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EX-31.1 - EXHIBIT 31.1 SECTION 302 CERTIFICATION - CEO - SANDRIDGE ENERGY INCsdq263016ex311-section302c.htm
EX-32.1 - EXHIBIT 32.1 SECTION 906 CERTIFICATIONS - SANDRIDGE ENERGY INCsdq263016ex321-section906c.htm
EX-31.2 - EXHIBIT 31.2 SECTION 302 CERTIFICATION - CFO - SANDRIDGE ENERGY INCsdq263016ex312-section302c.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________
Form 10-Q
__________________________ 
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-33784
__________________________ 
SANDRIDGE ENERGY, INC.
(Exact name of registrant as specified in its charter)
__________________________
Delaware
 
20-8084793
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
123 Robert S. Kerr Avenue
Oklahoma City, Oklahoma
 
73102
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code:
(405) 429-5500
Former name, former address and former fiscal year, if changed since last report: Not applicable
__________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
 
Accelerated filer
þ
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o    No þ

The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of the close of business on August 8, 2016, was 719,458,145.
 




References in this report to the “Company” and “SandRidge” mean SandRidge Energy, Inc., including its consolidated subsidiaries and its proportionately consolidated share of each of the SandRidge Mississippian Trust I (the “Mississippian Trust I”), SandRidge Mississippian Trust II (the “Mississippian Trust II”) and SandRidge Permian Trust (the “Permian Trust”)(each individually, a “Royalty Trust” and collectively, the “Royalty Trusts”).

DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) of the Company includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements express a belief, expectation or intention and generally are accompanied by words that convey projected future events or outcomes. These forward-looking statements may include projections and estimates concerning the Company’s capital expenditures, liquidity, capital resources and debt profile, the potential effects of a restructuring transaction on the Company’s operations, management, and employees, the Company’s ability to consummate a restructuring transaction, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, elements of the Company’s business strategy, compliance with governmental regulation of the oil and natural gas industry, including environmental regulations, acquisitions and divestitures and the effects thereof on the Company’s financial condition and other statements concerning the Company’s operations and financial performance and condition. Forward-looking statements are generally accompanied by words such as “estimate,” “assume,” “target,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “goal,” “should,” “intend” or other words that convey the uncertainty of future events or outcomes. The Company has based these forward-looking statements on its current expectations and assumptions about future events. These statements are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions and expected future developments as well as other factors the Company believes are appropriate under the circumstances. The actual results or developments anticipated may not be realized or, even if substantially realized, may not have the expected consequences to or effects on the Company’s business or results. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. These forward-looking statements speak only as of the date hereof. The Company disclaims any obligation to update or revise these forward-looking statements unless required by law, and it cautions readers not to rely on them unduly. While the Company’s management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties relating to, among other matters, the risks and uncertainties discussed in “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the “2015 Form 10-K”) and in Item 1A of this Quarterly Report.

The forward-looking statements related to one or more plans of reorganization (the “Plan”) involve known and unknown risks, uncertainties, assumptions and other factors that may cause the Company’s actual results, performance or achievements to be materially different from any results, performance or achievements expressed or implied by other forward-looking statements contained in this Quarterly Report on Form 10-Q, including but not limited to potential adverse effects related to the following: potential restructuring of the Company’s outstanding debt and related effects on the holders of the Company’s outstanding equity; potential effects of the industry downturn on the Company’s business, financial condition and results of operations; potential limitations on the Company’s ability to maintain contracts and other critical business relationships; requirements for adequate liquidity to fund operations in the future, including obtaining sufficient financing on acceptable terms; and other matters related to the potential restructuring and indebtedness, including any defaults related thereto.




SANDRIDGE ENERGY, INC.
FORM 10-Q
Quarter Ended June 30, 2016

INDEX




PART I. Financial Information

ITEM 1. Financial Statements

SANDRIDGE ENERGY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data) 
 
June 30,
2016
 
December 31,
2015
 
(Unaudited)
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
634,166

 
$
435,588

Accounts receivable, net
81,718

 
127,387

Derivative contracts
21,000

 
84,349

Prepaid expenses
15,331

 
6,833

Other current assets
1,650

 
19,931

Total current assets
753,865

 
674,088

Oil and natural gas properties, using full cost method of accounting
 
 
 
Proved
12,029,734

 
12,529,681

Unproved
338,573

 
363,149

Less: accumulated depreciation, depletion and impairment
(11,313,610
)
 
(11,149,888
)
 
1,054,697

 
1,742,942

Other property, plant and equipment, net
420,555

 
491,760

Other assets
11,791

 
13,237

Total assets
$
2,240,908

 
$
2,922,027


The accompanying notes are an integral part of these condensed consolidated financial statements.

4


SANDRIDGE ENERGY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED BALANCE SHEETS - Continued
(In thousands, except per share data) 
 
June 30,
2016
 
December 31,
2015
 
(Unaudited)
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 
 
 
Current liabilities
 
 
 
Accounts payable and accrued expenses
$
64,926

 
$
428,417

Derivative contracts
356

 
573

Asset retirement obligations
8,534

 
8,399

Total current liabilities
73,816

 
437,389

Long-term debt

 
3,562,378

Asset retirement obligations
62,425

 
95,179

Other long-term obligations

 
14,814

Liabilities subject to compromise
4,377,611

 

Total liabilities
4,513,852

 
4,109,760

Commitments and contingencies (Note 10)

 

Equity (deficit)
 
 
 
SandRidge Energy, Inc. stockholders’ equity (deficit)
 
 
 
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, 2016 and December 31, 2015; aggregate liquidation preference of $265,000
3

 
3

7.0% Convertible perpetual preferred stock; 2,597 shares issued and outstanding at June 30, 2016; aggregate liquidation preference of $259,700; 2,770 shares issued and outstanding at December 31, 2015; aggregate liquidation preference of $277,000
3

 
3

Common stock, $0.001 par value; 1,800,000 shares authorized; 721,143 issued and 719,632 outstanding at June 30, 2016 and 635,584 issued and 633,471 outstanding at December 31, 2015
718

 
630

Additional paid-in capital
5,313,895

 
5,301,136

Additional paid-in capital—stockholder receivable
(1,250
)
 
(1,250
)
Treasury stock, at cost
(5,218
)
 
(5,742
)
Accumulated deficit
(7,581,074
)
 
(6,992,697
)
Total SandRidge Energy, Inc. stockholders’ deficit
(2,272,923
)
 
(1,697,917
)
Noncontrolling interest
(21
)
 
510,184

Total stockholders’ deficit
(2,272,944
)
 
(1,187,733
)
Total liabilities and stockholders’ deficit
$
2,240,908

 
$
2,922,027


The accompanying notes are an integral part of these condensed consolidated financial statements.

5


SANDRIDGE ENERGY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
Revenues
 
 
 
 
 
 
 
Oil, natural gas and NGL
$
95,662

 
$
214,532

 
$
180,037

 
$
410,264

Midstream and marketing
3,254

 
8,606

 
7,541

 
17,370

Drilling and services
224

 
5,241

 
1,456

 
15,086

Other
281

 
1,228

 
719

 
2,195

Total revenues
99,421

 
229,607

 
189,753

 
444,915

Expenses
 
 
 
 
 
 
 
Production
42,686

 
81,776

 
89,968

 
171,274

Production taxes
2,121

 
4,382

 
3,829

 
8,896

Cost of sales
471

 
4,884

 
4,739

 
17,711

Midstream and marketing
756

 
7,724

 
1,840

 
15,831

Depreciation and depletion—oil and natural gas
27,952

 
94,298

 
60,278

 
200,405

Depreciation and amortization—other
6,974

 
12,508

 
13,809

 
25,855

Accretion of asset retirement obligations
1,387

 
1,111

 
2,975

 
2,191

Impairment
253,629

 
1,489,391

 
363,743

 
2,573,257

General and administrative
31,024

 
38,382

 
105,302

 
74,531

Loss (gain) on derivative contracts
7,969

 
33,004

 
5,161

 
(16,823
)
Loss on settlement of contract
1,092

 

 
90,184

 

Gain on sale of assets
(1,330
)
 
(2,770
)
 
(3,210
)
 
(4,674
)
Total expenses
374,731

 
1,764,690

 
738,618

 
3,068,454

Loss from operations
(275,310
)
 
(1,535,083
)
 
(548,865
)
 
(2,623,539
)
Other (expense) income
 
 
 
 
 
 
 
Interest expense (excludes $37.7 million of contractual interest expense on debt subject to compromise for the three and six month-periods ended June 30, 2016)
(41,605
)
 
(73,727
)
 
(122,756
)
 
(136,569
)
(Loss) gain on extinguishment of debt
(152
)
 
17,934

 
41,179

 
17,934

Reorganization items, net
(200,918
)
 

 
(200,918
)
 

Other income, net
2,077

 
2,170

 
2,230

 
1,634

Total other expense
(240,598
)
 
(53,623
)
 
(280,265
)
 
(117,001
)
Loss before income taxes
(515,908
)
 
(1,588,706
)
 
(829,130
)
 
(2,740,540
)
Income tax expense
3

 
25

 
7

 
65

Net loss
(515,911
)
 
(1,588,731
)
 
(829,137
)
 
(2,740,605
)
Less: net loss attributable to noncontrolling interest

 
(220,249
)
 

 
(337,170
)
Net loss attributable to SandRidge Energy, Inc.
(515,911
)
 
(1,368,482
)
 
(829,137
)
 
(2,403,435
)
Preferred stock dividends
5,440

 
7,074

 
16,321

 
17,955

Loss applicable to SandRidge Energy, Inc. common stockholders
$
(521,351
)
 
$
(1,375,556
)
 
$
(845,458
)
 
$
(2,421,390
)
Loss per share
 
 
 
 
 
 
 
Basic
$
(0.73
)
 
$
(2.78
)
 
$
(1.20
)
 
$
(4.98
)
Diluted
$
(0.73
)
 
$
(2.78
)
 
$
(1.20
)
 
$
(4.98
)
Weighted average number of common shares outstanding
 
 
 
 
 
 
 
Basic
718,102

 
495,153

 
703,943

 
486,704

Diluted
718,102

 
495,153

 
703,943

 
486,704


The accompanying notes are an integral part of these condensed consolidated financial statements.

6


SANDRIDGE ENERGY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands) 
 
SandRidge Energy, Inc. Stockholders
 
 
 
 
 
Convertible Perpetual Preferred Stock
 
Common Stock
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Deficit
 
Non-controlling Interest
 
Total
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(Unaudited)
Six Months Ended June 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
5,420

 
$
6

 
633,471

 
$
630

 
$
5,299,886

 
$
(5,742
)
 
$
(6,992,697
)
 
$
510,184

 
$
(1,187,733
)
Cumulative effect of adoption of ASU 2015-02

 

 

 

 

 

 
257,081

 
(510,205
)
 
(253,124
)
Purchase of treasury stock

 

 

 

 

 
(41
)
 

 

 
(41
)
Retirement of treasury stock

 

 

 

 
(41
)
 
41

 

 

 

Stock distributions, net of purchases - retirement plans

 

 
603

 

 
(860
)
 
524

 

 

 
(336
)
Stock-based compensation

 

 

 

 
9,339

 

 

 

 
9,339

Cancellations of restricted stock awards, net of issuance

 

 
(2,571
)
 
2

 
(2
)
 

 

 

 

Common stock issued for debt

 

 
84,390

 
84

 
4,325

 

 

 

 
4,409

Conversion of preferred stock to common stock
(173
)
 

 
2,220

 
2

 
(2
)
 

 

 

 

Net loss

 

 

 

 

 

 
(829,137
)
 

 
(829,137
)
Convertible perpetual preferred stock dividends

 

 

 

 

 

 
(16,321
)
 

 
(16,321
)
Balance at June 30, 2016
5,247

 
$
6

 
718,113

 
$
718

 
$
5,312,645

 
$
(5,218
)
 
$
(7,581,074
)
 
$
(21
)
 
$
(2,272,944
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


SANDRIDGE ENERGY, INC. (DEBTOR-IN-POSSESSION)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Six Months Ended June 30,
 
2016
 
2015
 
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net loss
$
(829,137
)
 
$
(2,740,605
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities
 
 
 
Provision for doubtful accounts
16,705

 

Depreciation, depletion and amortization
74,087

 
226,260

Accretion of asset retirement obligations
2,975

 
2,191

Impairment
363,743

 
2,573,257

Reorganization items, net
200,918

 

Debt issuance costs amortization
4,996

 
4,636

Amortization of discount, net of premium, on debt
2,734

 
285

Gain on extinguishment of debt
(41,179
)
 
(17,934
)
Write off of debt issuance costs

 
7,108

Gain on debt derivatives
(1,324
)
 

Cash paid for early conversion of convertible notes
(33,452
)
 

Loss (gain) on derivative contracts
5,161

 
(16,823
)
Cash received on settlement of derivative contracts
57,970

 
211,323

Loss on settlement of contract
90,184

 

Cash paid on settlement of contract
(11,000
)
 

Gain on sale of assets
(3,210
)
 
(4,674
)
Stock-based compensation
7,850

 
11,533

Other
(42
)
 
680

Changes in operating assets and liabilities
(47,020
)
 
61,757

Net cash (used in) provided by operating activities
(139,041
)
 
318,994

CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Capital expenditures for property, plant and equipment
(126,245
)
 
(636,822
)
Acquisition of assets
(1,397
)
 
(3,475
)
Proceeds from sale of assets
16,734

 
11,462

Net cash used in investing activities
(110,908
)
 
(628,835
)
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Proceeds from borrowings
488,900

 
2,190,000

Repayments of borrowings
(40,000
)
 
(940,000
)
Debt issuance costs
(332
)
 
(39,129
)
Noncontrolling interest distributions

 
(84,690
)
Purchase of treasury stock
(41
)
 
(2,714
)
Dividends paid — preferred

 
(11,262
)
Net cash provided by financing activities
448,527

 
1,112,205

NET INCREASE IN CASH AND CASH EQUIVALENTS
198,578

 
802,364

CASH AND CASH EQUIVALENTS, beginning of year
435,588

 
181,253

CASH AND CASH EQUIVALENTS, end of period
$
634,166

 
$
983,617

Supplemental Disclosure of Noncash Investing and Financing Activities
 
 
 
Cumulative effect of adoption of ASU 2015-02
$
(247,566
)
 
$

Property, plant and equipment transferred in settlement of contract
$
(215,635
)
 
$

Change in accrued capital expenditures
$
16,613

 
$
149,066

Equity issued for debt
$
4,409

 
$
(31,396
)
Preferred stock dividends paid in common stock
$

 
$
(6,693
)

The accompanying notes are an integral part of these condensed consolidated financial statements.

