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SandRidge Starts Restructuring; How A $2.7B Oil Deal Closed In A Cracker Barrel

May 20, 2016

Monday morning Oklahoma City-based SandRidge Energy formally filed for bankruptcy.

The move wasn’t unexpected among energy observers, but one of the interesting things about this particular filing is that SandRidge has almost twice as many assets as it does debt.

“They're looking at their long-term liquidity, and that's a problem. As long as commodity prices stay down, then they were never going to be able to get ahead of that debt,” said The Journal Record’s managing editor Adam Brooks. “That really hurts their revenue. And it's not like they can just sell these assets and take that money and pay it toward debt.”

Part of the plan involves converting $2.26 billion in debt to equity, which will lower SandRidge’s interest payments to big debt-holders and improve the company’s cash flow.

It’s been a rough 2016 for all Oklahoma oil and gas drillers, but SandRidge has been especially troubled. It was delisted from the New York Stock Exchange in January and moved to the over-the-counter pink sheet markets, where the stock now trades for pennies a share. They announced new legal and financial advisers later that month, and in February took advantage of a grace period on $20 million interest payments.

“It's no surprise that they filed,” Brooks said. “We'd heard rumors for weeks that 'Oh, this is going to be the week. This is going to be the week.' And then they finally had to take the plunge.”

There were forces beyond SandRidge’s control. State regulators trying to curtail seismic  activity affected SandRidge’s operations and finances, The Journal Record’s Sarah Terry-Cobo reported in November:

Disposal wells are the key to making the Mississippi Lime play economical.

SandRidge invested more than $200 million in infrastructure to ship salty, toxic wastewater from petroleum wells through pipes to disposal wells nearby. One in six wells the OCC put under a microscope belongs to SandRidge, accounting for nearly 85 percent of the company’s 125 active disposal sites.

If the Oklahoma Corporation Commission requires dramatic cutbacks for all of SandRidge’s wells, the company might not be able to afford to move the water elsewhere. One geologist estimated that reducing the volume from one disposal means redistributing to about four wells to reduce earthquake risk. And SandRidge can’t produce oil and gas if it can’t dispose of all the wastewater.

Brooks says the Chapter 11 bankruptcy protection means SandRidge will have time to restructure.

“They're not liquidating. They're not shutting down. They still have permission to pay their employees and keep their operations going,” Brooks said. “They have that new common stock offering coming, and like most of the industry they're still waiting for prices to rise, which some analysts think could happen by the end of the year. And this year they're already up about 50 percent.”

Ronnie Irani discusses selling his Permian Basin assets to WPX Energy, for a $2.75 billion transaction dubbed the Best Oil Deal of 2015.
Credit Brent Fuchs / The Journal Record

From Boardrooms To Bakeries

The trade publication Oil and Gas Investor called the $2.7 billion transaction between WPX Energy and RKI Exploration for RKI’s Permian Basin assets the “Best Oil Deal of 2015.” But what’s remarkable about the transaction was where it was negotiated – not over an $8,000 oak table, but over a $2 cup of coffee.

For seven Sundays last year, WPX CEO Rick Muncrief met with RKI head Ronnie Irani met at a Panera in Edmond to work out the deal, and build up a relationship based on trust and personal interaction rare in world of conference calls or meetings via Skype, Terry-Cobo writes:

Many Edmondites know Muncrief, so if he and Irani were seen together, it would raise suspicions before either were ready to go public.

Irani walked to Mucrief’s booth and casually took his place. And so began the delicate business of arranging 2015’s most important oil deal.

The two knew one another by reputation and through overlapping social circles within the industry’s state trade association. But they were born on opposite sides of the world: Muncrief in Ardmore, and Irani in Mumbai, India. And one thing they shared before they ever sipped coffee together was crucial in closing the $2.75 billion deal: the idea that keeping your word is paramount.

Fast-forward several weeks. When Muncrief and Irani met for the seventh time, a very loud, very honest couple sat in the next booth having a very loud, very honest marriage counseling session. Both men got uncomfortable, so they drove five miles down the road and closed the $2.7 billion deal at a Cracker Barrel. Terry-Cobo says even the slightest delay can make a buyer hesitate when billions of dollars are at stake:

That bond mattered when there was a last-minute hitch. Muncrief was only hours from a roadshow, preparing his Power Point, ready to hop on a flight and present the proposed acquisition to investors when someone noticed one of Irani’s five investor groups hadn’t signed off on the sale.

Muncrief grabbed the phone but remained calm.

“What the heck is goin’ on?” he asked.

“Everything is fine, we’re still fine,” Irani said. The problem was a simple communication error about the deadline.

The transaction closed August 17.

The Business Intelligence Report is a collaborative news project between KGOU and The Journal Record.

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