SEC Company Response from SANDRIDGE ENERGY INC (SD) (CIK 0001349436) (SD) — Feb 19, 2014
SANDRIDGE ENERGY INC (SD) (CIK 0001349436)
Date: Feb. 19, 2014 · CIK: 0001349436 · Accession: 0001193125-14-058815
AI Filing Summary & Sentiment
Reasoning
File numbers found in text: 001-33784
Referenced dates: February 4, 2014
Letter
Division of Corporation Finance Definitive Proxy Statement on Schedule 14A Filed May 29, 2013 Response Letter December 13, 2013 File No. 001-33784
Dear Mr. Schwall,
SandRidge Energy, Inc. (the “Company” or “SandRidge”) hereby submits this letter in response to the written comments of the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”), dated February 4, 2014 (the “Comment Letter”), with respect to the Form 10-K for the fiscal year ended December 31, 2012 filed by SandRidge with the Commission on March 1, 2013 (the “2012 Form 10-K”); the Form 10-Q for the fiscal quarter ended March 31, 2013 filed by SandRidge with the Commission on May 8, 2013; the Definitive Proxy Statement on Schedule 14A filed by SandRidge with the Commission on May 29, 2013; and the Response Letter filed by the Company with the Commission on December 13, 2013.
Set forth below is the heading and text of each comment set forth in the Comment Letter, followed by our response thereto. As noted in its responses to Comment 6 below, the Company undertakes to include certain disclosure in its Form 10-K for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”) and, to the extent applicable, in other future filings. Capitalized terms used but not otherwise defined herein have the respective meanings ascribed to them in the 2012 Form 10-K.
Form 10-K for the Fiscal Year ended December 31, 2012
Business, page 1
Mr. H. Roger Schwall
U.S. Securities and Exchange Commission
Page 2
Business Segments and Primary Operations, page 4
West Texas Overthrust, page 6
1. We note your response to prior comment two, clarifying that you have accrued your delivery shortfall liability using the $0.25 rate and have not accrued the incremental $0.70 per Mcf end-of-contract penalty because the opportunity to avoid payment by making excess deliveries in a future period has introduced uncertainty about the extent to which this liability may be reduced before it must otherwise be paid in 2042 (i.e., the final year of the contract).
You thereby emphasize that ultimate payment is less than probable and not estimable. However, these assessments appear to arise only when contemplating future events that may alleviate your liability rather than being attributable to incomplete information about the delivery shortfalls that have already occurred. We would like to understand why you believe the financial implications of actual delivery shortfall are subject to the guidance for loss contingencies in FASB ASC 450-20, and why if you are subject to this guidance, you have not effectively offset your loss with gain that is contingent on excess deliveries in the future, contrary to the guidance in FASB ASC 450-30-25-1 and 50-1.
Please explain your basis for assuming future excess deliveries will occur and be sufficient to avoid additional payment. Given your history of recording shortfalls in 2012 and 2013, and the information set forth in your response regarding an inability to provide an estimate, there does not appear to be a basis to forecast a surplus sufficient to overcome past CO2 delivery deficiencies.
Response
The terms of the treating agreement specify that delivery deficiency volumes in a given year are not added to the subsequent year’s annual requirement, but rather are added to the annual requirement of the final year of the term of the agreement. In the event the contract is cancelled by Occidental prior to the end of its term, whether due to nonperformance by the Company or otherwise, the Company is not obligated to pay Occidental the $0.70 end-of-contract penalty on any delivery deficiency volumes incurred through the date of cancellation. ASC 450-20 defines a contingency as “An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur.” As the delivery shortfalls in 2012 and 2013 create uncertainty that will not be resolved until future deliveries occur or fail to occur, the Company believes the contingencies guidance is applicable with respect to the treating agreement.
The Company has prepared several analyses based upon the assumption that drilling will resume in the West Texas Overthrust (“WTO”) once natural gas prices reach a level sufficient to produce a reasonable rate of return, all of which indicate that the Company would produce enough natural gas, and consequently enough CO2, to satisfy the total CO2 volume delivery commitment under the treating agreement. For this reason, the Company is currently not able to reasonably determine what portion of delivery deficiency volumes incurred in 2012 and 2013, if any, will ultimately be attributed to the annual requirement of the final year of the term of the agreement (2042) and believes its disclosures are compliant with guidance set forth in ASC 450-20.
