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Article by DailyStocks_admin    (04-04-13 11:46 PM)

Description

Filed with the SEC from Mar 21 to Mar 27:
SandRidge Energy (SD)
Mount Kellett Capital increased its holdings to 25,224,807 shares (5.1%) by buying three million shares on March 14 and March 15 for $5.64 to $5.73 each. It did not disclose any plans.
BUSINESS OVERVIEW

GENERAL

SandRidge Energy, Inc. is an independent oil and natural gas company headquartered in Oklahoma City, Oklahoma, concentrating on development and production activities in the Mid-Continent, Gulf of Mexico and Permian Basin in west Texas. The Company’s primary area of focus is the Mississippian formation, a shallow hydrocarbon system in the Mid-Continent area of northern Oklahoma and Kansas, where it had approximately 1,886,000 net acres under lease at December 31, 2012 . The Company also had approximately 457,000 and 232,000 net acres in the Gulf of Mexico and the Permian Basin, respectively, under lease at December 31, 2012 and owns and operates other interests in the Mid-Continent, west Texas and Gulf Coast. As described below, the Company entered into an agreement during December 2012 to sell a significant portion of its oil and natural gas properties in the Permian Basin. For more information, see “—2012 Developments—Sale of Permian Properties.”

As of December 31, 2012 , the Company had 6,082 gross ( 5,066.1 net) producing wells, a substantial portion of which it operates, and approximately 4,274,000 gross ( 2,941,000 net) total acres under lease. As of December 31, 2012 , the Company had 33 rigs drilling in the Mid-Continent, two rigs drilling in the Gulf of Mexico, and four rigs drilling in the Permian Basin. Total estimated proved reserves as of December 31, 2012 were 565.9 MMBoe, of which approximately 58% were oil, including NGLs, and approximately 57% were proved developed.

The Company also operates businesses that are complementary to its primary development and production activities, including gas gathering and processing facilities, an oil and natural gas marketing business and an oil field services business, including its wholly owned drilling rig business, Lariat Services, Inc. (“Lariat”). As of December 31, 2012 , the Company’s drilling rig fleet consisted of 30 operational rigs. These complementary businesses provide the Company with operational flexibility and an advantageous cost structure by reducing the Company’s dependence on third parties for these services. The Company also transports carbon dioxide (“CO 2 ”) to the Permian Basin for use in tertiary recovery projects. “SandRidge CO 2 ” refers to the Company’s wholly owned subsidiary SandRidge CO 2 , LLC.

The Company’s principal executive offices are located at 123 Robert S. Kerr Avenue, Oklahoma City, Oklahoma 73102 and the Company’s telephone number is (405) 429-5500. SandRidge makes available free of charge on its website at http://www.sandridgeenergy.com its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission (“SEC”). Any materials that the Company has filed with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1580, Washington D.C. 20549 or accessed via the SEC’s website address at http://www.sec.gov.

BUSINESS STRATEGY

The Company’s primary objectives are to achieve long-term growth and maximize stockholder value over multiple business cycles by pursuing the following strategies:

•

Concentrate in Core Operating Areas. The Company’s primary areas of operation are (1) the Mid-Continent area of Oklahoma and Kansas and (2) the shallow water Gulf of Mexico. By concentrating in these core areas, the Company is able to (i) further build and utilize its technical expertise in order to interpret specific geological and operational trends, (ii) achieve economies of scale and breadth of operations, both of which help to control costs, (iii) take advantage of investments in infrastructure including electrical and produced water disposal systems and (iv) opportunistically grow its holdings and operations in these areas to achieve production and reserve growth.

•

Focus on Conventional and Proven Reservoirs. The Company focuses its on-shore development efforts primarily in conventional, shallow, low-cost, permeable carbonate reservoirs with decades of production history. The nature of these reservoirs allows the Company to execute low-risk, repeatable drilling programs with predictable production profiles and a higher certainty of economic returns. Further, due to these low pressure and shallow characteristics, the Company is able to maintain a low-cost operating structure and manage service costs.

The Company’s offshore assets are primarily in the shallow waters of the Gulf of Mexico, which is a mature area that has been heavily explored and developed. The Company believes that there is still an abundance of low risk projects on the Gulf of Mexico shelf that offer attractive returns. These properties are being extensively reviewed for additional drilling and recompletion opportunities to fully exploit the remaining potential.

•

Invest in Infrastructure to Support Growth in Core Area. By constructing a saltwater disposal system and electrical infrastructure to service the Mississippian formation, the Company is able to produce oil and natural gas more efficiently and, therefore, more economically, giving it a competitive advantage over other operators in this rural area.

•

Pursue Opportunistic Acquisitions. The Company periodically reviews acquisition targets to complement its existing asset base. Accordingly, the Company selectively identifies such targets based on several factors including relative value, hydrocarbon mix and location and, when appropriate, seeks to acquire them at a discount to other opportunities.

•

Maintain Flexibility. The Company has multi-year inventories of both oil and natural gas drilling locations within its core operating areas. Additionally, the Company maintains its own fleet of drilling rigs through Lariat. Maintaining inventories of both oil and natural gas drilling locations as well as its own drilling rigs allows the Company to efficiently direct capital toward projects with the most attractive returns.

•

Mitigate Commodity Price Risk. The Company enters into derivative contracts to mitigate commodity price volatility inherent in the oil and natural gas industry. By increasing the predictability of cash inflows for a portion of its future production, the Company is better able to mitigate funding risks for its longer term development plans and lock-in rates of return on its capital projects.

•

Asset Monetization . The Company periodically evaluates its properties to identify opportunities to monetize assets to fund or accelerate development within its areas of focus, and may use proceeds realized from such transactions to fund the drilling and development of its core areas, for general corporate purposes or to retire corporate debt.

2012 DEVELOPMENTS
Acquisitions

Dynamic Acquisition . In April 2012, the Company acquired 100% of the equity interests of Dynamic Offshore Resources, LLC (“Dynamic”) for approximately $1.2 billion, comprised of approximately $680.0 million in cash and approximately 74 million shares of the Company’s common stock (the “Dynamic Acquisition”). Dynamic is an oil and natural gas exploration, development and production company with operations in the Gulf of Mexico. The Dynamic Acquisition expanded the Company’s presence in the Gulf of Mexico, adding oil and natural gas reserves and production to its existing asset base in this area.

Acquisition of Gulf of Mexico Properties. In June 2012, the Company acquired additional oil and natural gas properties in the Gulf of Mexico located on approximately 184,000 gross (103,000 net) acres for approximately $38.5 million, net of purchase price adjustments and subject to post-closing adjustments.

Divestitures

Sale of Working Interest in Mississippian Properties. In January 2012, the Company sold (i) non-operated working interests, equal to approximately 250,000 net acres, in the Mississippian formation in western Kansas and (ii) non-operated working interests, equal to approximately 114,000 net acres, and a proportionate share of existing salt water disposal facilities in the Mississippian formation in northern Oklahoma and southern Kansas to Repsol E&P USA Inc. (“Repsol”) for approximately $250.0 million. In addition, Repsol agreed to pay the development costs related to its working interest, as well as a portion of the Company’s development costs equal to 200% of Repsol’s working interest for wells within an area of mutual interest up to $750.0 million. The Company expects Repsol’s funding of the Company’s development cost for wells within the area of mutual interest to occur over a three-year period.

Sale of Tertiary Recovery Properties. In June 2012, the Company sold its tertiary recovery properties located in the Permian Basin area of west Texas for $130.8 million, net of post-closing adjustments. Approximately 0.4% and 1.3% of the Company’s combined production volumes for the years ended December 31, 2012 and 2011, respectively, were produced from the tertiary properties.

Sale of Permian Properties. In December 2012, the Company entered into an agreement to sell all of its oil and natural gas properties in the Permian Basin in west Texas, excluding the assets attributable to the SandRidge Permian Trust area of mutual interest (the “Permian Properties”), for $2.6 billion , subject to post-closing adjustments. At December 31, 2012, the Permian Properties had associated proved reserves of 198.9 MMBoe with a PV-10 value of $3.2 billion . PV-10 generally differs from the Standardized Measure of Discounted Net Cash Flows (“Standardized Measure”) because it does not include the effects of income taxes on future net revenues. For a reconciliation of PV-10 to Standardized Measure, see “Management’s Discussion and Analysis—Overview” in Item 7 of this report. The estimated Standardized Measure attributable to the Permian Properties was approximately $2.5 billion at December 31, 2012 . For the year ended December 31, 2012, production, revenues and direct operating expenses for the Permian Properties were 8.7 MMBoe, $566.1 million, and $130.3 million, respectively. The transaction closed on February 26, 2013.