8


SANDRIDGE ENERGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. Chapter 11 Proceedings

On May 16, 2016, the Company and certain of its direct and indirect subsidiaries (collectively with the Company, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company’s obligations under its senior credit facility, its Senior Secured Notes (as defined below) and its Unsecured Notes (as defined below). Under the Bankruptcy Code, the creditors under such agreements and instruments are stayed from taking any action against the Company as a result of an event of default.

Debtor-In-Possession. The Company and the Debtors are currently operating as debtors in possession in accordance with the applicable provisions of the Bankruptcy Code. The Bankruptcy Court has granted motions filed by the Company that were designed primarily to mitigate the impact of the Chapter 11 proceedings on the Company’s operations, customers and employees. As a result, the Company is able to conduct normal business activities and pay all associated obligations for the period following its bankruptcy filing and is authorized to pay and has paid certain pre-petition obligations, including for employee wages and benefits, goods and services provided by certain vendors, transportation of the Company's production, royalties and costs incurred on the Company’s behalf by other working interest owners. During the pendency of the Chapter 11 case, all transactions outside the ordinary course of business require the prior approval of the Bankruptcy Court.

Automatic Stay. Subject to certain specific exceptions under the Bankruptcy Code, the Chapter 11 filings automatically stayed most judicial or administrative actions against the Company and efforts by creditors to collect on or otherwise exercise rights or remedies with respect to pre-petition claims. Absent an order from the Bankruptcy Court, substantially all of the Debtors’ pre-petition liabilities are subject to settlement under the Bankruptcy Code.

Restructuring Support Agreement. Prior to the filing of the Bankruptcy Petitions, on May 11, 2016, the Company entered into a restructuring support and lock-up agreement (including term sheets and other exhibits attached thereto, the “Restructuring Support Agreement” or “RSA”). The RSA sets forth, subject to certain conditions, the commitments and obligations of the Debtors and the Consenting Creditors (as defined in the RSA) to support a comprehensive restructuring of the Company’s long-term debt (the “Restructuring Transactions”). The Restructuring Transactions will be effectuated through a plan of reorganization (the “Plan”) filed in the Chapter 11 proceedings as described further below.

The RSA commits each of the Debtors to, among other things, and subject to certain conditions: (a) support and take all reasonably necessary and appropriate actions to obtain approval by the Bankruptcy Court of the Plan and to effectuate the Restructuring Transactions, (b) take no action that is inconsistent or is likely to interfere with the Restructuring Transactions, and (c) comply with certain operating covenants.

The RSA may be terminated upon the occurrence of certain events, including, the failure to meet certain milestones related to the consensual use of cash collateral and the Plan, and upon certain breaches by the Debtors and the Consenting Creditors under the RSA. The RSA is subject to termination if the effective date of the Plan has not occurred within 225 days of the bankruptcy filing. There can be no assurance that the Plan will be consummated.

Plan of Reorganization. The Company filed the Plan and a related disclosure statement with the Bankruptcy Court on May 18, 2016. The Plan is subject to approval by the Bankruptcy Court. On July 15, 2016, the Bankruptcy Court approved the Company’s disclosure statement with respect to the Plan, and the Company is in the process of soliciting votes with respect to the Plan. The Company intends to seek confirmation of the Plan at a hearing before the Bankruptcy Court, currently scheduled to begin September 6, 2016.

If the Plan is confirmed by the Bankruptcy Court, the Debtors would exit Chapter 11 pursuant to the terms of the Plan. Under the Plan, the claims against and interests in the Debtors are organized into classes based, in part, on their respective priorities. The Plan provides that, upon emergency from bankruptcy:

First Lien Credit Agreement. Claims under the senior credit facility will receive their proportionate share of (a) $35.0 million in cash and (b) participation in the $425.0 million New First Lien Exit Facility.


9

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Senior Secured Note Claims. The Senior Secured Notes will receive their proportionate share of (a) the New Mandatory Convertible Debt, and (b)  85% of the post-reorganization new common stock in the reorganized Company (the “New Common Stock”), as fully diluted by the New Mandatory Convertible Debt measured through the conversion date, subject to dilution by (i) the Warrants, (ii) a Rights Offering, if any, and (iii) the Employee Incentive Plan. Holders of Senior Secured Notes may also be entitled to participate in the Rights Offering under specified circumstances.

General Unsecured Claims. The Company’s general unsecured claims, including the Unsecured Notes, will receive their proportionate share of (a) $10.0 million in cash, (b) 15% of the New Common Stock, as fully diluted by the New Mandatory Convertible Debt measured through the conversion date, subject to dilution by the Employee Incentive Plan, the Rights Offering, and the Warrants, (c) the Warrants, (d) the cash proceeds of the $35.0 million New Building Note, and (e) the Rights Offering. Holders of general unsecured claims, including the Unsecured Notes, may also be entitled to participate in the Rights Offering under specified circumstances.

Preferred and Common Stock. The Company’s existing 7.0% and 8.5% convertible perpetual preferred stock and common stock will be canceled and released under the Plan without receiving any recovery on account thereof.

Rights Offering. The Restructuring Support Agreement entitles the Debtors to implement a Rights Offering for up to $150.0 million of the New Common Stock at a valuation of the lesser of (a) $1.215 billion or (b) 90% of the equity value under the Plan. The Consenting Creditors are exclusively entitled to purchase the Rights Offering equity until the earlier of 30 days following approval of a disclosure statement by the Bankruptcy Court, 15 days before the date of the confirmation hearing set forth in the disclosure statement order or 90 days after the Chapter 11 filing.

The Plan provides for the following new debt and other instruments:

New First Lien Exit Facility. The New First Lien Exit Facility will have an initial borrowing base of $425.0 million with no borrowing base redeterminations to occur until October 2018 and semiannual borrowing base redeterminations thereafter. The New First Lien Exit Facility will mature on the earlier of March 31, 2020, or 40 months from the Effective Date, with interest payable quarterly at LIBOR plus 4.75% per annum, subject to a 1.00% LIBOR floor. The New First Lien Exit Facility will be secured by (i) first-priority mortgages on at least 95% of the present value of the proved developed producing reserves and 95% of the present value of all proved reserves included in the most recently delivered reserve report, (ii) a first-priority perfected pledge of capital stock of each credit party and their respective wholly owned subsidiaries and (iii) a first-priority security interest in the cash, cash equivalents, deposit, securities and other similar accounts, and a first-priority perfected security interest in substantially all other tangible (other than the Company’s corporate buildings in Oklahoma City) and intangible assets of the credit parties (including but not limited to as-extracted collateral, accounts receivable, inventory, equipment, general intangibles, investment property, intellectual property, real property and the proceeds of the foregoing). The New First Lien Exit Facility is subject to a variety of other terms and conditions including conditions precedent to funding, financial covenants, and various other covenants and representations and warranties.

New Mandatory Convertible Debt. The New Mandatory Convertible Debt will have a principal amount of $300.0 million. The New Mandatory Convertible Debt will mandatorily convert to 46.5% of the New Common Stock no later than four years after the Effective Date or upon the occurrence of certain specified conversion events. The New Mandatory Convertible Debt is subject to being fully or partially secured by springing liens in the same collateral as the New First Lien Exit Facility only upon the occurrence of certain specified litigation events expected to result in a material adverse effect on the business of the reorganized Company.

Warrants. The Warrants to purchase up to 12.5% of the New Common Stock will be exercisable at any time, in whole or in part, until their expiration date for a per share price based upon a $1.625 billion aggregate value of the New Common Stock at the trailing 30-day volume-weighted average price. The expiration date for the Warrants will be six years from the Effective Date.

New Building Note. The New Building Note will have a principal amount of $35.0 million and be secured by first priority mortgages on the Company’s headquarters facility and certain other non-oil and gas real property located in downtown Oklahoma City, Oklahoma. Interest will be payable on the New Building Note at 6% per annum for the first year following the Effective Date, 8% per annum for the second year following the Effective Date, and 10% thereafter through maturity. Interest will be payable in kind from the Effective Date through the earlier of September 30, 2020, 46 months from the

10

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Effective Date or 90 days after the refinancing or repayment of the New First Lien Exit Facility and thereafter in cash. The New Building Note will mature five years after the Effective Date. Under the Restructuring Support Agreement, certain holders of the Unsecured Notes have committed to purchase the New Building Note. On July 14, 2016, the Company conducted an auction for the New Building Note, which auction yielded a winning bid in the amount of $27.0 million in cash.

The Plan contemplates the following additional terms, among others:

Consensual Cash Collateral Use. The Company intends to fund ongoing operations and other cash needs during the Chapter 11 proceedings with cash on hand and cash from operations. Under the RSA, the Consenting Creditors have consented to the use of cash collateral during the Chapter 11 Cases through the effective date of the Plan, subject to certain terms, conditions, and termination events.

Releases. The Plan provides for releases of specified claims held by the Debtors, the Consenting Creditors, and certain other specified parties against one another and for customary exculpations and injunctions.

Employee Incentive Plan. The Employee Incentive Plan contemplates the issuance of up to 10% of pro forma ownership interests in the reorganized Company to officers and/or other employees of the reorganized Company. The Employee Incentive Plan will be subject to approval of the board of directors of the reorganized Company.

Executory Contracts. Subject to certain exceptions, under the Bankruptcy Code, the Debtors may assume, assign, or reject certain executory contracts and unexpired leases subject to the approval of the Bankruptcy Court and certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Counterparties to rejected contracts or leases may assert unsecured claims in the Bankruptcy Court against the applicable Debtors’ estate for such damages. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease with the Debtors, including where applicable a quantification of the Company’s obligations under any such executory contract or unexpired lease of the Debtors, is qualified by any overriding rejection rights the Company has under the Bankruptcy Code.

Potential Claims. The Debtors have filed with the Bankruptcy Court schedules and statements setting forth, among other things, the assets and liabilities of each of the Debtors, subject to the assumptions filed in connection therewith. These schedules and statements may be subject to further amendment or modification after filing. Certain holders of pre-petition claims that are not governmental units were required to file proofs of claim by the deadline for general claims, (the “bar date”), which was set by the Bankruptcy Court as July 22, 2016.

Differences between amounts scheduled by the Debtors and claims by creditors are being investigated and will be reconciled and resolved to within an immaterial amount in connection with the claims resolution process. In light of the expected number of creditors, the claims resolution process may take considerable time to complete and likely will continue after the Debtors emerge from bankruptcy. Accordingly, the ultimate number and amount of allowed claims is not presently known, nor can the ultimate recovery with respect to allowed claims be presently asserted.

Reorganization Expenses. The Company and the Debtors have incurred and will continue to incur significant costs associated with the reorganization, primarily legal and professional fees. The amount of these costs, which are being expensed as incurred, are expected to significantly affect the Company’s results of operations. In accordance with applicable guidance, certain costs associated with the bankruptcy proceedings have been recorded as reorganization items within our accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016. For additional information, see “Reorganization Items” below.

Financial Statement Classification of Liabilities Subject to Compromise. The accompanying unaudited condensed consolidated balance sheet as of June 30, 2016, includes amounts classified as liabilities subject to compromise, which represent liabilities the Company anticipates will be allowed as claims in the Chapter 11 case. These amounts represent the Debtors’ current estimate of known or potential obligations to be resolved in connection with the Chapter 11 proceedings, and may differ from actual future settlement amounts paid. Differences between liabilities estimated and claims filed, or to be filed, will be investigated

11

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


and resolved in connection with the claims resolution process. The Company will continue to evaluate these liabilities throughout the Chapter 11 process and adjust amounts as necessary. Such adjustments may be material.

Liabilities subject to compromise includes amounts related to the rejection of various executory contracts and unexpired leases. Additional amounts may be included in liabilities subject to compromise in future periods if additional executory contracts and unexpired leases are rejected. Conversely, to the extent that executory contracts or unexpired leases are not rejected and are instead assumed, liabilities associated therewith would constitute post-petition liabilities which will be satisfied in full under the Plan. The nature of many of the potential claims arising under the Debtors’ executory contracts and unexpired leases has not been determined at this time, and therefore, such claims are not reasonably estimable at this time and may be material.