Mr. H. Roger Schwall
U.S. Securities and Exchange Commission
Page 3
As mentioned in the correspondence dated December 13, 2013, the Company is in discussions with other companies that have expressed interest in developing the WTO. As part of those discussions, the Company has analyzed various scenarios for the development of the field. The attached chart presents estimated CO2 volumes that would be delivered as a result of WTO development assuming the resumption of drilling in the WTO at a price of $4.80 per Mcf of natural gas. This would result in a 20% rate of return, which the Company believes is a reasonable rate for natural gas drilling compared to other available drilling projects. Analyses of WTO development utilizing both a 10-rig drilling program and a 15-rig drilling program were prepared. The Company believes these would be nominal amounts of drilling activity given the fact that at one point in time the Company had over 40 rigs drilling in the WTO. At the time these analyses were prepared, the November NYMEX strip indicated a natural gas price of $4.80 per Mcf in 2021; Therefore, four of the analyses assumed the resumption of drilling in 2022. Additionally, in order to analyze the impact to production of an earlier natural gas price recovery, four analyses assumed that the price of natural gas would reach $4.80 per Mcf and drilling would resume in 2016. Under each scenario, CO2 volumes delivered are sufficient to satisfy the Company’s total delivery obligation under the treating agreement such that the Company would not incur any end-of-term penalties.
After the Staff’s review of the above discussion and the attached chart, the Company would welcome any questions and is available to discuss any such questions at the Staff’s convenience.
Financial Statements
Note 1—Summary of Significant Accounting Policies, page F-9
Revenue Recognition and Natural Gas Balancing, page F-13
2. We have read your response to prior comment seven and understand that you regard the Century Plant construction and CO2 delivery contracts to be separate units of accounting under FASB ASC 605-25-25-5. We would like to understand how you applied the guidance in FASB ASC 605-25-30-2 and 5, in recognizing the entire $796.3 million contract price as revenue in 2012, while zero has been allocated to your CO2 delivery commitment, which appears to represent a substantial performance obligations as evidenced by the penalty provisions in the treating and delivery agreement. Please explain why the amount allocated to the Century Plant was not limited to zero under this provision and why ultimate realization of proceeds are not viewed as contingent upon the delivery of CO2.
Response
The Company believes the construction and treating agreements entered into by the Company and Occidental are not typical to those contemplated under the guidance set forth in ASC 605-25, as (1) the Company has entered into the treating agreement in order to contract for the provision of services (processing of its natural gas production) and not as a revenue earnings
Mr. H. Roger Schwall
U.S. Securities and Exchange Commission
Page 4
activity, and (2) both parties to the treating agreement have significant performance obligations – the Company is obligated to deliver CO2 through the delivery of natural gas for treating at the Century Plant and Occidental is obligated to provide available treating capacity and treating services for Company-delivered volumes. The guidance set forth in ASC 605-25 does not specifically address the recognition of revenue attributable to a delivered item in situations where contracts have been entered into in contemplation of one another, but the purchaser of the initial deliverable is obligated to provide significant services in conjunction with the receipt of another deliverable of the arrangement; however, application of the guidance found in ASC 605-25-30-2 to both the Century Plant construction and CO2 delivery obligation as “deliverables” under the contracts requires consideration to be allocated at inception to all deliverables on the basis of their relative selling price. Consideration received from Occidental under the construction contract of $796.3 million represents the selling price of the Century Plant under construction accounting treatment and represented the Company’s best estimate of the selling price of such a plant; as mentioned previously, CO2 is considered a “waste gas” and a byproduct of the natural gas treating process which must be disposed; therefore, a relative selling price of $0 was allocated to the CO2 to be delivered in the future.