Royalty Trust Offering

In April 2012, SandRidge Mississippian Trust II (the “Mississippian Trust II”) completed its initial public offering of 29,900,000 common units representing approximately 60.1% of the beneficial interests in the Mississippian Trust II. Concurrent with the closing of the offering, the Company conveyed certain royalty interests to the Mississippian Trust II in exchange for the net proceeds of the offering and 19,825,000 units, representing approximately 39.9% of the beneficial interest, in the Mississippian Trust II. Net proceeds to the Company, after underwriting discounts and commissions, were approximately $587.1 million .
The Company and one of its wholly owned subsidiaries entered into a development agreement with the Mississippian Trust II that obligates the Company to drill, or cause to be drilled, a specified number of wells, which are also subject to a royalty interest, by December 31, 2016. One of the Company’s wholly owned subsidiaries also granted to the Mississippian Trust II a lien on the Company’s interests in the properties where the development wells are to be drilled, in order to secure the estimated amount of the drilling costs for the wells.
The Company has determined that the Mississippian Trust II is a variable interest entity (“VIE”) and that the Company is the primary beneficiary. As a result, the Company began consolidating the activities of the Mississippian Trust II into its results of operations in April 2012. See “Note 4 —Variable Interest Entities” to the Company’s consolidated financial statements included in Item 8 of this report for further discussion of the Mississippian Trust II.

Debt Transactions

Issuance of 8.125% Senior Notes due 2022. In April 2012, concurrent with the closing of the Dynamic Acquisition, the Company issued $750.0 million of unsecured 8.125% Senior Notes due 2022 pursuant to Rule 144A and Regulation S under the Securities Act. Net proceeds from the offering were approximately $730.1 million after deducting offering expenses, and were used to finance the cash portion of the Dynamic Acquisition purchase price and to pay related fees and expenses, with any remaining amount used for general corporate purposes.

Issuance of 7.5% Senior Notes due 2021 and 2023. In August 2012, the Company issued $825.0 million of unsecured 7.5% Senior Notes due 2023 and $275.0 million of additional unsecured 7.5% Senior Notes due 2021. Net proceeds from this offering were approximately $1.1 billion, after deducting offering expenses and excluding accrued interest funded through the offering, and were used to fund the Company’s tender offer for, and subsequent redemption of, its Senior Floating Rate Notes due 2014 (“Senior Floating Rate Notes”), as described below, to fund the Company’s capital expenditures and for general corporate purposes. As a result of these issuances, the Company’s borrowing base under its senior secured revolving credit facility (the “senior credit facility”) was reduced to $775.0 million from $1.0 billion.

Tender Offer and Redemption of Senior Floating Rate Notes. In August 2012, the Company purchased $329.9 million of the aggregate principal amount of its Senior Floating Rate Notes pursuant to a tender offer. In September 2012, the Company redeemed the remaining outstanding $20.1 million aggregate principal amount of its Senior Floating Rate Notes at par value, plus accrued interest.

Senior Notes Exchange Offers. In November 2012, the Company completed exchange offers to replace its 8.125% Senior Notes due 2022 that were issued in April 2012 and its 7.5% Senior Notes due 2023 and additional 7.5% Senior Notes due 2021 that were issued in August 2012 with equivalent notes that were registered under the Securities Act. The exchange offers did not result in the incurrence of any additional indebtedness.

BUSINESS SEGMENTS AND PRIMARY OPERATIONS

The Company operates in three business segments: exploration and production, drilling and oil field services and midstream services. Financial information regarding each segment is provided in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 23 —Business Segment Information” in Item 8 of this report. The information below includes the activities of SandRidge Mississippian Trust I (the “Mississippian Trust I”), SandRidge Permian Trust (the “Permian Trust”) and Mississippian Trust II (collectively, the “Royalty Trusts”), including amounts attributable to noncontrolling interest, all of which are included in the exploration and production segment.

Exploration and Production

The Company explores for, develops and produces oil and natural gas reserves, with a primary focus on increasing its reserves and production in the Mid-Continent. The Company operates substantially all of its wells in this area and also operates wells and owns leasehold positions in the Gulf of Mexico, Permian Basin, West Texas Overthrust (“WTO”) and Gulf Coast.

Properties

Mid-Continent

The Company held interests in approximately 2,729,000 gross ( 1,939,000 net) leasehold acres in Oklahoma and Kansas at December 31, 2012 . Associated proved reserves at December 31, 2012 totaled 235.8 MMBoe, 48% of which were proved developed reserves, based on estimates prepared by Netherland, Sewell & Associates, Inc. (“Netherland Sewell”) and the Company’s internal engineers. The Company’s interests in the Mid-Continent as of December 31, 2012 included 1,270 gross ( 677.3 net) producing wells with an average working interest of 53.3%. Average daily net production from the Mid-Continent area was approximately 40.3 MBoe for the month of December 2012. The Company had 33 rigs operating in the Mid-Continent as of December 31, 2012 , of which one was drilling a saltwater disposal well and 32 were drilling horizontal wells in the Mississippian formation.

Mississippian Formation. The Company’s primary focus within the Mid-Continent area is the Mississippian formation, which is an expansive carbonate hydrocarbon system located on the Anadarko Shelf in northern Oklahoma and Kansas. The top of this formation is encountered between approximately 4,000 and 7,000 feet and lies stratigraphically between the Pennsylvanian-aged Morrow formation and the Devonian-aged Woodford Shale formation. The Mississippian formation can reach 1,000 feet in gross thickness and the targeted porosity zone is between 50 and 100 feet in thickness. The formation’s geology is well understood as a result of the thousands of vertical wells drilled and produced there since the 1940s and the more than 1,365 horizontal wells drilled there since the beginning of 2007. At December 31, 2012 , the Company had approximately 2,632,000 gross (1,886,000 net) acres under lease, of which approximately 115,800 gross (94,100 net) acres were included in the Mississippian Trust I and the Mississippian Trust II’s areas of mutual interest.
In 2007, the application of horizontal cased-hole drilling and multi-stage hydraulic fracturing treatments demonstrated the potential for extracting significant additional quantities of oil and natural gas from the Mississippian formation. Since the beginning of 2007, there have been over 1,365 horizontal wells drilled in the formation, including approximately 600 drilled by the Company as of December 31, 2012 . From December 31, 2011 to December 31, 2012, the number of the Company’s producing horizontal wells in the Mississippian formation increased from 174 to 649. The Company drilled a total of 396 horizontal wells in the Mississippian formation during 2012, including 142 wells subject to the royalty interests of the Mississippian Trust I or Mississippian Trust II.
The Company’s saltwater disposal system, constructed beginning in 2007, and electrical infrastructure, constructed by the Company’s midstream services segment beginning in 2009, assist in the economically efficient production of oil and natural gas from the Mississippian formation. The saltwater disposal system, which included 113 active wells and approximately 600 miles of gathering lines at December 31, 2012 , reduces the overall cost of water disposal, which directly reduces production costs. The Company’s electrical infrastructure, which consisted of approximately 500 miles of power lines at December 31, 2012 , distributes electricity to the Company’s Mississippian formation operations at a lower cost than electricity provided by on-site generation. Additionally, by building its own infrastructure in these rural areas, the Company has been able to provide sufficient electricity to its operations. The Company is also able to obtain lower electrical rates based on aggregated volumes.

Gulf of Mexico

The Company’s Gulf of Mexico operations, a substantial portion of which were acquired during the second quarter of 2012 with the Dynamic Acquisition and additional Gulf of Mexico properties, primarily extend from the coast to more than 100 miles offshore and occur in waters with depths ranging from 10 to 1,380 feet. The Company’s Gulf of Mexico oil and natural gas properties are shallow-water assets, with the exception of the Bullwinkle field, which is a deepwater asset.

As of December 31, 2012 , the Company owned oil and natural gas properties in the federal and state waters in the Gulf of Mexico consisting of approximately 761,000 gross ( 457,000 net) leasehold acres, 339 gross ( 202.0 net) productive wells and 350 miles of pipeline gathering systems. Associated proved reserves at December 31, 2012 were approximately 54.3 MMBoe, of which 58% was oil, including NGLs, and 70% was proved developed. The Company operates approximately 94% of these assets, based on PV-10 values as of December 31, 2012 . Average daily net production from the Gulf of Mexico was approximately 29.8 MBoe for the month of December 2012. The Company had two rigs operating in the Gulf of Mexico as of December 31, 2012 .

The Company’s pipeline gathering systems in the Gulf of Mexico, including the Bullwinkle platform, which serves as a processing hub for deepwater production, gather and transport production from third-party fields for which the Company receives production handling revenues.

Permian Basin

The Permian Basin extends throughout southwestern Texas and southeastern New Mexico and is one of the largest, most active and longest-producing oil basins in the United States. The Company significantly expanded its holdings in the Permian Basin, specifically in the Central Basin Platform (“CBP”), through the acquisition of Arena Resources, Inc. (“Arena”) in July 2010 (the “Arena Acquisition”). Reserves and associated production in this area are predominantly oil.

