(NYSE: SDR) Pre-Earnings Review
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SandRidge Mississippian Trust II (NYSE: SDR), a statutory trust, holds royalty interests in specified oil and natural gas properties. Its properties are located in the Mississippian formation in Alfalfa, Grant, Kay, Noble, and Woods counties in northern Oklahoma and Barber, Comanche, Harper, and Sumner counties in southern Kansas.
Sandridge announced a quarterly distribution for the three-month period ended March 31, 2018 (which primarily relates to production attributable to the Trust’s interests from December 1, 2017 to February 28, 2018) of approximately $2.7 million, or $0.055 per unit. Investor may be hoping that improved prices for the products the Trust is based on may yield higher distributions, similar to those in prior years.
The Trust holds Royalty Interests in specified oil and natural gas properties located in the Mississippian formation in Alfalfa, Grant, Kay, Noble and Woods counties in northern Oklahoma and Barber, Comanche, Harper and Sumner counties in southern Kansas. The Royalty Interests were conveyed by SandRidge to the Trust concurrent with the initial public offering of the Trust’s common units in April 2012. As consideration for conveyance of the Royalty Interests, the Trust remitted the proceeds of the offering, along with 7,393,750 Trust common units and 12,431,250 Trust subordinated units, to certain wholly owned subsidiaries of SandRidge. At December 31, 2017 , SandRidge owned 18,675,000 Trust units, or approximately 37.6% of all Trust units.
The Royalty Interests entitle the Trust to receive 80% of the proceeds (after deducting post-production costs and any applicable taxes) from the sale of oil, natural gas and natural gas liquids production attributable to SandRidge’s net revenue interest in 54 wells producing at December 31, 2011 and 13 additional wells awaiting completion at that time, and 70% of the proceeds (after deducting post-production costs and any applicable taxes) from the sale of oil, natural gas and NGL production attributable to SandRidge’s net revenue interest in 206 horizontal oil and natural gas development wells drilled within an area of mutual interest (“AMI”). Pursuant to a development agreement between the Trust and SandRidge, SandRidge was obligated to drill, or cause to be drilled, the Trust Development Wells by December 31, 2016. SandRidge fulfilled this obligation in March 2015.
The Trust will dissolve and begin to liquidate on December 31, 2031 and will soon thereafter wind up its affairs and terminate. At the Termination Date, 50% of the Royalty Interests will revert automatically to SandRidge. The remaining 50% of the Royalty Interests will be sold at that time, and the net proceeds of the sale, as well as any remaining Trust cash reserves, will be distributed to the unitholders on a pro rata basis. SandRidge has a right of first refusal to purchase the Royalty Interests retained by the Trust at the Termination Date. The Trust will not dissolve until the Termination Date unless any of the following occurs: (a) the Trust sells all of the Royalty Interests; (b) cash available for distribution for any four consecutive quarters, on a cumulative basis, is less than $5.0 million; (c) Trust unitholders approve an earlier dissolution of the Trust; or (d) the Trust is judicially dissolved. In the case of any of the foregoing, the Trustee would then sell all of the Trust’s assets, either by private sale or public auction, and distribute the net proceeds of the sale to the Trust unitholders after payment, or reasonable provision for payment, of all Trust liabilities.
April 26, 2018. Sandridge announced a quarterly distribution for the three-month period ended March 31, 2018 (which primarily relates to production attributable to the Trust’s interests from December 1, 2017 to February 28, 2018) of approximately $2.7 million, or $0.055 per unit. The Trust makes distributions on a quarterly basis on or about the 60th day following the completion of each quarter. The distribution is expected to occur on or before May 25, 2018 to holders of record as of the close of business on May 11, 2018. https://finance.yahoo.com/news/sandridge-mississippian-trust-ii-announces-201500277.html
SandRidge Mississippian Trust II, a statutory trust, holds royalty interests in specified oil and natural gas properties. Its properties are located in the Mississippian formation in Alfalfa, Grant, Kay, Noble, and Woods counties in northern Oklahoma and Barber, Comanche, Harper, and Sumner counties in southern Kansas. As of December 31, 2016, the company’s properties consisted of royalty interests in initial wells and 173 additional wells. The company was founded in 2011 and is based in Austin, Texas. SandRidge Mississippian Trust II is a subsidiary of SandRidge Exploration and Production, LLC.
2017 2016 2015
Revenue 15,647 16,098 42,344
Distributable Income 11,601 16,098 42,344
Distributable Income Per Unit .233 .395 1.135
Comparison of Results of the Trust for the Years Ended December 31, 2017 and 2016
Royalty Income. Royalty income is a function of production volumes sold attributable to the Royalty Interests and associated prices received. Royalty income received during the year ended December 31, 2017 totaled $ 15.6 million compared to $ 16.1 million received during the year ended December 31, 2016. The approximate $0.5 million decrease in royalty income consisted of approximately $4.6 million attributable to a decrease in total volumes produced, partially offset by approximately $4.1 million attributable to an increase in prices received. The average number of producing wells decreased by 27 during the year ended December 31, 2017 compared to the year ended December 31, 2016 as wells that could not economically produce due to continued depressed pricing were shut-in.
