Derivatives

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts, which include commodity derivatives and an interest rate swap, at fair value. Changes in derivative contract fair values are recognized in earnings. Cash settlements and valuation gains and losses are included in loss on derivative contracts for commodity derivative contracts and in interest expense for interest rate swaps in the consolidated statements of operations. Commodity derivative contracts are settled on a monthly or quarterly basis. Settlements on interest rate swaps occur quarterly. Derivative assets and liabilities arising from the Company’s derivative contracts with the same counterparty that provide for net settlement are reported on a net basis in the consolidated balance sheet.

Commodity Derivatives. The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil and natural gas. The Company seeks to manage this risk through the use of commodity derivative contracts. These derivative contracts allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil and natural gas sales. None of the Company’s derivative contracts may be terminated prior to the contractual maturity solely as a result of a downgrade in the credit rating of a party to the contract. At March 31, 2013, the Company’s commodity derivative contracts consisted of fixed price swaps, collars and basis swaps, which are described below:



Fixed price swaps	The Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.

Collars	Two-way collars contain a fixed floor price (put) and a fixed ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.
	Three-way collars have two fixed floor prices (a purchased put and a sold put) and a fixed ceiling price (call). The purchased put establishes a minimum price unless the market price falls below the sold put, at which point the minimum price would be New York Mercantile Exchange plus the difference between the purchased put and the sold put strike price. The call establishes a maximum price (ceiling) the Company will receive for the volumes under the contract.

Basis swaps	The Company receives a payment from the counterparty if the settled price differential is greater than the stated terms of the contract and pays the counterparty if the settled price differential is less than the stated terms of the contract, which guarantees the Company a price differential for oil and natural gas from a specified delivery point.

Interest Rate Swaps. The Company is exposed to interest rate risk on its long-term fixed and variable interest rate borrowings. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the Company to (i) changes in market interest rates reflected in the fair value of the debt and (ii) the risk that the Company may need to refinance maturing debt with new debt at a higher rate. Variable rate debt, where the interest rate fluctuates, exposes the Company to short-term changes in market interest rates as the Company’s interest obligations on these instruments are periodically redetermined based on prevailing market interest rates, primarily LIBOR and the federal funds rate.

The Company had a $350.0 million notional interest rate swap agreement which effectively fixed the variable interest rate on the Senior Floating Rate Notes at an annual rate of 6.69% for periods prior to the Company’s purchase of the Senior Floating Rate Notes in the third quarter of 2012. The interest rate swap, which was not designated as a hedge, matured on April 1, 2013.

Derivatives Agreements with Royalty Trusts. Effective April 1, 2011, August 1, 2011 and April 1, 2012, the Company entered into derivatives agreements with the Mississippian Trust I, the Permian Trust and the Mississippian Trust II, respectively, to provide each Royalty Trust with the economic effect of certain oil and natural gas derivative contracts entered into by the Company with third parties. The underlying commodity derivative contracts cover volumes of oil and natural gas production through December 31, 2015, March 31, 2015 and December 31, 2014 for the Mississippian Trust I, Permian Trust and Mississippian Trust II, respectively. Under these arrangements, the Company pays the Royalty Trusts amounts it receives from its counterparties in accordance with the underlying contracts, and the Royalty Trusts pay the Company any amounts that the Company is required to pay its counterparties under such contracts.

Substantially concurrent with the execution of the respective derivatives agreements, the Company novated certain of the derivatives contracts underlying the derivatives agreements to each of the Permian Trust and the Mississippian Trust II. As a party to these contracts, the Permian Trust and the Mississippian Trust II receive payment directly from the counterparty and pay any amounts owed directly to the counterparty. To secure its obligations under the respective derivatives contracts novated to it, each of the Permian Trust and Mississippian Trust II granted the counterparties liens on the royalty interests held by each respective trust. Under the derivatives agreements, as development wells are drilled for the benefit of the Permian Trust and the Mississippian Trust II, the Company has the right, under certain circumstances, to assign or novate to the Permian Trust and the Mississippian Trust II additional derivative contracts. The Company novated certain additional derivative contracts underlying the derivatives agreements to the Permian Trust in April 2012 and to the Permian Trust and Mississippian Trust II in March 2013.

All contracts underlying the derivatives agreements with the Royalty Trusts, including those novated to the Permian Trust and the Mississippian Trust II, have been included in the Company’s consolidated derivative disclosures. See Note 3 for information on the Royalty Trusts’ open derivative contracts.

