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 consolidated statement 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 contractual maturity solely as a result of a downgrade in the credit rating of a party to the contract. At December 31, 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 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 rate debt and will be exposed to variable interest rates if it draws on its senior credit facility. 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.

Prior to its maturity on April 1, 2013, 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 their repurchase and redemption in the third quarter of 2012. The interest rate swap was not designated as a hedge.

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 Mississippian Trust II. As a party to these contracts, the Permian Trust and 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 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 Mississippian Trust II, the Company has the right, under certain circumstances, to assign or novate to the Permian Trust and 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 Mississippian Trust II, have been included in the Company’s consolidated derivative disclosures. See Note 4 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 December 31, 2013 and 2012 on a gross basis without regard to same-counterparty netting (in thousands):



		December 31,
Type of Contract	Balance Sheet Classification	2013			2012
Derivative assets
Oil price swaps	Derivative contracts—current	$	15,887		$	88,052
Natural gas price swaps	Derivative contracts—current	1,598			—
Oil basis swaps	Derivative contracts—current	—			183
Oil collars—three way	Derivative contracts—current	706			—
Natural gas collars	Derivative contracts—current	177			3,111
Oil price swaps	Derivative contracts—noncurrent	19,376			37,983
Oil collars—three way	Derivative contracts—noncurrent	12,189			190
Natural gas collars	Derivative contracts—noncurrent	341			884
Derivative liabilities
Oil price swaps	Derivative contracts—current	(38,396		)	(31,991		)
Natural gas price swaps	Derivative contracts—current	(1,460		)	—
Oil basis swaps	Derivative contracts—current	—			(695		)
Oil collars—two way	Derivative contracts—current	—			(103		)
Interest rate swap	Derivative contracts—current	—			(2,395		)
Oil price swaps	Derivative contracts—noncurrent	(38,344		)	(67,900		)
Oil collars—three way	Derivative contracts—noncurrent	—			(7,327		)
Total net derivative contracts		$	(27,926	)	$	19,992

Refer to Note 5 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. As of December 31, 2013, the counterparties to the Company’s open derivative contracts consisted of 13 financial institutions, 11 of which are also lenders under the Company’s senior credit facility. As a result, the Company is not required to post additional collateral under derivative contracts as the majority of the counterparties to the Company’s derivative contracts share in the collateral supporting the Company’s senior credit facility. To secure their obligations under the derivative contracts novated by the Company, the Permian Trust and 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):

December 31, 2013



	Gross Amounts		Gross Amounts Offset			Amounts Net of Offset		Financial Collateral			Net Amount
Assets
Derivative contracts - current	$	18,368	$	(5,589	)	$	12,779	$	—		$	12,779
Derivative contracts - noncurrent	31,906		(17,780		)	14,126		—			14,126
Total	$	50,274	$	(23,369	)	$	26,905	$	—		$	26,905

Liabilities
Derivative contracts - current	$	39,856	$	(5,589	)	$	34,267	$	(34,267	)	$	—
Derivative contracts - noncurrent	38,344		(17,780		)	20,564		(20,564		)	—
Total	$	78,200	$	(23,369	)	$	54,831	$	(54,831	)	$	—

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 Company recorded loss (gain) on commodity derivative contracts of $47.1 million, $(241.4) million and $(44.1) million for the years ended December 31, 2013, 2012 and 2011, respectively, as reflected in the accompanying consolidated statements of operations. Included in the loss (gain) on commodity derivative contracts for the years ended December 31, 2013, 2012 and 2011 are net cash (receipts) payments upon contract settlement of $(3.2) million, $(100.7) million and $37.6 million, respectively. For the year ended December 31, 2013, $29.6 million of cash payments related to settlements of commodity derivative contracts with contractual maturities after the year in which they were settled as a result of the sale of the Permian Properties. For the year ended December 31, 2012, the gain on commodity derivative contracts is net of a non-cash loss of $117.1 million resulting from the amendment of certain 2012 derivative contracts to contracts maturing in 2014 and 2015.

The Company recorded a loss on its interest rate swaps of $0.01 million, $1.2 million and $3.2 million for the years ended December 31, 2013, 2012 and 2011, respectively, which is included in interest expense in the accompanying consolidated statements of operations. Included in the loss for the years ended December 31, 2013, 2012 and 2011 are cash payments upon contract settlement of $2.4 million, $9.2 million and $9.4 million, respectively.

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

Oil Price Swaps

Natural Gas Price Swaps

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
January 2014 — December 2014	937	$4.00	—	$7.78
January 2015 — December 2015	1,010	$4.00	—	$8.55

Notional (MBbls)

Weighted Average
Fixed Price

January 2014 — December 2014

January 2015 — December 2015