The following table summarizes the components of liabilities subject to compromise included on the Company’s unaudited condensed consolidated balance sheet as of June 30, 2016 (in thousands):
 
June 30,
2016
Current maturities of long-term debt and accrued interest
$
4,179,185

Accounts payable and accrued expenses
189,766

Other long-term liabilities
8,660

Liabilities subject to compromise
$
4,377,611


Reorganization Items. The Company and the Debtors have incurred significant one-time costs associated with the reorganization, primarily the write-off of unamortized debt issuance costs and related unamortized debt premiums, discounts and derivatives, as well as adjustments for estimated allowable claims related to the Company’s legal proceedings and executory contracts approved for rejection by the Bankruptcy Court, and professional fees incurred subsequent to the Chapter 11 filings for the restructuring process. These costs, which are being expensed as incurred, significantly impact the Company’s results of operations.

The following table summarizes the components included in reorganization items in the Company’s accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016 (in thousands):
Unamortized debt premiums and discounts
 
$
(95,296
)
Unamortized debt issuance costs
 
(63,287
)
Debt holder conversion feature and mandatory prepayment feature - PGC Senior Secured Notes
 
9,777

Estimated litigation claims
 
(20,478
)
Rejection of executory contracts
 
(18,161
)
Ad valorem and franchise taxes
 
(3,494
)
Legal and professional fees and expenses
 
(10,759
)
Adjustment of pre-petition accounts payable settlements
 
780

Reorganization items
 
$
(200,918
)

A non-cash charge to write-off all of the unamortized debt issuance costs and associated discounts and premiums, as applicable, related to the senior credit facility, Senior Secured Notes and the Unsecured Notes is included in reorganization items as these debt instruments are expected to be impacted by the Chapter 11 proceedings. Legal and professional fees and expenses included in reorganization items represent post-petition costs incurred as a result of the restructuring process and are included in accounts payable and accrued expenses on the accompanying unaudited condensed consolidated balance sheet at June 30, 2016.


12

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


2. Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements as of December 31, 2015 have been derived from the audited financial statements contained in the Company’s 2015 Form 10-K. The unaudited interim condensed consolidated financial statements have been prepared in accordance with the accounting policies stated in the audited consolidated financial statements contained in the 2015 Form 10-K. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the accompanying financial statements include all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, necessary to state fairly the information in the Company’s accompanying unaudited condensed consolidated financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the 2015 Form 10-K. The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. Given risks involved with respect to the Chapter 11 proceedings, there is no assurance that the Company will emerge from bankruptcy proceedings as a going concern, and the realization of assets and satisfaction of liabilities, without substantial adjustments and/or changes in ownership, are also subject to uncertainty. As a result of these uncertainties, management has concluded that there is substantial doubt regarding the Company’s ability to continue as a going concern as it is currently structured.

The Company has applied Accounting Standards Codification (“ASC”) 852 “Reorganizations” in preparing the unaudited condensed consolidated financial statements. ASC 852 requires that the financial statements, for periods subsequent to the Chapter 11 filings, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Accordingly, certain revenues, expenses, realized gains and losses and provisions for losses that are realized or incurred during the bankruptcy proceedings, including losses related to executory contracts that have been approved for rejection by the Bankruptcy Court, and unamortized deferred financing costs, premiums, discounts and derivatives associated with debt classified as liabilities subject to compromise, are recorded as reorganization items. In addition, pre-petition obligations that may be impacted by the Chapter 11 process have been classified on the unaudited condensed consolidated balance sheet at June 30, 2016 as liabilities subject to compromise. These liabilities are reported at the amounts the Company anticipates will be allowed by the Bankruptcy Court, even if they may be settled for lesser amounts. See Note 1 for more information regarding reorganization items.

While operating as debtors in possession under the Bankruptcy Code, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities in amounts other than those reflected in the consolidated financial statements, subject to the approval of the Bankruptcy Court or otherwise as permitted in the ordinary course of business. Further, a plan or reorganization could materially change the amounts and classification in the Company’s historical financial statements.

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned or majority owned subsidiaries. During the six-month period ended June 30, 2015, the Company fully consolidated the activities of the Royalty Trusts as variable interest entities (“VIEs”) for which the Company was the primary beneficiary. Activities of the Royalty Trusts attributable to third party ownership were presented as noncontrolling interest and included as a component of equity in the condensed consolidated balance sheet as of December 31, 2015. As discussed further below, during the six-month period ended June 30, 2016, the Company proportionately consolidated the activities of the Royalty Trusts. All significant intercompany accounts and transactions have been eliminated in consolidation.

Significant Accounting Policies. For a description of the Company’s significant accounting policies, see Note 1 of the consolidated financial statements included in the 2015 Form 10-K as well as the items noted below.

Reclassifications. Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. These reclassifications have no effect on the Company’s previously reported results of operations.

Use of Estimates. The preparation of the accompanying unaudited condensed consolidated financial statements in conformity with GAAP 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.

    


13

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


The more significant areas requiring the use of assumptions, judgments and estimates include: oil, natural gas and natural gas liquids (“NGL”) reserves; impairment tests of long-lived assets; 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; income taxes; valuation of derivative instruments; contingencies; accrued revenue and related receivables; and estimation of liabilities subject to compromise. Although management believes these estimates are reasonable, actual results could differ significantly.

Recent Accounting Pronouncements. In February 2015, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2015-02, “Amendments to the Consolidation Analysis,” which makes changes to both the variable interest model and the voting model, affecting all reporting entities involved with limited partnerships or similar entities, particularly industries such as the oil and gas, transportation and real estate sectors. The guidance simplifies and improves current guidance by placing more emphasis on risk of loss when determining a controlling financial interest and reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a VIE. The requirements of the guidance were effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. The Company adopted this guidance on January 1, 2016, which resulted in the determination that the Royalty Trusts no longer qualify as VIEs. As a result, for the three and six-month periods ended June 30, 2016, the Company proportionately consolidated the activities of the Royalty Trusts. Under the proportionate consolidation method, the Company accounts for only its share of each Royalty Trust’s asset, liabilities, revenues and expenses within the appropriate classifications in the accompanying unaudited condensed consolidated financial statements. The Company adopted the provisions of ASU 2015-02 on a modified retrospective approach by recording a cumulative-effect adjustment as of January 1, 2016 that resulted in decreases of approximately $243.4 million to total assets and approximately $510.2 million to noncontrolling interest and increases of approximately $9.7 million to accounts payable and approximately $257.1 million to retained earnings.

In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability, consistent with the presentation of a debt discount. The guidance is effective on a retrospective basis for annual periods beginning after December 15, 2015, including interim periods within that reporting period, with early adoption permitted. The guidance was adopted on January 1, 2016, and resulted in a decrease of approximately $69.1 million to other assets and current maturities of long-term debt in the accompanying unaudited condensed consolidated balance sheet for the year ended December 31, 2015, with no impact to the accompanying unaudited condensed consolidated statements of operations. See Note 1 for treatment and classification of unamortized debt issuance costs subsequent to filing the Chapter 11 petitions. In August 2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” which excludes line-of-credit debt issuance costs from the scope of ASU 2015-03. The guidance was adopted on January 1, 2016 in conjunction with the adoption of ASU 2015-03 by making an accounting policy election to present line-of-credit arrangement debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit. The adoption of this policy resulted in no impact to the consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted. In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Certain of the provisions also amend or supersede existing guidance applicable to the recognition of a gain or loss on transfers of nonfinancial assets that are not an output of an entity’s ordinary activities, including sales of property, plant and equipment and real estate. In August, 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date of ASU 2014-09 to annual periods beginning after December 15, 2017, and interim periods within that reporting period. Early adoption is permitted, and either a full retrospective or modified approach may be used for adoption. The Company is currently evaluating the effect, if any, that the updated standard will have on its consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern,” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance is effective

14

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company evaluated the effect of the guidance and has determined that it will have no impact on its related disclosures.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires companies to recognize the assets and liabilities for the rights and obligations created by long-term leases of assets on the balance sheet. The guidance requires adoption by application of a modified retrospective transition approach for existing long-term leases and is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. The Company is currently evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-06, “Contingent Put and Call Options in Debt Instruments” which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts, which is one of the criteria for bifurcating an embedded derivative. The amendments eliminate diversity in practice in assessing embedded contingent call (put) options in debt instruments. The guidance requires adoption by application of a modified retrospective approach to existing and future debt instruments effective for fiscal years after December 15, 2016, including interim periods within those years.  Early adoption is permitted. The Company is currently evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “Improvements to Share-Based Payment Accounting” which was part of the FASB simplification initiative and involves several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance requires adoption by various application methods. All amendments must be adopted in the same period. The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those years. Early adoption is permitted. The Company is currently evaluating the effect that the guidance will have on its consolidated financial statements and related disclosures.

3. Divestiture

Divestiture of West Texas Overthrust (the “WTO”) Properties and Release from Treating Agreement. On January 21, 2016, the Company paid $11.0 million in cash and transferred ownership of substantially all of its oil and natural gas properties and midstream assets located in the Piñon field in the WTO to Occidental Petroleum Corporation (“Occidental”) and was released from all past, current and future claims and obligations under an existing 30 year treating agreement between the companies. As of the date of the transaction, the Company had accrued approximately $111.9 million for penalties associated with shortfalls in meeting its delivery requirements under the agreement since it became effective in late 2012. The Company recognized a loss of approximately $89.1 million on the termination of the treating agreement and the cease-use of transportation agreements that supported production from the Piñon field and reduced its asset retirement obligations associated with its oil and natural gas properties by $34.1 million.


15

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


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 following levels of the fair value hierarchy:

Level 1
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
 
 
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.
 
 
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 of 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 each level of the hierarchy as of June 30, 2016 and December 31, 2015, as described below.

Level 1 Fair Value Measurements

Investments. The fair value of investments, consisting of assets attributable to the Company’s non-qualified deferred compensation plan, is based on quoted market prices. Investments are included in other assets in the accompanying unaudited condensed consolidated balance sheets.

Level 2 Fair Value Measurements

Commodity Derivative Contracts. The fair values of the Company’s oil and natural gas fixed price swaps and oil and natural gas collars 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.

Mandatory Prepayment Feature - PGC Senior Secured Notes. In conjunction with the acquisition of and termination of a gathering agreement with Piñon Gathering Company, LLC (“PGC”) in October 2015, the Company issued the PGC Senior Secured Notes with a $78.0 million principal value. These notes bear payment terms identical to and are secured by the same assets as the 8.75% Senior Secured Notes due 2020 issued by the Company in June 2015 as discussed in Note 6. The 8.75% Senior Secured Notes due 2020 issued in June 2015 and PGC Senior Secured Notes (collectively, “Senior Secured Notes”) mature on June 1, 2020; provided, however, that if on October 15, 2019, the aggregate outstanding principal amount of the Company’s unsecured 8.75% Senior Notes due 2020 exceeds $100.0 million, the Senior Secured Notes mature on October 16, 2019. The issuance of the PGC Senior Secured Notes at a substantial discount, as discussed in Note 6 and Note 7, resulted in the treatment of the mandatory prepayment feature contained in those notes as an embedded derivative that met the criteria to be bifurcated from its host contract, the PGC Senior Secured Notes, and accounted for separately from those notes. Prior to the Chapter 11 filings, the mandatory prepayment feature contained in the PGC Senior Secured Notes was recorded at fair value each reporting period based upon values determined through the use of discounted cash flow models of the PGC Senior Secured Notes both (i) with the mandatory prepayment feature and (ii) excluding the mandatory prepayment feature. Subsequent to the Chapter 11 filings in May 2016, the value of the mandatory repayment feature of $2.5 million was written off and is included in reorganization items in the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016.


16

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Level 3 Fair Value Measurements

Commodity Derivative Contracts. The fair values of the Company’s natural gas basis swaps are based upon quotes obtained from counterparties to the derivative contracts. These values were reviewed internally for reasonableness through the use of a discounted cash flow model using non-exchange traded regional pricing information. Additionally, the Company applied a weighted average credit default risk rating factor for its counterparties or gave effect to its credit risk, as applicable, in determining the fair value of these commodity derivative contracts. The significant unobservable input used in the fair value measurement of the Company’s natural gas basis swaps is the estimate of future natural gas basis differentials. Significant increases (decreases) in natural gas basis differentials could result in a significantly higher (lower) fair value measurement. The significant unobservable inputs and the range and weighted average of these inputs used in the fair value measurements of the Company’s natural gas basis swaps at June 30, 2016 and December 31, 2015 are included in the table below.
Unobservable Input
 
Range
 
Weighted Average
 
Fair Value
 
 
(Price per Mcf)
 
(In thousands)
June 30, 2016
 
 
 
 
 
 
 
 
Natural gas basis differential forward curve
 
$
(0.09
)
$
(0.26
)
 
$
(0.19
)
 
$
(356
)
December 31, 2015
 
 
 
 
 
 
 
 
Natural gas basis differential forward curve
 
$
(0.06
)
$
(0.28
)
 
$
(0.22
)
 
$
(1,748
)

Debt Holder Conversion Feature. The Company’s 8.125% Convertible Senior Notes due 2022 and 7.5% Convertible Senior Notes due 2023 (collectively, the “Convertible Senior Unsecured Notes” and together with the Senior Unsecured Notes, the “Unsecured Notes”), each contain a conversion option whereby, prior to the Chapter 11 filings, the Convertible Senior Unsecured Notes holders had the option to convert the notes into shares of Company common stock. Further, with respect to any such conversions prior to the second anniversary of the issuance of the Convertible Senior Unsecured Notes, in addition to the shares deliverable upon conversion, holders were entitled to receive an early conversion payment. These conversion features were identified as embedded derivatives that met the criteria to be bifurcated from their host contracts, the Convertible Senior Unsecured Notes, and accounted for separately from those notes. Prior to the Chapter 11 filings, the holder conversion features were recorded at fair value each reporting period. Subsequent to the Chapter 11 filings in May 2016, the value of the debt holder conversion features of $7.3 million was written off and is included in reorganization items in the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016.