ASC 605-25-30-5 states that the amount allocable to the delivered unit of accounting (the Century Plant) is limited to the amount that is not contingent upon delivery of additional items or meeting other specified performance conditions, with ASC 605-25-30-6 further indicating that the amount recognized attributable to the delivered item shall not exceed all amounts to which the vendor is legally entitled, including cancellation fees (in the event of customer cancellation). Under the terms of the treating agreement, Occidental is subject to significant penalties in the event that Occidental chooses to terminate the agreement. Upon termination of the contract by Occidental, whether as a result of nonperformance by the Company or otherwise, Occidental is required to transfer title of the Century Plant to the Company, reimburse the Company for contract overages (i.e., costs incurred by the Company in excess of reimbursements paid by Occidental) during the construction of the Century Plant and pay the Company a lump sum penalty calculated based upon the Company’s CO2 delivery requirements in future periods (at a rate of $0.70 per Mcf). As such, an amount greater than the $796.3 million consideration received would be required to be transferred to the Company in the event Occidental terminated the agreement; therefore the allocable proceeds are not considered contingent upon future delivery of CO2 volumes under the guidance of ASC 605-25-30-5 nor are the proceeds limited under the guidance in ASC 605-25-30-6.
3. We understand from your response to prior comment seven that you have not recognized incremental oil and gas reserves in conjunction with the construction of the Century Plant, notwithstanding your accounting for construction contract losses as oil and gas property development costs under the full cost method. Tell us how you determined that construction costs were not development costs under the full cost method while also concluding that losses on the construction contract were development costs. Please also clarify whether you attributed the losses to evaluated properties whose costs are subject to amortization or unevaluated properties whose costs are not subject to amortization and explain how these losses have been factored into your ceiling tests at each balance sheet date
Mr. H. Roger Schwall
U.S. Securities and Exchange Commission
Page 5
Response
As an oil and gas company following the full cost method of accounting that had also been contracted to construct a processing plant for a third party, it was necessary for the Company to decide as to which of two competing accounting models—full cost method of accounting for oil and gas or construction accounting—it would follow in accounting for the construction of the Century Plant, including any differences in billings and costs incurred. The Company’s capitalization of costs incurred in excess of billings that will not be paid or reimbursed by Occidental (“losses”) as development costs within the full cost pool resulted in the same impact to the full cost pool and net income as would have been recognized had the Company capitalized all costs incurred to construct the Century Plant in its full cost pool and credited reimbursements from Occidental to the full cost pool as received; however, the Company believes that its use of the completed contract method in this instance provides financial statement users greater visibility into the costs incurred and borne by the Company in connection with the construction agreement.
The Company acknowledges that costs incurred during construction in excess of payments received for the constructed asset would typically result in a loss on the income statement under construction accounting guidance; however, the Company believes in this instance that such losses are properly classified within the Company’s full cost pool as “development costs” as defined in Rule 4-10 of Regulation S-X (costs incurred to obtain access to proved reserves for extraction, treating, gathering and storing the oil and gas) because the Company incurred those costs solely for the purpose of developing its high-CO2 reserves within the Piñon Field. Because the Century Plant was constructed on behalf of Occidental and, upon completion, is an asset the title to which is held by Occidental, the Company did not consider construction costs subject to reimbursement under the construction contract to be development costs of the Company. Only the costs of the Plant’s construction that were ultimately borne by the Company, i.e., the losses, are considered development costs incurred by the Company.
