registration Statement filed on Forms S-1 and S-3 by SandRidge with the SEC on January 5, 2012 and subsequent amendments thereto.

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 Mississippian Trust II’s issuance of 25,000,000 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 for general corporate purposes and to fund SandRidge’s drilling program, which may include funding of SandRidge’s drilling obligation to the Mississippian Trust II.

(b)

Adjustment to reverse income amounts resulting from the final adjustment to liabilities established in the Arena Acquisition purchase price allocation that were reduced to zero based on final information received during the year ended December 31, 2011. Income from the settlement is considered non-recurring and therefore reversed in the pro forma condensed statement of operations.

(c)

Adjustment to reverse the release of a portion of SandRidge’s valuation allowance for the year ended December 31, 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 $7.0 million of valuation allowance against SandRidge’s existing net deferred tax asset for the year ended December 31, 2011. The $7.0 million valuation allowance release is presented net of $0.8 million of income tax expense related to the filing of Arena’s final tax returns. The release of the valuation allowance is considered non-recurring and therefore reversed in the pro forma condensed statement of operations for the year ended December 31, 2011.

(d)

The Permian Trust and Mississippian Trust II’s general and administrative expenses are each estimated at $1.3 million annually and include an annual administrative services fee of $0.3 million payable by the Permian Trust and Mississippian Trust II to SandRidge that will be eliminated in consolidation. Adjustment to the Permian Trust for the year ended December 31, 2011 is net of amounts attributable to the Permian Trust from August 16, 2011 to December 31, 2011 already reflected in the SandRidge historical results.

(e)

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

(f)

Reflects net income of the Permian Trust attributable to third-party beneficial ownership of 65.7%. Such amounts were estimated based on pro forma income of the Permian Trust of $89.8 million less estimated depletion of $15.7 million for the year ended December 31, 2011. Adjustment for the year ended December 31, 2011 is net of amounts attributable to the Permian Trust from August 16, 2011 to December 31, 2011 already reflected in the SandRidge historical results.

(g)

Adjustment to reduce oil and natural gas sales, production expense and production tax expense for amounts attributable to the East Texas Properties during the year ended December 31, 2011.

(h)

Adjustment to reduce depletion, using the unit of production method under the full cost method of accounting, and ARO accretion expense for amounts attributable to the East Texas Properties during the year ended December 31, 2011.

(i)

Adjustment to income tax expense for income tax attributable to net revenues generated by the East Texas Properties during the year ended December 31, 2011. Adjustment was based upon the SandRidge consolidated effective income tax rate excluding the effects of adjustments to SandRidge’s valuation allowance caused by the Arena Acquisition discussed in (b) above.

(j)

Reflects net income of the Mississippian Trust II attributable to an assumed third-party beneficial ownership of 52.1%. Such amounts were estimated based on pro forma distributable income of the Mississippian Trust II of $37.3 million less estimated depletion of $9.7 million for the year ended December 31, 2011.

(k)

Adjustment to the weighted average number of common shares outstanding – diluted based on pro forma loss applicable to SandRidge Energy, Inc. common stockholders.

SANDRIDGE ENERGY INC - FORM 8-K - EX-99.1 - PRO FORMA FINANCIAL INFORMATION - April 2, 2012

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