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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 September 30, 2018 
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
Accelerated filer
þ

Non-accelerated filer
o

Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes þ No o
The number of shares outstanding of the registrant’s common stock, par value $0.001 per share, as of the close of business on November 2, 2018, was 35,693,515.



References in this report to the “Company,” “SandRidge,” “we,” “our,” and “us” mean SandRidge Energy, Inc., including its consolidated subsidiaries and its proportionately consolidated share of each of SandRidge Mississippian Trust I, SandRidge Mississippian Trust II and SandRidge Permian Trust (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 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, 2017 (the “2017 Form 10-K”) and in Item 1A of this Quarterly Report.




SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
FORM 10-Q
Quarter Ended September 30, 2018 

INDEX




PART I. Financial Information

ITEM 1. Financial Statements

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share data) 
September 30, 2018December 31, 2017
ASSETS
Current assets 
Cash and cash equivalents $32,562 $99,143 
Restricted cash - other 1,912 2,165 
Accounts receivable, net 54,493 71,277 
Derivative contracts 73 1,310 
Prepaid expenses 2,223 5,248 
Other current assets 350 15,954 
Total current assets 91,613 195,097 
Oil and natural gas properties, using full cost method of accounting 
Proved 1,206,363 1,056,806 
Unproved 68,737 100,884 
Less: accumulated depreciation, depletion and impairment (546,769)(460,431)
728,331 697,259 
Other property, plant and equipment, net 211,198 225,981 
Other assets 1,181 1,290 
Total assets $1,032,323 $1,119,627 

LIABILITIES AND STOCKHOLDERS’ EQUITY 
Current liabilities 
Accounts payable and accrued expenses $112,980 $139,155 
Derivative contracts 36,905 10,627 
Asset retirement obligation 40,041 41,017 
Other current liabilities 7 8,115 
Total current liabilities 189,933 198,914 
Long-term debt  37,502 
Derivative contracts 6,791 3,568 
Asset retirement obligation 39,227 36,527 
Other long-term obligations 3,837 3,176 
Total liabilities 239,788 279,687 
Commitments and contingencies (Note 11) 
Stockholders’ Equity 
Common stock, $0.001 par value; 250,000 shares authorized; 35,691 issued and outstanding at September 30, 2018 and 35,650 issued and outstanding at December 31, 2017
36 36 
Warrants 88,517 88,500 
Additional paid-in capital 1,054,155 1,038,324 
Accumulated deficit (350,173)(286,920)
Total stockholders’ equity 792,535 839,940 
Total liabilities and stockholders’ equity $1,032,323 $1,119,627 
The accompanying notes are an integral part of these condensed consolidated financial statements.
4

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share data)
Three Months Ended September 30, Nine Months Ended September 30, 
2018201720182017
Revenues 
Oil, natural gas and NGL $97,491 $80,540 $263,761 $263,235 
Other 169 352 489 858 
Total revenues 97,660 80,892 264,250 264,093 
Expenses 
Production 23,429 26,765 68,927 76,997 
Production taxes 5,636 3,606 14,725 9,435 
Depreciation and depletion — oil and natural gas 33,090 31,029 92,048 87,486 
Depreciation and amortization — other 3,036 3,399 9,229 10,729 
Impairment  498 4,170 3,475 
General and administrative 9,251 20,292 33,616 59,184 
Accelerated vesting upon change in control   6,545  
Proxy contest (459) 7,139  
Employee termination benefits 23  32,653 4,815 
Loss (gain) on derivative contracts 11,329 11,702 59,763 (46,024)
Other operating (income) expense (105)(132)(1,343)135 
Total expenses 85,230 97,159 327,472 206,232 
Income (loss) from operations 12,430 (16,267)(63,222)57,861 
Other (expense) income 
Interest expense, net (627)(872)(2,226)(2,757)
Gain on extinguishment of debt   1,151  
Other (expense) income, net (118)197 972 2,222 
Total other expense (745)(675)(103)(535)
Income (loss) before income taxes 11,685 (16,942)(63,325)57,326 
Income tax benefit (30)(8,457)(72)(8,496)
Net income (loss) $11,715 $(8,485)$(63,253)$65,822 
Earnings (loss) per share 
Basic $0.33 $(0.25)$(1.81)$2.07 
Diluted $0.33 $(0.25)$(1.81)$2.06 
Weighted average number of common shares outstanding 
Basic 35,308 34,290 34,971 31,750 
Diluted 35,330 34,290 34,971 31,984 

The accompanying notes are an integral part of these condensed consolidated financial statements.
5

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
(In thousands) 
Common Stock
Warrants
Additional Paid-In Capital
Accumulated Deficit
Total
Shares
Amount
Shares
Amount
Nine Months Ended September 30, 2018 
Balance at December 31, 2017
35,650 $36 6,570 $88,500 $1,038,324 $(286,920)$839,940 
Issuance of stock awards, net of cancellations
15  — —  —  
Common stock issued for general unsecured claims
26 — — — — —  
Stock-based compensation
— — — — 23,224 — 23,224 
Issuance of warrants for general unsecured claims
— — 32 17 (17)—  
Cash paid for tax withholdings on vested stock awards
— — — — (7,376)— (7,376)
Net loss
— — — — — (63,253)(63,253)
Balance at September 30, 2018 35,691 $36 6,602 $88,517 $1,054,155 $(350,173)$792,535 