The fair values of the holder conversion features were determined using a binomial lattice model based on certain assumptions including (i) the Company’s stock price, (ii) risk-free rate, (iii) recovery rate, (iv) hazard rate and (v) expected volatility. The significant unobservable input used in the fair value measurement of the conversion features is the hazard rate, an estimate of default probability. Significant increases (decreases) in the hazard rate could result in significantly (lower) higher fair value measurement. The significant unobservable inputs and range and weighted average of these inputs used in the fair value measurement of the conversion options at December 31, 2015 are included in the table below.
Unobservable Input
 
Range
 
Weighted Average
 
Fair Value
 
 
 
 
(In thousands)
Debt conversion feature hazard rate
 
114.0
%
135.2
%
 
119.2
%
 
$
29,355


See further discussion of the Convertible Senior Unsecured Notes at Note 6.

Guarantee. The Company guaranteed on behalf of Fieldwood Energy, LLC (“Fieldwood”) certain plugging and abandonment obligations associated with the sale of its Gulf of Mexico and Gulf Coast oil and natural gas properties (the “Gulf Properties”) from the date of closing in February 2014 until the Company was released from the guarantee in the third quarter of 2015. The fair value of this guarantee was based on the present value of estimated future payments for plugging and abandonment obligations associated with the Gulf Properties, adjusted for the cumulative probability of Fieldwood’s default prior to the Company’s release by the Bureau of Ocean Energy Management from its obligation under the guarantee (3.71% at December 31, 2014). The discount and probability of default rates were based upon inputs that are readily available in the public market, such as historical option adjusted spreads of the Company’s senior notes, which are publicly traded, and historical default rates of publicly traded companies with credit ratings similar to Fieldwood. The significant unobservable input used in the fair value

17

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


measurement of the guarantees was the estimate of future payments for plugging and abandonment of approximately $372.0 million, which was developed based upon third-party quotes and then-current actual costs.

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):

June 30, 2016
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$

 
$
21,000

 
$

 
$

 
$
21,000

Investments
6,647

 

 

 

 
6,647

 
$
6,647

 
$
21,000

 
$

 
$

 
$
27,647

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$

 
$

 
$
356

 
$

 
$
356

 
$

 
$

 
$
356

 
$

 
$
356


December 31, 2015
 
Fair Value Measurements
 
Netting(1)
 
Assets/Liabilities at Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$

 
$
85,524

 
$

 
$
(1,175
)
 
$
84,349

Investments
10,106

 

 

 

 
10,106

 
$
10,106

 
$
85,524

 
$

 
$
(1,175
)
 
$
94,455

Liabilities
 
 
 
 
 
 
 
 
 
Commodity derivative contracts
$

 
$

 
$
1,748

 
$
(1,175
)
 
$
573

Debt holder conversion feature

 

 
29,355

 

 
29,355

Mandatory prepayment feature - PGC Senior Secured Notes

 
2,941

 

 

 
2,941

 
$

 
$
2,941

 
$
31,103

 
$
(1,175
)
 
$
32,869

____________________
(1)Represents the effect of netting assets and liabilities for counterparties with which the right of offset exists.

Level 3 - Commodity Derivative Contracts. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for commodity derivative contracts during the three and six-month periods ended June 30, 2016 and 2015 (in thousands): 
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2016
 
2015
 
2016
 
2015
Beginning balance
 
$
(1,162
)
 
$
1,332

 
$
(1,748
)
 
$
350

Purchases
 

 

 

 
(1,847
)
Gain (loss) on commodity derivative contracts
 
806

 
(3,539
)
 
1,392

 
(710
)
Ending balance
 
$
(356
)
 
$
(2,207
)
 
$
(356
)
 
$
(2,207
)

Losses due to changes in fair value of the Company’s Level 3 commodity derivative contracts have been included in loss (gain) on derivative contracts in the accompanying unaudited condensed consolidated statements of operations. See Note 7 for further discussion of the Company’s derivative contracts.

18

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Level 3 - Debt Holder Conversion Feature. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for debt holder conversion features during the three and six-month periods ended June 30, 2016 (in thousands):
 
 
Three Months Ended June 30, 2016
 
Six Months Ended June 30, 2016
Beginning balance
 
$
7,281

 
$
29,355

Gain on derivative holder conversion feature
 

 
(880
)
Conversions
 

 
(21,194
)
Write off of derivative holder conversion feature to reorganization items
 
(7,281
)
 
(7,281
)
Ending balance
 
$

 
$


Prior to commencement of the Chapter 11 Proceedings, the fair value of the conversion features were determined quarterly with changes in fair value recorded as interest expense.

Level 3 - Guarantee. The table below sets forth a reconciliation of the Company’s Level 3 fair value measurements for the guarantee during the three and six-month periods ended June 30, 2015 (in thousands): 
 
 
Three Months Ended June 30, 2015
 
Six Months Ended June 30, 2015
Beginning balance
 
$
4,791

 
$
5,104

Gain on guarantee
 
(1,055
)
 
(1,368
)
Ending balance
 
$
3,736

 
$
3,736


While in effect, the fair value of the guarantee was determined quarterly with changes in fair value recorded as an adjustment to the full cost pool.

Transfers. The Company recognizes transfers between fair value hierarchy levels as of the end of the reporting period in which the event or change in circumstances causing the transfer occurred. During the three and six-month periods ended June 30, 2016 and 2015, the Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements.

Fair Value of Financial Instruments

The Company measures the fair value of its Senior Secured Notes, its 8.75% Senior Notes due 2020, 7.5% Senior Notes due 2021, 8.125% Senior Notes due 2022, and 7.5% Senior Notes due 2023 (collectively, the “Senior Unsecured Notes”) and the Convertible Senior Unsecured Notes using pricing that is readily available in the public market. The Company classifies these inputs as Level 2 in the fair value hierarchy. The estimated fair values and carrying values of the Company’s senior notes at June 30, 2016 and December 31, 2015 were as follows (in thousands):
 
June 30, 2016 (1)
 
December 31, 2015
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
8.75% Senior Secured Notes
$
544,752

 
$
1,328,000

 
$
403,098

 
$
1,265,814

Senior Unsecured Notes
 
 
 
 
 
 
 
8.75% Senior Notes due 2020
$
24,867

 
$
395,935

 
$
39,740

 
$
389,232

7.5% Senior Notes due 2021
$
43,759

 
$
757,767

 
$
79,812

 
$
751,087

8.125% Senior Notes due 2022
$
30,224

 
$
527,737

 
$
57,749

 
$
518,693

7.5% Senior Notes due 2023
$
33,184

 
$
543,561

 
$
58,799

 
$
534,869

Convertible Senior Unsecured Notes
 
 
 
 
 
 
 
8.125% Convertible Senior Notes due 2022
$
102

 
$
40,694

 
$
44,199

 
$
78,290

7.5% Convertible Senior Notes due 2023
$
118

 
$
46,900

 
$
15,125

 
$
24,393

____________________
(1)
Includes write-off of discounts and derivatives associated with the 8.75% Senior Secured Notes, 8.75% Senior Notes due 2020, 7.5% Senior Notes due 2023, 8.125% Senior Notes due 2022, discounts and derivatives associated with the

19

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Convertible Senior Notes due 2022 and 7.5% Convertible Senior Notes due 2023, and premium associated with the 7.5% Senior Notes due 2021 due to the Company's Chapter 11 proceedings.

All of the Company’s senior notes are stated at carrying value, which has been adjusted to par value, in liabilities subject to compromise on the accompanying unaudited condensed consolidated balance sheet as of June 30, 2016. See Note 6 for discussion of the Company’s debt.

5. Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands): 
 
June 30,
2016
 
December 31,
2015
Oil and natural gas properties
 
 
 
Proved(1)
$
12,029,734

 
$
12,529,681

Unproved
338,573

 
363,149

Total oil and natural gas properties
12,368,307

 
12,892,830

Less accumulated depreciation, depletion and impairment
(11,313,610
)
 
(11,149,888
)
Net oil and natural gas properties capitalized costs
1,054,697

 
1,742,942

Land
5,210

 
14,260

Non-oil and natural gas equipment(2)
306,989

 
373,687

Buildings and structures(3)
230,685

 
227,673

Total
542,884

 
615,620

Less accumulated depreciation and amortization
(122,329
)
 
(123,860
)
Other property, plant and equipment, net
420,555

 
491,760

Total property, plant and equipment, net
$
1,475,252

 
$
2,234,702

____________________
(1)
Includes cumulative capitalized interest of approximately $50.9 million and $48.9 million at June 30, 2016 and December 31, 2015, respectively.
(2)
Includes cumulative capitalized interest of approximately $4.3 million at both June 30, 2016 and December 31, 2015.
(3)
Includes cumulative capitalized interest of approximately $20.4 million at both June 30, 2016 and December 31, 2015.

The Company reduced the net carrying value of its oil and natural gas properties by $251.0 million and $359.4 million during the three and six-month periods ended June 30, 2016, as a result of its quarterly full cost ceiling analysis. See Note 2 for discussion of the proportionate consolidation of the Royalty Trusts for the three and six-month periods ended June 30, 2016.

The Company disposed of certain drilling and oilfield services assets previously classified as held for sale during 2016 and recorded losses on the sale of those assets of $2.7 million and $1.6 million for the three and six-month periods ended June 30, 2016, which are included in gain on sale of assets in the accompanying unaudited condensed consolidated statements of operations. At June 30, 2016, the Company has remaining drilling and oilfield services assets with a net book value of $1.4 million classified as held for sale in the other current assets line of the accompanying unaudited condensed consolidated balance sheet, and expects to dispose of these assets prior to the fourth quarter of 2016.


20

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


6. Debt

Chapter 11 Proceedings

The Chapter 11 filings constituted an event of default with respect to the Company’s existing debt obligations. As a result of the Chapter 11 filings, the obligations arising under the Company's pre-petition senior credit facility, Senior Secured Notes, Senior Unsecured Notes and Convertible Senior Unsecured Notes became immediately due and payable, but the enforcement of any obligations thereunder was automatically stayed as a result of the Chapter 11 filings.

Reclassification of Debt. The balance outstanding under the senior credit facility of $448.9 million, par value of the Senior Secured Notes of $1.3 billion, par value of the Senior Unsecured Notes of $2.2 billion and par value of the Convertible Senior Unsecured Notes of $87.6 million have been reclassified as liabilities subject to compromise on the accompanying unaudited condensed consolidated balance sheet at June 30, 2016. Additionally, a non-cash charge to write off all of the related unamortized debt issuance costs and associated discounts and premiums of approximately $158.6 million and the fair value of associated debt derivatives of $9.8 million as of May 16, 2016 related to the Company's debt is included in reorganization items in the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016, as discussed in Note 1.

See Note 5 for the fair values and carrying values of the senior notes outstanding at June 30, 2016 and December 31, 2015, respectively. As of December 31, 2015, there were no amounts outstanding under the senior credit facility, and the carrying values of the senior notes were net of unamortized discounts, premiums, and deferred costs of $342.6 million, and included the fair value of debt derivatives of $32.3 million.

Senior Credit Facility

The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated its obligations under the senior credit facility. Due to the Chapter 11 proceedings, however, most acts to exercise remedies under the Company’s credit facility, including those related to defaults of various financial covenants and ratios, were stayed as of May 16, 2016, the date of the Chapter 11 petition filing, and continue to be stayed. No further funds are available to the Company under the credit facility.

The terms of the senior credit facility contain certain financial covenants, including maintenance of agreed upon levels for the (a) ratio of total secured debt under the senior credit facility to earnings before interest, taxes, depreciation and amortization (“EBITDA”), which could not exceed 2.00:1.00 at each quarter end and (b) ratio of current assets to current liabilities, which must be at least 1.0:1.0 at each quarter end. For the purpose of the current ratio calculation, any amounts available to be drawn under the senior credit facility are included in current assets, and unrealized assets and liabilities resulting from mark-to-market adjustments on the Company’s commodity derivative contracts are disregarded. The senior credit facility matures by its terms on the earlier of March 2, 2020 and 91 days prior to the earliest date of any maturity under or mandatory offer to repurchase the Company’s currently outstanding notes.

The senior credit facility also contains various covenants that limit the ability of the Company and certain of its subsidiaries to: grant certain liens; make certain loans and investments; make distributions; redeem stock; redeem or prepay debt; merge or consolidate with or into a third party; or engage in certain asset dispositions, including a sale of all or substantially all of the Company’s assets. The terms of the senior credit facility allow the Company to redeem or purchase outstanding Senior Unsecured Notes for up to $275.0 million in cash subject to certain limitations. Additionally, the senior credit facility limits the ability of the Company and certain of its subsidiaries to incur additional indebtedness with certain exceptions. See Note 1 for information regarding the Company’s Bankruptcy Petitions and the Chapter 11 proceedings.