The Company held interests in approximately 322,000 gross ( 232,000 net) leasehold acres in the Permian Basin at December 31, 2012 , of which approximately 16,600 gross (15,300 net) acres were included in the Permian Trust’s area of mutual interest. Associated proved reserves at December 31, 2012 were 235.6 MMBoe, 55% of which were proved developed reserves, based on estimates provided by Netherland Sewell and Lee Keeling and Associates, Inc. (“Lee Keeling”). The Company’s interests in the Permian Basin as of December 31, 2012 included 3,458 gross ( 3,298.2 net) producing wells with an average working interest of 95.4%. Average daily net production from the Company’s Permian Basin properties was approximately 27.7 MBoe for the month of December 2012. The Company had four rigs operating in the Permian Basin as of December 31, 2012 and drilled 717 wells in this area during 2012, of which 269 were subject to the Permian Trust’s royalty interest.

As discussed in “2012 Developments” above, the Company completed the sale of all of its oil and natural gas properties in the Permian Basin, excluding assets attributable to the Permian Trust’s area of mutual interest, in February 2013.

Other

West Texas Overthrust. The WTO is an area located in Pecos and Terrell Counties in west Texas and is associated with the Marathon-Ouachita fold and thrust belt that extends east-northeast across the United States into the Appalachian Mountain Region. Low natural gas prices continue to limit development activity in this area. The Company held interests in approximately 257,000 gross (215,000 net) leasehold acres in the WTO at December 31, 2012. The Company’s average daily net production in this area was approximately 7.9 MBoe for the month of December 2012.
Pursuant to a 30-year treating agreement the Company entered into with Occidental Petroleum Corporation (“Occidental”), the Company will deliver natural gas to Occidental’s CO 2 treatment plant in Pecos County, Texas (the “Century Plant”), and Occidental will remove CO 2 from the Company’s delivered natural gas production volumes. The Company will retain all methane gas after treatment. Under this agreement, the Company is required to deliver certain minimum CO 2 volumes annually, and is required to compensate Occidental to the extent such requirements are not met. The Company accrued $8.5 million at December 31, 2012 for the Company’s shortfall in meeting its 2012 delivery obligation. Based upon projected natural gas production levels, the Company expects to accrue between approximately $29.5 million and $36.0 million during the year ending December 31, 2013 for amounts related to the Company’s anticipated shortfall in meeting its 2013 annual delivery obligation. Due to the sensitivity of natural gas production to prevailing market prices, the Company is unable to estimate additional amounts it may be required to pay under this agreement in subsequent periods.
Gulf Coast. As of December 31, 2012 , the Company owned oil and natural gas interests in approximately 173,000 gross (75,000 net) acres in the Gulf Coast area, which encompasses the coastal plain from the southernmost tip of Texas through the southern portion of Louisiana. The Company’s average daily net production in this area was approximately 2.5 MBoe for the month of December 2012 .

Proved Reserves

Preparation of Reserve Estimates

The estimates of oil and natural gas reserves in this report are based on reserve reports, substantially all of which were prepared by independent petroleum engineers. To achieve reasonable certainty, the Company’s engineers relied on technologies that have been demonstrated to yield results with consistency and repeatability. The technologies and economic data used to estimate the Company’s proved reserves include, but are not limited to, well logs, geological maps, seismic data, well test data, production data, historical price and cost information and property ownership interests. This data was reviewed by various levels of management for accuracy, before consultation with independent petroleum engineers. Such consultation included review of properties, assumptions and any new data available. Internal reserves estimates and methodologies were compared to those prepared by independent petroleum engineers to test the reserves estimates and conclusions before the reserves estimates were included in this report. The accuracy of the reserve estimates is dependent on many factors, including the following:

•

the quality and quantity of available data and the engineering and geological interpretation of that data;

•

estimates regarding the amount and timing of future costs, which could vary considerably from actual costs;

•

the accuracy of mandated economic assumptions such as the future price of oil and natural gas; and

•

the judgment of the personnel preparing the estimates.

SandRidge’s Executive Vice President—Corporate Reserves and Acquisitions and Divestitures is the technical person primarily responsible for overseeing the preparation of the Company’s reserves estimates. He has a Bachelor of Science degree in Mechanical Engineering with over 30 years of practical industry experience, including over 25 years of estimating and evaluating reserve information. In addition, SandRidge’s Executive Vice President—Corporate Reserves and Acquisitions and Divestitures has been a certified professional engineer in the state of Oklahoma since 1988 and a member of the Society of Petroleum Engineers since 1980.

SandRidge’s Reservoir Engineering Department continually monitors asset performance, making reserves estimate adjustments, as necessary, to ensure the most current reservoir information is reflected in reserves estimates. Reserve information includes production histories as well as other geologic, economic, ownership and engineering data. The department currently has a total of 23 full-time employees, comprised of seven degreed engineers, one degreed geologist and 15 engineering analysts/technicians with a minimum of a four-year degree in mathematics, economics, finance or other business or science field.

The Company maintains a continuous education program for its engineers and technicians on new technologies and industry advancements and also offers refresher training on basic skill sets.

In order to ensure the reliability of reserves estimates, internal controls within the reserve estimation process include:

•

No employee’s compensation is tied to the amount of reserves recorded.

•

Reserves estimates are prepared by experienced reservoir engineers or under their direct supervision.

•

The Reservoir Engineering Department reports directly to the Company’s President, independently from all of the Company’s operating divisions.

•

The Reservoir Engineering Department follows comprehensive SEC-compliant internal policies to determine and report proved reserves including:

•

confirming that reserves estimates include all properties owned and are based upon proper working and net revenue interests;

•

reviewing and using in the estimation process data provided by other departments within the Company such as Accounting; and

•

comparing and reconciling internally generated reserves estimates to those prepared by third parties.

Each quarter, the Executive Vice President—Corporate Reserves and Acquisitions and Divestitures presents the status of the Company’s reserves to a committee of executives, which subsequently approves all changes. In the event the quarterly updated reserves estimates are disclosed, the aforementioned review process is evidenced by signatures from the Executive Vice President—Corporate Reserves and Acquisitions and Divestitures and the Chief Financial Officer.

The Reservoir Engineering Department works closely with its independent petroleum consultants at each fiscal year end to ensure the integrity, accuracy and timeliness of annual independent reserves estimates. These independently developed reserves estimates are reviewed by the Audit Committee, as well as the Chief Financial Officer, Senior Vice President of Accounting, Vice President of Internal Audit, Vice President of Financial Reporting, Treasurer and General Counsel and are approved as the Company’s corporate reserves. In addition to reviewing the independently developed reserve reports, the Audit Committee annually meets with the third-party engineer at Netherland Sewell who is primarily responsible for the reserve report. The Audit Committee also periodically meets with the other independent petroleum consultants that prepare estimates of proved reserves.

CEO BACKGROUND

Board Nominees

Based upon the recommendation of our Nominating and Governance Committee, our Board of Directors has nominated Everett R. Dobson and Daniel W. Jordan for reelection as directors to the Board. If elected, each nominee would serve a three-year term expiring at the close of our 2015 annual meeting, or until his successor is duly elected. Biographical information of the nominees is furnished above under “Director Biographical Information.”

Our Board of Directors contemplates that each of the nominees will be able to serve if elected. However, if, prior to the Annual Meeting, a nominee becomes unable to serve, the persons named in the enclosed proxy will vote for the election of such other person as may be nominated by the Board of Directors in accordance with applicable SEC rules.

EXECUTIVE OFFICERS AND COMPENSATION

Executive Officers

Set forth below is information regarding each of our executive officers as of March 31, 2012:




Name Age Position

Tom L. Ward
52 Chairman and Chief Executive Officer

Matthew K. Grubb
48 President and Chief Operating Officer

James D. Bennett
42 Executive Vice President and Chief Financial Officer

Rodney E. Johnson
55 Executive Vice President – Reservoir Engineering

Todd N. Tipton
56 Executive Vice President – Exploration

David C. Lawler
44 Executive Vice President – Operations

Wayne C. Chang
50 Senior Vice President – Midstream

Randall D. Cooley
58 Senior Vice President – Accounting

Philip T. Warman
41 Senior Vice President, General Counsel and Corporate Secretary

Kevin R. White
54 Senior Vice President – Business Development

Mary L. Whitson
51 Senior Vice President – Corporate and Human Resources

Tom L. Ward . Mr. Ward has served as our Chairman and Chief Executive Officer since June 2006 and was our President from December 2006 until January 2011. Biographical information about Mr. Ward can be found above under the heading “Election of Directors – Director Nominees.”

Matthew K. Grubb . Mr. Grubb has served as our President since January 2011 and as our Chief Operating Officer since June 2007. Prior to this, he served as our Executive Vice President – Operations since August 2006. Mr. Grubb was employed by Samson Resources beginning in 1995 and served as Division Operations Manager of East Texas and Southeast U.S. Regions for Samson Resources from 2002 through July 2006. Mr. Grubb earned a Bachelor of Science degree in Petroleum Engineering in 1986 and a Master of Science degree in Mechanical Engineering in 1988, both from Texas A&M University.

