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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                 to                

Commission File Number: 001-35274

 

 

SANDRIDGE PERMIAN TRUST

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   45-6276683

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

The Bank of New York Mellon

Trust Company, N.A., Trustee

919 Congress Avenue, Suite 500

Austin, Texas

  78701
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code: (855) 802-1092

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

As of May 7, 2012, 39,375,000 Common Units and 13,125,000 Subordinated Units of Beneficial Interest in SandRidge Permian Trust were outstanding.

 

 

 


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SANDRIDGE PERMIAN TRUST

FORM 10-Q

Quarter Ended March 31, 2012

 

PART I. FINANCIAL INFORMATION

  
ITEM 1.    Financial Statements (Unaudited)    4
   Statements of Assets and Trust Corpus    4
   Statement of Distributable Income    5
   Statement of Changes in Trust Corpus    6
   Notes to Financial Statements    7
ITEM 2.    Trustee’s Discussion and Analysis of Financial Condition and Results of Operations    12
ITEM 3.    Quantitative and Qualitative Disclosures About Market Risk    16
ITEM 4.    Controls and Procedures    16

PART II. OTHER INFORMATION

  
ITEM 1A.    Risk Factors    17
ITEM 6.    Exhibits    17

All references to “we,” “us,” “our,” or the “Trust” refer to SandRidge Permian Trust. References to “SandRidge” refer to SandRidge Energy, Inc., and where the context requires, its subsidiaries. The royalty interests conveyed by SandRidge from its interests in certain properties in the Permian Basin in Andrews County, Texas and held by the Trust are referred to as the “Royalty Interests.”

 

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DISCLOSURES REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Quarterly Report”) includes “forward-looking statements” about the Trust, SandRidge and other matters discussed herein that are subject to risks and uncertainties within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact included in this document, including, without limitation, statements under “Trustee’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I and elsewhere herein regarding the Trust’s or SandRidge’s plans and objectives for future operations, information regarding target distributions and statements regarding the number of development wells to be completed in future periods, are forward-looking statements. Actual outcomes and results may differ materially from those projected. Our forward-looking statements are generally accompanied by words such as “estimate,” “target,” “project,” “predict,” “believe,” “expect,” “anticipate,” “potential,” “could,” “may,” “foresee,” “plan,” “goal,” “should,” “intend” or other words that convey the uncertainty of future events or outcomes. We have based these forward-looking statements on our current expectations and assumptions about future events. These statements are based on certain assumptions made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. However, whether actual results and developments will conform with our expectations and predictions is subject to a number of risks and uncertainties, including the risk factors discussed in Item 1A of the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the “2011 Form 10-K”), which could affect the future results of the energy industry in general, and the Trust and SandRidge in particular, and could cause those results to differ materially from those expressed in such forward-looking statements. The actual results or developments anticipated may not be realized or, even if substantially realized, they may not have the expected consequences to or effects on SandRidge’s business or the Trust’s results. Such statements are not guarantees of future performance and actual results or developments may differ materially from those projected in such forward-looking statements. The Trust undertakes no obligation to publicly update or revise any forward-looking statements.

 

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PART I. Financial Information

ITEM 1. Financial Statements

SANDRIDGE PERMIAN TRUST

STATEMENTS OF ASSETS AND TRUST CORPUS

(In thousands, except unit data)

 

     March 31,
2012
    December 31,
2011
 
     (Unaudited)        

ASSETS

    

Cash and cash equivalents

   $ 1,565      $ 1,815   

Investment in royalty interests

     549,831        549,831   

Less: accumulated amortization

     (32,017     (23,121
  

 

 

   

 

 

 

Net investment in royalty interests

     517,814        526,710   
  

 

 

   

 

 

 

Total assets

   $ 519,379      $ 528,525   
  

 

 

   

 

 

 

TRUST CORPUS

  

 

Trust corpus, 39,375,000 common units and 13,125,000 subordinated units issued and outstanding at March 31, 2012 and December 31, 2011

   $ 519,379      $ 528,525   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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SANDRIDGE PERMIAN TRUST

STATEMENT OF DISTRIBUTABLE INCOME

(In thousands, except unit and per unit data)

 

     Three Months
Ended

March  31, 2012
 
     (Unaudited)  

Revenues

  

Royalty income

   $ 29,166   

Derivative settlements, net

     1,847   
  

 

 

 

Total revenues

     31,013   

Expenses

  

Post-production expenses

     40   

Ad valorem taxes

     162   

Production taxes

     1,401   

Trust administrative expenses

     599   

Cash reserves withheld, net of amounts used for current Trust expenses

     368   
  

 

 

 

Total expenses

     2,570   
  

 

 

 

Distributable income available to unitholders

   $ 28,443   
  

 

 

 

Distributable income per unit (52,500,000 units issued and outstanding)

   $ 0.541767   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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SANDRIDGE PERMIAN TRUST

STATEMENT OF CHANGES IN TRUST CORPUS

(In thousands)

 

     Three Months
Ended

March  31, 2012
 
     (Unaudited)  

Trust corpus, December 31, 2011

   $ 528,525   

Amortization of investment in royalty interests

     (8,897

Net cash reserves withheld

     368   

Distributable income

     28,443   

Distributions paid or payable to unitholders

     (29,060
  

 

 

 

Trust corpus, March 31, 2012

   $ 519,379   
  

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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SANDRIDGE PERMIAN TRUST

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

1. Organization of Trust

SandRidge Permian Trust (the “Trust”) is a statutory trust formed on May 12, 2011 under the Delaware Statutory Trust Act pursuant to a trust agreement by and among SandRidge Energy, Inc. (“SandRidge”), as Trustor, The Bank of New York Mellon Trust Company, N.A., as Trustee (the “Trustee”), and The Corporation Trust Company, as Delaware Trustee (the “Delaware Trustee”). The trust agreement was amended and restated by SandRidge, the Trustee and the Delaware Trustee on August 16, 2011. References in this report to the “trust agreement” are to the amended and restated trust agreement.

The Trust was created to acquire and hold Royalty Interests in specified oil and natural gas properties located in Andrews County, Texas (the “Underlying Properties”). The Royalty Interests were conveyed by SandRidge to the Trust concurrent with the initial public offering of the Trust’s common units in August 2011. As consideration for conveyance of the Royalty Interests, the Trust remitted the proceeds of the offering, along with 4,875,000 Trust common units and 13,125,000 Trust subordinated units, to certain wholly-owned subsidiaries of SandRidge. At March 31, 2012, SandRidge owned 2,875,000 Trust common units and 13,125,000 Trust subordinated 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, including natural gas liquids, and natural gas production attributable to SandRidge’s net revenue interest in 517 oil and natural gas wells developed as of April 1, 2011, including 21 wells awaiting completion at that time (the “Initial Wells”) and 70% of the proceeds (after deducting post-production costs and any applicable taxes) from the sale of oil, including natural gas liquids, and natural gas production attributable to SandRidge’s net revenue interest in 888 development wells to be drilled (the “Trust Development Wells”) within an area of mutual interest (“AMI”) beginning on April 1, 2011, the effective date of the conveyance.

As specified in the development agreement executed by the Trust with SandRidge (see Note 5), SandRidge is credited for having drilled one full Trust Development Well if the well is drilled and perforated for completion to the Grayburg/San Andres formation and SandRidge’s net revenue interest in the well is equal to 69.3%. The actual number of wells required to be drilled may increase or decrease in proportion to SandRidge’s net revenue interest in each well. At March 31, 2012, the Trust’s properties consisted of Royalty Interests in (a) the Initial Wells, (b) 257 additional wells (equivalent to approximately 266 Trust Development Wells under the development agreement as described in Note 5) that were drilled and perforated for completion between April 1, 2011 and March 31, 2012, and (c) the equivalent of approximately 622 Trust Development Wells to be drilled within the AMI.

The Trust makes quarterly cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust’s administrative expenses and cash reserves withheld by the Trustee, on or about 60 days following the completion of each quarter. Due to the timing of the payment of production proceeds to the Trust, each distribution covers production from a three-month period consisting of the first two months of the most recently ended quarter and the final month of the quarter preceding it.

The common and subordinated units have identical rights and privileges, except with respect to their rights to receive distributions. The subordinated units, all of which are held by SandRidge, constitute 25% of the Trust units issued and outstanding. The subordinated units are entitled to receive pro rata distributions from the Trust each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is no less than 80% of the target distribution for the corresponding quarter (“Subordination Threshold”). If there is not sufficient cash to fund such a distribution on all of the common units, the distribution to be made with respect to the subordinated units is reduced or eliminated for such quarter in order to make a distribution, to the extent possible, of up to the Subordination Threshold amount on all of the common units. In exchange for agreeing to subordinate a portion of its Trust units, and in order to provide additional financial incentive to SandRidge to satisfy its drilling obligation, SandRidge is entitled to receive incentive distributions equal to 50% of the amount by which the cash available for distribution on all of the Trust units in any quarter exceeds 120% of the target distribution for such quarter (“Incentive Threshold”). At the end of the fourth full calendar quarter following SandRidge’s satisfaction of its drilling obligation with respect to the Trust Development Wells, the subordinated units will automatically convert into common units on a one-for-one basis and SandRidge’s right to receive incentive distributions will terminate. After such time, the common units will no longer have the protection of the Subordination Threshold, and all Trust unitholders will share on a pro rata basis in the Trust’s distributions.