The obligations under the senior credit facility are guaranteed by certain Company subsidiaries and are required to be secured by first priority liens on all shares of capital stock of certain of the Company’s material present and future subsidiaries, all of the Company’s intercompany debt, and certain of the Company’s other assets, including proved oil, natural gas and NGL reserves representing at least 80.0% of the discounted present value (as defined in the senior credit facility) of proved oil, natural gas and NGL reserves of the Company.

At the Company’s election, interest under the senior credit facility, as amended, is determined by reference to (a) the ICE Benchmark Administration Limited LIBOR (“LIBOR”) plus an applicable margin between 1.750% and 2.750% per annum or (b) the “base rate,” which is the highest of (i) the federal funds rate plus 0.5%, (ii) the prime rate published by Royal Bank of

21

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Canada under the senior credit facility or (iii) the one-month Eurodollar rate (as defined in the senior credit facility) plus 1.00% per annum, plus, in each case under scenario (b), an applicable margin between 0.750% and 1.750% per annum. Interest is payable quarterly for base rate loans and at the applicable maturity date for LIBOR loans, except that if the interest period for a LIBOR loan is six months or longer, interest is paid at the end of each three-month period. Quarterly, the Company pays commitment fees assessed at an annual rate of 0.5% on any available portion of the senior credit facility.

On March 11, 2016, the administrative agent notified the Company that the lenders had elected to reduce the borrowing base to $340.0 million from $500.0 million pursuant to a special redetermination. On April 20, 2016, the Company submitted for consideration by its lenders additional properties to serve as collateral under the senior credit facility to support a borrowing base of $500.0 million. On May 11, 2016, in connection with the execution of the RSA and in exchange for waivers from the requisite percentage of lenders with respect to certain specified defaults and events of defaults under the senior credit facility, the Company permanently repaid $40.0 million of borrowings to the lenders, which payment correspondingly reduced the lenders’ commitments. See Note 1 for further discussion of the senior credit facility and the plan of reorganization.

The senior credit facility had $448.9 million drawn at June 30, 2016 and had $10.2 million in outstanding letters of credit. Additionally, at June 30, 2016, the Company had incurred $1.3 billion in junior lien debt subject to an intercreditor agreement as a result of the issuance of Senior Secured Notes in June 2015 and the PGC Senior Secured Notes in October 2015.

Senior Secured Notes

The Company issued $1.25 billion of 8.75% Senior Secured Notes due 2020 in June 2015. Net proceeds from the issuance were approximately $1.21 billion after deducting offering expenses, a portion of which was used to repay amounts outstanding at that time under the Company’s senior credit facility. The Senior Secured Notes were issued to qualified institutional buyers eligible under Rule 144A of the Securities Act and to persons outside the United States under Regulation S of the Securities Act.

Additionally, the Company issued $78.0 million par value of the PGC Senior Secured Notes in conjunction with the acquisition of and termination of a gathering agreement with PGC in October 2015. Because the PGC Senior Secured Notes were issued as partial consideration for the acquisition and termination, these notes were recorded at fair value of approximately $50.3 million, which included mandatory prepayment feature liabilities and a discount. Fair value at issuance was determined based upon the then-current market value of the Senior Secured Notes. The unamortized portions of the discount and the carrying value of the mandatory prepayment feature as of the date of the Chapter 11 filings, May 16, 2016, were written off to reorganization items on the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016 as noted above.

The Company accrued interest on its Senior Secured Notes at a fixed rate of 8.75% prior to the Chapter 11 filings, with no interest accrued subsequent to the filings. The Senior Secured Notes are by their terms redeemable, in whole or in part, prior to their maturity at specified redemption prices and are jointly and severally guaranteed unconditionally, in full, on a second-priority secured basis by certain of the Company’s wholly owned subsidiaries.

The Senior Secured Notes are secured by second-priority liens on all of the Company’s assets that secure the senior credit facility on a first-priority basis; provided, however, the security interest in those assets that secure the Senior Secured Notes and the guarantees are contractually subordinated to liens thereon that secure the credit facility and certain other permitted indebtedness. Consequently, the Senior Secured Notes and the guarantees are effectively subordinated to the credit facility and such other indebtedness to the extent of the value of such assets.

Maturity Date and Mandatory Prepayment Feature. Pursuant to the indenture, the Senior Secured Notes mature on June 1, 2020; provided, however, that if on October 15, 2019, the aggregate outstanding principal amount of the unsecured 8.75% Senior Notes due 2020 exceeds $100.0 million, the Senior Secured Notes mature on October 16, 2019. See further discussion of the mandatory prepayment feature Note 4 and Note 7, which with respect to the PGC Senior Secured Notes was an embedded derivative that was accounted for separately from these notes, prior to being written-off to reorganization items on the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016, as discussed in Note 1.

Indenture. The indenture governing the Senior Secured Notes contains covenants that restrict the Company’s ability to take a variety of actions, including limitations on the payment of dividends, incurrence of indebtedness, create liens, enter into consolidations or mergers, purchase or redeem stock or subordinated or unsecured indebtedness, certain dispositions and transfers

22

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


of assets, transactions with related parties, make investments and refinance certain indebtedness. The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company’s obligations under its Senior Secured Notes. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. See Note 1 for additional details about the Company’s Bankruptcy Petitions and the Chapter 11 proceedings.

Senior Unsecured Notes

The Company accrued interest on its Senior Unsecured Notes at a fixed rate through the date of the Chapter 11 filings, with no interest accrued subsequent to the filings. The Senior Unsecured Notes are by their terms redeemable, in whole or in part, prior to their maturity at specified redemption prices and are jointly and severally guaranteed unconditionally, in full, on an unsecured basis by certain of the Company’s wholly owned subsidiaries. See Note 14 for condensed financial information of the subsidiary guarantors. Certain of the Senior Unsecured Notes were issued at a discount or a premium. Prior to the Chapter 11 filings, the discount or premium was amortized to interest expense over the term of the respective series of Senior Unsecured Notes. The unamortized portions of the discount or premium as of the date of the Chapter 11 filings, May 16, 2016, were written off to reorganization items on the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016 as noted above.

The unamortized portion of the debt issuance costs associated with the Senior Unsecured Notes as of the date of the Chapter 11 filings, May 16, 2016, was written off to reorganization items on the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016 as noted above.

Indentures. Each of the indentures governing the Company’s Senior Unsecured Notes contains covenants that restrict the Company’s ability to take a variety of actions, including limitations on the incurrence of indebtedness, payment of dividends, investments, asset sales, certain asset purchases, transactions with related parties and consolidations or mergers. The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company’s obligations under its Senior Unsecured Notes. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default. See Note 1 for additional details about the Company’s Bankruptcy Petitions and the Chapter 11 proceedings.

Convertible Senior Unsecured Notes
    
The Convertible Senior Unsecured Notes were issued in conjunction with exchanges and repurchases of Senior Unsecured Notes that took place in August and October 2015. The Convertible Senior Unsecured Notes are guaranteed by the same guarantors that guarantee the Senior Unsecured Notes and are subject to covenants and bear payment terms substantially identical to those of the corresponding series of Senior Unsecured Notes of similar tenor, other than the conversion features, described further below, and the extension of the final maturity by one day. The Company accrued interest on its Convertible Senior Unsecured Notes at a fixed rate through the date of the Chapter 11 filings, with no interest accrued subsequent to the filings. The transactions were determined to be an extinguishment of each of the Senior Unsecured Notes exchanged. As such, the newly-issued Convertible Senior Unsecured Notes were recorded at fair value on the date of issuance.

The Company’s filing of the Bankruptcy Petitions constitutes an event of default that accelerated the Company’s obligations under its Convertible Senior Unsecured Notes. Under the Bankruptcy Code, the creditors under these debt agreements are stayed from taking any action against the Company as a result of an event of default, and further conversions of the Convertible Senior Unsecured Notes into shares of the Company’s common stock were also stayed. See Note 1 for additional details about the Company’s Bankruptcy Petitions and the Chapter 11 Cases.

Conversions to Common Stock. During the six-month period ended June 30, 2016, holders of $200.5 million aggregate principal amount ($67.4 million net of discount and including holders’ conversion feature) of 8.125% Convertible Senior Notes due 2022 and $31.6 million aggregate principal amount ($10.4 million net of discount and holders’ conversion feature) of 7.5% Convertible Senior Notes due 2023 exercised conversion options applicable to those notes, resulting in the issuance of approximately 84.4 million shares of Company common stock and aggregate cash payments of $33.5 million for accrued interest and early conversion payments. The conversions resulted in a gain on extinguishment of debt totaling $41.3 million, including the write off of $4.3 million of net unamortized debt issuance costs, which is included in other income on the unaudited condensed consolidated statement of operations for the six-month period ended June 30, 2016. There were no conversions during the three-month period ended June 30, 2016.

23

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


7. Derivatives

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts at fair value. Changes in derivative fair values are recognized in earnings.

Chapter 11 Proceedings

Both a default by the Company under its senior credit facility and a Chapter 11 filing by the Company constitute defaults under its commodity derivative contracts. As a result, certain commodity derivative contracts were settled in the second quarter of 2016 and prior to their contractual maturities (“early settlements”) after the Chapter 11 filings occurred, resulting in $11.5 million of cash receipts. Additionally, new agreements have been executed with four counterparties for current and future trading purposes.

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. The Company seeks to manage this risk through the use of commodity derivative contracts, which allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil and natural gas sales. 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. Cash settlements and valuation gains and losses on commodity derivative contracts are included in gain on derivative contracts in the unaudited condensed consolidated statements of operations. Commodity derivative contracts are settled on a monthly or quarterly basis. Derivative assets and liabilities arising from the Company’s commodity derivative contracts with the same counterparty that provide for net settlement are reported on a net basis in the consolidated balance sheets. At June 30, 2016, the Company’s commodity derivative contracts consisted of fixed price swaps and basis swaps, which are described below:

Fixed price swaps
The Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.
 
 
Basis swaps
The Company receives a payment from the counterparty if the settled price differential is greater than the stated terms of the contract and pays the counterparty if the settled price differential is less than the stated terms of the contract, which guarantees the Company a price differential for oil or natural gas from a specified delivery point.

The Company recorded losses on commodity derivative contracts of $8.0 million and $33.0 million for the three-month periods ended June 30, 2016 and 2015, respectively, which include net cash receipts upon settlement of $32.4 million and $74.4 million, respectively. The Company recorded a loss (gain) on commodity derivative contracts of $5.2 million and $(16.8) million for the six-month periods ended June 30, 2016 and 2015, respectively, which includes net cash receipts upon settlement of $58.0 million and $211.3 million, respectively. Included in the net cash receipts for the three and six-month periods ended June 30, 2016 are $11.5 million of cash receipts related to early settlements.

Master Netting Agreements and the Right of Offset. 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 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 June 30, 2016, the counterparties to the Company’s open commodity derivative contracts consisted of two financial institutions, which are also lenders under the Company’s senior credit facility. The Company is not required to post additional collateral under its commodity derivative contracts as the majority of the counterparties to the Company’s commodity derivative contracts share in the collateral supporting the Company’s senior credit facility. 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 liability positions, the applicable portion of shared collateral under the senior credit facility (in thousands):


24

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


June 30, 2016
 
 
Gross Amounts
 
Gross Amounts Offset
 
Amounts Net of Offset
 
Financial Collateral
 
Net Amount
Assets
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
21,000

 
$

 
$
21,000

 
$

 
$
21,000

Derivative contracts - noncurrent
 

 

 

 

 

Total
 
$
21,000

 
$

 
$
21,000

 
$

 
$
21,000

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
356

 
$

 
$
356

 
$
(356
)
 
$

Derivative contracts - noncurrent
 

 

 

 

 

Total
 
$
356

 
$

 
$
356

 
$
(356
)
 
$


December 31, 2015
 
 
Gross Amounts
 
Gross Amounts Offset
 
Amounts Net of Offset
 
Financial Collateral
 
Net Amount
Assets
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
85,524

 
$
(1,175
)
 
$
84,349

 
$

 
$
84,349

Derivative contracts - noncurrent
 

 

 

 

 

Total
 
$
85,524

 
$
(1,175
)
 
$
84,349

 
$

 
$
84,349

Liabilities
 
 
 
 
 
 
 
 
 
 
Derivative contracts - current
 
$
1,748

 
$
(1,175
)
 
$
573

 
$
(573
)
 
$

Derivative contracts - noncurrent
 

 

 

 

 

Total
 
$
1,748

 
$
(1,175
)
 
$
573

 
$
(573
)
 
$


At June 30, 2016, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps 
 
Notional (MBbls)
 
Weighted Average
Fixed Price
July 2016 - December 2016
552,000

 
$
88.40


Natural Gas Basis Swaps
 
Notional (MMcf)
 
Weighted Average
Fixed Price
July 2016 - December 2016
1,840,000

 
$
(0.38
)

Debt - Embedded Derivatives

Debt Holder Conversion Feature. As discussed further in Note 4 and Note 6, the Convertible Senior Unsecured Notes contain a conversion feature that prior to the Chapter 11 filings was exercisable at the holders’ option. This conversion feature was identified as an embedded derivative as the feature (i) possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, the Convertible Senior Unsecured Notes, and (ii) separate, stand-alone instruments with the same terms would qualify as derivative instruments. As such, the holders’ conversion feature was bifurcated and accounted for separately from the Convertible Senior Unsecured Notes. The holders’ conversion feature was recorded at fair value each reporting period with changes in fair value included in interest expense in the unaudited condensed consolidated statement of operations prior to the Chapter 11 filings, at which time, the remaining value of the holders’ conversion feature was written-off and included in reorganization items on the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016.