The accompanying notes are an integral part of these condensed consolidated financial statements.
6

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)
Nine Months Ended September 30, 
20182017
CASH FLOWS FROM OPERATING ACTIVITIES 
Net (loss) income $(63,253)$65,822 
Adjustments to reconcile net (loss) income to net cash provided by operating activities 
Provision for doubtful accounts (6)133 
Depreciation, depletion, and amortization 101,277 98,215 
Impairment 4,170 3,475 
Debt issuance costs amortization 352 313 
Amortization of premiums and discounts on debt (47)(231)
Gain on extinguishment of debt (1,151) 
Loss (gain) on derivative contracts 59,763 (46,024)
Cash (paid) received on settlement of derivative contracts (29,025)7,700 
Stock-based compensation 22,415 12,616 
Other (1,734)188 
Changes in operating assets and liabilities 16,407 5,699 
Net cash provided by operating activities 109,168 147,906 
CASH FLOWS FROM INVESTING ACTIVITIES 
Capital expenditures for property, plant and equipment (146,819)(152,743)
Acquisition of assets  (48,236)
Proceeds from sale of assets 14,497 19,769 
Net cash used in investing activities (132,322)(181,210)
CASH FLOWS FROM FINANCING ACTIVITIES 
Repayments of borrowings (36,304) 
Debt issuance costs  (1,488)
Cash paid for tax withholdings on vested stock awards (7,376)(3,766)
Net cash used in financing activities (43,680)(5,254)
NET DECREASE IN CASH, CASH EQUIVALENTS and RESTRICTED CASH (66,834)(38,558)
CASH, CASH EQUIVALENTS and RESTRICTED CASH, beginning of year 101,308 174,071 
CASH, CASH EQUIVALENTS and RESTRICTED CASH, end of period $34,474 $135,513 
Supplemental Disclosure of Cash Flow Information 
Cash received for income taxes $4,381 $ 
Supplemental Disclosure of Noncash Investing and Financing Activities 
Change in accrued capital expenditures $29,141 $(15,241)
Equity issued for debt $ $(268,779)

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

7

SANDRIDGE ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation

Nature of Business. SandRidge Energy, Inc. is an oil and natural gas exploration and production company headquartered in Oklahoma City, Oklahoma with its principal focus on developing high-return, growth-oriented projects in the U.S. Mid-Continent and North Park Basin of Colorado. 

Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its wholly owned or majority owned subsidiaries, including its proportionate share of the Royalty Trusts. All significant intercompany accounts and transactions have been eliminated in consolidation.

Interim Financial Statements. The accompanying unaudited condensed consolidated financial statements and notes have been derived from the Company's 2017 Form 10-K and should be read in conjunction with the audited financial statements and notes contained in the Company’s 2017 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 financial statements include all adjustments, which consist of normal recurring adjustments unless otherwise disclosed, necessary to fairly state the Company’s unaudited condensed consolidated financial statements.  

Significant Accounting Policies. The unaudited condensed consolidated financial statements were prepared in accordance with the accounting policies stated in the 2017 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 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.

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; income taxes; valuation of derivative instruments; contingencies; and accrued revenue and related receivables. Although management believes these estimates are reasonable, actual results could differ significantly.

Recent Accounting Pronouncements. The Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606),” which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. Its objective is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which deferred the effective date of ASU 2014-09 to January 1, 2018, for the Company. The ASU required adoption using either the retrospective transition method, which required restating previously reported results or the cumulative effect (modified retrospective) transition method, which utilized a cumulative-effect adjustment to retained earnings in the period of adoption to account for prior period effects rather than restating previously reported results. The Company adopted Topic 606 and all the related amendments (the “new revenue standard”) on January 1, 2018, using the modified retrospective transition method. See Note 2 for further discussion of the adoption of the new revenue standard.

The FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory,” which removed the prohibition in Accounting Standards Codification (“ASC”) 740 against the immediate recognition of current and deferred income tax effects of intra-entity transfers of assets other than inventory. The amendments in this ASU were effective for the Company on January 1, 2018, with early adoption permitted on January 1, 2017. The ASU required application on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company adopted the ASU on January 1, 2018. There was no impact to the Company’s consolidated financial statements and related disclosures upon adoption.
 
8

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

The FASB issued ASU 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic: 610-20): Clarifying the Scope of Asset Derecognition Guidance and the Accounting for Partial Sales of Nonfinancial
Assets,” which helps filers determine the guidance applicable for gain/loss recognition subsequent to the adoption of ASU 2014-09, Revenue from Contracts with Customers. The amendments also clarified that the derecognition of all businesses except those related to conveyances of oil and gas rights or contracts with customers should be accounted for in accordance with the derecognition and deconsolidation guidance in Topic 810, Consolidation. The Company adopted the ASU on January 1, 2018, using the modified retrospective transition method. Under this transition method the Company could have elected to apply this guidance retrospectively either to all contracts at the date of initial application or only to contracts that are not completed contracts at the date of initial application. The Company elected to evaluate only contracts that are not completed contracts. As there were no uncompleted contracts at January 1, 2018, there was no impact to the Company’s consolidated financial statements and related disclosures upon adoption.

The FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement," which removes, modifies or adds disclosure requirements regarding fair value measurements. The amendments in this ASU are effective for all entities beginning after December 15, 2019, with amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty requiring prospective adoption and all other amendments requiring retrospective adoption. Early adoption is permitted and the Company elected to adopt this ASU during the third quarter of 2018, which resulted in a change to the Company's fair value measurement disclosures on a prospective basis, but had no impact on its consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted. The FASB issued ASU 2016-02, “Leases (Topic 842),” which requires lessees to recognize the assets and liabilities for the rights and obligations of all leases with a term greater than 12 months (long-term) on the balance sheet. Leases will be classified as financing or operating expenses, with the classification affecting the pattern and classification of expense recognition in the income statement. Leases to explore for or use oil and natural gas are not impacted by this guidance. In January 2018, the FASB issued ASU 2018-01, “Leases (Topic 842), Land Easement Practical Expedient for Transition to Topic 842.” This ASU permits an entity to continue to apply its current accounting policy for land easements that existed before the effective date of Topic 842. Once an entity adopts Topic 842, it would apply that Topic prospectively to all new (or modified) land easements to determine whether the arrangement contains a lease. ASU 2016-02 required adoption by application of a modified retrospective transition approach. In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842)." The amendments in this update provide another transition method whereby entities are allowed to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The amendments further provide lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component, similar to the expedient provided for lessees. The lessor practical expedient is limited to circumstances in which the nonlease component or components otherwise would be accounted for under the new revenue guidance and both (1) the timing and pattern of transfer are the same for the nonlease component(s) and associated lease component and (2) the lease component, if accounted for separately, would be classified as an operating lease. The amendments also clarify whether Topic 842 or Topic 606 applies for combined components. This topic is effective for the Company on January 1, 2019. Early adoption is permitted.

Topic 842 provides a number of optional practical expedients in transition. The Company plans to elect the ‘package of practical expedients,’ which means the Company will not have to reassess under the new lease standard its prior conclusions about lease identification, lease classification and initial indirect costs. The Company also plans to elect the land easement practical expedient. The Company does not expect to elect the use-of-hindsight. Upon adoption, the Company anticipates recognizing assets and liabilities for the rights and obligations of its existing long-term operating leases on its consolidated balance sheets and utilizing new systems, processes and internal controls to properly identify, classify, measure and recognize new (or modified) leases after the date of adoption. While the effects of adoption are continuing to be assessed, the Company believes the primary impact of the lease standard relates to (1) recognizing assets and liabilities for the rights and obligations of the Company’s vehicle, drilling rig and equipment leases and, (2) providing new disclosures about the Company’s leasing activities. The Company will complete its evaluation during 2018 and will adopt Topic 842 on January 1, 2019. The Company expects to adopt this Topic using a modified retrospective approach by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The new leasing standard also provides practical expedients for an entity’s ongoing accounting. The Company currently plans to elect the short-term lease recognition exemption for leases that qualify, which means the Company will not recognize assets and liabilities for the rights and obligations of qualifying leases, including existing short-term leases of those assets in
9

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

transition. The Company is also currently evaluating applicability of the practical expedient to avoid separating lease and nonlease components for its leases.

2. Revenues

The Company adopted the new revenue standard on January 1, 2018, using the modified retrospective method for all contracts outstanding on that date. Adoption of the new revenue standard had no impact on the Company’s consolidated balance sheet, results of operations, equity or cash flows as of the adoption date, and the Company does not expect any further material impact to its consolidated financial statements on an ongoing basis as a result of adopting the new revenue standard. The Company has included the disclosures required by the new revenue standard below.

The following table disaggregates the Company’s revenue by source for the three and nine-month periods ended September 30, 2018 and 2017:
Three Months Ended September 30, Nine Months Ended September 30, 
2018 2017 2018 2017 
(In thousands)
Oil
$63,994 $44,032 $166,548 $147,792 
NGL
18,776 15,391 52,111 42,962 
Natural gas
14,721 21,117 45,102 72,481 
Other
169 352 489 858 
Total revenues
$97,660 $80,892 $264,250 $264,093 

Oil, natural gas and NGL revenues. A majority of the Company’s revenues come from sales of oil, natural gas and NGLs and are recorded at a point in time when control of the oil, natural gas and NGL production passes to the customer at the inlet of the processing plant or pipeline, or the delivery point for onloading to a delivery truck. As the Company’s customers obtain control of the production prior to selling it to other end customers, the Company presents its revenues on a net basis, rather than on a gross basis.