 

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2. Basis of Presentation and Summary of Significant Accounting Policies

Basis of Accounting.  The financial statements of the Trust differ from financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as the Trust records revenues when cash is received (rather than when earned) and expenses when paid (rather than when incurred) and may also establish certain cash reserves for contingencies, which would not be accrued in financial statements prepared in accordance with GAAP. This comprehensive basis of accounting other than GAAP corresponds to the accounting permitted for royalty trusts by the Securities and Exchange Commission (“SEC”) as specified by Staff Accounting Bulletin Topic 12:E, Financial Statements of Royalty Trusts . Amortization of investment in royalty interests, calculated on a unit-of-production basis, and any impairments are charged directly to trust corpus.

The Trust is treated for federal and applicable state income tax purposes as a partnership. For U.S. federal income tax purposes, a partnership is not a taxable entity and incurs no U.S. federal income tax liability. With respect to state taxation, a partnership is typically treated in the same manner as it is for U.S. federal income tax purposes. However, the Trust’s activities result in the Trust having nexus in Texas and, therefore, make it subject to the Texas franchise tax. Texas franchise tax is treated as an income tax for financial statement purposes and the Trust will be required to pay Texas franchise tax each year at a maximum effective rate of 0.7% of its gross income apportioned to Texas in the prior year. The Trust records Texas franchise tax when paid.

Interim Financial Statements. The accompanying unaudited financial statements have been prepared by the Trust in accordance with the accounting policies stated in the audited financial statements contained in the 2011 Form 10-K and reflect all adjustments that are, in the opinion of the Trustee, necessary to state fairly the information in the Trust’s unaudited interim financial statements.

Risks and Uncertainties.  The Trust’s revenue and distributions are substantially dependent upon the prevailing and future prices for oil and natural gas, each of which depends on numerous factors beyond the Trust’s control such as economic conditions, the global political environment, regulatory developments and competition from other energy sources. Oil and natural gas prices historically have been volatile and may be subject to significant fluctuations in the future. The Trust’s derivative arrangements serve to mitigate a portion of the effect of this price volatility. See Note 5 for the Trust’s open oil derivative contracts.

3. Distributions to Unitholders

The Trust makes quarterly cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust’s administrative expenses and cash reserves withheld by the Trustee, ad valorem tax and Texas franchise tax, on or about 60 days following the completion of each quarter. Other than the first distribution, which covered production for the five-month period from April 1, 2011 to August 31, 2011, distributions cover a three-month period. Distributions to unitholders are recorded when declared. See Note 6 for discussion of the Trust’s quarterly distribution to be paid in May 2012. The Trust’s 2011 and 2012 distributions to unitholders were as follows:

 

    

Covered

Production Period

   Date Declared      Date Paid      Total
Distribution
Paid
     Distribution
Per Unit
 
                        (in millions)         

Calendar Quarter 2012

              

First Quarter

  

September 1 –

November 30, 2011

     February 2, 2012         February 29, 2012         $29.1         $0.553523   

Calendar Quarter 2011

              

First Quarter

   N/A      N/A         N/A         N/A         N/A   

Second Quarter

   N/A      N/A         N/A         N/A         N/A   

Third Quarter

   N/A      N/A         N/A         N/A         N/A   

Fourth Quarter

  

April 1 –

August 31, 2011

     October 28, 2011         November 30, 2011         $37.9         $0.722746   

4. Loan Commitment

Pursuant to the trust agreement, if at any time the Trust’s cash on hand (including available cash reserves) is not sufficient to pay the Trust’s ordinary course administrative expenses as they become due, SandRidge will loan funds to the Trust necessary to pay such expenses. Any funds loaned by SandRidge pursuant to this commitment will be limited to the payment of current accounts payable or other obligations to trade creditors in connection with obtaining goods or services or the payment of other accrued current liabilities arising in the ordinary course of the Trust’s business, and may not be used to satisfy Trust indebtedness, or to make distributions. If SandRidge loans funds pursuant to this commitment, unless SandRidge agrees otherwise, no further distributions will

 

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be made to unitholders (except in respect of any previously determined quarterly cash distribution amount) until such loan is repaid. Any such loan will be on an unsecured basis, and the terms of such loan will be substantially the same as those which would be obtained in an arm’s length transaction between SandRidge and an unaffiliated third party. There was no such loan outstanding with SandRidge at March 31, 2012 or December 31, 2011.

5. Related Party Transactions

Trustee Administrative Fee.  Under the terms of the trust agreement, the Trust pays an annual administrative fee of $150,000 to the Trustee, which will be adjusted for inflation by no more than 3% in any year, beginning in 2017. During the three-month period ended March 31, 2012, the Trust paid legal expenses incurred by the Trustee and the Delaware Trustee equal to approximately $7,000 and the Trustee’s administrative fees for the first quarter of 2012 equal to approximately $38,000.

Registration Rights Agreement . The Trust is party to a registration rights agreement pursuant to which the Trust has agreed to register the offering of the Trust units held by SandRidge and certain of its affiliates and permitted transferees upon request by SandRidge.

Development Agreement . The Trust is party to a development agreement with SandRidge, effective April 1, 2011, that obligates SandRidge to drill, or cause to be drilled, the Trust Development Wells by March 31, 2015. In the event of delays, SandRidge will have until March 31, 2016 to fulfill its drilling obligation. Additionally, SandRidge agreed not to drill and complete, or allow another person within its control to drill and complete, any other well in the AMI other than (a) the Trust Development Wells, (b) up to five horizontal wells to test the results of horizontal drilling in the AMI and (c) wells that were spud and temporarily abandoned on or before March 31, 2011, until SandRidge has fulfilled its drilling obligation. The Trust will not own any interests in the five test horizontal wells, if they are drilled, and such wells will not count toward SandRidge’s drilling obligation.

A wholly owned subsidiary of SandRidge granted to the Trust a lien (“Drilling Support Lien”) covering its interest in the AMI (except its interest in the Initial Wells) in order to secure the estimated amount of the drilling costs for the Trust’s interests in the undeveloped Underlying Properties. The initial amount recoverable by the Trust pursuant to the Drilling Support Lien could not exceed approximately $295.0 million, subject to adjustment as described below. As SandRidge fulfills its drilling obligation over time, the total amount that may be recovered is proportionately reduced and the Trust Development Wells drilled and perforated for completion are released from the lien. If SandRidge does not fulfill its drilling obligation by March 31, 2016, the Trust may foreclose on any remaining interest in the AMI that is subject to the Drilling Support Lien. Any amounts actually recovered in a foreclosure action would be applied to the completion of SandRidge’s drilling obligation and would not result in a distribution to the Trust’s unitholders. At March 31, 2012, SandRidge had drilled and perforated for completion approximately 266 equivalent Trust Development Wells, and, accordingly, the maximum amount potentially recoverable under the Drilling Support Lien had been reduced to approximately $206.1 million.

Administrative Services Agreement.  The Trust is party to an administrative services agreement with SandRidge, effective April 1, 2011, that obligates the Trust to pay SandRidge an annual administrative services fee for accounting, tax preparation, bookkeeping and informational services to be performed by SandRidge on behalf of the Trust. Additionally, the administrative services agreement designates SandRidge as the Trust’s hedge manager, pursuant to which SandRidge has authority to administer the derivative contracts underlying the derivatives agreement (discussed below), and, on behalf of the Trust, to administer the Trust’s derivative contracts with unaffiliated third parties. For its services under the administrative services agreement, SandRidge receives an annual fee of $300,000, which is payable in equal quarterly installments and will remain fixed for the life of the Trust. SandRidge is also entitled to receive reimbursement for its out-of-pocket fees, costs and expenses incurred in connection with the provision of any of the services under this agreement. The administrative services agreement will terminate on the earliest to occur of: (i) the date the Trust shall have dissolved and commenced winding up in accordance with the trust agreement, (ii) the date that all of the Royalty Interests have been terminated or are no longer held by the Trust, (iii) pertaining to services to be provided with respect to any Underlying Properties transferred by SandRidge, the date that either SandRidge or the Trustee may designate by delivering 90-days’ prior written notice, provided that SandRidge’s drilling obligation has been completed and the transferee of such Underlying Properties assumes responsibility to perform the services in place of SandRidge and (iv) a date mutually agreed to by SandRidge and the Trustee. During the three-month period ended March 31, 2012, the Trust paid SandRidge’s administrative fees for the first quarter of 2012 equal to $75,000.

Derivatives Agreement.  The Trust is party to a derivatives agreement with SandRidge, effective August 1, 2011, that provides the Trust with the economic effect of certain oil derivative contracts entered into between SandRidge and a third party. Under the derivatives agreement, SandRidge pays the Trust amounts it receives from its counterparty and the Trust pays SandRidge any amounts that SandRidge is required to pay such counterparty. Substantially concurrent with the execution of the derivatives agreement, SandRidge novated certain of the derivative contracts underlying the derivatives agreement to the Trust. As a party to these contracts, the Trust receives payment directly from the counterparty and is required to pay any amounts owed directly to the

 

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counterparty. To secure its obligations under these novated contracts, the Trust entered into a collateral agency agreement and granted the counterparty a lien on the Royalty Interests. Under the collateral agency agreement, the Trust pays a $15,000 annual fee to the collateral agent. Under the derivatives agreement, as Trust Development Wells are drilled, SandRidge has the right, under certain circumstances, to assign or novate to the Trust additional derivative contracts. The Trust’s derivative contracts consist of fixed price swaps, under which the Trust receives a fixed price for the contract and pays a floating market price over a specified period for a contracted volume.

The following tables present, as of March 31, 2012, the notional amount and weighted average fixed price of the open contracts underlying the derivatives agreement and the contracts that were novated to the Trust. The combined volume in the tables below reflects the total volume of oil derivative contracts for the Trust.