During the construction phase of the Century Plant, estimated losses were accounted for as a major development project (Regulation SX Rule 4-10(c)(3)(ii)(B)) attributed to unevaluated properties in the WTO and were, therefore, excluded from costs subject to amortization. Additionally, such estimated losses were included in the Company’s ceiling for ceiling test purposes at the then current carrying cost (i.e., the losses were included in both the ceiling and the capitalized costs compared to the ceiling as allowed under Regulation SX Rule 4-10(c)(4)(i)(B)). Upon completion of the construction phase of the Century Plant, these losses were included in costs subject to amortization and were no longer included in the Company’s ceiling for ceiling test purposes (included only in capitalized costs subject to the ceiling limitation), due to the fact that construction of the Plant had concluded. The Company believes that attribution of these costs to unevaluated properties during the construction period was reasonable given the large number of unproved future identified drilling locations in the WTO and the fact that the Company’s existing smaller CO2 processing plants had capacity adequate to process natural gas volumes from then-producing WTO wells; however, attribution of these costs exclusively to prove
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CORRESP 1 filename1.htm SEC Response Letter February 19, 2014 Mr. H. Roger Schwall Assistant Director Division of Corporation Finance U.S. Securities and Exchange Commission 100 F Street, N.E. Washington, D.C. 20549-3628 Re: SandRidge Energy, Inc. Form 10-K for the Fiscal Year Ended December 31, 2012 Filed March 1, 2013 Form 10-Q for the Fiscal Quarter ended March 31, 2013 Filed May 8, 2013 Definitive Proxy Statement on Schedule 14A Filed May 29, 2013 Response Letter December 13, 2013 File No. 001-33784 Dear Mr. Schwall, SandRidge Energy, Inc. (the “Company” or “SandRidge”) hereby submits this letter in response to the written comments of the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”), dated February 4, 2014 (the “Comment Letter”), with respect to the Form 10-K for the fiscal year ended December 31, 2012 filed by SandRidge with the Commission on March 1, 2013 (the “2012 Form 10-K”); the Form 10-Q for the fiscal quarter ended March 31, 2013 filed by SandRidge with the Commission on May 8, 2013; the Definitive Proxy Statement on Schedule 14A filed by SandRidge with the Commission on May 29, 2013; and the Response Letter filed by the Company with the Commission on December 13, 2013. Set forth below is the heading and text of each comment set forth in the Comment Letter, followed by our response thereto. As noted in its responses to Comment 6 below, the Company undertakes to include certain disclosure in its Form 10-K for the fiscal year ended December 31, 2013 (the “2013 Form 10-K”) and, to the extent applicable, in other future filings. Capitalized terms used but not otherwise defined herein have the respective meanings ascribed to them in the 2012 Form 10-K. Form 10-K for the Fiscal Year ended December 31, 2012 Business, page 1 Mr. H. Roger Schwall U.S. Securities and Exchange Commission Page 2 Business Segments and Primary Operations, page 4 West Texas Overthrust, page 6 1. We note your response to prior comment two, clarifying that you have accrued your delivery shortfall liability using the $0.25 rate and have not accrued the incremental $0.70 per Mcf end-of-contract penalty because the opportunity to avoid payment by making excess deliveries in a future period has introduced uncertainty about the extent to which this liability may be reduced before it must otherwise be paid in 2042 (i.e., the final year of the contract). You thereby emphasize that ultimate payment is less than probable and not estimable. However, these assessments appear to arise only when contemplating future events that may alleviate your liability rather than being attributable to incomplete information about the delivery shortfalls that have already occurred. We would like to understand why you believe the financial implications of actual delivery shortfall are subject to the guidance for loss contingencies in FASB ASC 450-20, and why if you are subject to this guidance, you have not effectively offset your loss with gain that is contingent on excess deliveries in the future, contrary to the guidance in FASB ASC 450-30-25-1 and 50-1. Please explain your basis for assuming future excess deliveries will occur and be sufficient to avoid additional payment. Given your history of recording shortfalls in 2012 and 2013, and the information set forth in your response regarding an inability to provide an estimate, there does not appear to be a basis to forecast a surplus sufficient to overcome past CO2 delivery deficiencies. Response The terms of the treating agreement specify that delivery deficiency volumes in a given year are not added to the subsequent year’s annual requirement, but rather are added to the annual requirement of the final year of the term of the agreement. In the event the contract is cancelled by Occidental prior to the end of its term, whether due to nonperformance by the Company or otherwise, the Company is not obligated to pay Occidental the $0.70 end-of-contract penalty on any delivery deficiency volumes incurred through the date of cancellation. ASC 450-20 defines a contingency as “An existing condition, situation, or set of circumstances involving uncertainty as to possible gain (gain contingency) or loss (loss contingency) to an entity that will ultimately be resolved when one or more future events occur or fail to occur.” As the delivery shortfalls in 2012 and 2013 create uncertainty that will