Pricing for the Company’s oil, natural gas and NGL contracts is variable and is based on volumes sold multiplied by either an index price, net of deductions, or a percentage of the sales price obtained by the customer, which is also based on index prices. The transaction price is allocated on a pro-rata basis to each unit of oil, natural gas or NGL sold based on the terms of the contract. Oil, natural gas and NGL revenues are also recorded net of royalties, discounts and allowances, and transportation costs, as applicable. Taxes assessed by governmental authorities on oil, natural gas and NGL sales are presented separately from revenues and are included in production tax expense in the consolidated statements of operations.

Revenues Receivable. The Company records an asset in accounts receivable, net on its consolidated balance sheet for revenues receivable from contracts with customers at the end of each period. Pricing for revenues receivable is estimated using current month crude oil, natural gas and NGL prices, net of deductions. Revenues receivable are typically collected the month after the Company delivers the related production to its customers. As of September 30, 2018, and December 31, 2017, the Company had revenues receivable of $33.7 million and $34.6 million, respectively, and did not record any bad debt expense on revenues receivable during the three and nine-month periods ended September 30, 2018.

Practical expedients and exemptions. The Company elected not to retrospectively restate contracts that were modified prior to January 1, 2017, and assumed that the contract terms in place at January 1, 2018 were in place from the inception of the contract.

Most of the Company's contracts are short-term in nature with a contract term of one year or less. The Company generally expenses certain insignificant costs when incurred rather than recognizing them as an asset because the amortization period would have been one year or less. Additionally, the Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, and (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed. Payment terms are typically within 30 days of control being transferred.

10

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

Currently, the Company’s existing contracts do not contain financing components, but the Company has elected the practical expedient that allows financing components to be ignored if the difference between the performance and payment is less than one year for any future contracts that may contain financing components.

3. Proxy Contest

In the second quarter of 2018, the Company received notification from Carl C. Icahn and certain affiliated entities (together, "Icahn"), that they intended to nominate a full slate of five candidates for election to the Board at the 2018 Annual Meeting of Stockholders (the "2018 annual meeting") that was held on June 19, 2018 (the "proxy contest"). The Company and Icahn, together with certain of their Board nominees, each entered into a settlement agreement pursuant to which the size of the Board was expanded to eight directors. The Board now consists of previously incumbent directors Sylvia K. Barnes, David J. Kornder and William M. Griffin, and newly elected members Bob G. Alexander, Jonathan Christodoro, Jonathan Frates, John J. "Jack" Lipinski and Randolph C. Read following the certification of the voting results, which occurred on June 22, 2018. As confirmed by external counsel, the election of a majority of non-incumbent directors nominated in connection with the proxy contest resulted in the accelerated vesting of certain share and incentive-based compensation awards granted to the Company's employees and directors as discussed further in Note 15.

The Company incurred legal, consulting and advisory fees related to shareholder activism and the proxy contest, as well as the review of strategic alternatives of $7.1 million for the nine-month period ended September 30, 2018, which is net of $(0.5) million in fees which were reimbursed to the Company during the three-month period ended September 30, 2018.


11

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

4. Employee Termination Benefits

The following table presents a summary of employee termination benefits for the three and nine-month periods ended September 30, 2018 and 2017 (in thousands):
Cash
Share-Based Compensation (4)
Number of Shares
Total Employee Termination Benefits
Three Months Ended September 30, 2018 
Executive Employee Termination Benefits
$ $  $ 
Other Employee Termination Benefits
23   23 
$23 $  $23 
Three Months Ended September 30, 2017 
Executive Employee Termination Benefits
$ $  $ 
Other Employee Termination Benefits
    
$ $  $ 
Nine Months Ended September 30, 2018 
Executive Employee Termination Benefits (1)
$11,945 $9,196 554 $21,141 
Other Employee Termination Benefits (2)
7,577 3,935 209 11,512 
$19,522 $13,131 763 $32,653 
Nine Months Ended September 30, 2017 
Executive Employee Termination Benefits (3)
$2,500 $1,825 96 $4,325 
Other Employee Termination Benefits
490   490 
$2,990 $1,825 96 $4,815 
____________________
1. On February 8, 2018, the Company’s then current CEO, James Bennett, separated employment from the Company, and on February 22, 2018, the Company’s then current CFO, Julian Bott, also separated employment from the Company. In accordance with the terms of their respective employment agreements, the Company incurred cash severance costs and share-based compensation costs associated with the accelerated vesting of awards during the first quarter of 2018.
2. As a result of a reduction in workforce in the first quarter of 2018, certain employees received termination benefits including cash severance and accelerated share-based and incentive compensation vesting upon separation of service from the Company.
3. Includes cash severance costs and share-based compensation costs associated with the accelerated vesting of awards related to the departure of the Company's former Executive Vice President of Investor Relations and Strategy, Duane Grubert.
4. Share-based compensation recognized in connection with the accelerated vesting of restricted stock awards and performance share units upon the departure of certain executives and the reduction in workforce in the first quarter of 2018 reflects the remaining unrecognized compensation expense associated with these awards at the date of termination. The unrecognized compensation expense was calculated using the grant date fair value for restricted stock awards and performance share units. One share of the Company’s common stock was issued per performance share unit.