Oil Contracts Underlying the Derivatives Agreement

 

     Notional
(MBbl)
     Weighted Avg.
Fixed Price
 

April 2012 — December 2012

     516       $ 102.20   

January 2013 — December 2013

     921       $ 102.84   

January 2014 — December 2014

     1,100       $ 101.75   

January 2015 — March 2015

     232       $ 100.90   

Oil Contracts Underlying the Derivatives Agreement and Novated to the Trust

 

     Notional
(MBbl)
     Weighted Avg.
Fixed Price
 

April 2012 — December 2012

     350       $ 102.20   

January 2013 — December 2013

     368       $ 102.84   

January 2014 — December 2014

     311       $ 101.75   

January 2015 — March 2015

     71       $ 100.90   

The Trust estimates it will pay a net settlement of approximately $97,000 during May 2012 related to the novated derivative contracts for the January 2012 through March 2012 contract periods.

6. Subsequent Events

Distribution to Unitholders. On April 30, 2012, the Trust declared a cash distribution of $0.581742 per unit covering production for the three-month period from December 1, 2011 to February 29, 2012 for record holders as of May 15, 2012. The distribution will be paid on or about May 30, 2012. Distributable income for December 1, 2011 to February 29, 2012 was calculated as follows (in thousands, except for unit and per unit amounts):

 

Revenues

  

Royalty income

   $ 32,373   

Derivative settlements, net

     272   
  

 

 

 

Total revenues

     32,645   
  

 

 

 

Expenses

  

Post-production expenses

     25   

Production taxes

     1,542   

Cash reserves withheld by Trustee (1)

     537   
  

 

 

 

Total expenses

     2,104   
  

 

 

 

Distributable income available to unitholders

   $ 30,541   
  

 

 

 

Distributable income per unit (52,500,000 units issued and outstanding)

   $ 0.581742   
  

 

 

 

 

 

(1) Includes amounts withheld for payment of future Trust administrative expenses.

Additional Novated Derivative Contracts . On April 12, 2012, SandRidge novated certain additional portions of the derivative contracts underlying the derivatives agreement to the Trust. These contracts are classified in Note 5 as “Oil Contracts Underlying the Derivative Agreement.” Prior to such novation, SandRidge paid the Trust amounts it received from its counterparty and the Trust paid SandRidge any amount that SandRidge was required to pay such counterparty related to these contracts. Following the novation, the Trust will receive payment directly from the counterparty and will be required to pay any amounts owed directly to the counterparty. The following table presents the notional amount and weighted average fixed price of the open contracts underlying the derivatives agreement that were novated to the Trust in April 2012.

 

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Oil Contracts Underlying the Derivatives Agreement and Subsequently Novated to the Trust

 

     Notional
(MBbl)
     Weighted Avg.
Fixed Price
 

April 2012 — December 2012

     278       $ 102.20   

January 2013 — December 2013

     714       $ 102.84   

January 2014 — December 2014

     950       $ 101.75   

January 2015 — March 2015

     200       $ 100.90   

 

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ITEM 2. Trustee’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following discussion and analysis is intended to help the reader understand the Trust’s financial condition, results of operations, liquidity and capital resources. This discussion and analysis should be read in conjunction with the Trust’s unaudited financial statements and the accompanying notes included in this Quarterly Report and the Trust’s audited financial statements and the accompanying notes included in the 2011 Form 10-K.

Overview

The Trust is a statutory trust created on May 12, 2011 under the Delaware Statutory Trust Act. The business and affairs of the Trust are managed by the Trustee and, as necessary, the Delaware Trustee. The Trust’s purpose is to hold the Royalty Interests, to distribute to the Trust unitholders cash that the Trust receives in respect of the Royalty Interests and the derivatives agreement (described in Note 5 to the unaudited financial statements contained in Part I, Item 1 of this Quarterly Report) and to perform certain administrative functions in respect of the Royalty Interests and the Trust units. Other than the foregoing activities, the Trust does not conduct any operations or activities. The Trust derives all or substantially all of its income and cash flow from the Royalty Interests and the derivatives agreement. The Trust is treated as a partnership for federal income tax purposes. The Trust’s activities result in the Trust having nexus in Texas and, therefore, make it subject to Texas franchise tax. The Trust will be required to pay Texas franchise tax each year at a maximum effective rate of 0.7% of its gross income apportioned to Texas in the prior year.

Properties. At March 31, 2012, the Trust’s properties consisted of Royalty Interests in (a) the Initial Wells, (b) 257 additional wells (equivalent to approximately 266 Trust Development Wells under the development agreement as described below) that were drilled and perforated for completion between April 1, 2011 and March 31, 2012, and (c) the equivalent of approximately 622 Trust Development Wells to be drilled within an AMI consisting of approximately 17,500 gross acres (15,900 net acres) in Andrews County, Texas.

SandRidge is obligated to drill, or cause to be drilled, the Trust Development Wells on or before March 31, 2016. SandRidge is not permitted to drill and complete any well within the AMI for its own account, subject to certain exceptions, until it has satisfied the drilling obligation to the Trust. SandRidge has granted to the Trust a lien covering its interest in the AMI (except its interest in the Initial Wells) in order to secure the estimated amount of the drilling costs for the Trust’s interests in the undeveloped Underlying Properties, the balance of which is reduced as SandRidge fulfills its drilling obligation under the development agreement. At March 31, 2012, the amount potentially recoverable under the lien was approximately $206.1 million.

The Trust is not responsible for any costs related to the drilling of the Trust Development Wells or any other operating or capital costs related to the Underlying Properties. As of March 31, 2012, there were 748 producing wells subject to the Royalty Interests and 26 wells awaiting completion. The following table presents the number of Initial Wells, Trust Development Wells drilled and Trust Development Wells to be drilled as of December 31, 2011 and March 31, 2012.

 

     Initial Wells      Trust
Development
Wells Drilled(1)
     Trust
Development
Wells To Be
Drilled
     Total  

December 31, 2011

     517         195         693         1,405   

March 31, 2012

     517         266         622         1,405   

 

(1) SandRidge is credited for having drilled one full Trust Development Well if a well is drilled and perforated for completion to the Grayburg/San Andres formation and SandRidge’s net revenue interest in the well is equal to 69.3%. For wells in which SandRidge has a net revenue interest greater or less than 69.3%, SandRidge will receive proportionate credit for such well. In certain circumstances, SandRidge may also receive Trust Development Well credit for horizontal wells drilled to such formation.

Distributions. The Trust makes quarterly cash distributions of substantially all of its cash receipts, after deducting amounts for the Trust’s administrative expenses and cash reserves withheld by the Trustee, ad valorem tax and Texas franchise tax, on or about 60 days following the completion of each quarter. The Trust’s subordinated units are entitled to receive pro rata distributions from the Trust each quarter if and to the extent there is sufficient cash to provide a cash distribution on the common units that is at least equal to the Subordination Threshold. If there is not sufficient cash to fund such a distribution on all of the common units (including the common units SandRidge owns), the distribution to be made with respect to the subordinated units is reduced or eliminated for such quarter in order to make a distribution, to the extent possible, to all of the common units (including the common units held by SandRidge) up to the Subordination Threshold. If the cash available for distribution on all of the Trust units in any quarter exceeds the Incentive Threshold for the corresponding quarter, SandRidge, as holder of the Trust’s subordinated units, is entitled to 50% of the amount by which the cash available for distribution exceeds the Incentive Threshold.

 

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The following table sets forth the Subordination Threshold and Incentive Threshold for each remaining calendar quarter through the first quarter of 2017, as set out in the trust agreement.

 

Period(1)    Subordination
Threshold(2)
     Incentive
Threshold(2)
 

2012

     

First quarter

   $ 0.42       $ 0.63   

Second quarter

     0.44         0.66   

Third quarter

     0.47         0.70   

Fourth quarter

     0.49         0.74   

2013

     

First quarter

     0.51         0.77   

Second quarter

     0.53         0.80   

Third quarter

     0.56         0.84   

Fourth quarter

     0.58         0.87   

2014

     

First quarter

     0.61         0.91   

Second quarter

     0.63         0.95   

Third quarter

     0.65         0.98   

Fourth quarter

     0.66         0.98   

2015

     

First quarter

     0.64         0.96   

Second quarter

     0.61         0.92   

Third quarter

     0.56         0.85   

Fourth quarter

     0.54         0.81   

2016

     

First quarter

     0.53         0.80   

Second quarter

     0.52         0.78   

Third quarter

     0.51         0.77   

Fourth quarter

     0.50         0.75   

2017

     

First quarter

     0.49         0.74   

 

(1) Due to the timing of the payment of production proceeds to the Trust, each distribution covers production from a three-month period consisting of the first two months of the most recently ended quarter and the final month of the quarter preceding it.
(2) Each of the Subordination Threshold (80% of quarterly target distribution) and Incentive Threshold (120% of quarterly target distribution) terminates after the fourth full calendar quarter following SandRidge’s completion of its drilling obligation.

Pursuant to IRC Section 1446, withholding tax on income effectively connected to a United States trade or business allocated to foreign partners should be made at the highest marginal rate. Under Section 1441, withholding tax on fixed, determinable, annual, periodic income from United States sources allocated to foreign partners should be made at 30% of gross income unless the rate is reduced by treaty. This is intended to be a qualified notice to nominees and brokers as provided for under Treasury Regulation Section 1.1446-4(b) by the Trust, and while specific relief is not specified for Section 1441 income, this disclosure is intended to suffice. Nominees and brokers should withhold 35% of the distribution made to foreign partners.