not be resolved until future deliveries occur or fail to occur, the Company believes the contingencies guidance is applicable with respect to the treating agreement. The Company has prepared several analyses based upon the assumption that drilling will resume in the West Texas Overthrust (“WTO”) once natural gas prices reach a level sufficient to produce a reasonable rate of return, all of which indicate that the Company would produce enough natural gas, and consequently enough CO2, to satisfy the total CO2 volume delivery commitment under the treating agreement. For this reason, the Company is currently not able to reasonably determine what portion of delivery deficiency volumes incurred in 2012 and 2013, if any, will ultimately be attributed to the annual requirement of the final year of the term of the agreement (2042) and believes its disclosures are compliant with guidance set forth in ASC 450-20. Mr. H. Roger Schwall U.S. Securities and Exchange Commission Page 3 As mentioned in the correspondence dated December 13, 2013, the Company is in discussions with other companies that have expressed interest in developing the WTO. As part of those discussions, the Company has analyzed various scenarios for the development of the field. The attached chart presents estimated CO2 volumes that would be delivered as a result of WTO development assuming the resumption of drilling in the WTO at a price of $4.80 per Mcf of natural gas. This would result in a 20% rate of return, which the Company believes is a reasonable rate for natural gas drilling compared to other available drilling projects. Analyses of WTO development utilizing both a 10-rig drilling program and a 15-rig drilling program were prepared. The Company believes these would be nominal amounts of drilling activity given the fact that at one point in time the Company had over 40 rigs drilling in the WTO. At the time these analyses were prepared, the November NYMEX strip indicated a natural gas price of $4.80 per Mcf in 2021; Therefore, four of the analyses assumed the resumption of drilling in 2022. Additionally, in order to analyze the impact to production of an earlier natural gas price recovery, four analyses assumed that the price of natural gas would reach $4.80 per Mcf and drilling would resume in 2016. Under each scenario, CO2 volumes delivered are sufficient to satisfy the Company’s total delivery obligation under the treating agreement such that the Company would not incur any end-of-term penalties. After the Staff’s review of the above discussion and the attached chart, the Company would welcome any questions and is available to discuss any such questions at the Staff’s convenience. Financial Statements Note 1—Summary of Significant Accounting Policies, page F-9 Revenue Recognition and Natural Gas Balancing, page F-13 2. We have read your response to prior comment seven and understand that you regard the Century Plant construction and CO2 delivery contracts to be separate units of accounting under FASB ASC 605-25-25-5. We would like to understand how you applied the guidance in FASB ASC 605-25-30-2 and 5, in recognizing the entire $796.3 million contract price as revenue in 2012, while zero has been allocated to your CO2 delivery commitment, which appears to represent a substantial performance obligations as evidenced by the penalty provisions in the treating and delivery agreement. Please explain why the amount allocated to the Century Plant was not limited to zero under this provision and why ultimate realization of proceeds are not viewed as contingent upon the delivery of CO2. Response The Company believes the construction and treating agreements entered into by the Company and Occidental are not typical to those contemplated under the guidance set forth in ASC 605-25, as (1) the Company has entered into the treating agreement in order to contract for the provision of services (processing of its natural gas production) and not as a revenue earnings Mr. H. Roger Schwall U.S. Securities and Exchange Commission Page 4 activity, and (2) both parties to the treating agreement have significant performance obligations – the Company is obligated to deliver CO2 through the delivery of natural gas for treating at the Century Plant and Occidental is obligated to provide available treating capacity and treating services for Company-delivered volumes. The guidance set forth in ASC 605-25 does not specifically address the recognition of revenue attributable to a delivered item in situations where contracts have been entered into in contemplation of one another, but the purchaser of the initial deliverable is obligated to provide significant services in conjunction with the receipt of another deliverable of the arrangement; however, application of the guidance found in ASC 605-25-30-2 to both the Century Plant construction and CO2 delivery obligation as “deliverables” under the contracts requires consideration to be allocated at inception to all deliverables on the basis of their relative selling price. Consideration received from Occidental under the construction contract of $796.3 million represents the selling price of the Century Plant under construction accounting treatment and represented the Company’s best estimate of the selling price of such a plant; as mentioned previously, CO2 is considered a “waste gas” and a byproduct of the natural gas treating process which must be disposed; therefore, a relative selling price of $0 was allocated to the CO2 to be delivered in the future. ASC 605-25-30-5 states that the amount allocable to the delivered unit of accounting (the Century Plant) is limited to the amount that is not contingent upon delivery of additional items or meeting other