25

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


Mandatory Prepayment Feature - PGC Senior Secured Notes. As discussed further in Note 4 and Note 6, the Senior Secured Notes contain a mandatory prepayment feature that prior to the petition date was triggered if the outstanding principal amount of the unsecured 8.75% Senior Notes due 2020 exceeds $100.0 million on October 15, 2019. With respect to the PGC Senior Secured Notes, which were issued at a substantial discount, this mandatory prepayment feature was identified as an embedded derivative as the feature (i) possessed economic characteristics that were not clearly and closely related to the economic characteristics of the host contract, the PGC Senior Secured Notes, and (ii) separate, stand-alone instruments with the same terms would qualify as derivative instruments. As such, the mandatory prepayment feature contained in the PGC Senior Secured Notes was bifurcated and accounted for separately from those notes. The mandatory prepayment feature contained in the PGC Senior Secured notes was recorded at fair value each reporting period with changes in fair value included in interest expense in the accompanying consolidated statement of operations prior to the Chapter 11 filings, at which time, the remaining value of the mandatory prepayment feature was written-off and included in reorganization items on the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016.

Fair Value of Derivatives. 

The following table presents the fair value of the Company’s derivative contracts as of June 30, 2016 and December 31, 2015 on a gross basis without regard to same-counterparty netting (in thousands):
Type of Contract
 
Balance Sheet Classification
 
June 30,
2016
 
December 31,
2015
Derivative assets
 
 
 
 
 
 
Oil price swaps
 
Derivative contracts-current
 
$
21,000

 
$
68,224

Oil collars - three way
 
Derivative contracts-current
 

 
17,300

Derivative liabilities
 
 
 
 
 
 
Natural gas basis swaps
 
Derivative contracts-current
 
(356
)
 
(1,748
)
Debt holder conversion feature
 
Current maturities of long-term debt
 

 
(29,355
)
Mandatory prepayment feature - PGC Senior Secured Notes
 
Current maturities of long-term debt
 

 
(2,941
)
Total net derivative contracts
 
$
20,644

 
$
51,480


See Note 4 for additional discussion of the fair value measurement of the Company’s derivative contracts and Note 6 for discussion of the debt holder conversion feature.


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8. Commitments and Contingencies

Chapter 11 Proceedings

Commencement of the Chapter 11 Cases automatically stayed many of the proceedings and actions against the Company noted below, including actions to collect pre-petition indebtedness or to exercise control over the property of the Company’s bankruptcy estates, and the Company intends to seek authority to pay all general claims in the ordinary course of business notwithstanding the commencement of the Chapter 11 Cases in a manner consistent with the Restructuring Support Agreement. The Plan in the Chapter 11 Cases, if confirmed as contemplated by the Restructuring Support Agreement, will provide for the treatment of claims against the Company’s bankruptcy estates, including pre-petition liabilities that have not otherwise been satisfied or addressed during the Chapter 11 Cases. See Note 1 for further discussion about the Company’s Bankruptcy Petitions and the Chapter 11 Cases.

In connection with the estimation of general unsecured claims asserted in its bankruptcy, the Company is required to establish reserves for litigation matters in amounts that it estimates will be characterized as “allowed” in the claims administration process.  Such amounts include potential settlements that the Company would not entertain outside of the bankruptcy process. In that regard, the Company recorded an adjustment to adjust the reserve for the below described litigation of $20.5 million, which is included in reorganization items in the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016, to bring the total reserves for current anticipated allowed claim amounts for litigation matters to $24.5 million, which is included in liabilities subject to compromise on the accompanying unaudited condensed consolidated balance sheet as of June 30, 2016.

Additionally, effective June 6, 2016, the Bankruptcy Court issued orders allowing the Company to reject nine long-term executory contracts, including two firm transportation service agreements, a drilling carry obligation and various other agreements. Accordingly, the Company recorded an adjustment for the rejected contracts of approximately $18.2 million, which is included in reorganization items in the accompanying unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2016, to bring the total estimated liability for the current anticipated claim amounts related to such contracts to $27.5 million, which is included in liabilities subject to compromise on the accompanying unaudited condensed consolidated balance sheet as of June 30, 2016. See Note 1 for further discussion of reorganization items and liabilities subject to compromise.

Legal Proceedings

On April 5, 2011, Wesley West Minerals, Ltd. and Longfellow Ranch Partners, LP filed suit against the Company and SandRidge Exploration and Production, LLC (collectively, the “SandRidge Entities”) in the 83rd District Court of Pecos County, Texas. The plaintiffs, who have leased mineral rights to the SandRidge Entities in Pecos County, allege that the SandRidge Entities have not properly paid royalties on all volumes of natural gas and CO2 produced from the acreage leased from the plaintiffs. The plaintiffs also allege that the SandRidge Entities have inappropriately failed to pay royalties on CO2 produced from the plaintiffs' acreage that results from the treatment of natural gas at Occidental’s CO2 treatment plant in Pecos County, Texas the (“Century Plant”). The plaintiffs seek approximately $45.5 million in actual damages for the period of time between January 2004 and December 2011, punitive damages and a declaration that the SandRidge Entities must pay royalties on CO2 produced from the plaintiffs' acreage that results from treatment of natural gas at the Century Plant. The Commissioner of the General Land Office of the State of Texas (“GLO”) is named as an additional defendant in the lawsuit as some of the affected oil and natural gas leases described in the plaintiffs' allegations cover mineral classified lands in which the GLO is entitled to one-half of the royalties attributable to such leases. The GLO has filed a cross-claim against the SandRidge Entities asserting the same claims as the plaintiffs with respect to the leases covering mineral classified lands and seeking approximately $13.0 million in actual damages, inclusive of penalties and interest. On February 5, 2013, the Company received a favorable summary judgment ruling that effectively removes a majority of the plaintiffs' and GLO's claims. On April 29, 2013, the court entered an order allowing for an interlocutory appeal of its summary judgment ruling.

The plaintiffs appealed the rulings to the Texas Court of Appeals in El Paso. On November 19, 2014, that court issued its opinion, which affirmed the trial court’s summary judgment rulings in part, but reversing them in part. The Court of Appeals affirmed the summary judgment rulings in the SandRidge Entities’ favor against the GLO. The court also affirmed the summary judgment rulings in the SandRidge Entities’ favor against Wesley West Minerals, Ltd., on the largest oil and gas lease involved in the case, which accounted for much of the total damages the plaintiffs are claiming. The court reversed certain rulings on other leases, thus deciding those matters for the plaintiffs. The parties have petitioned the Supreme Court of Texas for review of the

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Court of Appeals’ decision. The Company intends to continue to defend the remaining issues in the trial court, as well as future appellate proceedings.

Between December 2012 and March 2013, seven putative shareholder derivative actions were filed in state and federal court in Oklahoma:

Arthur I. Levine v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on December 19, 2012 in the U.S. District Court for the Western District of Oklahoma
Deborah Depuy v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 22, 2013 in the U.S. District Court for the Western District of Oklahoma
Paul Elliot, on Behalf of the Paul Elliot IRA R/O, v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant filed on January 29, 2013 in the U.S. District Court for the Western District of Oklahoma
Dale Hefner v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 4, 2013 in the District Court of Oklahoma County, Oklahoma
Rocky Romano v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on January 22, 2013 in the District Court of Oklahoma County, Oklahoma
Joan Brothers v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on February 15, 2013 in the U.S. District Court for the Western District of Oklahoma
Lisa Ezell, Jefferson L. Mangus, and Tyler D. Mangus v. Tom L. Ward, et al., and SandRidge Energy, Inc., Nominal Defendant - filed on March 22, 2013 in the U.S. District Court for the Western District of Oklahoma

Each lawsuit identified above was filed derivatively on behalf of the Company and names as defendants current and former directors of the Company. The Hefner lawsuit also names as defendants certain current and former directors and senior executive officers of the Company. All seven lawsuits assert overlapping claims - generally that the defendants breached their fiduciary duties, mismanaged the Company, wasted corporate assets, and engaged in, facilitated or approved self-dealing transactions in breach of their fiduciary obligations. The Depuy lawsuit also alleges violations of federal securities laws in connection with the Company allegedly filing and distributing certain misleading proxy statements. The lawsuits seek, among other relief, injunctive relief related to the Company's corporate governance and unspecified damages.

On April 10, 2013, the U.S. District Court for the Western District of Oklahoma consolidated the Levine, Depuy, Elliot, Brothers, and Ezell actions (the “Federal Shareholder Derivative Litigation”) under the caption “In re SandRidge Energy, Inc. Shareholder Derivative Litigation,” appointed a lead plaintiff and lead counsel, and ordered the lead plaintiff to file a consolidated complaint by May 1, 2013. On June 3, 2013, the Company and the individual defendants filed their respective motions to dismiss the consolidated complaint. On September 11, 2013, the court granted the defendants’ respective motions to dismiss the consolidated complaint without prejudice, and granted plaintiffs leave to file an amended consolidated complaint. The plaintiffs filed an amended consolidated complaint on October 9, 2013, in which plaintiffs allege that: (i) the Company’s former Chief Executive Officer (“CEO”), Tom Ward, breached his fiduciary duties by usurping corporate opportunities, (ii) certain of the Company’s current and former directors breached their fiduciary duties of care, (iii) Mr. Ward and certain of the Company’s current and former directors wasted corporate assets, (iv) certain entities allegedly affiliated with Mr. Ward aided and abetted Mr. Ward’s breaches of fiduciary duties, (v) Mr. Ward and entities allegedly affiliated with Mr. Ward misappropriated the Company’s confidential and proprietary information, and (vi) entities allegedly affiliated with Mr. Ward were unjustly enriched. On November 15, 2013, the Company and the individual defendants filed their respective motions to dismiss the amended consolidated complaint. On September 22, 2014, the court denied the motion to dismiss filed on behalf of the Company and the director defendants. The court also granted in part and denied in part the respective motions to dismiss filed on behalf of the other defendants.

On May 8, 2013, the court stayed the Romano action pending further order of the court. On October 29, 2014, the court granted plaintiff’s application to dismiss the action without prejudice.

On September 26, 2014, the Board formed a Special Litigation Committee (“SLC”), composed of two independent and disinterested Company directors, and delegated absolute and final authority to the SLC to review and investigate the claims alleged by the plaintiffs in the Federal Shareholder Derivative Litigation and in the Hefner action, and to determine whether or how those claims should be asserted on the Company’s behalf.


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On November 30, 2015, the court stayed the Hefner action until further order of the court.

On October 7, 2015, the derivative plaintiffs in the Federal Shareholder Derivative Litigation, the SLC, and the individual defendants in the Federal Shareholder Derivative Litigation (Tom Ward, Jim Brewer, Everett Dobson, William Gilliland, Daniel Jordan, Roy Oliver Jr., and Jeffrey Serota), executed a Stipulation of Settlement, which would result in a partial settlement of the Federal Shareholder Derivative Litigation by settling all claims against the individual defendants, subject to certain terms and conditions, including the approval of the court. Under the terms of the proposed partial settlement, the Company would implement or agree to maintain certain corporate governance reforms, and the insurers for the individual defendants would pay $38.0 million to an escrow fund, which would be used to pay certain expenses arising from pending securities litigation and, to the extent funds remain after paying such expenses, would be paid to the Company without any further restrictions on the Company’s use of such funds. The proposed partial settlement expressly provides, among other terms, that the settling defendants deny all allegations of wrongdoing and are entering into the settlement solely to avoid the costs, disruption, uncertainty, and risk of further litigation.

On October 9, 2015, the court issued an Order granting preliminary approval of the Stipulation of Settlement and, after notice and a hearing on December 18, 2015, the court issued a Final Judgment and Order on December 22, 2015, granting final approval of the Stipulation of Settlement. The partial settlement did not settle any of the derivative plaintiffs’ claims against non-settling defendants WCT Resources, L.L.C., 192 Investments, L.L.C., and TLW Land & Cattle, L.P in the Federal Shareholder Derivative Litigation. On January 12, 2016, a shareholder who objected to the Stipulation of Settlement filed a notice of appeal of the court’s Final Judgment and Order approving the Stipulation of Settlement.

On March 31, 2016, the derivative plaintiffs in the Federal Shareholder Derivative Litigation, the SLC, and the remaining defendants, WCT Resources, L.L.C., 192 Investments, L.L.C., and TLW Land & Cattle, L.P., executed a Stipulation of Settlement, which would resolve the remaining claims in the Federal Shareholder Derivative Litigation. Under the terms of the proposed settlement, the remaining defendants would make a payment of $500,000 to the Company, less taxes, expenses, and incentive awards. Counsel for the derivative plaintiffs have agreed that they will not seek reimbursement of expenses in excess of $120,000. Counsel for the derivative plaintiffs have also agreed that they will not seek incentive awards for the two named plaintiffs in excess of $15,000 each.

On April 6, 2016, the court issued an Order granting preliminary approval of the Stipulation of Settlement and establishing procedures for notice to shareholders and consideration of any shareholder objections to the settlement. The court also set a hearing for final approval of the proposed settlement on June 15, 2016.