Results of Trust Operations

Trust Operations for the Three Months Ended March 31, 2012

The primary factors affecting the Trust’s revenues and costs are the quantity of oil and natural gas production attributable to the Royalty Interests, the prices received for such production and amounts paid or received as net settlements under the derivatives agreement and the Trust’s derivative contracts with unaffiliated third parties. Royalty income, post-production expenses, certain taxes

 

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and derivative settlements are recorded on a cash basis when net revenue distributions are received by the Trust from SandRidge and net derivative settlements are received from the Trust’s derivative counterparty. Information regarding the Trust’s production, pricing and costs for the three-month period ended March 31, 2012, consisting of the February 2012 net revenue distribution and net derivative settlements, is presented below.

 

     Three Months
Ended
 
Production Data    March 31, 2012 (1)  

Oil (MBbls)(2)

     343   

Natural gas (MMcf)

     85   

Combined equivalent volumes (MBoe)

     357   

Average daily combined equivalent volumes (MBoe/d)

     3.9   

Average Prices

  

Oil (per Bbl)(2)

   $ 84.38   

Natural gas (per Mcf)

   $ 2.95   

Combined equivalent (per Boe)

   $ 81.73   

Average Prices – including impact of derivative settlements and post-production expenses

  

Oil (per Bbl)(2)(3)

   $ 91.57   

Natural gas (per Mcf)

   $ 2.47   

Combined equivalent (per Boe)

   $ 88.52   

Expenses (per Boe)

  

Post-production

   $ 0.11   

Production taxes

   $ 3.93   
  

 

 

 

Total expenses

   $ 4.04   
  

 

 

 

 

(1) Oil and natural gas volumes and related revenues and expenses for the three-month period ended March 31, 2012 (included in SandRidge’s February 2012 net revenue distribution to the Trust) represent oil and natural gas production from September 1, 2011 to November 30, 2011.
(2) Includes natural gas liquids.
(3) Includes impact of derivative settlements attributable to production from September 1, 2011 to November 30, 2011.

Royalty Income. Royalty income received during the three-month period ended March 31, 2012 totaled $29.2 million based upon production attributable to the Royalty Interests of 343 MBbls of oil and 85 MMcf of natural gas for the period from September 1, 2011 to November 30, 2011. Average prices received for oil and natural gas production, excluding the impact of derivative settlements and post-production expenses, during the three-month period ended March 31, 2012 were $84.38 per Bbl of oil and $2.95 per Mcf of natural gas.

Derivative Settlements. The Trust’s derivatives agreement with SandRidge reduces the Trust’s exposure to commodity price volatility attributable to a portion of production from the Royalty Interests through March 31, 2015 through the use of oil fixed price swaps. Net cash settlements received related to the Trust’s derivatives during the three-month period ended March 31, 2012 were approximately $1.8 million, and included net settlements received of approximately $1.8 million related to production from September 1, 2011 to November 30, 2011 and net settlements received of approximately $57,000 related to December 2011 production. Total net derivative settlements received by the Trust for production from September 1, 2011 to November 30, 2011, including $0.7 million received in December 2011, were $2.5 million, which effectively increased the average price received for oil production for the related period by $7.19 per Bbl to $91.57 per Bbl.

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 oil and natural gas produced. Post-production expenses for the three-month period ended March 31, 2012 totaled approximately $40,000.

Production Taxes. Production taxes are calculated as a percentage of oil and natural gas revenues, excluding the effects of derivative settlements and net of any applicable tax credits. Production taxes for the three-month period ended March 31, 2012 totaled $1.4 million, or $3.93 per Boe, and were approximately 4.8 % of royalty income.

 

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Texas Franchise Tax. The Trust did not make any Texas franchise tax payments during the three-month period ended March 31, 2012. The Trust’s estimated 2011 Texas franchise tax liability of approximately $0.2 million will be paid during the 2nd quarter of 2012.

Distributable Income. Distributable income for the three-month period ended March 31, 2012 was $28.4 million, which included a net addition to the cash reserve for payment of future Trust expenses of $0.4 million ($1.1 million withheld from the February 2012 cash distribution to unitholders less $0.7 million used to pay Trust expenses during the period).

Liquidity and Capital Resources

The Trust’s principal sources of liquidity and capital are cash flow generated from the Royalty Interests, derivative contracts, and borrowings to fund administrative expenses, including any amounts borrowed under SandRidge’s loan commitment described in Note 4 to the unaudited financial statements contained in Part I, Item I of this Quarterly Report. The Trust’s primary uses of cash are distributions to Trust unitholders, including, if applicable, incentive distributions to SandRidge, payment of amounts owed under the Trust’s derivative contracts, payment of Trust administrative expenses, including any reserves established by the Trustee for future liabilities, payment of applicable taxes and payment of expense reimbursements to SandRidge for out-of-pocket expenses incurred on behalf of the Trust. Under the conveyances granting the Royalty Interests, the Trust does not have any capital requirements related to drilling wells or any other operating and capital costs related to the wells.

Administrative expenses include payments to the Trustee and the Delaware Trustee as well as a quarterly fee of $75,000 to SandRidge pursuant to an administrative services agreement. Each quarter, the Trustee determines the amount of funds available for distribution. Available funds are the excess cash, if any, received by the Trust from the sale of oil and natural gas production attributable to the Royalty Interests for the quarter, over the Trust’s expenses for the quarter, subject in all cases to the subordination and incentive provisions previously described. If at any time the Trust’s cash on hand (including available cash reserves) is not sufficient to pay the Trust’s ordinary course administrative expenses as they become due, the Trust may borrow funds from the Trustee or other lenders, including SandRidge, to pay such expenses. If such funds are borrowed, no further distributions will be made to unitholders (except in respect of any previously determined quarterly distribution amount) until the borrowed funds have been repaid, except that if SandRidge loans such funds, SandRidge may permit the Trust to make distributions prior to SandRidge being repaid.

Under the derivatives agreement, SandRidge pays the Trust amounts it receives from its counterparty and the Trust pays SandRidge any amounts that SandRidge is required to pay such counterparty. Additionally, the Trust receives payment directly from its counterparty to the contracts novated to the Trust by SandRidge and is required to pay any amounts owed under those contracts directly to the counterparty. Significant payments by the Trust to SandRidge or the counterparty to the novated contracts could reduce or eliminate distributions paid to unitholders. In this regard, the Trust estimates it will pay a net settlement of approximately $97,000 during May 2012 related to derivative contracts novated to it by SandRidge for the contract periods from January 2012 to March 2012.

2012 Trust Distributions to Unitholders. On February 2, 2012, the Trust declared a cash distribution of $0.553523 per unit covering production for the period from September 1, 2011 to November 30, 2011 for record holders as of February 14, 2012. The distribution, totaling $29.1 million, was made on February 29, 2012.

Future Trust Distributions to Unitholders. On April 30, 2012, the Trust declared a cash distribution of $0.581742 per unit covering production for the period from December 1, 2011 to February 29, 2012 for record holders as of May 15, 2012. The distribution will be paid on or about May 30, 2012 and was calculated as follows (in thousands, except for unit and per unit amounts):

 

Revenues

  

Royalty income

   $ 32,373   

Derivative settlements, net

     272   
  

 

 

 

Total revenues

     32,645   
  

 

 

 

Expenses

  

Post-production expenses

     25   

Production taxes

     1,542   

Cash reserves withheld by Trustee(1)

     537   
  

 

 

 

Total expenses

     2,104   
  

 

 

 

Distributable income available to unitholders

   $ 30,541   
  

 

 

 

Distributable income per unit (52,500,000 units issued and outstanding)

   $ 0.581742   
  

 

 

 

 

(1) Includes amounts withheld for payment of future Trust administrative expenses.

 

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Table of Contents

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

The discussion in this section provides information about commodity derivative contracts, the benefits and obligations of which SandRidge has passed to the Trust pursuant to a derivatives agreement effective August 1, 2011. Under the derivatives agreement, SandRidge pays the Trust amounts it receives from its counterparty under certain of its derivative contracts with a third party, and the Trust pays SandRidge any amounts that SandRidge is required to pay its counterparty under such derivative contracts. Substantially concurrent with the execution of the derivatives agreement and again in April 2012, SandRidge novated certain of the derivative contracts underlying the derivatives agreement to the Trust. As a party to these contracts, the Trust receives payment directly from the counterparty, and is required to pay any amounts owed directly to the counterparty. To secure its obligations under these novated contracts, the Trust entered into a collateral agency agreement and has granted the counterparty a lien on the Royalty Interests. Under the collateral agency agreement, the Trust pays a $15,000 annual fee to the collateral agent. Under the derivatives agreement, as Trust Development Wells are drilled, SandRidge has the right, under certain circumstances, to assign or novate to the Trust additional derivative contracts. The commodity derivative contracts underlying the derivatives agreement are settled in cash and do not require the actual delivery of a commodity at settlement. Fixed price swap contracts are settled based upon New York Mercantile Exchange prices. The contracts underlying the derivatives agreement cover a portion of the anticipated future sales volumes of oil production from the Initial Wells as well as a portion of the anticipated future production from the Trust Development Wells through March 31, 2015. See Note 5 to the unaudited financial statements contained in Part I, Item I of this Quarterly Report for notional and price information of the Trust’s open oil derivative contracts. The Trust received net settlement proceeds of approximately $1.8 million related to the derivatives agreement during the three-month period ended March 31, 2012.

