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 (gain) loss on derivative contracts for commodity derivative contracts in the consolidated statements of operations. Commodity derivative contracts are settled on a monthly or quarterly basis. 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 sheets.

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, 2014, 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.

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 or natural gas from a specified delivery point.

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. The Company is party to derivatives agreements with the Mississippian Trust I, Permian Trust and Mississippian Trust II 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 for the Mississippian Trust I and Mississippian Trust II and through March 31, 2015 for the Permian Trust. 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.

In accordance with the terms 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 additional derivative contracts to the Permian Trust and Mississippian Trust II.

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, 2014 and 2013 on a gross basis without regard to same-counterparty netting (in thousands):



		December 31,
Type of Contract	Balance Sheet Classification	2014		2013
Derivative assets
Oil price swaps	Derivative contracts—current	$	204,072	$	15,887
Natural gas price swaps	Derivative contracts—current	29,648		1,598
Natural gas basis swaps	Derivative contracts—current	350		—
Oil collars—three way	Derivative contracts—current	56,289		706
Natural gas collars	Derivative contracts—current	1,055		177
Oil price swaps	Derivative contracts—noncurrent	36,288		19,376
Oil collars—three way	Derivative contracts—noncurrent	10,715		12,189
Natural gas collars	Derivative contracts—noncurrent	—		341
Derivative liabilities
Oil price swaps	Derivative contracts—current	—		(38,396		)
Natural gas price swaps	Derivative contracts—current	—		(1,460		)
Oil price swaps	Derivative contracts—noncurrent	—		(38,344		)
Total net derivative contracts		$	338,417	$	(27,926	)

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 sheets. 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, 2014, the counterparties to the Company’s open derivative contracts consisted of nine financial institutions, all 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 (i) the Company's derivative contracts on a gross basis, (ii) the effects of netting assets and liabilities for which the right of offset exists based on master netting arrangements and (iii) for the Company’s derivative liability positions, the applicable portion of shared collateral under the senior credit facility (for SandRidge's derivative contracts) and under liens granted on the royalty interests (for the Permian Trust and the Mississippian Trust II) (in thousands):

December 31, 2014



	Gross Amounts		Gross Amounts Offset		Amounts Net of Offset		Financial Collateral		Net Amount
Assets
Derivative contracts - current	$	291,414	$	—	$	291,414	$	—	$	291,414
Derivative contracts - noncurrent	47,003		—		47,003		—		47,003
Total	$	338,417	$	—	$	338,417	$	—	$	338,417

Liabilities
Derivative contracts - current	$	—	$	—	$	—	$	—	$	—
Derivative contracts - noncurrent	—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—

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	)	$	—

The Company recorded (gain) loss on commodity derivative contracts of $(334.0) million, $47.1 million and $(241.4) million for the years ended December 31, 2014, 2013 and 2012, respectively, as reflected in the accompanying consolidated statements of operations, which includes net cash payments (receipts) upon settlement of $32.3 million, $(0.8) million and $(91.4) million, respectively. Included in these net cash payments are $69.6 million and $29.6 million of cash payments related to settlements of commodity derivative contracts with contractual maturities after the year in which they were settled primarily as a result of the sale of the Gulf Properties in February 2014 and the Permian Properties in February 2013, respectively. 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 and $1.2 million for the years ended December 31, 2013 and 2012, 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 and 2012 are cash payments upon contract settlement of $2.4 million and $9.2 million, respectively.

At December 31, 2014, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps

Natural Gas Price Swaps

Natural Gas Basis Swaps

Oil Collars - Three-way



	Notional (MBbls)	Sold Put		Purchased Put		Sold Call
January 2015 - December 2015	4,576	$	76.56	$	90.28	$	103.48
January 2016 - December 2016	2,556	$	83.14	$	90.00	$	100.85

Natural Gas Collars

Notional (MBbls)

Weighted Average
Fixed Price

January 2015 - December 2015

January 2016 - December 2016