specified performance conditions, with ASC 605-25-30-6 further indicating that the amount recognized attributable to the delivered item shall not exceed all amounts to which the vendor is legally entitled, including cancellation fees (in the event of customer cancellation). Under the terms of the treating agreement, Occidental is subject to significant penalties in the event that Occidental chooses to terminate the agreement. Upon termination of the contract by Occidental, whether as a result of nonperformance by the Company or otherwise, Occidental is required to transfer title of the Century Plant to the Company, reimburse the Company for contract overages (i.e., costs incurred by the Company in excess of reimbursements paid by Occidental) during the construction of the Century Plant and pay the Company a lump sum penalty calculated based upon the Company’s CO2 delivery requirements in future periods (at a rate of $0.70 per Mcf). As such, an amount greater than the $796.3 million consideration received would be required to be transferred to the Company in the event Occidental terminated the agreement; therefore the allocable proceeds are not considered contingent upon future delivery of CO2 volumes under the guidance of ASC 605-25-30-5 nor are the proceeds limited under the guidance in ASC 605-25-30-6. 3. We understand from your response to prior comment seven that you have not recognized incremental oil and gas reserves in conjunction with the construction of the Century Plant, notwithstanding your accounting for construction contract losses as oil and gas property development costs under the full cost method. Tell us how you determined that construction costs were not development costs under the full cost method while also concluding that losses on the construction contract were development costs. Please also clarify whether you attributed the losses to evaluated properties whose costs are subject to amortization or unevaluated properties whose costs are not subject to amortization and explain how these losses have been factored into your ceiling tests at each balance sheet date Mr. H. Roger Schwall U.S. Securities and Exchange Commission Page 5 Response As an oil and gas company following the full cost method of accounting that had also been contracted to construct a processing plant for a third party, it was necessary for the Company to decide as to which of two competing accounting models—full cost method of accounting for oil and gas or construction accounting—it would follow in accounting for the construction of the Century Plant, including any differences in billings and costs incurred. The Company’s capitalization of costs incurred in excess of billings that will not be paid or reimbursed by Occidental (“losses”) as development costs within the full cost pool resulted in the same impact to the full cost pool and net income as would have been recognized had the Company capitalized all costs incurred to construct the Century Plant in its full cost pool and credited reimbursements from Occidental to the full cost pool as received; however, the Company believes that its use of the completed contract method in this instance provides financial statement users greater visibility into the costs incurred and borne by the Company in connection with the construction agreement. The Company acknowledges that costs incurred during construction in excess of payments received for the constructed asset would typically result in a loss on the income statement under construction accounting guidance; however, the Company believes in this instance that such losses are properly classified within the Company’s full cost pool as “development costs” as defined in Rule 4-10 of Regulation S-X (costs incurred to obtain access to proved reserves for extraction, treating, gathering and storing the oil and gas) because the Company incurred those costs solely for the purpose of developing its high-CO2 reserves within the Piñon Field. Because the Century Plant was constructed on behalf of Occidental and, upon completion, is an asset the title to which is held by Occidental, the Company did not consider construction costs subject to reimbursement under the construction contract to be development costs of the Company. Only the costs of the Plant’s construction that were ultimately borne by the Company, i.e., the losses, are considered development costs incurred by the Company. During the construction phase of the Century Plant, estimated losses were accounted for as a major development project (Regulation SX Rule 4-10(c)(3)(ii)(B)) attributed to unevaluated properties in the WTO and were, therefore, excluded from costs subject to amortization. Additionally, such estimated losses were included in the Company’s ceiling for ceiling test purposes at the then current carrying cost (i.e., the losses were included in both the ceiling and the capitalized costs compared to the ceiling as allowed under Regulation SX Rule 4-10(c)(4)(i)(B)). Upon completion of the construction phase of the Century Plant, these losses were included in costs subject to amortization and were no longer included in the Company’s ceiling for ceiling test purposes (included only in capitalized costs subject to the ceiling limitation), due to the fact that construction of the Plant had concluded. The Company believes that attribution of these costs to unevaluated properties during the construction period was reasonable given the large number of unproved future identified drilling locations in the WTO and the fact that the Company’s existing smaller CO2 processing plants had capacity adequate to process natural gas volumes from then-producing WTO wells; however, attribution of these costs exclusively to prove