Derivative Settlements. The Trust’s derivatives agreement with SandRidge was intended to reduce the Trust’s exposure to commodity price volatility attributable to a portion of production from the Royalty Interests through December 31, 2015 by the use of oil fixed price swaps. Net cash settlements received under the derivatives agreement during the year ended December 31, 2016 were approximately $4.3 million related to the conveyed contracts for production attributable to the Royalty Interests from September 1, 2015 to December 31, 2015, which effectively increased the average price received for oil production for the related period by $25.17 per Bbl, to $62.63 per Bbl. The derivatives agreement has terminated, and the Trust will not receive any additional settlements.
Post-Production Expenses. The Trust bears post-production expenses attributable to production from the Royalty Interests. Post-production expenses generally consist of costs incurred to gather, store, compress, transport, process, treat, dehydrate and market the natural gas produced. Post-production expenses for the year ended December 31, 2017 decreased to approximately $1.8 million from approximately $2.1 million for the year ended December 31, 2016 primarily as a result of the decrease in production.
Property Taxes. Property taxes paid during the year ended December 31, 2017 totaled approximately $0.2 million compared to approximately $0.3 million for the year ended December 31, 2016.
Production Taxes. Production taxes are calculated as a percentage of oil, natural gas and NGL revenues, excluding the effects of derivative settlements and net of any applicable tax credits. Production taxes for the year ended December 31, 2017 totaled $0.7 million, or $0.94 per Boe, and were approximately 4.8% of royalty income. Production taxes for the year ended December 31, 2016 totaled $0.4 million, or $0.43 per Boe, and were approximately 2.8% of royalty income. Production tax rates increased due to Trust wells reaching the expiration point of a previously reduced tax rate. The average effective production tax rate for the Trust will continue to increase, up to a maximum rate of 7%, as more Trust wells reach this expiration point.
Trust Administrative Expenses. Trust administrative expenses for the year ended December 31, 2017 remained relatively consistent and totaled approximately $1.4 million compared to approximately $1.7 million for the year ended December 31, 2016.
Distributable income for the year ended December 31, 2017 was $11.6 million, which did not include any net reduction to the cash reserve for the payment of future Trust expenses, reflecting approximately $1.5 million used to pay Trust expenses during the period offset by approximately $1.5 million withheld in aggregate from 2017 cash distributions to unitholders. Distributable income for the year ended December 31, 2016 was $16.1 million, which included a net reduction to the cash reserve for the payment
of future Trust expenses of approximately $0.2 million, reflecting approximately $1.9 million used to pay Trust expenses during the period partially offset by approximately $1.7 million withheld in aggregate from 2016 cash distributions to unitholders.
Distributions to Common and Subordinated Unitholders. Holders of Trust common units received greater distributions than holders of Trust subordinated units during the year ended December 31, 2016 as a result of the Trust’s subordination provisions. Because income available for distribution on all Trust units for the February 2016 and May 2016 distributions was below the Subordination Threshold, no distributions were paid to the subordinated units for those periods. As a result of the subordination provisions, holders of common units received approximately $2.6 million more in distributions for the year ended December 31, 2016, then such holders would have received had the subordination provisions not existed. Beginning with the Trust’s August 2016 distribution, distributions made on common units no longer have the benefit of the Subordination Threshold, the common units are not subject to the Incentive Threshold, and all Trust unitholders share on a pro rata basis in the Trust’s distributions.
used to pay Trust expenses during the period partially offset by approximately $1.8 million withheld in aggregate from 2015 cash distributions to unitholders.
Distributions to Common and Subordinated Unitholders. Holders of Trust common units received greater distributions than holders of Trust subordinated units during the years ended December 31, 2016 and 2015 as a result of the Trust’s subordination provisions. Because income available for distribution on all Trust units for the February 2016, May 2016 and all of the 2015 distributions were below the Subordination Threshold, no distributions were paid on the subordinated units for those periods. As a result of the subordination provisions, holders of common units received approximately $2.6 million and $10.6 million more in distributions for the years ended December 31, 2016 and 2015, respectively, then such holders would have received had the subordination provisions not existed.
The Trust’s reserves and quarterly cash distributions are highly dependent upon the prices realized from the sale of oil, natural gas and NGL. The markets for these commodities are volatile and have experienced depressed pricing throughout 2015 and 2016. Although oil, natural gas and NGL prices rose during 2017, a buildup in inventories, lower global demand, or other factors could cause prices for U.S. oil, natural gas and NGL to weaken.
Stock influences and risk factors
Continued increases in oil, natural gas or NGL prices could improve proceeds to the Trust and cash distributions to unitholders;
If they do not meet the NYSE’s continued listing requirements, the NYSE may delist the Trust units, which could affect the market price, trading volume, liquidity and resale price of the Trust Units;
The Trust is passive in nature and has no voting rights in SandRidge, managerial, contractual or other ability to influence SandRidge, or control over the field operations of, or sale of oil, natural gas and NGL from the Underlying Properties;
The amount of cash available for distribution by the Trust is reduced by Trust expenses, post-production costs and applicable taxes associated with the Royalty Interests.
On Wednesday, May 9, 2018, SDR shares were at $1.27 on traded volume of 295K shares. The current RSI (14) is 82.85
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