See Note 15 for additional discussion of the Company’s share-based compensation awards.

5. Acquisitions and Divestitures

Acquisition of Properties. In February 2017, the Company acquired assets consisting of approximately 13,000 net acres in Woodward County, Oklahoma for approximately $47.8 million in cash, net of post-closing adjustments. Also included in the acquisition were working interests in four wells previously drilled on the acreage.

2017 Property Divestitures. During the nine-month period ended September 30, 2017, the Company divested various non-core oil and natural gas properties for approximately $16.0 million in cash. All of these divestitures were accounted for as adjustments to the full cost pool with no gain or loss recognized.

12

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

See Note 7 for discussion of significant fixed asset divestitures and Note 16 for discussion of acquisitions and divestitures subsequent to the balance sheet date.

 6. 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 levels of the fair value hierarchy noted below. The carrying values of cash, restricted cash, accounts receivable, prepaid expenses, certain other current assets and other assets, accounts payable and accrued expenses, other current liabilities and other long-term obligations included in the unaudited condensed consolidated balance sheets approximated fair value at September 30, 2018, and December 31, 2017. As a result, these financial assets and liabilities are not discussed below. The fair values of property, plant and equipment classified as assets held for sale and related impairments, which are calculated using Level 3 inputs, are discussed in Note 7.

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 Level 2 of the hierarchy as of September 30, 2018, and Level 1 and Level 2 as of December 31, 2017, 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 of $5.1 million are included in other current assets in the accompanying unaudited condensed consolidated balance sheet at December 31, 2017. The Company’s non-qualified deferred compensation plan was terminated and all remaining investment balances were distributed to participants in January 2018.

Level 2 Fair Value Measurements

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

13

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

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):

September 30, 2018
Fair Value Measurements
Netting(1)
Assets/Liabilities at Fair Value
Level 1
Level 2
Level 3
Assets
Commodity derivative contracts
$ $224 $ $(151)$73 
$ $224 $ $(151)$73 
Liabilities 
Commodity derivative contracts
$ $43,847 $ $(151)$43,696 
$ $43,847 $ $(151)$43,696 

December 31, 2017
Fair Value Measurements
Netting(1)
Assets/Liabilities at Fair Value
Level 1
Level 2
Level 3
Assets
Commodity derivative contracts
$ $5,582 $ $(4,272)$1,310 
Investments
5,072   — 5,072 
$5,072 $5,582 $ $(4,272)$6,382 
Liabilities
Commodity derivative contracts
$ $18,467 $ $(4,272)$14,195 
$ $18,467 $ $(4,272)$14,195 
____________________
1. Represents the effect of netting assets and liabilities for counterparties with which the right of offset exists.

Transfers. The Company did not have any transfers between Level 1, Level 2 or Level 3 fair value measurements during the three and nine-month periods ended September 30, 2018 and 2017.

Fair Value of Financial Instruments - Long-Term Debt

The Company measured the fair value of its $35.0 million initial principal note, as amended in February 2017, which was secured by first priority mortgages on the Company’s real estate in Oklahoma City, Oklahoma (the “Building Note”) using a discounted cash flow analysis, which is classified as a Level 2 input in the fair value hierarchy. The Company repaid the Building Note in full during the first quarter of 2018. The estimated fair values and carrying values of the Company’s long-term debt are as follows (in thousands):
September 30, 2018December 31, 2017
Fair Value
Carrying Value
Fair Value
Carrying Value
Building Note
$ $ $42,526 $37,502 

See Note 9 for additional discussion of the Company’s long-term debt.

14

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

7. Property, Plant and Equipment

Property, plant and equipment consists of the following (in thousands): 
September 30, 2018December 31, 2017
Oil and natural gas properties
Proved
$1,206,363 $1,056,806 
Unproved
68,737 100,884 
Total oil and natural gas properties
1,275,100 1,157,690 
Less accumulated depreciation, depletion and impairment
(546,769)(460,431)
Net oil and natural gas properties capitalized costs
728,331 697,259 
Land
4,500 4,500 
Electrical infrastructure
131,010 131,010 
Other non-oil and natural gas equipment
19,671 26,809 
Buildings and structures
79,548 79,548 
Total 234,729 241,867 
Less accumulated depreciation and amortization
(23,531)(15,886)
Other property, plant and equipment, net
211,198 225,981 
Total property, plant and equipment, net
$939,529 $923,240 

The Company had approximately $10.6 million in assets classified as held for sale in the other current assets line of the accompanying consolidated balance sheet at December 31, 2017. Approximately $9.3 million of the total at December 31, 2017 was related to one of the Company’s properties located in downtown Oklahoma City, OK, which was classified as held for sale in the fourth quarter of 2017 and sold during the second quarter of 2018 for approximately $10.4 million, net of transaction fees. The resulting gain of $1.1 million was recorded in other operating expense on the accompanying condensed consolidated statements of operations for the nine-month period ended September 30, 2018.