James D. Bennett . Mr. Bennett has served as our Executive Vice President and Chief Financial Officer since January 2011. From 2010 until he joined SandRidge, he was Managing Director for White Deer Energy, a private equity fund focused on the exploration and production, oilfield service and equipment, and midstream sectors of the oil and gas industry. From 2006 to December 2009, he was a Managing Director at GSO Capital Partners L.P. Mr. Bennett graduated with a Bachelor of Business Administration degree with a major in Finance from Texas Tech University in 1993. Mr. Bennett has served on the board of directors of the general partner of Cheniere Energy Partners L.P. and PostRock Energy Corporation.

Rodney E. Johnson . Mr. Johnson joined us as Vice President of Reservoir Engineering in January 2007 and was promoted to Senior Vice President – Reservoir Engineering in June 2007 and then to Executive Vice President – Reservoir Engineering in January 2009. He most recently served as Manager of Reservoir Engineering over Texas and Louisiana Regions for Chesapeake Energy Corporation from October 2003 through December 2006. Prior to that, Mr. Johnson served as Manager of Technology for Aera Energy LLC (a joint venture of Exxon Mobil Corporation and Royal Dutch Shell plc) where he held positions of increasing importance from 1996 through September 2003. Mr. Johnson graduated from Wichita State University in 1980 with a Bachelor of Science degree in Mechanical Engineering. He has been a registered Professional Engineer since 1988.

Todd N. Tipton . Mr. Tipton joined us as Executive Vice President – Exploration in September 2006. Prior to this, he was Exploration Manager of the Western Division from 2001 through August 2006 for Devon Energy Corporation. He received a Bachelor degree in Geology from The State University of New York at Buffalo in 1977 and completed an executive development program at The Johnson Graduate School of Management at Cornell University. Mr. Tipton is a member of the Rocky Mountain Association of Geologists and a member of the Independent Petroleum Association of Mountain States.

David C. Lawler . Mr. Lawler joined us as Executive Vice President – Operations in August 2011. Prior to joining the Company, Mr. Lawler served as Chief Executive Officer and President of PostRock Energy Corporation and its predecessor entities since August 2008 after having served as Chief Operating Officer of PostRock Energy Corporation’s predecessor entities from May 2007 through August 2008. Prior to that, Mr. Lawler was employed by Shell Exploration & Production Company from May 1997 to May 2007 in roles of increasing responsibility, most recently as Engineering and Operations Manager for multiple assets along the U.S. Gulf Coast. Mr. Lawler graduated from the Colorado School of Mines in 1990 with a Bachelor of Science degree in Petroleum Engineering and earned his Master of Business Administration degree from Tulane University in 2003.

Wayne C. Chang . Mr. Chang joined us as Vice President – Midstream in February 2007 and was promoted to Senior Vice President – Midstream in January 2009. Mr. Chang most recently served as the Director of Producer Services for Enogex, Inc., the largest gas gatherer and intrastate transporter of gas in the State of Oklahoma. Prior to this, he worked for diversified oil and gas companies such as Conoco Inc., Phillips Petroleum Company and Chesapeake Energy Corporation focusing on the midstream sector. Mr. Chang graduated from the University of Oklahoma with a Bachelor of Science Degree in Chemical Engineering in 1984.

Randall D. Cooley . Mr. Cooley joined us as Vice President – Accounting in November 2006, upon our acquisition of NEG Oil & Gas LLC and was promoted to Senior Vice President – Accounting in January 2008. Prior to joining SandRidge, Mr. Cooley served as the senior financial officer with National Energy Group, Inc., having held the position of Vice President and Chief Financial Officer from March 2003 to November 2006. Mr. Cooley earned a Bachelor of Science in Business Administration, with a major in Accounting, from the University of Southern Mississippi in 1978 and is a Certified Public Accountant.

Philip T. Warman . Mr. Warman joined us as Senior Vice President and General Counsel in August 2010. He also serves as our Corporate Secretary. Prior to joining SandRidge, Mr. Warman was the Associate General Counsel for SEC and finance matters for Spectra Energy Corporation from January 2007 through July 2010. From 1998 through 2006 he practiced law as a corporate finance attorney with Vinson & Elkins, LLP in Houston, Texas. Mr. Warman earned a Bachelor of Science in Chemical Engineering from the University of Houston in 1993 and graduated from the University of Texas School of Law in 1998.

Kevin R. White . Mr. White joined us as Senior Vice President – Business Development in January 2008. Prior to joining SandRidge, he worked for six years as a consultant in the oil and gas industry. Mr. White served as Executive Vice President of Corporate Development and Strategic Planning for Louis Dreyfus Natural Gas Corp. from 1993 until the company was sold in 2001. He attended Oklahoma State University, receiving his Bachelor of Science degree in Accounting in 1979 and a Master of Science degree in Accounting and his Certified Public Accountant qualification in 1980.

Mary L. Whitson . Ms. Whitson has served as our Senior Vice President – Corporate and Human Resources since June 2011 and had previously served as our Senior Vice President – Human Resources since September 2006. Ms. Whitson was the Vice President – Human Resources for Chesapeake Energy Corporation through August 2006, where she held human resources management positions of increasing responsibility for more than eight years. She attended Oklahoma State University and received a Bachelor of Science degree from the University of Central Oklahoma in 1996.

Compensation Discussion and Analysis

This Compensation Discussion and Analysis (1) provides an overview of our compensation policies and programs; (2) explains our compensation objectives and practices with respect to our executive officers; and (3) summarizes the elements of compensation for each of the individuals identified in the following table, whom we refer to in this Compensation Discussion and Analysis as our “named executive officers.”




Name Principal Position

Tom L. Ward
Chairman and Chief Executive Officer

Matthew K. Grubb
President and Chief Operating Officer

James D. Bennett
Executive Vice President and Chief Financial Officer

Todd N. Tipton
Executive Vice President – Exploration

Rodney E. Johnson
Executive Vice President – Reservoir Engineering

MANAGEMENT DISCUSSION FROM LATEST 10K

Overview

SandRidge is an independent oil and natural gas company headquartered in Oklahoma City, Oklahoma, concentrating on development and production activities in the Mid-Continent, Gulf of Mexico and Permian Basin in west Texas.

2012 Operational Highlights

Operational highlights for 2012 include the following:

•

Acquired properties in the Gulf of Mexico during the second quarter of 2012 for a total of approximately $1.3 billion. These acquisitions significantly expanded the Company’s presence in the Gulf of Mexico and contributed production of approximately 7.0 MMBoe in 2012.

•

Drilled 396 wells in the Mid-Continent area during 2012. Mid-Continent properties contributed approximately 11.0 MMBoe, or 32.9%, of the Company’s total production in 2012 compared to approximately 4.9 MMBoe, or 20.9%, in 2011.

•

Increased oil production in 2012 by 6.1 MMBbls, or 51.8% , from 2011. Oil production comprised 53.5% of total production in 2012 compared to 50.6% of total production in 2011.

2013 Developments and Outlook

On February 26, 2013, the Company closed the sale of its Permian Properties for net proceeds of $2.6 billion , subject to post-closing adjustments. The Company intends to use the sales proceeds to fund capital expenditures in the Mississippian formation and to reduce outstanding debt, as well as for general corporate purposes. Additionally, the Company settled a portion of its existing oil derivative contracts in February 2013 prior to their respective maturities to reduce volumes hedged in proportion to the anticipated reduction in daily production volumes due to the sale, which resulted in a realized loss of approximately $30.0 million . The Company expects lower daily production volumes initially due to the sale of the Permian Properties; however, it expects full-year 2013 production to be generally consistent with 2012 production based on anticipated growth from the Mississippian formation as a result of increased drilling activity.

Results by Segment

The Company operates in three business segments: exploration and production, drilling and oil field services and midstream services. These segments represent the Company’s three main business units, each offering different products and services. The exploration and production segment is engaged in the acquisition, development and production of oil and natural gas properties and includes the activities of the Royalty Trusts. The drilling and oil field services segment is engaged in the contract drilling of oil and natural gas wells and provides various oil field services. The midstream services segment is engaged in the purchasing, gathering, treating and selling of natural gas.

Management evaluates the performance of the Company’s business segments based on income (loss) from operations, which is defined as segment operating revenues less operating expenses and depreciation, depletion, amortization and accretion. Results of these measurements provide important information to the Company about the activity, profitability and contributions of each of the Company’s lines of business. Each of the Company’s business segments results for the years ended December 31, 2012 , 2011 and 2010 are discussed below.