Commodity Price Risk.  Because the Trust’s primary asset and source of income is the Royalty Interests, which generally entitles the Trust to receive a portion of the net proceeds from sales of oil and natural gas production from the Underlying Properties, the Trust’s most significant market risk relates to the prices received for oil and natural gas production. The derivative contracts described above are intended to mitigate a portion of the variability of oil prices received for the Trust’s share of production from the Underlying Properties.

Credit Risk.  A portion of the Trust’s liquidity is concentrated in the derivative contracts described above. The use of derivative contracts, including the arrangement between the Trust and SandRidge, involves the risk that SandRidge or its counterparty or the Trust’s unaffiliated counterparty will be unable to meet their obligations under the contracts. The Trust’s counterparty under the derivatives agreement is SandRidge, whose sole current counterparty is an institution with a corporate credit rating equal to or better than an “investment grade” credit rating. The sole current counterparty to the derivative contracts novated by SandRidge to the Trust is also an institution with a corporate credit rating of an “investment grade” credit rating. SandRidge is not required to pay the Trust to the extent of payment defaults by SandRidge’s counterparty.

ITEM 4. Controls and Procedures

The Trustee conducted an evaluation of the Trust’s disclosure controls and procedures as defined in Rules 13a-15 and 15d-15 under the Securities Act designed to ensure that information required to be disclosed by the Trust in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, the Trustee has concluded that the disclosure controls and procedures of the Trust are effective as of the end of the period covered by this report. In its evaluation of disclosure controls and procedures, the Trustee has relied, to the extent considered reasonable, on information provided by SandRidge.

Due to the nature of the Trust as a passive entity and in light of the contractual arrangements pursuant to which the Trust was created, including the provisions of (i) the trust agreement, (ii) the administrative services agreement, (iii) the development agreement and (iv) the conveyances granting the Royalty Interests, the Trustee’s disclosure controls and procedures related to the Trust necessarily rely on (A) information provided by SandRidge, including information relating to results of operations, the status of drilling of the Trust Development Wells, the costs and revenues attributable to the Trust’s interests under the conveyance and other operating and historical data, plans for future operating and capital expenditures, reserve information, information relating to projected production, and other information relating to the status and results of operations of the Underlying Properties and the Royalty Interests, and (B) conclusions and reports regarding reserves by the Trust’s independent reserve engineers.

There were no changes in the Trust’s internal control over financial reporting during the quarter ended March 31, 2012, that have materially affected, or are reasonably likely to materially affect, the Trustee’s internal control over financial reporting. The Trustee notes for purposes of clarification that it has no authority over, has not evaluated and makes no statement concerning, the internal control over financial reporting of SandRidge.

 

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Table of Contents

PART II. Other Information

ITEM 1A. Risk Factors

Risk factors relating to the Trust are contained in Item 1A of the Trust’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011. No material change to such risk factors has occurred during the three months ended March 31, 2012.

ITEM 6. Exhibits

See the Exhibit Index accompanying this Quarterly Report.

 

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Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

SANDRIDGE PERMIAN TRUST
By:   THE BANK OF NEW YORK MELLON
    TRUST COMPANY, N.A, Trustee
   

By:

 

/s/ Michael J. Ulrich

       

Michael J. Ulrich

Vice President

Date: May 14, 2012

The registrant, SandRidge Permian Trust, has no principal executive officer, principal financial officer, board of directors or persons performing similar functions. Accordingly, no additional signatures are available, and none have been provided. In signing the report above, the Trustee does not imply that it has performed any such function or that any such function exists pursuant to the terms of the trust agreement under which it serves.

 

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Table of Contents

EXHIBIT INDEX

 

          Incorporated by Reference         

Exhibit

No.

  

Exhibit Description

   Form      SEC
File No.
     Exhibit      Filing Date      Filed
Herewith
 

3.1

   Certificate of Trust of SandRidge Permian Trust      S-1         333-174492         3.1         05/25/2011      

3.2

   Amended and Restated Trust Agreement of SandRidge Permian Trust, dated August 16, 2011, by and among SandRidge Energy, Inc., The Bank of New York Mellon Trust Company, N.A., and The Corporation Trust Company      8-K         001-35274         4.1         08/02/2011      

10.1

   Novation Agreement dated April 12, 2012      8-K         001-35274         10.1         04/13/2012      

10.2

   Deed of Trust and Security Agreement from SandRidge Permian Trust, as Mortgagor, to Martha Wach, as Trustee, for the benefit of Wilmington Trust, National Association, as Collateral Agent, as Mortgagee, dated as of August 19, 2011                  *   

31.1

   Section 302 Certification                  *   

32.1

   Section 906 Certification                  *   

 

19

Exhibit 10.2

Execution Version

N OTICE OF C ONFIDENTIALITY R IGHTS : I F YOU ARE A NATURAL PERSON , YOU MAY REMOVE OR STRIKE ANY OR ALL OF THE FOLLOWING INFORMATION FROM ANY INSTRUMENT THAT TRANSFERS AN INTEREST IN REAL PROPERTY BEFORE IT IS FILED FOR RECORDING IN THE PUBLIC RECORDS : YOUR SOCIAL SECURITY NUMBER OR YOUR DRIVER S LICENSE NUMBER .

 

WHEN RECORDED OR FILED,

PLEASE RETURN TO :

Jones Day

2727 North Harwood Street

Dallas, Texas 75201

Attention: Cassandra F. Gil

  
   Space above for County Recorder’s Use

D EED OF T RUST AND S ECURITY A GREEMENT

from

SANDRIDGE PERMIAN TRUST,

as Mortgagor,

to

MARTHA WACH, AS TRUSTEE,

FOR THE BENEFIT OF

WILMINGTON TRUST, NATIONAL ASSOCIATION,

as Collateral Agent, as Mortgagee,

for the benefit of

THE SECURED PERSONS

 

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TABLE OF CONTENTS

 

     Page  

ARTICLE I DEFINITIONS

     1   

Section 1.01 Terms Defined Above

     1   

Section 1.02 Terms Defined in the Collateral Agency Agreement

     1   

Section 1.03 Certain Defined Terms

     1   

ARTICLE II GRANT OF LIENS AND SECURED OBLIGATIONS

     3   

Section 2.01 Grant of Liens

     3   

Section 2.02 Grant of Security Interest

     4   

Section 2.03 Deposit Account Control Agreements

     4   

Section 2.04 Secured Obligations

     5   

Section 2.05 Pro Rata Benefit

     6   

ARTICLE III REPRESENTATIONS, WARRANTIES AND COVENANTS

     6   

Section 3.01 Title

     6   

Section 3.02 Defend Title

     6   

Section 3.03 Not a Foreign Person

     6   

Section 3.04 Power to Create Lien and Security

     6   

Section 3.05 Abandon, Sales

     7   

Section 3.06 Failure to Perform

     7   

ARTICLE IV RIGHTS AND REMEDIES

     7   

Section 4.01 Event of Default

     7   

Section 4.02 Foreclosure and Sale

     7   

Section 4.03 Act Incident to Sale

     8   

Section 4.04 Judicial Foreclosure; Receivership

     8   

Section 4.05 Foreclosure for Installments

     8   

Section 4.06 Separate Sales

     8   

Section 4.07 Possession of Deed of Trust Property

     8   

Section 4.08 Remedies Cumulative, Concurrent and Nonexclusive

     10   

Section 4.09 Discontinuance of Proceedings

     10   

Section 4.10 No Release of Obligations

     10   

Section 4.11 Release of and Resort to Collateral

     10   

Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc

     10   

Section 4.13 Application of Proceeds

     11   

Section 4.14 Indemnity

     11   

Section 4.15 Limitations on Rights and Waivers

     11   

ARTICLE V THE TRUSTEE

     12   

Section 5.01 Duties, Rights, and Powers of Trustee

     12   

Section 5.02 Successor Trustee

     12   

Section 5.03 Retention of Moneys

     12   

ARTICLE VI MISCELLANEOUS

     13   

Section 6.01 Instrument Construed

     13   

 

-ii-


Section 6.02 Releases

     13   

Section 6.03 Severability

     13   

Section 6.04 Successors and Assigns

     13   

Section 6.05 Application of Payments to Certain Obligations

     13   

Section 6.06 Nature of Covenants

     13   

Section 6.07 Notices

     14   

Section 6.08 Counterparts

     14   

Section 6.09 Governing Law

     14   

Section 6.10 Exculpation Provisions

     15   

Section 6.11 Amendments

     15   

Section 6.12 Entire Agreement; Collateral Agency Agreement Controlling

     15   

Section 6.13 References

     15   

Exhibit A - Oil and Gas Properties

  

 

2


THIS DEED OF TRUST AND SECURITY AGREEMENT (this “ Deed of Trust ”) is entered into as of August 19, 2011 (the “ Effective Date ”) by SandRidge Permian Trust, a Delaware statutory trust (the “ Mortgagor ”), in favor of Martha Wach, as Trustee for the benefit of Wilmington Trust, National Association, as Collateral Agent (the “ Mortgagee ”), for the benefit of the Secured Persons (as defined below) with respect to all Deed of Trust Property (as defined below).

RECITALS

A. On even date herewith, the Mortgagor, Swap Counterparties and the Mortgagee, as collateral agent, are executing a Collateral Agency Agreement (such agreement, as may from time to time be amended, restated, amended and restated, modified or supplemented, the “ Collateral Agency Agreement ”), pursuant to which, upon the terms and conditions stated therein, the Mortgagee, as collateral agent, has agreed to act on behalf of all Swap Counterparties with respect to the Collateral and to define the rights, duties, authority and responsibilities of the Mortgagee and the relationship among the Swap Counterparties regarding their interests in the Collateral.