Additionally, during the first quarter of 2018, the Company classified its remaining midstream generator assets as held for sale. These assets had a carrying value of $5.7 million which exceeded the estimated net realizable value of $1.6 million based on expected sales prices obtained from third parties. As a result, the Company recorded an impairment of $4.1 million for the nine-month period ended September 30, 2018. The midstream generator assets were sold during the second quarter of 2018 with no gain or loss recognized on the sale.

8. Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in thousands):
September 30, 2018December 31, 2017
Accounts payable and other accrued expenses
$54,957 $75,191 
Accrued interest
65 1,385 
Revenues and royalties payable
42,075 37,274 
Payroll and benefits
15,719 21,475 
Drilling advances
164 3,830 
Total accounts payable and accrued expenses
$112,980 $139,155 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

9. Long-Term Debt

Credit Facility. On February 10, 2017, the $425.0 million reserve-based revolving credit facility (the “First Lien Exit Facility”) was refinanced and replaced by a new $600.0 million credit facility (the “credit facility”). The borrowing base under the credit facility was reduced from $425.0 million to $350.0 million during the October 2018 semi-annual redetermination. The next borrowing base redetermination is scheduled for April 1, 2019. The credit facility matures on March 31, 2020. The outstanding borrowings under the credit facility bear interest based on a pricing grid tied to borrowing base utilization of (a) LIBOR plus an applicable margin that varies from 3.00% to 4.00% per annum, or (b) the base rate plus an applicable margin that varies from 2.00% to 3.00% per annum. Interest on base rate borrowings is payable quarterly in arrears and interest on LIBOR borrowings is payable every one, two, three or six months, at the election of the Company. Quarterly, the Company pays commitment fees assessed at annual rates of 0.50% on any available portion of the credit facility. The Company has the right to prepay loans under the credit facility at any time without a prepayment penalty, other than customary “breakage” costs with respect to LIBOR loans. Upon refinancing of the First Lien Exit Facility, $50.0 million maintained in a restricted cash collateral account, as required by the terms of the First Lien Exit Facility, was released to the Company.

The credit facility is secured by (i) first-priority mortgages on at least 95% of the PV-9 valuation of all proved reserves included in the most recently delivered reserve report of the Company, (ii) a first-priority perfected pledge of substantially all of the capital stock owned by each credit party and equity interests in the Royalty Trusts that are owned by a credit party and (iii) a first-priority perfected security interest in substantially all the cash, cash equivalents, deposits, securities and other similar accounts, and other tangible 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 credit facility requires the Company to maintain (i) a maximum consolidated total net leverage ratio, measured as of the end of any fiscal quarter, of no greater than 3.50 to 1.00 and (ii) a minimum consolidated interest coverage ratio, measured as of the end of any fiscal quarter, of no less than 2.25 to 1.00. These financial covenants are subject to customary cure rights. The Company was in compliance with all applicable financial covenants under the credit facility as of September 30, 2018.

The credit facility contains customary affirmative and negative covenants, including as to compliance with laws (including environmental laws, ERISA and anti-corruption laws), maintenance of required insurance, delivery of quarterly and annual financial statements, oil and gas engineering reports, maintenance and operation of property (including oil and gas properties), restrictions on the incurrence of liens, indebtedness, asset dispositions, fundamental changes, restricted payments including dividends and other customary covenants. The Company was in compliance with these covenants as of September 30, 2018.

The credit facility includes events of default relating to customary matters, including, among other things, nonpayment of principal, interest or other amounts; violation of covenants; incorrectness of representations and warranties in any material respect; cross-payment default and cross acceleration with respect to indebtedness in an aggregate principal amount of $25.0 million or more; bankruptcy; judgments involving a liability of $25.0 million or more that are not paid; and ERISA events. Many events of default are subject to customary notice and cure periods.

The credit facility also provides that a change in control, as defined therein, constitutes an event of default. In connection with the change in the majority of the members of the Company’s Board that occurred as a result of the 2018 annual meeting in June 2018, the Company entered into a consent and waiver agreement with the administrative agent and certain lenders constituting the majority lenders under the credit facility. The consent and waiver agreement waived any event of default which might have occurred as a result of the change in the majority of the members of the Company’s Board and recognized the new members of the Board as existing members of the Board under the definition of change in control in the credit agreement.

The Company had no amounts outstanding under the credit facility at September 30, 2018, and $6.2 million in outstanding letters of credit, which reduce availability under the credit facility on a dollar-for-dollar basis.