On December 5, 2012, James Glitz and Rodger A. Thornberry, on behalf of themselves and all other similarly situated stockholders, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain current and former executive officers of the Company. On January 4, 2013, Louis Carbone, on behalf of himself and all other similarly situated stockholders, filed a substantially similar putative class action complaint in the same court and against the same defendants. On March 6, 2013, the court consolidated these two actions under the caption “In re SandRidge Energy, Inc. Securities Litigation” (the “Securities Litigation”) and appointed a lead plaintiff and lead counsel. On July 23, 2013, plaintiffs filed a consolidated amended complaint, which asserts a variety of federal securities claims against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class of (a) purchasers of SandRidge common stock during the period from February 24, 2011 to November 8, 2012, (b) purchasers of common units of the Mississippian Trust I in or traceable to its initial public offering on or about April 12, 2011, and (c) purchasers of common units of the Mississippian Trust II (together with the Mississippian Trust I, the “Mississippian Trusts”) in or traceable to its initial public offering on or about April 23, 2012. The claims are based on allegations that the Company, certain of its current and former officers and directors, and the Mississippian Trusts, among other defendants, are responsible for making false and misleading statements, and omitting material information, concerning a variety of subjects, including oil and natural gas reserves, the Company's capital expenditures, and certain transactions entered into by companies allegedly affiliated with the Company's former CEO Tom Ward.

On May 11, 2015, the court dismissed without prejudice plaintiffs’ claims against the Mississippian Trusts and the underwriter defendants. On August 27, 2015, the court dismissed without prejudice plaintiffs’ claims against the Company and the individual current and former officers and directors, and granted plaintiffs leave to file a second amended consolidated complaint.

On October 23, 2015, plaintiffs filed their Second Consolidated Amended Complaint in which plaintiffs assert federal securities claims against the Company and certain of its current and former officers and directors on behalf of a putative class of purchasers of SandRidge common stock during the period between February 24, 2011, and November 8, 2012. The claims are based on allegations that the Company and certain of its current and former officers and directors are responsible for making false

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and misleading statements, and omitting material information, concerning a variety of subjects, including oil and gas reserves, the Company’s capital expenditures, and certain transactions entered into by companies allegedly affiliated with the Company’s former CEO Tom Ward. Each of the Mississippian Trusts has requested that the Company indemnify it for any losses it may incur in connection with the Securities Litigation.

On July 15, 2013, James Hart and 15 other named plaintiffs filed an amended complaint in the United States District Court for the District of Kansas (the “Kansas District Court”) in an action undertaken individually and on behalf of others similarly situated against SandRidge Energy, Inc., SandRidge Operating Company, SandRidge Exploration and Production, LLC, SandRidge Midstream, Inc., and Lariat Services, Inc. In their Amended Complaint, plaintiffs allege that the defendants failed to properly calculate overtime pay for the plaintiffs and for other similarly situated current and former employees. The plaintiffs further allege that the defendants required the plaintiffs and other similarly situated current and former employees to engage in work-related activities without pay. The plaintiffs assert claims against the defendants for (i) violations of the Fair Labor Standards Act, (ii) violations of the Kansas Wage Payment Act, (iii) breach of contract, and (iv) fraud, and seek to recover unpaid wages and overtime pay, liquidated damages, statutory penalties, economic damages, compensatory and punitive damages, attorneys’ fees and costs, and both pre- and post-judgment interest.

On October 3, 2013, the plaintiffs filed a Motion for Conditional Collective Action Certification and for Judicial Notice to the Class and a Motion to Toll the Statute of Limitations. On October 11, 2013, the defendants filed a Motion to Dismiss and a Motion to Transfer Venue to the United States District Court for the Western District of Oklahoma (the “Oklahoma District Court”). On February 25, 2014, the Kansas District Court granted the defendants’ Motion to Transfer Venue to the Oklahoma District Court.

On April 2, 2014, the Oklahoma District Court granted the defendants’ Motion to Dismiss and granted plaintiffs leave to file an amended complaint by April 16, 2014, which they did on such date. On July 1, 2014, the Oklahoma District Court granted plaintiffs’ Motion for Conditional Collective Action Certification and for Judicial Notice to the Class, and denied plaintiffs’ Motion to Toll the Statute of Limitations.

On May 27, 2015, the parties reached an agreement in principle to settle this lawsuit. Pursuant to such agreement, the Company will establish a settlement fund from which to pay participating plaintiffs’ claims as well as plaintiffs’ attorneys’ fees. The proposed settlement agreement is subject to final negotiations between the parties and court approval. During 2015, the Company established a $5.1 million reserve for this lawsuit.

On June 9, 2015, the Duane & Virginia Lanier Trust, individually and on behalf of all others similarly situated, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class of (a) purchasers of common units of the Mississippian Trust I pursuant or traceable to its initial public offering on or about April 7, 2011, and/or at other times during the time period between April 7, 2011, and November 8, 2012 (the “Class Period”), and (b) purchasers of common units of the Mississippian Trust II pursuant or traceable to its initial public offering on or about April 17, 2012, and/or at other times during the Class Period. The claims are based on allegations that the Company, certain of its current and former officers and directors, and the Mississippian Trusts, among other defendants, are responsible for making false and misleading statements, and omitting material information, concerning a variety of subjects, including oil and natural gas reserves and the Company's capital expenditures. The Company and the other defendants intend to defend this lawsuit vigorously. Each of the Mississippian Trusts has requested that the Company indemnify it for any losses it may incur in connection with this lawsuit.

On July 30, 2015, Barton Gernandt, Jr., individually and on behalf of all others similarly situated, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class comprised of all persons, except the named defendants and their immediate family members, who were participants in, or beneficiaries of, the SandRidge Energy, Inc. 401(k) Plan (the “401(k) Plan”) at any time between August 2, 2012, and the present, and whose 401(k) Plan accounts included investments in SandRidge common stock. The plaintiff purports to bring the action both derivatively on the 401(k) Plan’s behalf pursuant to the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) §§ 409 and 502, and as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure. The plaintiff’s claims are based on allegations that the defendants breached their fiduciary duties owed to the 401(k) Plan and to the 401(k) Plan participants by allowing the investment of the 401(k) Plan’s assets in SandRidge stock when it was otherwise allegedly imprudent to do so based on the financial condition of the Company and the fact the Company’s common stock was artificially inflated because, among other things, the Company materially overstated the amount of oil being produced and the ratio of oil to natural gas in one of its core holdings.


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On August 19, 2015, Christina A. Cummings, individually and on behalf of all others similarly situated, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain of its current and former officers, among other defendants, on behalf of a putative class comprised of all participants for whose individual accounts the 401(k) Plan held shares of the Company’s common stock from November 8, 2012, to the present, inclusive. The plaintiff purports to bring the action both derivatively on the 401(k) Plan’s behalf pursuant to ERISA §§ 409 and 502, and as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure. The plaintiff’s claims are based on allegations that the defendants breached their fiduciary duties owed to the 401(k) Plan and to the 401(k) Plan participants by allowing the investment of the 401(k) Plan’s assets in SandRidge stock when it was otherwise allegedly imprudent to do so based on the financial condition of the Company. On September 10, 2015, the Court consolidated this action with the Gernandt action.

On September 14, 2015, Richard A. McWilliams, individually and on behalf of all others similarly situated, filed a putative class action complaint in the U.S. District Court for the Western District of Oklahoma against the Company and certain of its current and former officers and directors, among other defendants, on behalf of a putative class comprised of all persons, except the named defendants and their immediate family members, who were participants in, or beneficiaries of, the 401(k) Plan at any time between August 2, 2012, and the present, and whose 401(k) Plan accounts included investments in the Company’s common stock. The plaintiff purports to bring the action both derivatively on the 401(k) Plan’s behalf pursuant to ERISA §§ 409 and 502, and as a class action pursuant to Rule 23 of the Federal Rules of Civil Procedure. The plaintiff’s claims are based on allegations that the defendants breached their fiduciary duties owed to the 401(k) Plan and to the 401(k) Plan participants by allowing the investment of the 401(k) Plan’s assets in the Company’s common stock when it was otherwise allegedly imprudent to do so based on the financial condition of the Company and the fact the Company’s stock was artificially inflated because, among other things, the Company materially overstated the amount of oil being produced and the ratio of oil to natural gas in one of its core holdings. On September 24, 2015, the Court consolidated this action with Gernandt action.

On November 24, 2015, the plaintiffs filed a Consolidated Class Action Complaint in the consolidated Gernandt action. The Company intends to defend this consolidated lawsuit vigorously.

On November 18, 2015, Mickey Peck, on behalf of himself and others similarly situated, filed a First Amended Collective Action Complaint in the United States District Court for the Western District of Oklahoma against SandRidge Energy, Inc., and SandRidge Operating Company for violations of the Fair Labor Standards Act. Plaintiff alleges that the Company improperly classified certain of its consultants as independent contractors rather than as employees and, therefore, improperly paid such consultants a day rate without paying any overtime compensation. On January 14, 2016, the Court entered an Order conditionally certifying the class and providing for notice.

On January 12, 2016, Lisa Griggs and April Marler, on behalf of themselves and all other similarly situated, filed a putative class action petition in the District Court of Logan County, Oklahoma, against SandRidge Exploration and Production, LLC, and certain other oil and gas exploration companies. In their petition, plaintiffs assert various tort claims based upon purported damage and loss resulting from earthquakes allegedly caused by the defendants’ operations of wastewater disposal wells. Plaintiffs seek to certify a class of “all residents of Oklahoma owning real property from 2011 through the time the Class is certified.” On February 16, 2016, the defendants filed a Notice of Removal of the lawsuit to the Oklahoma District Court. On April 8, 2016, the plaintiffs filed a Motion to Remand the action back to the District Court of Logan County, Oklahoma. On June 30, 2016, the Oklahoma District Court denied the plaintiffs’ Motion to Remand. On July 21, 2016, the plaintiffs voluntarily dismissed this lawsuit without prejudice.

On February 12, 2016, Brenda Lene and Jon Darryn Lene filed a petition in the District Court of Logan County, Oklahoma, against SandRidge Exploration and Production, LLC, and certain other oil and gas exploration companies. In their petition, plaintiffs assert various tort claims based on their allegations that their home suffered damages due to earthquakes allegedly caused by the defendants’ operations of wastewater disposal wells. On July 20, 2016, the plaintiffs voluntarily dismissed this lawsuit without prejudice.

On April 11, 2016, Public Justice, on behalf of the Sierra Club, filed a civil action against SandRidge Exploration and Production, LLC, among other defendants, in the United States District Court for the Western District of Oklahoma. Plaintiff seeks declaratory and injunctive relief under the citizen suit provision of the Resource Conservation and Recovery Act (“RCRA”) to enforce alleged violations of RCRA relating to earthquakes allegedly induced by the defendants’ injection and disposal into the ground of oil and gas production wastes. Plaintiff seeks an order preliminarily and permanently enjoining the defendants by ordering them to (i) substantially reduce the amounts of production wastes being injected into the ground, (ii) reinforce vulnerable

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structures that current forecasts show could be impacted by large magnitude earthquakes, and (iii) establishing an independent earthquake monitoring center.

On March 3, 2016, Brian Thieme, on behalf of himself and all others similarly situated, filed a putative class action complaint in the United States District Court for the Western District of Oklahoma against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiff alleges that, commencing on or around December 27, 2007, and continuing until at least March 31, 2012, the defendants conspired to rig bids and depress the market for the purchases of oil and natural gas leasehold interests and properties containing producing oil and natural gas wells located in certain areas of Oklahoma, Texas, Colorado and Kansas, in violation of Sections 1 and 3 of the Sherman Antitrust Act. Plaintiff seeks to certify two separate and distinct classes of members.

On March 10, 2016, Don Beadles, in Trust for the Alva Synagogue Church, on behalf of himself and all others similarly situated, filed a putative class action complaint in the United States District Court for the Western District of Oklahoma against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiff alleges that since as early as December 2007, and continuing until at least as late as March 2012 (the “Relevant Class Period”), the defendants conspired to rig bids and otherwise depress the amounts they paid to property owners for the acquisition of oil and gas leasehold interests and producing properties located in certain areas of Oklahoma, Texas, Colorado and Kansas, in violation of Sections 1 and 3 of the Sherman Antitrust Act. Plaintiff seeks to certify a class of “[a]ll persons and entities that, during the Relevant Class Period, provided or sold to one of more of the Defendants (a) oil and gas leasehold interests on their property and/or (b) the producing properties, in exchange for lease payments, including but not limited to lease bonuses.”

On March 24, 2016, Janet L. Lowry, on behalf of herself and all others similarly situated, filed a putative class action complaint in the United States District Court for the Western District of Oklahoma against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiff alleges that, commencing on or around December 27, 2007, and continuing until at least March 31, 2012, the defendants conspired to rig bids and depress the price of royalty and bonus payments exchanged for purchases of oil and natural gas leasehold interests and interests in properties containing producing oil and natural gas wells located in certain areas of Oklahoma, Texas, Colorado and Kansas, in violation of Section 1 of the Sherman Antitrust Act. Plaintiff seeks to certify two separate and distinct classes of members.

On April 15, 2016, the United States District Court for the Western District of Oklahoma consolidated the Thieme, Beadles, and Lowry cases under the caption “In re Anadarko Basin Oil and Gas Lease Antitrust Litigation,” together with nine additional subsequently filed cases, as well as with any other cases pending in the court, alleging similar violations under the Sherman Antitrust Act and the Oklahoma Antitrust Reform Act.