B. The Mortgagee and the other Secured Persons (as defined herein) have conditioned their obligations under the Secured Documents (as defined herein) upon the execution and delivery by the Mortgagor of this Deed of Trust.

C. Therefore, in order to comply with the terms and conditions of the Secured Documents and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Mortgagor hereby agrees as follows:

ARTICLE I

DEFINITIONS

Section 1.01 Terms Defined Above . As used in this Deed of Trust, each term defined above has the meaning indicated above.

Section 1.02 Terms Defined in the Collateral Agency Agreement . Unless otherwise defined herein, each term defined in the Collateral Agency Agreement and used herein has the meaning given to it in the Collateral Agency Agreement.

Section 1.03 Terms Defined in the UCC . Unless otherwise defined herein or in the Collateral Agency Agreement, each capitalized term defined in the Applicable UCC and used herein has the meaning given to it in the Applicable UCC.

Section 1.04 Certain Defined Terms . As used in this Deed of Trust, the following terms have the meanings specified below:

Applicable UCC ” means the provisions of the Uniform Commercial Code presently in effect in the jurisdiction in which the relevant UCC Collateral is situated or which otherwise is applicable to the creation, perfection, the effect of perfection or nonperfection, or the priority of the Liens described herein or the rights and remedies of Mortgagee under this Deed of Trust.

 

- 1 -


Collateral ” means, collectively, all the Deed of Trust Property and all the UCC Collateral.

Deed of Trust Property ” means the properties and assets described in Section 2.01(a) through Section 2.01(d) .

Event of Default ” has the meaning assigned to such term in Section 4.01 .

Hydrocarbon Interests ” means all rights, titles, interests and estates now owned or hereafter acquired by the Mortgagor in and to the oil and gas leases, oil, gas and mineral leases, wellbore interests, and/or other liquid or gaseous hydrocarbon leases, mineral fee interests, overriding royalty and royalty interests, net profit interests and production payment interests, and other interests and estates and the lands and premises covered or affected thereby, including any reserved or residual interests of whatever nature, in each case, that are described on Exhibit A ; and it is the intention of the Mortgagor and the Mortgagee herein to cover and affect hereby all interests which the Mortgagor may now own or may hereafter acquire in and to the interests and Property described on Exhibit A , even though the Mortgagor’s interests or the Property be incorrectly described on Exhibit A or a description of a part or all of the interests or Property described on Exhibit A or the Mortgagor’s interests therein be omitted, and notwithstanding that the interests as specified on Exhibit A may be limited to particular lands, specified depths or particular types of property interests.

Hydrocarbons ” means all oil, gas, casinghead gas, drip gasoline, natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined or separated therefrom and all other minerals which may be produced and saved from or attributable to the Oil and Gas Properties of the Mortgagor, including all oil in tanks, and all rents, issues, profits, proceeds, products, revenues and other incomes from or attributable to the Hydrocarbon Interests or other properties constituting Oil and Gas Properties.

Indemnified Parties ” means the Trustee, the Mortgagee and each other Secured Person, their respective Affiliates, and each such Person’s officers, directors, employees, representatives, agents, attorneys, accountants and experts.

Oil and Gas Properties ” means the Hydrocarbon Interests; the Properties now or hereafter pooled or unitized with the Hydrocarbon Interests; and all presently existing or future unitization, communitization, pooling agreements and declarations of pooled units and the units created thereby (including without limitation all units created under orders, regulations and rules or other official acts of any Governmental Authority and units created solely among working interest owners pursuant to operating agreements or otherwise) which may affect all or any portion of the Hydrocarbon Interests, the lands pooled or unitized therewith and the Mortgagor’s interests therein, together with all additions, substitutions, replacements and accessions to any and all of the foregoing.

Permitted Liens ” means all Liens permitted to be placed on the Deed of Trust Properties under Section 14(a) of the Collateral Agency Agreement.

Release Date ” means the date upon which (a) all Secured Obligations (including, without limitation, all Swap Obligations (including interest accruing during the pendency of an insolvency or liquidation proceeding, regardless of whether allowed or allowable in such insolvency or liquidation proceeding) and all fees, costs, expenses and other amounts payable under the Principal Documents) shall have been paid in full in cash (other than contingent indemnification obligations) and (b) no Approved Swap Agreement is outstanding and in effect.

 

- 2 -


Secured Documents ” means the collective reference to the Collateral Agency Agreement and each Approved Swap Agreement.

Secured Obligations ” has the meaning assigned to such term in Section 2.04 .

Secured Persons ” means the Collateral Agent, each Swap Counterparty, each Indemnified Party and any legal owner, holder, assignee or pledgee of any of the Secured Obligations.

Trustee ” means Martha Wach of Dallas County, Texas, whose address for notice hereunder is c/o Jones Day, 2727 North Harwood Street, Dallas, Texas 75201, ph: (214) 969-5121, fax: (214) 969-5100, email: mwach@jonesday.com, and any successors and substitutes in trust hereunder.

UCC Collateral ” has the meaning assigned to such term in Section 2.02.

ARTICLE II

GRANT OF LIENS AND SECURED OBLIGATIONS

Section 2.01 Grant of Liens . To secure payment of the Secured Obligations and the performance of the covenants and obligations herein contained, the Mortgagor does by these presents hereby GRANT, BARGAIN, SELL, ASSIGN, MORTGAGE, TRANSFER and CONVEY to the Trustee, for the use and benefit of the Mortgagee and the Secured Persons, all of the following described real (immovable) and personal (movable) property, rights, titles, interests and estates, TO HAVE AND TO HOLD unto the Trustee for the use and benefit of the Mortgagee and the Secured Persons forever to secure the Secured Obligations:

(a) All rights, titles, interests and estates now owned or hereafter acquired by the Mortgagor in and to the Oil and Gas Properties.

(b) All rights, titles, interests and estates now owned or hereafter acquired by the Mortgagor in and to all geological, geophysical, engineering, accounting, title, legal and other technical or business data concerning the Oil and Gas Properties, the Hydrocarbons or any other item of property which are in the possession of the Mortgagor, and all books, files, records, magnetic media, computer records and other forms of recording or obtaining access to such data.

(c) Any Property that may from time to time hereafter, by delivery or by writing of any kind, be subjected to the Liens hereof by the Mortgagor or by anyone on the Mortgagor’s behalf; and the Trustee and/or the Mortgagee are hereby authorized to receive the same at any time as additional security hereunder.

 

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(d) All of the rights, titles and interests of every nature whatsoever now owned or hereafter acquired by the Mortgagor in and to the Oil and Gas Properties and all other rights, titles, interests and estates and every part and parcel thereof, including, without limitation, any rights, titles, interests and estates as the same may be enlarged by the discharge of any payments out of production or by the removal of any charges or Permitted Liens to which any of such Oil and Gas Properties or other rights, titles, interests or estates are subject or otherwise; all rights of the Mortgagor to Liens securing payment of proceeds from the sale of production from any of such Oil and Gas Properties, together with any and all renewals and extensions of any of such related rights, titles, interests or estates; all contracts and agreements supplemental to or amendatory of or in substitution for the contracts and agreements described or mentioned above; and any and all additional interests of any kind hereafter acquired by the Mortgagor in and to the such related rights, titles, interests or estates.

TO HAVE AND TO HOLD the Deed of Trust Property unto the Mortgagee for the use and benefit of the Mortgagee and the Secured Persons and to its and their successors and assigns forever to secure the payment of the Secured Obligations and to secure the performance of the covenants, agreements, and obligations of the Mortgagor herein contained.

Any fractions or percentages specified on Exhibit A in referring to the Mortgagor’s interests are solely for purposes of the warranties made by the Mortgagor pursuant to Section 3.01 and shall in no manner limit the quantum of interest affected by this Section 2.01 with respect to any Oil and Gas Property or with respect to any unit or well identified on Exhibit A .

Section 2.02 Grant of Security Interest . The Mortgagor hereby grants to the Mortgagee, for the benefit of the Secured Persons, a security interest in and to all of the Mortgagor’s rights, titles and interests in and to the following Property of the Mortgagor now owned or at any time hereafter acquired by the Mortgagor or in which the Mortgagor now has or at any time in the future may acquire any right, title or interest and whether now existing or hereafter coming into existence (collectively, the “ UCC Collateral ”) as collateral security for the prompt and complete payment when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations:

(a) all Accounts arising from the sale, assignment, transfer or disposition of Hydrocarbons;

(b) all Deposit Accounts holding proceeds from the sale, assignment, transfer or disposition of Hydrocarbons (each, a “ Pledged Deposit Account ”);

(c) to the extent not otherwise included, all Proceeds of any and all of the foregoing UCC Collateral and all supporting obligations given with respect thereto; provided, however, that the foregoing grant of a security interest, and the provisions of this Deed of Trust, shall not apply to up to $1,000,000 in cash held by The Bank of New York Mellon Trust Company, N.A., as Trustee of Mortgagor, as a reserve for the payment of Mortgagor’s administrative expenses.

Section 2.03 Deposit Account Control Agreements .

(a) The Mortgagor shall cause or arrange for the Mortgagee to have control, in accordance with Section 9-104 of the Applicable UCC, over each Pledged Deposit Account that the Mortgagor at any time opens or maintains.

 

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(b) So long as no Event of Default shall have occurred and be continuing, the Mortgagor shall have the sole right to direct the disposition of funds with respect to each Pledged Deposit Account.

(c) If an Event of Default shall have occurred and be continuing, the Mortgagee may, at any time and without notice to, or consent from, the Mortgagor transfer, or direct the transfer of, funds from any Pledged Deposit Account to satisfy the Secured Obligations (as defined in the Collateral Agency Agreement).