Fair Value of Derivatives. The following table presents the fair value of the Company’s derivative contracts as of March 31, 2013 and December 31, 2012 on a gross basis without regard to same-counterparty netting (in thousands):



Type of Contract	Balance Sheet Classification	March 31, 2013			December 31, 2012
Derivative assets
Oil price swaps	Derivative contracts-current	$	44,306		$	88,052
Oil basis swaps	Derivative contracts-current	122			183
Oil collars - three way	Derivative contracts-current	311			—
Natural gas collars	Derivative contracts-current	600			3,111
Oil price swaps	Derivative contracts-noncurrent	32,710			37,983
Oil collars - three way	Derivative contracts-noncurrent	12,019			190
Natural gas collars	Derivative contracts-noncurrent	639			884
Derivative liabilities
Oil price swaps	Derivative contracts-current	(29,161		)	(31,991		)
Natural gas price swaps	Derivative contracts-current	(2,985		)	—
Oil basis swaps	Derivative contracts-current	(333		)	(695		)
Oil collars - two way	Derivative contracts-current	(137		)	(103		)
Interest rate swap	Derivative contracts-current	—			(2,395		)
Oil price swaps	Derivative contracts-noncurrent	(60,533		)	(67,900		)
Oil collars - three way	Derivative contracts-noncurrent	—			(7,327		)
Total net derivative contracts		$	(2,442	)	$	19,992

Refer to Note 4 for additional discussion of the fair value measurement of the Company’s derivative contracts.

Master Netting Agreements and the Right of Offset. The Company has master netting agreements with all of its derivative counterparties, which allow the Company to net its derivative assets and liabilities with the same counterparty. As a result, the Company's maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from its counterparties. The Company's open derivative contracts are with counterparties that share in the collateral supporting the Company's senior credit facility. As a result, the Company is not required to post additional collateral under its derivative contracts. To secure their obligations under the derivative contracts novated by the Company, the Permian Trust and the Mississippian Trust II have each given the counterparties to such contracts a lien on its royalty interests. The following tables summarize the Company's derivative contracts on a gross basis, the effects of netting assets and liabilities for which the right of offset exists based on master netting arrangements, and the applicable portion of shared collateral under the senior credit facility for SandRidge's derivative contracts and under the liens granted by the Permian Trust and the Mississippian Trust II on their royalty interest for the Trusts' novated derivative contracts associated with the Company's net derivative liability position (in thousands):

March 31, 2013



	Gross Amounts		Gross Amounts Offset			Net Amounts		Financial Collateral			Net Amount
Assets
Derivative contracts - current	$	45,339	$	(19,646	)	$	25,693	$	—		$	25,693
Derivative contracts - noncurrent	45,368		(20,149		)	25,219		—			25,219
Total	$	90,707	$	(39,795	)	$	50,912	$	—		$	50,912

Liabilities
Derivative contracts - current	$	32,616	$	(19,646	)	$	12,970	$	(12,970	)	$	—
Derivative contracts - noncurrent	60,533		(20,149		)	40,384		(40,384		)	—
Total	$	93,149	$	(39,795	)	$	53,354	$	(53,354	)	$	—

December 31, 2012



	Gross Amounts		Gross Amounts Offset			Net Amounts		Financial Collateral			Net Amount
Assets
Derivative contracts - current	$	91,346	$	(20,324	)	$	71,022	$	—		$	71,022
Derivative contracts - noncurrent	39,057		(15,440		)	23,617		—			23,617
Total	$	130,403	$	(35,764	)	$	94,639	$	—		$	94,639

Liabilities
Derivative contracts - current	$	35,184	$	(20,324	)	$	14,860	$	(14,860	)	$	—
Derivative contracts - noncurrent	75,227		(15,440		)	59,787		(59,787		)	—
Total	$	110,411	$	(35,764	)	$	74,647	$	(74,647	)	$	—

The following table summarizes the cash settlements and valuation gain and loss on the Company’s commodity derivative contracts and interest rate swap, which are included in loss on derivative contracts and interest expense, respectively, in the accompanying unaudited condensed consolidated statements of operations for the three-month periods ended March 31, 2013 and 2012 (in thousands):



	Three Months Ended March 31,
	2013			2012
Commodity Derivatives
Realized loss(1)	$	16,085		$	125,456
Unrealized loss	24,812			129,190
Loss on commodity derivative contracts	$	40,897		$	254,646
Interest Rate Swap
Realized loss	$	2,409		$	2,200
Unrealized gain	(2,395		)	(1,354		)
Loss on interest rate swap	$	14		$	846

____________________

(1)

The three-month period ended March 31, 2013 includes $29.6 million of realized losses related to settlements of commodity derivative contracts with contractual maturities after the quarterly period in which they were settled (“early settlements”) in conjunction with the sale of the Permian Properties. The three-month period ended March 31, 2012 includes $117.1 million of non-cash realized losses on derivative contracts amended in January 2012.

At March 31, 2013, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps



	Notional (MBbls)	Weighted Average Fixed Price
April 2013 - December 2013	10,142	$	98.64
January 2014 - December 2014	7,511	$	92.43
January 2015 - December 2015	5,076	$	83.69

Natural Gas Price Swaps

Oil Basis Swaps

Oil Collars - Two-way

Oil Collars - Three-way



	Notional (MBbls)	Sold Put	Purchased Put	Sold Call
January 2014 - December 2014	8,213	$70.00	$90.20	$100.00
January 2015 - December 2015	2,920	$73.13	$90.82	$103.13

Natural Gas Collars



	Notional (MMcf)	Collar Range
April 2013 - December 2013	5,146	$3.78	—	$6.71
January 2014 - December 2014	937	$4.00	—	$7.78
January 2015 - December 2015	1,010	$4.00	—	$8.55

Notional (MMcf)

Weighted Average
Fixed Price

April 2013 - December 2013