Building Note. On October 4, 2016 (the “Emergence Date”), in accordance with the joint plan of organization (the "Plan") of the Company and certain of its direct and indirect subsidiaries (collectively, the “Debtors"), the Company entered into the Building Note, which had an initial principal amount of $35.0 million. Net proceeds of $26.8 million received from the sale of the Building Note were remitted to unsecured creditors on the Emergence Date. The Company repaid the Building Note in full in February 2018. Interest was payable on the Building Note at 6% per annum for the first year following the Emergence Date, 8% per annum for the second year following the Emergence Date, and 10% thereafter through maturity. Interest costs were
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

payable in-kind until 90 days after the refinancing of the First Lien Exit Facility, which was May 11, 2017, and approximately $1.3 million in in-kind interest costs were added to the Building Note principal from the Emergence Date. Interest became payable thereafter in cash. The Building Note was set to mature on October 2, 2021 and became prepayable in whole or in part without premium or penalty upon the refinancing of the First Lien Exit Facility. The Building Note was initially recorded at a fair value of $36.6 million upon implementation of fresh start accounting. Prior to repayment, the resulting premium was being amortized to interest expense over the term of the Building Note. Upon repayment, the remaining unamortized premium of $1.2 million was recognized as a gain on extinguishment of debt in the unaudited condensed consolidated statement of operations for the nine-month period ended September 30, 2018.

10. Derivatives

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, on occasion, has sought 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. The Company has not designated any of its derivative contracts as hedges for accounting purposes and records all derivative contracts at fair value with changes in derivative contract fair values recognized as gain or loss on derivative contracts in the unaudited condensed consolidated statements of operations. 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. Commodity derivative contracts are settled on a monthly basis. On a quarterly basis, the commodity derivative contract valuations are adjusted to the mark-to-market valuation. At September 30, 2018, the Company’s commodity derivative contracts consisted of fixed price swaps under which 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.

The Company recorded losses on commodity derivative contracts of $11.3 million and $11.7 million for the three-month periods ended September 30, 2018, and 2017, respectively, which include net cash payments (receipts) upon settlement of $11.6 million and $(5.0) million, respectively. The Company recorded loss (gain) on commodity derivative contracts of $59.8 million and $(46.0) million for the nine-month periods ended September 30, 2018, and 2017, respectively, which include net cash payments (receipts) upon settlement of $29.0 million and $(7.7) million, respectively.

On June 26, 2018, the Board suspended the Company's ability to enter into new commodity derivative contracts pending review. In November 2018, the Board concluded this comprehensive evaluation of its commodity derivatives program and determined that no action should be taken with respect to outstanding derivatives contracts at this time. Future derivative transactions will require Board approval.

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 unaudited condensed 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 September 30, 2018, the counterparties to the Company’s open commodity derivative contracts consisted of five financial institutions, all of which are also lenders under the Company’s credit facility. The Company is not required to post additional collateral under its commodity derivative contracts as all of the counterparties to the Company’s commodity derivative contracts share in the collateral supporting the Company’s credit facility.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

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 credit facility as of September 30, 2018, and December 31, 2017 (in thousands):

September 30, 2018
Gross Amounts
Gross Amounts Offset
Amounts Net of Offset
Financial Collateral
Net Amount
Assets
Derivative contracts - current
$224 $(151)$73 $ $73 
Derivative contracts - noncurrent
     
Total
$224 $(151)$73 $ $73 
Liabilities
Derivative contracts - current
$37,056 $(151)$36,905 $(36,905)$ 
Derivative contracts - noncurrent
6,791  6,791 (6,791) 
Total
$43,847 $(151)$43,696 $(43,696)$ 

December 31, 2017
Gross Amounts
Gross Amounts Offset
Amounts Net of Offset
Financial Collateral
Net Amount
Assets
Derivative contracts - current
$5,582 $(4,272)$1,310 $ $1,310 
Derivative contracts - noncurrent
     
Total
$5,582 $(4,272)$1,310 $ $1,310 
Liabilities
Derivative contracts - current
$14,899 $(4,272)$10,627 $(10,627)$ 
Derivative contracts - noncurrent
3,568  3,568 (3,568) 
Total
$18,467 $(4,272)$14,195 $(14,195)$ 

At September 30, 2018, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps 
Notional (MBbls)
Weighted Average
Fixed Price
October 2018 - December 2018 828 $56.12 
January 2019 - December 2019 1,825 $54.29 

Natural Gas Price Swaps
Notional (MMcf)
Weighted Average
Fixed Price
October 2018 - December 2018 3,680 $3.11 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)

Fair Value of Derivatives 

The following table presents the fair value of the Company’s derivative contracts as of September 30, 2018, and December 31, 2017, on a gross basis without regard to same-counterparty netting (in thousands):
Type of Contract
Balance Sheet Classification
September 30, 2018December 31, 2017
Derivative assets 
Natural gas price swaps
Derivative contracts-current $224 $5,582 
Derivative liabilities 
Oil price swaps Derivative contracts-current (37,056)(14,899)
Oil price swaps Derivative contracts-noncurrent (6,791)(3,568)
Total net derivative contracts
$(43,623)$(12,885)

See Note 6 for additional discussion of the fair value measurement of the Company’s derivative contracts. 

