Troubled SandRidge Energy Inc., leaching money and stock market credibility, found an escape clause in a contract it no longer wanted: give away midstream and producing assets.
The company also converted its entire borrowing base to cash on Jan. 22.
The company delisted from the New York Stock Exchange on Jan. 7. Some observers had speculated that the company’s hiring of a financial adviser might mean bankruptcy, though it is unclear if that path is one the company is willing to take. The company now has a cash balance of $885 million.
SandRidge did not return a request for comment.
On Jan. 21, SandRidge essentially abandoned its E&P and midstream assets to Occidental Petroleum Corp. (NYSE: OXY) to settle claims from a 30-year agreement for removal of CO2 produced in West Texas.
The company also borrowed $488.9 million, including $11 million in outstanding letters of credit, on the advice of financial adviser Houlihan Lokey Inc. and legal adviser Kirkland & Ellis LLP. The funds will be used for general corporate purposes, SandRidge said.
SandRidge settled all claims arising out of an agreement to transport CO2 from natural gas volumes produced by the company in the Piñon Field.
The E&P assets, which were 99% gas, represented about 6% of the company's total production and 17% of its total lease operating expense in the third quarter of 2015.
The transaction is expected to lower the company's operating expenses by about $39 million in 2016.
James Bennett, president and CEO, commented, "After many months of focused effort, I am pleased to announce the closing of an agreement that brings an end to our West Texas CO2 delivery obligations and associated deficiency payments. In this transaction we are eliminating a significant liability while also improving our annual cash flows, both of which are consistent with our stated business objectives. With significantly lower operating expenses, we can move forward with renewed attention to the development of our Midcontinent and Niobrara assets."
SandRidge’s agreement with Occidental required it to deliver a total of about 3,200 billion cubic feet (Bcf) of CO2 over the entire 30-year agreement period.
However, SandRidge was coming up far short of its agreement. Through December 2014, SandRidge had delivered 54.7 Bcf of CO2 about 300 Bcf less than the minimum annual requirements.
The company was obligated to pay Occidental $0.25 per Mcf to the extent minimum annual CO2 volume requirements were not met. As a result of its shortfall, it owed penalties of about $75 million.
For 2015, SandRidge projected that natural gas production levels would mean accruing up to $38 million related for volume shortfalls.
If such under delivered volumes are not made up with commensurate over deliveries in the future, the company will be obligated to pay Occidental $0.70 per Mcf—or about $210.1 million total in 2041, SandRidge said. The amount had not been accrued by the company as a liability because SandRidge did not expect it could make such a payment.
Despite its financial concerns, the company has continued to make deals in the downturn. In December, SandRidge purchased Niobrara Shale oil assets in the North Park Basin in Colorado for about $190 million cash.
Darren Barbee can be reached at email@example.com.
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