Exploration and Production Segment

The Company generates the majority of its consolidated revenues and cash flow from the production and sale of oil and natural gas. The Company’s revenues, profitability and future growth depend substantially on prevailing prices for oil and natural gas and on the Company’s ability to find and economically develop and produce oil and natural gas reserves. Prices for oil and natural gas fluctuate widely and are difficult to predict. In order to reduce the Company’s exposure to these fluctuations, the Company enters into commodity derivative contracts for a portion of its anticipated future oil and natural gas production. Reducing the Company’s exposure to price volatility mitigates the risk that it will not have adequate funds available for its capital expenditure programs.

The primary factors affecting the financial results of the Company’s exploration and production segment are the prices the Company receives for its oil and natural gas production, the quantity of oil and natural gas it produces and changes in the fair value of commodity derivative contracts.

Revenues

Exploration and production segment revenues from oil and natural gas sales increased $532.5 million , or 43.4% in the year ended December 31, 2012 from 2011 , primarily as a result of a 6.1 MMBbl, or 51.8% , increase in oil production. Natural gas production also increased 24.2 Bcf, or 35.0% ; however, the average price received for natural gas production decreased by $1.01 per Mcf, or 28.9% , which more than offset the increase in natural gas production. The increase in oil and natural gas production was due to the acquisition of properties located in the Gulf of Mexico during the second quarter of 2012 combined with increased drilling in the Mid-Continent, where, during 2012, the Company completed and commenced production on 377 gross (269 net) wells.

Exploration and production segment revenues increased $458.1 million, or 58.8%, in the year ended December 31, 2011 from 2010, as a result of a 60.2% increase in oil production and a $16.32 per barrel, or 24.4%, increase in the average price received for oil production. These increases were slightly offset by a 9.1% decrease in natural gas production and an $0.18 per Mcf, or 4.9%, decrease in the average price received for natural gas production. The increase in oil production was due to the inclusion of a full year of production from the Permian Basin properties acquired in the Arena Acquisition in July 2010, and increased focus on oil drilling throughout 2010 and 2011. During 2011, the Company completed and commenced production on 943 gross (892 net) wells, substantially all of which were located in the Mid-Continent and Permian Basin. Properties acquired in the Arena Acquisition produced 4.1 MMBbls of oil, including production from additional wells drilled on the acquired properties, for the year ended December 31, 2011 compared to 1.5 MMBbls in the 2010 period after the acquisition. The decrease in natural gas production was a result of natural production declines in existing natural gas wells.

During the fourth quarter of 2012, the Company substantially completed construction of the Century Plant and recognized construction contract revenue and costs equal to $796.3 million , which reflects agreed upon change orders and scope revisions to the original contract. Contract losses incurred on the construction of the Century Plant were recorded as development costs within the Company’s oil and natural gas properties. As of December 31, 2012 , the Company had recorded a total of $180.0 million to its oil and natural gas properties for the loss identified based on costs incurred in excess of contract amounts.

Operating Expenses

Production expense includes the costs associated with the Company’s exploration and production activities, including, but not limited to, lease operating expense and treating costs. Production expenses increased $155.4 million , or 47.9% , in 2012 from 2011 primarily due to operating expenses associated with oil and natural gas properties located in the Gulf of Mexico that were acquired during the second quarter of 2012 and additional oil wells located in the Mid-Continent that began producing during 2012. On a per Boe basis, production expense for 2012 was comparable to 2011, increasing $0.43 , or 3.1% , to $14.31 per Boe during the year ended December 31, 2012 from $13.88 per Boe in 2011 . Production expenses increased $86.4 million in 2011 from 2010 primarily due to operating expenses associated with properties acquired from Arena and additional oil wells that began producing during late 2010 and in 2011. Higher production costs were incurred on oil production compared to production costs on natural gas volumes. Total production increased 16.4% with oil production increasing 60.2% for the year ended December 31, 2011 compared to 2010.

Production taxes increased slightly for the year ended December 31, 2012 compared to 2011 . Approximately 22% of the Company’s oil and natural gas production for the year ended December 31, 2012 was from production in the Gulf of Mexico, including from properties acquired during the second quarter of 2012. This production is not subject to production tax. In addition, wells drilled in the Mississippian formation in Oklahoma are part of a tax credit incentive program that reduces the combined statutory rates. Production taxes increased $16.9 million, or 57.9%, during the year ended December 31, 2011 compared to 2010 due to increased oil production, including production from properties acquired in the Arena Acquisition and newly producing wells.

Depreciation and depletion for the Company’s oil and natural gas properties increased $250.8 million , or 79.1% , for the year ended December 31, 2012 from 2011 . The increase was due to a 43.5% increase in the Company’s combined production volume as well as an increase in the depreciation and depletion rate per Boe to $16.93 for the year ended December 31, 2012 from $13.57 per Boe in 2011 , that primarily resulted from the acquisition of properties located in the Gulf of Mexico during 2012. Depreciation and depletion for the Company’s oil and natural gas properties increased $51.3 million for the year ended December 31, 2011 from the same period in 2010. The increase was due to a 16.4% increase in the Company’s combined production volume as well as an increase in the depreciation and depletion rate per Boe to $13.57 in 2011 from $13.24 per Boe in 2010 that resulted from the sale of oil and natural gas properties in 2011.

Accretion on asset retirement obligations increased $19.6 million for the year ended December 31, 2012 from 2011 as a result of the increase in future plugging and abandonment obligations associated with the oil and natural gas properties located in the Gulf of Mexico that were acquired during the second quarter of 2012.

During the year ended December 31, 2012 , the Company recorded a $235.4 million impairment to the carrying value of goodwill. Primarily as a result of a decrease in the Company’s probable reserves as of December 31, 2012, which are one of the significant components in the determination of the fair value of the applicable reporting unit, the carrying value of the reporting unit exceeded its fair value such that the entire carrying value of the Company’s goodwill was impaired. For additional information regarding the goodwill impairment, see “Note 9 —Goodwill” to the Company’s consolidated financial statements in Item 8 of this report.

The Company’s derivative contracts are not designated as accounting hedges and, as a result, realized and unrealized gains or losses on commodity derivative contracts are recorded as a component of operating expenses. Internally, management views the settlement of such derivative contracts as adjustments to the price received for oil and natural gas production to determine “effective prices.” Realized gains or losses related to settlements of derivative contracts prior to their respective contractual maturities (“early settlements”) are not considered in the calculation of effective prices. The realized gain, including realized gain on early settlements, for the year ended December 31, 2012 was due primarily to lower oil prices at the time of settlement compared to the contract price for the Company’s oil price swaps. These gains were partially offset by a non-cash realized loss resulting from the amendment of certain 2012 derivative contracts to contracts maturing in 2014 and 2015. The realized loss for the year ended December 31, 2011 was primarily due to higher oil prices at the time of settlement compared to the contract price for the Company’s oil price swaps. Realized gains resulting from early settlements of commodity derivative contracts partially offset the realized loss for the year ended December 31, 2011. The realized gain, including realized gain on early settlements, for the year ended December 31, 2010 was primarily due to lower natural gas prices at the time of settlement compared to the contract price on the Company’s natural gas price swaps.

Unrealized gain or loss on derivative contracts represents the change in fair value of open derivative contracts during the period. The unrealized gains on the Company’s commodity contracts recorded during the years ended December 31, 2012 and 2011 were attributable to a decrease in average oil prices at the end of the period compared to the average oil prices at the beginning of the period, or the contract price for contracts entered into during the period. The unrealized loss on commodity contracts recorded during the year ended December 31, 2010 was attributable to an increase in average oil prices and decreases in the price differentials on the Company’s natural gas basis swaps at December 31, 2010 compared to the average oil prices and price differentials at December 31, 2009 or the contract price for contracts entered into during 2010.

Drilling and Oil Field Services Segment

The financial results of the Company’s drilling and oil field services segment depend primarily on demand and prices that can be charged for its services. On a consolidated basis, drilling and oil field service revenues earned and expenses incurred in performing services for third parties, including third-party working interests in wells the Company operates, are included in drilling and services revenues and expenses. Drilling and oil field service revenues earned and expenses incurred in performing services for the Company’s own account are eliminated in consolidation. The primary factors affecting the results of the Company’s drilling and oil field services segment are the rates received on rigs drilling for third parties, the number of days rigs worked for third parties and the amount of oil field services provided to third parties.

Drilling and oil field services segment total revenues and operating expenses increased $13.3 million and $11.8 million , respectively, in the year ended December 31, 2012 from 2011 . The increase in revenues and expenses was primarily attributable to an increase in supplies sold to, and oil field services work performed for, Company-operated wells in the Mid-Continent with higher third-party working interest percentages during the year ended December 31, 2012 . While the average drilling revenue per day per rig working for third parties increased during the year ended December 31, 2012 compared to 2011 , this was more than offset by a decrease in the number of days drilling for third parties. The overall increase in revenue resulted in income from operations of $11.9 million in the year ended December 31, 2012 compared to income from operations of $10.3 million in 2011 .

