Derivatives

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts at fair value. Changes in derivative contract fair values are recognized in earnings. Cash settlements and valuation gains and losses are included in loss (gain) on derivative contracts for commodity derivative contracts and in interest expense for interest rate swaps in the accompanying unaudited condensed 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 condensed 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 contractual maturity solely as a result of a downgrade in the credit rating of a party to the contract. At September 30, 2013, the Company’s commodity derivative contracts consisted of fixed price swaps and collars, 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 (“NYMEX”) 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.

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 and redemption 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, Permian Trust and 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 derivative 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 derivative contracts novated to it, each of the Permian Trust and the Mississippian Trust II granted the counterparties liens on the royalty interests held by each respective Royalty 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 the 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 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 September 30, 2013 and December 31, 2012 on a gross basis without regard to same-counterparty netting (in thousands):



Type of Contract	Balance Sheet Classification	September 30, 2013			December 31, 2012
Derivative assets
Oil price swaps	Derivative contracts-current	$	14,585		$	88,052
Natural gas price swaps	Derivative contracts-current	6,374			—
Oil basis swaps	Derivative contracts-current	—			183
Natural gas collars	Derivative contracts-current	727			3,111
Oil price swaps	Derivative contracts-noncurrent	23,050			37,983
Oil collars - three way	Derivative contracts-noncurrent	12,837			190
Natural gas collars	Derivative contracts-noncurrent	513			884
Derivative liabilities
Oil price swaps	Derivative contracts-current	(43,519		)	(31,991		)
Oil basis swaps	Derivative contracts-current	—			(695		)
Oil collars - two way	Derivative contracts-current	(92		)	(103		)
Oil collars - three way	Derivative contracts-current	(6,240		)	—
Interest rate swap	Derivative contracts-current	—			(2,395		)
Oil price swaps	Derivative contracts-noncurrent	(45,464		)	(67,900		)
Oil collars - three way	Derivative contracts-noncurrent	—			(7,327		)
Total net derivative contracts		$	(37,229	)	$	19,992

See 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 present its derivative assets and liabilities with the same counterparty on a net basis in the consolidated balance sheet. 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 Royalty Trusts' novated derivative contracts associated with the Company’s net derivative liability positions (in thousands):

September 30, 2013



	Gross Amounts		Gross Amounts Offset			Amounts Net of Offset		Financial Collateral			Net Amount
Assets
Derivative contracts - current	$	21,686	$	(13,380	)	$	8,306	$	—		$	8,306
Derivative contracts - noncurrent	36,400		(20,922		)	15,478		—			15,478
Total	$	58,086	$	(34,302	)	$	23,784	$	—		$	23,784

Liabilities
Derivative contracts - current	$	49,851	$	(13,380	)	$	36,471	$	(36,471	)	$	—
Derivative contracts - noncurrent	45,464		(20,922		)	24,542		(24,542		)	—
Total	$	95,315	$	(34,302	)	$	61,013	$	(61,013	)	$	—

December 31, 2012



	Gross Amounts		Gross Amounts Offset			Amounts Net of Offset		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 gains and losses on the Company’s commodity derivative contracts and interest rate swap, which are included in loss (gain) on derivative contracts and interest expense, respectively, in the accompanying unaudited condensed consolidated statements of operations for the three and nine-month periods ended September 30, 2013 and 2012 (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013		2012			2013			2012
Commodity Derivatives
Loss (gain) on settlement(1)	$	13,203	$	(28,970	)	$	11,571		$	7,366
Loss (gain) due to change in fair value	119,605		222,467			58,480			(229,073		)
Loss (gain) on commodity derivative contracts	$	132,808	$	193,497		$	70,051		$	(221,707	)
Interest Rate Swap
Loss on settlement	$	—	$	2,330		$	2,409		$	6,824
Gain due to change in fair value	—		(2,033		)	(2,395		)	(5,632		)
Loss on interest rate swap	$	—	$	297		$	14		$	1,192

____________________

(1)

The three-month period ended September 30, 2012 included $2.1 million of gains related to settlements of commodity derivative contracts with contractual maturities after the quarterly period in which they were settled (“early settlements”). The nine-month periods ended September 30, 2013 and 2012 included $29.3 million and $(59.5) million, respectively, of losses (gains) related to early settlements. The nine-month period ended September 30, 2012 also included $117.1 million of non-cash losses due to the amendment of derivative contracts in January 2012.

At September 30, 2013, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps



	Notional (MBbls)	Weighted Average Fixed Price
October 2013 - December 2013	3,494	$	99.48
January 2014 - December 2014	8,813	$	92.98
January 2015 - December 2015	6,614	$	85.25

Natural Gas Price 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
October 2013 - December 2013	1,716	$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

October 2013 - December 2013