(d) Upon the occurrence and during the continuance of any Event of Default, the Mortgagee shall be authorized to send each bank at which a Pledged Deposit Account is maintained (with a copy to the Mortgagor) a notice instructing such bank that Mortgagee shall thereafter, and Mortgagee shall be authorized to, exercise exclusive control of the applicable Pledged Deposit Account.

Section 2.04 Secured Obligations . This Deed of Trust is executed and delivered by the Mortgagor to secure and enforce the payment of the following (the “ Secured Obligations ”):

(a) any sums which may be advanced or paid by the Mortgagee or the Swap Counterparties under the terms hereof or of the Collateral Agency Agreement or other Secured Documents on account of the failure of the Mortgagor to comply with the covenants of the Mortgagor contained herein, or the failure of the Mortgagor or other obligor to comply with the covenants of the Mortgagor; and all other obligations of the Mortgagor arising pursuant to the provisions of this Deed of Trust, including penalties, indemnities, legal and other fees, charges and expenses, and amounts advanced by and expenses incurred in order to preserve any Collateral, whether due after acceleration or otherwise;

(b) all interest (including, without limitation, interest accruing at any post-default rate (including the Default Rate) and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) in respect of all of the Secured Obligations and all costs of collection and attorneys’ fees, all as provided herein and in the Collateral Agency Agreement, Approved Swap Agreements and other Security Instruments;

(c) all Swap Obligations, indebtedness, obligations and liabilities, whether now in existence or hereafter arising, whether by acceleration or otherwise, of the Mortgagor to any Approved Swap Counterparty under any Approved Swap Agreement, including, without limitation, any amounts payable in respect of a liquidation of, an acceleration of obligations under, or an early termination of, such Approved Swap Agreement, and any unpaid amounts owing in respect thereof;

(d) all other obligations and liabilities of the Mortgagor to the Secured Persons, whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, the Secured Documents, in each case, whether on account of principal, interest, reimbursement obligations, payments in respect of an early termination date, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Secured Persons that are required to be paid by the Mortgagor pursuant to the terms of any of the Secured Documents); and

 

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(e) any and all renewals, modifications, substitutions, rearrangements or extensions of any of the foregoing, whether in whole or in part.

Section 2.05 Pro Rata Benefit . This Deed of Trust is executed and granted for the pro rata benefit and security of the Secured Persons to secure the Secured Obligations for so long as same remains unpaid and thereafter until the Release Date.

ARTICLE III

REPRESENTATIONS, WARRANTIES AND COVENANTS

The Mortgagor hereby represents, warrants and covenants as follows:

Section 3.01 Title . To the extent of the undivided interests specified on Exhibit A , the Mortgagor has good and defensible title to and is possessed of the Deed of Trust Property. The Mortgagor has valid title to the UCC Collateral. The Collateral is free of all Liens except Permitted Liens.

Section 3.02 Defend Title . This Deed of Trust is, and always will be kept, a direct first priority Lien upon the Collateral; provided that Permitted Liens may exist as provided in the Collateral Agency Agreement, but no intent to subordinate the priority of the Liens created hereby is intended or inferred by such existence. The Mortgagor will not create or suffer to be created or permit to exist any Lien prior or junior to or on a parity with the Lien of this Deed of Trust upon the Collateral or any part thereof other than such Permitted Liens. The Mortgagor will warrant and defend the title to the Collateral, subject to the Permitted Liens, against the claims and demands of all other Persons whomsoever and will maintain and preserve the Lien created hereby (and its priority) until the Release Date. If (i) an adverse claim be made against or a cloud develop upon the title to any part of the Collateral other than a Permitted Lien or (ii) any Person, including the holder of a Permitted Lien, shall challenge the priority or validity of the Liens created by this Deed of Trust, then the Mortgagor agrees to immediately defend against such adverse claim, take appropriate action to remove such cloud or subordinate such Permitted Lien, in each case, at the Mortgagor’s sole cost and expense. The Mortgagor further agrees that the Mortgagee may take such other action as it reasonably deems advisable to protect and preserve its interest in the Collateral, and in such event the Mortgagor will indemnify the Mortgagee against any and all cost, attorneys’ fees and other expenses which they may incur in defending against any such adverse claim or taking action to remove any such cloud.

Section 3.03 Not a Foreign Person . The Mortgagor is not a “foreign person” within the meaning of sections 1445 and 7701 of the Internal Revenue Code of 1986, as amended (i.e., the Mortgagor is not a non-resident alien, foreign corporation, foreign partnership, foreign trust or foreign estate as those terms are defined in such Code and any regulations promulgated thereunder).

Section 3.04 Power to Create Lien and Security . The Mortgagor has full trust power and lawful authority to grant, bargain, sell, assign, transfer, mortgage and convey a Lien on all of the Collateral in the manner and form herein provided.

 

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Section 3.05 Abandon, Sales . The Mortgagor will not sell, lease, assign, transfer or otherwise dispose or abandon any of the Collateral before the Release Date except (i) for the sale, assignment, transfer and disposition of Hydrocarbons in the ordinary course of business, (ii) as consented to by a Dual-Vote Majority and/or (iii) as otherwise contemplated by this Deed of Trust.

Section 3.06 Failure to Perform . The Mortgagor agrees that if it fails to perform any act or to take any action which it is required to perform or take hereunder or pay any money which the Mortgagor is required to pay hereunder, the Mortgagee, in the Mortgagor’s name or its own name, may, but shall not be obligated to, perform or cause to perform such act or take such action or pay such money, and any expenses so incurred by it and any money so paid by it shall be a demand obligation owing by the Mortgagor to the Mortgagee, and the Mortgagee, upon making such payment, shall be subrogated to all of the rights of the Person receiving such payment. Each amount due and owing by the Mortgagor to the Mortgagee pursuant to this Deed of Trust shall bear interest from the date of demand on Mortgagor therefor until paid at the Default Rate.

ARTICLE IV

RIGHTS AND REMEDIES

Section 4.01 Event of Default . A Triggering Event under the Collateral Agency Agreement shall be an “ Event of Default ” under this Deed of Trust.

Section 4.02 Foreclosure and Sale .

(a) If an Event of Default shall occur and be continuing, to the extent provided by applicable law, the Mortgagee shall have the right and option to proceed with foreclosure by directing the Trustee to proceed with foreclosure under power of sale which is hereby conferred and to sell all or any portion of such Deed of Trust Property at one or more sales, as an entirety or in parcels, at such place or places and otherwise in such a manner and upon such notice as may be required by law, or, in the absence of any such requirement, as the Mortgagee may deem appropriate, and to make conveyance to the purchaser or purchasers. Trustee is hereby authorized and empowered, subject to any required regulatory approvals, to sell the Deed of Trust Property, or any part thereof, at public auction to the highest bidder for cash, with or without having taken possession of same. Any such sale (including notice thereof) shall comply with the applicable requirements, at the time of the sale, of Section 51.002 of the Texas Property Code or, if and to the extent such statute is not then in force, with the applicable requirements, at the time of the sale, of the successor statute or statutes, if any, governing sales of Texas real property under powers of sale conferred by deeds of trust. If there is no statute in force at the time of the sale governing sales of Texas real property under powers of sale conferred by deeds of trust, such sale shall comply with applicable law, at the time of the sale, governing sales of Texas real property under powers of sale conferred by deeds of trust. Nothing contained in this Section 4.02 shall be construed so as to limit in any way any rights to sell the Deed of Trust Property or any portion thereof by private sale if and to the extent that such private sale is permitted under the laws of the applicable jurisdiction or by public or private sale after entry of a judgment by any court of competent jurisdiction so ordering. The Mortgagor hereby irrevocably appoints the Trustee and the Mortgagee, with full power of substitution, to each be the Mortgagor’s attorney-in-fact and in the name and on behalf of the Mortgagor, at any time after the occurrence and during the continuance of an Event of Default, to execute and deliver any deeds, transfers, conveyances, assignments, assurances and notices which the Mortgagor ought to execute and deliver and

 

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do and perform any and all such acts and things which the Mortgagor ought to do and perform under the covenants herein contained and generally, to use the name of the Mortgagor in the exercise of all or any of the powers hereby conferred on the Trustee and/or the Mortgagee. At any such sale: whether made under the power herein contained or any other legal enactment, or by virtue of any judicial proceedings or any other legal right, remedy or recourse, it shall not be necessary for the Trustee or the Mortgagee, as appropriate, to have physically present, or to have constructive possession of, the Deed of Trust Property (the Mortgagor hereby covenanting and agreeing to deliver any portion of the Deed of Trust Property not actually or constructively possessed by the Trustee or the Mortgagee immediately upon his or its demand) and the title to and right of possession of any such property shall pass to the purchaser thereof as completely as if the same had been actually present and delivered to purchaser at such sale, each instrument of conveyance executed by the Trustee or the Mortgagee shall contain a general warranty of title, binding upon the Mortgagor and its successors and assigns, each and every recital contained in any instrument of conveyance made by the Trustee or the Mortgagee shall conclusively establish (except as between the Mortgagor and the Mortgagee) the truth and accuracy of the matters recited therein, including, without limitation, nonpayment of the Secured Obligations, advertisement and conduct of such sale in the manner provided herein and otherwise by law and appointment of any successor trustee hereunder, any and all prerequisites to the validity thereof shall be conclusively presumed to have been performed, the receipt of the Trustee, Mortgagee or of such other party or officer making the sale shall be a sufficient discharge to the purchaser or purchasers for its purchase money and no such purchaser or purchasers, or its assigns or personal representatives, shall thereafter be obligated to see to the application of such purchase money, or be in any way answerable for any loss, misapplication or nonapplication thereof, to the fullest extent permitted by law, the Mortgagor shall be completely and irrevocably divested of all of its right, title, interest, claim and demand whatsoever, either at law or in equity, in and to the property sold and such sale shall be a perpetual bar both at law and in equity against the Mortgagor, and against any and all other Persons claiming or to claim the property sold or any part thereof, by, through or under the Mortgagor, and to the extent and under such circumstances as are permitted by law, the Mortgagee or any Secured Person may be a purchaser at any such sale, and shall have the right, after paying or accounting for all costs of said sale or sales, to credit the amount of the bid upon the amount of the Secured Obligations (in the order of priority set forth in Section 4.13 ) in lieu of cash payment.