Drilling and oil field services segment total revenues and operating expenses increased $74.7 million and $54.4 million, respectively, in the year ended December 31, 2011 from 2010. The increase in revenues and expenses was primarily attributable to an increase in the number of rigs working for third parties and an increase in oil field services performed for third parties during 2011. Additionally, the average daily rate received per rig working for third parties increased to $15,215 during 2011 compared to $14,287 during 2010. The increases in rigs working for third parties and the average daily rate received from third parties resulted in income from operations of $10.3 million in the year ended December 31, 2011 compared to a loss from operations of $10.0 million in 2010.

Midstream Services Segment

Midstream services segment revenues consist mostly of revenue from gas marketing, which is a very low-margin business. Midstream services are primarily undertaken to realize incremental margins on natural gas purchased at the wellhead, and provide value-added services to customers. On a consolidated basis, midstream and marketing revenues represent natural gas sold on behalf of third parties and the fees the Company charges to gather, compress and treat this natural gas. Gas marketing operating costs represent payments made to third parties for the proceeds from the sale of natural gas owned by such parties, net of any applicable margin, and actual costs the Company charges to gather, compress and treat the natural gas. In general, natural gas purchased and sold by the Company’s midstream services segment is priced at a published daily or monthly index price. The primary factors affecting the results of the Company’s midstream services segment are the quantity of natural gas the Company gathers, treats and markets and the prices it pays and receives for natural gas.

The Company owns and operates two gas treating plants in west Texas, which remove CO 2 from natural gas production and deliver residue gas to nearby pipelines. Occidental took ownership of and began operating Phase I and Phase II of the Century Plant during the third and fourth quarters of 2012, respectively, for the purpose of separating and removing CO 2 from the delivered natural gas stream and the Company has diverted its high CO 2 natural gas production from its two gas treating plants to the Century Plant. With the completion of the Century Plant in the fourth quarter of 2012 and prevailing low natural gas prices, the Company determined that the future use of its gas treating plants would be limited and recorded an impairment of $59.7 million in the midstream services segment in the fourth quarter of 2012.

Midstream services segment total revenues and operating expenses, excluding impairment, for the year ended December 31, 2012 decreased $26.3 million and $23.2 million , respectively, from the same period in 2011 . These decreases in revenue and operating expenses were due to a 5.4 Bcf decrease in third-party volumes the Company processed and marketed as a result of decreased natural gas production in west Texas and a decrease in natural gas prices. These decreases were partially offset by an increase in revenue from and expenses related to electrical transmission as a result of the expansion of the Company’s electrical infrastructure in the Mid-Continent in 2012. The $59.7 million impairment of the Company’s natural gas treating plants, as discussed above, resulted in a loss from operations of $73.0 million for the year ended December 31, 2012 compared to a loss from operations of $13.0 million in 2011 .

Midstream services segment total revenues and operating expenses for the year ended December 31, 2011 decreased $33.3 million and $16.4 million, respectively, from the same period in 2010. The decrease in revenues and operating costs was due to a decrease in third-party volumes the Company marketed of approximately 5.6 Bcf, a decrease in natural gas prices and a decrease in natural gas volumes processed in the Company’s gas treating plants. The decrease in revenues and a $2.8 million impairment on certain midstream assets resulted in a loss from operations of $13.0 million for the year ended December 31, 2011 compared to income from operations of $4.0 million in 2010.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

SandRidge is an independent oil and natural gas company concentrating on development and production activities in the Mid-Continent, west Texas and Gulf of Mexico. The Company’s primary areas of focus are the Mississippian formation in the Mid-Continent area of Oklahoma and Kansas and the Permian Basin in west Texas. The Company owns and operates additional interests in the Mid-Continent, Gulf of Mexico, WTO and Gulf Coast.

In April 2012, the Company completed the Dynamic Acquisition for total consideration of approximately $1.2 billion . Dynamic is an oil and natural gas exploration, development and production company with operations in the Gulf of Mexico. In June 2012, the Company acquired the Gulf of Mexico Properties which consisted of approximately 184,000 gross ( 103,000 net) acres of oil and natural gas properties in the Gulf of Mexico for approximately $38.5 million , net of purchase price adjustments and subject to post-closing adjustments. These acquisitions expanded the Company's presence in the Gulf of Mexico, adding oil and natural gas reserves and production to its existing asset base in this area.

The Company also operates businesses that are complementary to its primary development and production activities, including gas gathering and processing facilities, an oil and gas marketing business and an oil field services business, including a drilling rig business. These complementary businesses provide the Company with operational flexibility and an advantageous cost structure by reducing the Company’s dependence on third parties for these services. The extent to which each of these supplemental businesses contributes to the Company’s consolidated results of operations largely is determined by the amount of work each performs for third parties. Revenues and costs related to work performed by these businesses for the Company’s own account are eliminated in consolidation and, therefore, do not directly contribute to the Company’s consolidated results of operations.

Recent Developments

August 2012 Debt Offering. In August 2012 , the Company issued $825.0 million of unsecured 7.5% Senior Notes due 2023 and $275.0 million of additional unsecured 7.5% Senior Notes due 2021. Net proceeds from this offering were approximately $1.1 billion , after deducting offering expenses and excluding accrued interest funded through the offering, and were used to fund the Company’s tender offer for, and subsequent redemption of, its Senior Floating Rate Notes, as described below, and for general corporate purposes, including to fund the Company’s capital expenditures.

Tender Offer and Redemption of Senior Floating Rate Notes. In August 2012 , the Company announced a cash tender offer to purchase any and all of the outstanding $350.0 million aggregate principal amount of its Senior Floating Rate Notes for total consideration of $1,002.50 per $1,000 principal amount of such notes tendered by August 17, 2012 . Holders tendering after August 17, 2012 were eligible to receive $972.50 per $1,000 principal amount of notes tendered. The Company purchased approximately 94.3% , or $329.9 million , of the aggregate principal amount of its Senior Floating Rate Notes pursuant to the tender offer, which expired on August 31, 2012 . On September 4, 2012 , the Company redeemed the remaining outstanding $20.1 million aggregate principal amount of its Senior Floating Rate Notes at par value, plus accrued interest. The premium paid to purchase these notes and the unamortized debt issuance costs associated with the notes, totaling $3.1 million , were recorded as a loss on extinguishment of debt for the three and nine -month periods ended September 30, 2012 .

Senior Notes Exchange Offers. On October 11, 2012 , the Company commenced registered exchange offers for the 7.5% Senior Notes due 2023, the additional 7.5% Senior Notes due 2021 and the 8.125% Senior Notes due 2022. The terms of each series of senior notes to be issued in these exchange offers will be identical to the terms of the respective series of senior notes to be exchanged, except that the transfer restrictions, registration rights and provisions for additional interest relating to the exchanged notes will not apply to the senior notes to be issued in the exchange offers. The exchange offers are expected to close in November 2012.

Recent Accounting Pronouncements

For a discussion of recent accounting pronouncements, see Note 1 to the Company’s unaudited interim condensed consolidated financial statements included in Item 1 of this Quarterly Report.

Results by Segment

The Company operates in three business segments: exploration and production, drilling and oil field services and midstream gas services. These segments represent the Company’s three main business units, each offering different products and services. The exploration and production segment is engaged in the acquisition, development and production of oil and natural gas properties and includes the activities of the Royalty Trusts. The drilling and oil field services segment is engaged in the contract drilling of oil and natural gas wells. The midstream gas services segment is engaged in the purchasing, gathering, treating and selling of natural gas. The All Other column in the tables below includes items not related to the Company’s reportable segments, including its CO 2 gathering and sales and corporate operations.

Management evaluates the performance of the Company’s business segments based on income (loss) from operations, which is defined as segment operating revenues less operating expenses and depreciation, depletion, amortization and accretion. Results of these measurements provide important information to the Company about the activity and profitability of the Company’s lines of business.

Exploration and Production Segment

The Company currently generates the majority of its consolidated revenues and cash flow from the production and sale of oil and natural gas. The Company’s revenues, profitability and future growth depend substantially on prevailing prices for oil and natural gas and on the Company’s ability to find and economically develop and produce oil and natural gas reserves. Prices for oil and natural gas fluctuate widely. In order to reduce the Company’s exposure to these fluctuations, the Company enters into commodity derivative contracts for a portion of its anticipated future oil and natural gas production. Reducing the Company’s exposure to price volatility mitigates the risk that it will not have adequate funds available for its capital expenditure programs.