11. Commitments and Contingencies

Legal Proceedings. On October 14, 2016, Lisa West and Stormy Hopson filed an amended class action complaint in the United States District Court for the Western District of Oklahoma against SandRidge Exploration and Production, LLC, among other defendants. In their amended complaint, plaintiffs asserted various tort claims seeking relief for damages, including the reimbursement of past and future earthquake insurance premiums, resulting from seismic activity allegedly caused by the defendants’ operation of wastewater disposal wells. The court dismissed the plaintiffs’ amended complaint on May 12, 2017, but permitted the plaintiffs to file a second amended complaint. On July 18, 2017, the plaintiffs filed a second amended class action complaint making allegations substantially similar to those contained in the amended complaint that was previously dismissed. On August 13, 2018, the court granted the Company’s motion to dismiss, thereby dismissing the Company from the lawsuit.

As previously disclosed, on May 16, 2016, the Debtors filed voluntary petitions for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). The Bankruptcy Court confirmed the Plan on September 9, 2016, and the Debtors subsequently emerged from bankruptcy on October 4, 2016.

Pursuant to the Plan, claims against the Company were discharged without recovery in each of the following consolidated cases (the “Cases”):

• In re SandRidge Energy, Inc. Securities Litigation, Case No. 5:12-cv-01341-LRW, USDC, Western District of Oklahoma
• Ivan Nibur, Lawrence Ross, Jase Luna, Matthew Willenbucher, and the Duane & Virginia Lanier Trust v. SandRidge Mississippian Trust I, et al., Case No. 5:15-cv-00634-SLP, USDC, Western District of Oklahoma
• Barton W. Gernandt Jr., et al. v. SandRidge Energy, Inc., Case No. 5:15-cv-00834-D, USDC, Western District of Oklahoma

Although the Cases have not been dismissed against certain former officers and directors who remain defendants in the Cases, the Company remains as a nominal defendant in each of the Cases so that any of the respective plaintiffs may seek to recover proceeds from any applicable insurance policies or proceeds. In each of the Cases, to the extent liability exceeds the amount of available insurance proceeds, the Company may owe indemnity obligations to its former officers and/or directors who remain as defendants in such action. An estimate of reasonably probable losses associated with any of the Cases cannot be made at this time, however the Company believes that any potential liability with respect to the Cases will not be material. The Company has not established any reserves relating to any of the Cases.

In addition to the matters described above, the Company is involved in various lawsuits, claims and proceedings which are being handled and defended by the Company in the ordinary course of business. Pursuant to the terms of the SandRidge Mississippian Trust I and SandRidge Mississippian Trust II, the Company is obligated to indemnify each Royalty Trust against losses, claims, damages, liabilities and expenses, including reasonable costs of investigation and attorney’s fees and expenses arising out of certain legal matters as stipulated in the respective agreements with each Royalty Trust.
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Restricted Cash. Restricted cash - other included on the unaudited condensed consolidated balance sheets at September 30, 2018, and December 31, 2017 is the cash portion of consideration set aside for future settlement of general unsecured claims related to the Chapter 11 proceedings in accordance with the Plan. The corresponding liability for future cash settlements of general unsecured claims is included in accounts payable and accrued expenses on the unaudited condensed consolidated balance sheets.

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 has historically entered into commodity derivative arrangements in order to mitigate a portion of the effect of this price volatility on the Company’s cash flows. The Company may not fully benefit from increases in the market price of oil and natural gas during periods where the strike prices for the Company's commodity derivative contracts are below market prices at the time of settlement. See Note 10 for the Company’s open oil and natural gas derivative contracts.

The Company historically has depended on cash flows from operating activities and, as necessary, borrowings under its credit facility to fund its capital expenditures. Based on its cash balances, cash flows from operating activities and net borrowing availability under the credit facility, the Company expects to be able to fund its planned capital expenditures budget, working capital needs, and any potential debt service requirements for the next year; however, if oil or natural gas prices decline from current levels, they could 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. Potential decreases in the Company's cash flows from operating activities during periods of declining market prices of oil and natural gas may be offset to the extent the Company has commodity derivative contracts in place that have strike prices above market prices at the time of settlement.

12. Equity

Common Stock and Performance Share Units. At September 30, 2018, the Company had 35.7 million shares of common stock, par value $0.001 per share, issued and outstanding, including 0.4 million shares of unvested restricted stock awards, and 250.0 million shares of common stock authorized. In accordance with normal practices, the Company granted additional restricted stock awards and an immaterial amount of performance share units in the third quarter of 2018.

Accelerated Vesting upon Change in Control. As a result of the election of a majority of non-incumbent directors nominated in connection with the proxy contest in the second quarter of 2018, and on the advice of outside counsel, vesting was accelerated for the majority of the Company's then-outstanding unvested restricted stock awards and all of the Company's then-outstanding unvested performance share units. See Note 3 and Note 15 for additional discussion of this event. 

Warrants. The Company has issued approximately 4.6 million Series A warrants and 2.0 million Series B warrants that are exercisable until October 4, 2022 for one share of common stock per warrant at initial exercise prices of $41.34 and $42.03 per share, respectively, subject to adjustments pursuant to the terms of the warrants, to certain holders of general unsecured claims as defined in the Plan. The warrants contain customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions. 

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(Unaudited)

13. Income Taxes

For each interim reporting period, the Company estimates 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.