On March 29, 2016, Harold Koppitz, on behalf of himself and all others similarly situated, filed a putative class action petition in the District Court of Woods County, Oklahoma, against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiff alleges that, commencing on or around February 1, 2007, and continuing until at least March 31, 2012, the defendants conspired to rig bids and depress the market for purchases of oil and natural gas leasehold interests located within the State of Oklahoma in violation of the Oklahoma Antitrust Reform Act. Plaintiff seeks to certify two separate and distinct classes of members. On August 3, 2016, the plaintiff voluntarily dismissed the Company from this lawsuit without prejudice.

On April 26, 2016, the defendants filed a Notice of Removal of the lawsuit to the United States District Court for the Western District of Oklahoma. On that same date, plaintiff voluntarily dismissed his petition. On April 29, 2016, plaintiff filed a new petition in the District Court of Woods County, Oklahoma, against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants, in which plaintiff makes allegations substantially similar to the allegations contained in his original petition.

On April 13, 2016, Wesley and Towanda Mallory, on behalf of themselves and all others similarly situated, filed a putative class action petition in the District Court of Stephens County, Oklahoma, against SandRidge Energy, Inc. and the Company’s former CEO, Tom L. Ward, among other defendants. Plaintiffs allege that, commencing on or around December 27, 2007, and continuing until at least April 1, 2013 (the “Class Period”), the defendants conspired to rig bids and depress prices for oil and natural gas leasehold and working interests and producing properties within the State of Oklahoma in violation of the Oklahoma Antitrust Reform Act. Plaintiffs seek to certify a class of “[a]ll Oklahoma citizens and entities that, during the relevant Class Period, provided or sold to one of more of the Defendants (a) oil and gas leasehold interests on their property and/or (b) the producing properties or interests relating to land located in the Anadarko Basin Region, in exchange for lease payments, including

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but not limited to lease bonuses.” On May 26, 2016, the plaintiffs voluntarily dismissed without prejudice the Company as a defendant in this action.

On February 4, 2015, the staff of the Securities and Exchange Commission (the “SEC”) Enforcement Division in Washington, D.C., notified the Company that it had commenced an informal inquiry concerning the Company’s accounting for, and disclosure of, its carbon dioxide delivery shortfall penalties under the terms of the Gas Treating and CO2 Delivery Agreement, dated June 29, 2008, between SandRidge Exploration and Production, LLC, and Oxy USA Inc.

Additionally, the Company received a letter from an attorney for a former employee at the Company (the “Former Employee”). In the letter, the attorney alleged, among other things, that the Former Employee had been terminated because he had objected to the levels of oil and gas reserves disclosed by the Company in its public filings. Over 85% of such reserves were calculated by an independent petroleum engineering firm.  The Audit Committee of the Company’s Board of Directors has retained an independent law firm to review the Former Employee’s allegations and the circumstances of the Former Employee’s termination. In addition, the Company reported the Former Employee’s allegations to the SEC staff, which thereafter issued two subpoenas to the Company relating to the Former Employee’s allegations.  Counsel for the Audit Committee is responding to both of these subpoenas.

During the course of the above inquiries, the SEC issued a subpoena to the Company seeking documents relating to employment-related agreements between the Company and certain employees. The Company is cooperating with this inquiry and, after discussion with the staff, the Company sent corrective letters to certain current and former employees who had entered into agreements containing language that may have been inconsistent with SEC rules prohibiting a company from impeding an individual from communicating directly with the SEC about possible securities law violations. The Company also updated its Code of Conduct and other relevant policies. On June 16, 2016, the SEC filed a proof of claim in the Company’s Chapter 11 Cases in the amount of $1.2 million as a result of the SEC staff’s inquiry concerning employment-related agreements. Counsel for the Company is in discussions with the SEC in an effort to resolve the Company’s liability regarding these inquiries.

The Company continues to cooperate with the above inquiries.

In addition to the litigation described above, the Company is a defendant in lawsuits from time to time in the normal course of business.

Risks and Uncertainties

The Company’s revenue, profitability and future growth are substantially dependent upon the prevailing and future prices for oil and natural gas, which depend on numerous factors beyond the Company’s control such as overall oil and natural gas production and inventories in relevant markets, economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil and natural gas prices historically have been volatile, and may be subject to significant fluctuations in the future. The Company enters into commodity derivative arrangements in order to mitigate a portion of the effect of this price volatility on the Company’s cash flows. See Note 7 for the Company’s open oil and natural gas derivative contracts.

    The Company depends on cash flows from operating activities and, as necessary, borrowings under its senior credit facility to fund its capital expenditures. Based on current cash balances, cash flows from operating activities and net borrowings under the senior credit facility in 2016, the Company expects to be able to fund its planned capital expenditures budget, debt service requirements and working capital needs for 2016; however, if current depressed oil or natural gas prices persist for a prolonged period or further decline, they would have a material adverse effect on the Company’s financial position, results of operations, cash flows and quantities of oil, natural gas and NGL reserves that may be economically produced, which would further adversely impact the Company’s ability to comply with the financial covenants under its senior credit facility. See Note 1 and Note 6 for further discussion of the financial covenants in the senior credit facility.


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SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


9. Equity

Chapter 11 Proceedings

If confirmed by the Bankruptcy Court, the Plan of Reorganization, as discussed in Note 1, provides that the Company’s currently authorized common stock and 7.0% and 8.5% convertible perpetual preferred stock will be canceled and released under the Plan without receiving any recovery on account thereof.

Common Stock

During the six-month period ended June 30, 2016, the Company issued approximately 84.4 million shares of common stock upon the exercise of conversion options by holders of approximately $232.1 million in par value of the Convertible Senior Unsecured Notes. The Company recorded the issuance of common shares at fair value on the various dates the exchanges occurred. There were no conversions of Convertible Senior Unsecured Notes to shares of the Company’s common stock during the three-month period ended June 30, 2016, and all potential future conversions have been stayed as a result of the Chapter 11 petition filings. See Note 6 for additional discussion of the Convertible Senior Unsecured Notes transactions.

Preferred Stock Dividends

Prior to the Chapter 11 petition filings, dividends on the Company’s 8.5% and 7.0% convertible perpetual preferred stock could be paid in cash or with shares of the Company’s common stock at the Company’s election.

In the first quarter of 2016, prior to the February semi-annual dividend payment date, the Company announced the suspension of payment of the semi-annual dividend on its 8.5% convertible perpetual preferred stock. The Company suspended payment of the cumulative dividend on its 7.0% convertible perpetual preferred stock during the third quarter of 2015. At June 30, 2016, the Company’s accrued dividends in arrears of $11.3 million and $21.0 million on its 8.5% and 7.0% convertible perpetual preferred stock, respectively, were included in liabilities subject to compromise on the accompanying unaudited condensed consolidated balance sheet. The Company ceased accruing dividends on its 8.5% and 7.0% convertible perpetual preferred stock as of May 16, 2016, in conjunction with the Chapter 11 petition filings.

In the first quarter of 2015, dividends of $11.3 million on the Company’s 8.5% convertible perpetual preferred stock were paid in cash. For the three and six-month periods ended June 30, 2015, the Company paid a semi-annual dividend of $3.50 per share on its 7.0% convertible perpetual preferred stock by issuing approximately 5.7 million shares of common stock. In accordance with the terms governing the 7.0% convertible perpetual preferred stock, for purposes of the dividend payment, the value of each share issued was determined by multiplying (i) the average volume-weighted share price for the 15 trading day period ending April 28, 2015 by (ii) 95%. Based upon the common stock’s closing price on May 15, 2015, the common stock issued had a market value of approximately $6.7 million, or $2.23 per each of the 3.0 million shares of 7.0% convertible perpetual preferred stock outstanding, that resulted in a difference between the fixed rate semi-annual dividend and the value of shares issued of approximately $3.8 million. This difference was recorded as a reduction to preferred stock dividends in the unaudited condensed consolidated statements of operations for the three and six-month periods ended June 30, 2015.

Paid and unpaid dividends included in the calculation of loss applicable to the Company’s common stockholders and the Company’s basic loss per share calculation for the three and six-month periods ended June 30, 2016 and 2015 are presented in the accompanying unaudited condensed consolidated statements of operations.

See Note 11 for discussion of the Company’s loss per share calculation.


34

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)



Treasury Stock

The Company makes required statutory tax payments on behalf of employees when their restricted stock awards vest and then withholds a number of vested shares of common stock having a value on the date of vesting equal to the tax obligation. The following table shows the number of shares withheld for taxes and the associated value of those shares for the six-month periods ended June 30, 2016 and 2015. These shares were accounted for as treasury stock when withheld and then immediately retired.
 
Six Months Ended June 30,
 
2016
 
2015
 
(In thousands)
Number of shares withheld for taxes
933

 
1,279

Value of shares withheld for taxes
$
41

 
$
2,093


Stockholder Receivable

The Company is party to a settlement agreement relating to a third-party claim against its former CEO under Section 16(b) of the Securities Exchange Act of 1934, as amended. Based on the nature of the settlement as well as the former CEO’s position as an officer of the Company at the time of the settlement, the receivable is classified as a component of additional paid-in capital in the accompanying unaudited condensed consolidated balance sheets. The remaining amount receivable under the agreement as of June 30, 2016 and December 31, 2015 was $1.3 million and is due in October 2016.

See Note 12 for discussion of the Company’s share-based compensation.


35

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


10. Income Taxes

The Company estimates for each interim reporting period the effective tax rate expected for the full fiscal year and uses that estimated rate in providing for income taxes on a current year-to-date basis. The provision for income taxes consisted of the following components for the three and six-month periods ended June 30, 2016 and 2015 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2016
 
2015
 
2016
 
2015
Current
 
 
 
 
 
 
 
Federal
$

 
$

 
$

 
$

State
3

 
25

 
7

 
65

Total provision
3

 
25

 
7

 
65

Less: income tax provision attributable to noncontrolling interest

 
19

 

 
49

Total provision attributable to SandRidge Energy, Inc.
$
3

 
$
6

 
$
7

 
$
16


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. The Company’s deferred tax assets have been reduced by a valuation allowance due to a determination that it is more likely than not that some or all of the deferred assets will not be realized based on the weight of all available evidence. The Company continues to closely monitor and weigh all available evidence, including both positive and negative, in making its determination whether to maintain a valuation allowance. As a result of the significant weight placed on the Company's cumulative negative earnings position, the Company continued to maintain the full valuation allowance against its net deferred tax asset at June 30, 2016. Thus the Company’s effective tax rate and tax expense for the three and six-month periods ended June 30, 2016 continue to be low as a result of the Company not recognizing an income tax benefit associated with its net loss from the same periods.
    
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. The Company experienced ownership changes within the meaning of IRC Section 382 during 2008 and 2010 that subjected certain of the Company’s tax attributes, including $929.4 million of federal net operating loss carryforwards, to the IRC Section 382 limitation. These limitations could result in all or a portion of the remaining $484.5 million limited net operating loss carryforwards expiring unused. None of these limitations resulted in a current federal tax liability at June 30, 2016.

The Restructuring Transactions effectuated through the Plan may have a material impact on the Company’s tax attributes, the full extent of which is currently unknown. Cancellation of indebtedness income resulting from the Restructuring Transactions may reduce the Company’s tax attributes, including but not limited to net operating loss carryforwards. Further, the Company will experience an IRC Section 382 ownership change upon confirmation of the Plan by the Bankruptcy Court which could subject certain remaining tax attributes to a more restrictive IRC Section 382 limitation. However, the Company is currently analyzing alternatives within the IRC available to taxpayers in Chapter 11 bankruptcy proceedings in order to minimize the impact of an ownership change on such tax attributes. Additionally, the Company has incurred significant one-time costs associated with the Plan, a material amount of which are non-deductible under the IRC.

At both June 30, 2016 and December 31, 2015, the Company had a liability of approximately $0.1 million for unrecognized tax benefits. The Company does not expect a significant change in its gross unrecognized tax benefits balance within the next twelve months.

The Company’s only taxing jurisdiction is the United States (federal and state). The Company’s tax years 2012 to present remain open for federal examination. Additionally, tax years 2005 through 2011 remain subject to examination for the purpose of determining the amount of remaining federal net operating loss and other carryforwards. The number of years open for state tax audits varies, depending on the state, but are generally from three to five years.    


36

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)


11. Loss per Share

The following table summarizes the calculation of weighted average common shares outstanding used in the computation of diluted loss per share, for the three and six-month periods ended June 30, 2016 and 2015:
 
Net Loss
 
Weighted Average Shares
 
Loss Per Share
 
(In thousands, except per share amounts)
Three Months Ended June 30, 2016
 
 
 
 
 
Basic loss per share
$
(521,351
)
 
718,102

 
$
(0.73
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock and units(1)

 

 
 
Diluted loss per share
$
(521,351
)
 
718,102

 
$
(0.73
)
Three Months Ended June 30, 2015
 
 
 
 
 
Basic loss per share
$
(1,375,556
)
 
495,153

 
$
(2.78
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock(1)

 

 
 
Convertible preferred stock(2)

 

 
 
Diluted loss per share
$
(1,375,556
)
 
495,153

 
$
(2.78
)
Six Months Ended June 30, 2016
 
 
 
 
 
Basic loss per share
$
(845,458
)
 
703,943

 
$
(1.20
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock and units(1)

 

 
 
Diluted loss per share
$
(845,458
)
 
703,943

 
$
(1.20
)
Six Months Ended June 30, 2015
 
 
 
 
 
Basic loss per share
$
(2,421,390
)
 
486,704

 
$
(4.98
)
Effect of dilutive securities
 
 
 
 
 
Restricted stock and units(1)