Exploration and Production Segment — Three months ended September 30, 2012 compared to the three months ended September 30, 2011

Exploration and production segment revenues increased $172.4 million , or 53.6% , to $493.8 million in the three-month period ended September 30, 2012 from the same period in 2011, as a result of a 1,751 MBbl, or 54.9% , increase in oil production, a $5.19 per Bbl, or 6.5% , increase in the average price received for oil production and a 9,249 MMcf, or 51.6% , increase in natural gas production. These increases were slightly offset by a $1.04 per Mcf, or 28.6% , decrease in the average price received for natural gas production. The increase in oil production was due to the continued focus on increased oil drilling throughout 2011 and continuing in 2012 in the Mid-Continent and Permian Basin. Additionally, the acquisition of oil and natural gas properties located in the Gulf of Mexico during the second quarter of 2012 contributed 1,148 MBbl in oil production and 8,505 MMcf in natural gas production during the three-month period ended September 30, 2012 .

Due to the long-term nature of the Company’s investment in the development of its properties, the Company enters into oil and natural gas swaps and collars for a portion of its production in order to stabilize future cash inflows for planning purposes. The Company’s derivative contracts are not designated as accounting hedges and, as a result, realized and unrealized gains or losses on commodity derivative contracts are recorded as a component of operating expenses. Internally, management views the settlement of such derivative contracts as adjustments to the price received for oil and natural gas production to determine “effective prices.” Realized gains or losses related to settlements of derivative contracts prior to their respective contractual maturities (“early settlements”) are not considered in the calculation of effective prices. The effective price received for oil for the three-month period ended September 30, 2012 was $91.84 per Bbl compared to $76.94 per Bbl during the same period in 2011. The effective price received for natural gas for the three-month period ended September 30, 2012 was $2.23 per Mcf compared to $3.08 per Mcf during the same period in 2011.

During the three-month period ended September 30, 2012 , the exploration and production segment reported a $193.5 million net loss on its commodity derivative positions ( $29.0 million realized gain and $222.5 million unrealized loss) compared to a $596.7 million net gain on its commodity derivative positions ( $7.8 million realized loss and $604.5 million unrealized gain) in the same period in 2011. The realized gain for the three-month period ended September 30, 2012 was due to lower oil prices at the time of settlement compared to the contract price for the Company’s oil price swaps. The realized loss for the three-month period ended September 30, 2011 was due to higher oil prices at the time of settlement compared to the contract price for the Company’s oil price swaps. Realized gains of $2.1 million resulting from early settlements were included in the realized gain for the three-month period ended September 30, 2012 . Realized gains totaling $9.9 million resulting from early settlements were included in the net realized loss for the three-month period ended September 30, 2011 . Unrealized gains or losses on derivative contracts represent the change in fair value of open derivative contracts during the period. The unrealized loss on the Company’s commodity contracts recorded during the three-month period ended September 30, 2012 was attributable to an increase in average oil prices at September 30, 2012 compared to the average oil prices at June 30, 2012 or the contract price for contracts entered into during the third quarter of 2012. The unrealized gain on the Company’s commodity contracts recorded during the three months ended September 30, 2011 was attributable to a decrease in average oil prices at September 30, 2011 compared to the average oil prices at June 30, 2011 or the contract price for contracts entered into during the third quarter of 2011.

For the three-month period ended September 30, 2012 , the Company had a loss from operations of $48.5 million in its exploration and production segment compared to income from operations of $717.3 million in the same period in 2011. An increase of $169.8 million in oil and natural gas revenues was partially offset by increases of $50.5 million in production expense and $81.7 million in depreciation and depletion on oil and natural gas properties during the three-month period ended September 30, 2012 . Additionally, the Company recorded a $193.5 million net loss on derivative contracts for the three months ended September 30, 2012 compared to a $596.7 million net gain for the same period in 2011. See further discussion of these changes under “Consolidated Results of Operations” below.

Exploration and Production Segment — Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Exploration and production segment revenues increased $365.3 million , or 40.3% , to $1,271.6 million in the nine -month period ended September 30, 2012 from the same period in 2011, as a result of a 4,385 MBbl, or 51.3% , increase in oil production, a $3.64 per Bbl, or 4.4% , increase in the average price received for oil production and a 12,392 MMcf, or 23.6% , increase in natural gas production. These increases were slightly offset by a $1.43 per Mcf, or 39.1% , decrease in the average price received for natural gas production. The increase in oil production was due to the continued focus on increased oil drilling throughout 2011 and continuing in 2012 in the Mid-Continent and Permian Basin. Additionally, the acquisition of oil and natural gas properties located in the Gulf of Mexico during the second quarter of 2012 contributed 2,068 MBbl in oil production and 13,830 MMcf in natural gas production during the nine-month period ended September 30, 2012.

The effective price received for oil for the nine -month period ended September 30, 2012 was $89.63 per Bbl compared to $75.30 per Bbl during the same period in 2011. The effective price received for natural gas for the nine -month period ended September 30, 2012 was $2.31 per Mcf compared to $3.41 per Mcf during the same period in 2011.

During the nine -month period ended September 30, 2012 , the exploration and production segment reported a $221.7 million net gain on its commodity derivative positions ( $7.4 million realized loss and $229.1 million unrealized gain) compared to a $489.1 million net gain on its commodity derivative positions ( $34.7 million realized loss and $523.8 million unrealized gain) in the same period in 2011. The realized loss for the nine -month period ended September 30, 2012 was due primarily to non-cash realized losses of $117.1 million resulting from the amendment of certain 2012 derivative contracts to contracts maturing in 2014 and 2015 for the nine -month period ended September 30, 2012 . These losses were partially offset by realized gains for the nine-month period ended September 30, 2012 on the Company's oil and natural gas swaps due to lower oil and natural gas prices at the time of settlement compared to the contract price. The realized loss for the nine -month period ended September 30, 2011 was due to higher oil prices at the time of settlement compared to the contract price for the Company’s oil price swaps. The unrealized gains on the Company’s commodity contracts recorded during the nine -month periods ended September 30, 2012 and 2011 were attributable to a decrease in average oil prices at the end of the period compared to the average oil prices at beginning of the period, or the contract price for contracts entered into during the period. Realized gains of $59.5 million and $48.1 million resulting from early settlements were included in the net realized losses for the nine -month periods ended September 30, 2012 and 2011, respectively.

For the nine -month period ended September 30, 2012 , the Company had income from operations of $614.0 million in its exploration and production segment compared to income from operations of $834.3 million in the same period in 2011. An increase of $361.9 million in oil and natural gas revenues was offset by a decrease of $267.4 million in gain on derivative contracts and increases of $100.5 million in production expense and $162.7 million in depreciation and depletion on oil and natural gas properties during the nine -month period ended September 30, 2012 . See further discussion of these changes under “Consolidated Results of Operations” below.

Drilling and Oil Field Services Segment

The financial results of the Company’s drilling and oil field services segment depend primarily on demand and prices that can be charged for its services. On a consolidated basis, drilling and oil field service revenues earned and expenses incurred in performing services for third parties, including third-party working interests in wells the Company operates, are included in drilling and services revenues and expenses. Drilling and oil field service revenues earned and expenses incurred in performing services for the Company’s own account are eliminated in consolidation.

Drilling and Oil Field Services Segment — Three months ended September 30, 2012 compared to the three months ended September 30, 2011

Drilling and oil field services segment revenues increased $2.2 million to $27.8 million in the three-month period ended September 30, 2012 from the same period in 2011, and drilling and oil field services segment expenses also increased $2.2 million during the same period to $25.2 million . The increase in revenues and expenses was primarily attributable to an increase in oil field services work performed for third parties, including an increase in third-party working interest owners as a result of higher third-party working interests in wells operated by the Company in the Mid-Continent, during the three-month period ended September 30, 2012 . This increase was partially offset by a decrease in the average number of rigs working for third parties during the three-month period ended September 30, 2012 compared to the same period in 2011. Income from operations of $2.5 million in the three-month period ended September 30, 2012 was consistent with income from operations in the 2011 period.


Drilling and Oil Field Services Segment — Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Drilling and oil field services segment revenues increased $15.6 million to $90.7 million in the nine -month period ended September 30, 2012 from the same period in 2011, and drilling and oil field services segment expenses increased $11.4 million during the same period to $80.0 million . The increase in revenues and expenses was primarily attributable to an increase in supplies sold and oil field services work performed for third parties, including an increase in third-party working interest owners as a result of higher third-party working interests in wells operated by the Company in the Mid-Continent, during the nine -month period ended September 30, 2012 . This increase was partially offset by a decrease in the average number of rigs working for third parties during the nine-month period ended September 30, 2012 compared to the same period in 2011. This overall increase resulted in income from operations of $10.7 million in the nine -month period ended September 30, 2012 compared to income from operations of $6.5 million in the 2011 period.

Midstream Gas Services Segment

Midstream gas services segment revenues consist mostly of revenue from gas marketing, which is a very low-margin business. Midstream gas services are primarily undertaken to realize incremental margins on natural gas purchased at the wellhead, and provide value-added services to customers. On a consolidated basis, midstream and marketing revenues represent natural gas sold on behalf of third parties and the fees the Company charges to gather, compress and treat this natural gas. Gas marketing operating costs represent payments made to third parties for the proceeds from the sale of natural gas owned by such parties, net of any applicable margin and actual costs the Company charges to gather, compress and treat the natural gas. In general, natural gas purchased and sold by the Company’s midstream gas services segment is priced at a published daily or monthly index price. The primary factors affecting the results of the Company’s midstream gas services segment are the quantity of natural gas the Company gathers, treats and markets and the prices it pays and receives for natural gas.

The Company owns and operates two gas treating plants in west Texas, which remove CO 2 from natural gas production and deliver residue gas to nearby pipelines. During the operational assessments of Phase I and Phase II of the Century Plant, in Pecos County, Texas, the Company has diverted some of its natural gas from the Company’s two existing gas treating plants for processing at the Century Plant. As a result of these assessments, the Century Plant had been taken off line from time to time to resolve certain operational issues. During the third quarter of 2012, Phase I was completed and Occidental took ownership and began operating the Phase I assets for the purpose of separating and removing CO 2 from the delivered natural gas stream. The Company is currently in the process of diverting its high CO 2 natural gas production through the Century Plant and conducting performance testing for Phase II of the Century Plant. Phase II is expected to be completed by the end of the first quarter of 2013 , at which time Occidental will take ownership and begin operating the Phase II related assets. With the completion of Phase I and upon successful completion of the performance testing of Phase II, the use of the Company’s two gas treating plants in west Texas may be limited, the extent of which depends on certain variables, including natural gas prices and the expected need for such plants to supplement treating capacity at the Century Plant in the future. In 2011, the Company evaluated its existing gas treating plants for impairment in connection with the operational phase of Phase I of the Century Plant and concluded no impairment was necessary. The Company continues to monitor the status of the Century Plant, the related impact on its gas treating plants and CO 2 compression facilities and natural gas prices. As of September 30, 2012 , no impairment of these plants or facilities was deemed necessary.

Midstream Gas Services Segment — Three months ended September 30, 2012 compared to the three months ended September 30, 2011

Midstream gas services segment revenues for the three-month period ended September 30, 2012 were $10.3 million compared to $14.7 million in the same period in 2011. The decrease in revenue was due to a decrease in third-party volumes the Company marketed of approximately 0.7 Bcf as a result of a decrease in volumes processed by the Company's gas treating plants in west Texas and a decrease in natural gas prices. The decrease in revenue resulted in a loss from operations of $3.4 million for the three-month period ended September 30, 2012 compared to a loss from operations of $2.0 million in the same period in 2011.

Midstream Gas Services Segment — Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011

Midstream gas services segment revenues for the nine -month period ended September 30, 2012 were $26.7 million compared to $52.4 million in the same period in 2011. The decrease in revenue was due to a decrease in third-party volumes the Company marketed of approximately 4.5 Bcf as a result of a decrease in volumes processed by the Company's gas treating plants in west Texas and a decrease in natural gas prices. The decrease in revenue resulted in a loss from operations of $9.8 million for the nine -month period ended September 30, 2012 compared to a loss from operations of $7.1 million in the same period in 2011.


Consolidated Results of Operations

Three months ended September 30, 2012 compared to the three months ended September 30, 2011

Oil and natural gas revenues increased $169.8 million for the three-month period ended September 30, 2012 compared to the same period in 2011, as a result of an increase in the amount of oil and natural gas produced and an increase in the average price received for oil production. This increase was slightly offset by a decrease in the average price received for natural gas production. See further discussion of oil and natural gas production and prices received during the three-month period ended September 30, 2012 under “Results by Segment—Exploration and Production Segment.”

Midstream and marketing revenues decreased $4.4 million , or 29.0% , in the three-month period ended September 30, 2012 compared to the same period in 2011. The decrease was attributable to a decrease in third-party volumes the Company marketed in west Texas and a decrease in natural gas prices for the three-month period ended September 30, 2012 compared to the same period in 2011.


Expenses. Total expenses increased to $608.7 million for the three months ended September 30, 2012 compared to $(332.8) million for the same period in 2011. The increase was due, in part, to the increases in production expense, depreciation and depletion on oil and natural gas properties and general and administrative expense. Additionally, expenses for the three months ended September 30, 2012 included a $193.5 million loss on derivative contracts compared to a $596.7 million gain on derivative contracts in the three months ended September 30, 2011 .

Production expense includes the costs associated with the Company’s exploration and production activities, including, but not limited to, lease operating expense and treating costs. Production expenses increased $50.5 million primarily due to operating expenses associated with additional oil wells that began producing during 2011 and 2012 and oil and natural gas properties located in the Gulf of Mexico that were acquired during the second quarter of 2012. Total combined production increased 53.3% , with oil production increasing 54.9% and natural gas production increasing 51.6% for the three-month period ended September 30, 2012 compared to the same period in 2011.

Production taxes increased for the three-month period ended September 30, 2012 compared to the 2011 period. Approximately 27% of the Company’s oil and natural gas production for the three-month period ended September 30, 2012 was from production in the Gulf of Mexico, including from properties that were acquired during the second quarter of 2012. This production is not subject to production tax. Excluding Gulf of Mexico oil and natural gas production, the increase in production taxes is consistent with the increase in the oil and natural gas production in the Mid-Continent and Permian Basin.

Midstream and marketing expenses decreased $4.0 million , or 27.0% , due to decreased natural gas volumes purchased from third parties as a result of decreased natural gas production in west Texas and a decrease in natural gas volumes processed at the Company’s gas treating plants during the three-month period ended September 30, 2012 .

Depreciation and depletion for the Company’s oil and natural gas properties increased $81.7 million for the three-month period ended September 30, 2012 from the same period in 2011. The increase was due to an increase of 53.3% in the Company’s combined production volume as well as an increase in the depreciation and depletion per Boe to $17.54 in the three-month period ended September 30, 2012 from $13.67 per Boe in the same period in 2011 primarily as a result of oil and natural gas properties located in the Gulf of Mexico that were acquired during the second quarter of 2012.

Depreciation and amortization - other increased $2.9 million or 21.7% for the three-month period ended September 30, 2012 due primarily to an increase in other depreciable fixed assets, including drilling equipment, electrical infrastructure projects and renovations to the Company's corporate headquarters.

Accretion on asset retirement obligation increased $6.8 million as a result of the future plugging and abandonment obligations associated with the oil and natural gas properties located in the Gulf of Mexico that were acquired during the second quarter of 2012.

General and administrative expenses increased $10.5 million , or 29.0% , to $46.8 million for the three-month period ended September 30, 2012 from the same period in 2011, due primarily to an increase in compensation costs as a result of an increase in the number of employees.

The Company recorded a net loss of $193.5 million ( $29.0 million realized gain and $222.5 million unrealized loss) on its commodity derivative contracts for the three-month period ended September 30, 2012 compared to a net gain of $596.7 million ( $7.8 million realized loss and $604.5 million unrealized gain) in the same period in 2011.

CONF CALL

Tom Ward - Chairman & CEO

Sorry, running a little bit late, I was back to talking to Aubrey about Board seat; just kidding, just kidding. Okay, our operating regions have changed a bit over the years. We now have three operating regions that we are active in, still active in the Permian, even after the sale. We are most active in the Mississippian, where we have, that's the area that is the growth interest for the company and then in the Gulf of Mexico we had the acquisition last year of Dynamic, that continues to exceed our expectations and then lastly we still have our gas asset in the West Texas Overthrust. So if you were to be here six years ago as Kevin mentioned, you would have had a company that was focused only in the West Texas Overthrust and a 100% natural gas. So moving forward overtime what we've done is the most dramatic shift to oil of any public company.

Our corporate objectives are, I'll keep my part of the presentation very brief, because I want you to make sure that you see our deep management team and all the work that’s going on and especially in the Mississippian project where we're the premier operator to our corporate objectives and we want to continue to perform as the premier operator in the Mississippian. I think that by the end of today, you will know that we have the best drilling team, the best completion team, the lowest LOE and the best operations in the Mississippian.

Our second goal is to invest in high rates return projects. The Mississippian is a very high rate return project. We had to overcome the issue of saltwater and we've done that successfully now. Last year was a big year for us to build out saltwater disposal. This year we're drilling within that infrastructure and I think that makes 2013 a pivotal year for the company and we want to continue to improve our credit metrics. So one of the things James will be talking about is just the continuing efforts to make the company in a better financial position, which today we're in the best financial position the company has ever been in our six year history.

This is just a slide that goes to show that really if you just focus on the bottom right, on the financial leverage of the company, proforma of the Permian sale, we're in the best debt-to-EBITDA position that we've been in and we've historically had a high leverage position, especially after we moved out of the natural gas production after we moved from a product that as EBITDA was falling in 2008, 2009, with natural gas process moving down, we had to use some leverage to ride the ship and we were able to do that and now successfully have moved forward with our financial leverage down to approximately two times.

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