(b) If an Event of Default shall occur and be continuing, then (i) the Mortgagee shall be entitled to all of the rights, powers and remedies afforded a secured party by the Applicable UCC with reference to the UCC Collateral and (ii) the Trustee or the Mortgagee may proceed as to any Collateral in accordance with the rights and remedies granted under this Deed of Trust or applicable law in respect of the Collateral. Such rights, powers and remedies shall be cumulative and in addition to those granted to the Trustee or the Mortgagee under any other provision of this Deed of Trust or under any other Secured Document.

Section 4.03 Act Incident to Sale . The Trustee or the Mortgagee may appoint or delegate any one or more Persons as agent to perform any act or acts necessary or incident to any sale held by the Trustee or the Mortgagee, including the posting of notices (but excluding the conduct of the sale, which shall be the obligation of the Trustee), in the name and on behalf of the Trustee or the Mortgagee. If the Trustee or the Mortgagee shall have given notice of sale hereunder, any successor or substitute trustee thereafter appointed may complete the sale and the conveyance of the property pursuant thereto.

 

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Section 4.04 Judicial Foreclosure; Receivership . If any of the Secured Obligations shall become due and payable and shall not be promptly paid, the Mortgagee shall have the right and power to proceed by a suit or suits in equity or at law, whether for the specific performance of any covenant or agreement herein contained or in aid of the execution of any power herein granted, or for any foreclosure hereunder or for the sale of the Collateral under the judgment or decree of any court or courts of competent jurisdiction, or for the appointment of a receiver pending any foreclosure hereunder or the sale of the Collateral under the order of a court or courts of competent jurisdiction or under executory or other legal process, or for the enforcement of any other appropriate legal or equitable remedy. Any money advanced by the Mortgagee in connection with any such receivership shall be a demand obligation (which obligation the Mortgagor hereby expressly promises to pay) owing by the Mortgagor to the Mortgagee and shall bear interest from the date of making such advance by the Mortgagee until paid at the Default Rate.

Section 4.05 Foreclosure for Installments . The Mortgagee shall also have the option to proceed with foreclosure in satisfaction of any installments of the Secured Obligations which have not been paid when due either through the courts or by directing the Trustee to proceed with foreclosure in satisfaction of the matured but unpaid portion of the Secured Obligations as if under a full foreclosure, conducting the sale as herein provided and without declaring the entire principal balance and accrued interest and other Secured Obligations then due; such sale may be made subject to the unmatured portion of the Secured Obligations, and any such sale shall not in any manner affect the unmatured portion of the Secured Obligations, but as to such unmatured portion of the Secured Obligations this Deed of Trust shall remain in full force and effect just as though no sale had been made hereunder. It is further agreed that several sales may be made hereunder without exhausting the right of sale for any unmatured part of the Secured Obligations, it being the purpose hereof to provide for a foreclosure and sale of the security for any matured portion of the Secured Obligations without exhausting the power to foreclose and sell the Deed of Trust Property for any subsequently maturing portion of the Secured Obligations.

Section 4.06 Separate Sales . The Collateral may be sold in one or more parcels and to the extent permitted by applicable law in such manner and order as the Mortgagee, in its sole discretion, may elect, it being expressly understood and agreed that the right of sale arising out of any Event of Default shall not be exhausted by any one or more sales.

Section 4.07 Possession of Deed of Trust Property . If an Event of Default shall have occurred and be continuing, then, to the extent permitted by applicable law, the Mortgagee shall have the right and power to enter into and upon and take possession of all or any part of the Collateral in the possession of the Mortgagor, its successors or assigns, or its or their agents or servants, and may exclude the Mortgagor, its successors or assigns, and all persons claiming under the Mortgagor, and its or their agents or servants wholly or partly therefrom; and, holding the same, the Mortgagee may use, administer, manage, operate and control the Collateral and conduct the business thereof to the same extent as the Mortgagor, its successors or assigns, might at the time do and may exercise all rights and powers of the Mortgagor, in the name, place and stead of the Mortgagor, or otherwise as the Mortgagee shall deem best. All costs, expenses and liabilities of every character incurred by the Mortgagee in administering, managing, operating, and controlling the Deed of Trust Property shall constitute a demand obligation (which obligation the Mortgagor hereby expressly promises to pay) owing by the Mortgagor to the Mortgagee and shall bear interest from the date of demand on Mortgagor therefor until paid at the Default Rate.

 

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Section 4.08 Remedies Cumulative, Concurrent and Nonexclusive . Every right, power, privilege and remedy herein given to the Trustee or the Mortgagee shall be cumulative and in addition to every other right, power and remedy herein specifically given or now or hereafter existing in equity, at law or by statute. Each and every right, power, privilege and remedy whether specifically herein given or otherwise existing may be exercised from time to time and so often and in such order as may be deemed expedient by the Mortgagee, and the exercise, or the beginning of the exercise, or the abandonment, of any such right, power, privilege or remedy shall not be deemed a waiver of the right to exercise, at the same time or thereafter any other right, power, privilege or remedy. No delay or omission by the Trustee or Mortgagee or any other Secured Person in the exercise of any right, power or remedy shall impair any such right, power, privilege or remedy or operate as a waiver thereof or of any other right, power, privilege or remedy then or thereafter existing.

Section 4.09 Discontinuance of Proceedings . If the Trustee or the Mortgagee shall have proceeded to invoke any right, remedy or recourse permitted hereunder or under any Secured Document or available at law and shall thereafter elect to discontinue or abandon same for any reason, then it shall have the unqualified right so to do and, in such an event, the parties shall be restored to their former positions with respect to the Secured Obligations, this Deed of Trust, the Collateral Agency Agreement, the Collateral and otherwise, and the rights, remedies, recourses and powers of the Trustee and the Mortgagee, as applicable, shall continue as if same had never been invoked.

Section 4.10 No Release of Obligations . Neither the Mortgagor nor any other Person hereafter obligated for payment of all or any part of the Secured Obligations shall be relieved of such obligation by reason of: the failure of any Person so obligated to foreclose the Lien of this Deed of Trust or to enforce any provision hereunder or under the Collateral Agency Agreement or any other Secured Document; the release, regardless of consideration, of the Collateral or any portion thereof or interest therein or the addition of any other property to the Collateral; or by any other act or occurrence save and except upon the occurrence of the Release Date.

Section 4.11 Release of and Resort to Collateral . The Mortgagee may release, regardless of consideration, any part of the Collateral without, as to the remainder, in any way impairing, affecting, subordinating or releasing the Lien created in or evidenced by this Deed of Trust or its stature as a first and prior Lien in and to the Collateral and without in any way releasing or diminishing the liability of any Person liable for the repayment of the Secured Obligations. For payment of the Secured Obligations, the Mortgagee may resort to any other security therefor held by the Mortgagee or the Trustee in such order and manner as the Mortgagee may elect.

Section 4.12 Waiver of Redemption, Notice and Marshalling of Assets, Etc. To the fullest extent permitted by law, the Mortgagor hereby irrevocably and unconditionally waives and releases all benefits that might accrue to the Mortgagor by virtue of any present or future moratorium law or other law exempting the Collateral from attachment, levy or sale on execution or providing for any appraisement, valuation, stay of execution, exemption from civil process, redemption or extension of time for payment; all notices of any Event of Default or of the Mortgagee’s or any other Secured Person’s intention to accelerate the Secured Obligations or of any election to exercise or any actual exercise of any right, remedy or recourse provided for hereunder or under any Secured Document or available at law; and any

 

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right to a marshalling of assets or a sale in inverse order of alienation. If any law referred to in this Deed of Trust and now in force, of which the Mortgagor or its successor or successors might take advantage despite the provisions hereof, shall hereafter be repealed or cease to be in force, such law shall thereafter be deemed not to constitute any part of the contract herein contained or to preclude the operation or application of the provisions hereof. If the laws of any state which provides for a redemption period do not permit the redemption period to be waived, the redemption period shall be specifically reduced to the minimum amount of time allowable by statute.

Section 4.13 Application of Proceeds . The proceeds of any foreclosure sale of the Collateral or any part thereof and all other monies received in any other proceedings for the enforcement hereof shall be applied:

(a) First, to the payment of all reasonable expenses incurred by the Trustee or the Mortgagee incident to the enforcement of this Deed of Trust, the Collateral Agency Agreement or any Secured Document to collect any portion of the Secured Obligations (including, without limiting the generality of the foregoing, expenses of any entry or taking of possession, of any sale, of advertisement thereof, and of conveyances, and court costs, compensation of agents and employees, legal fees and a reasonable commission to the Trustee acting, if applicable), and to the payment of all other reasonable charges, expenses, liabilities and advances incurred or made by the Trustee or the Mortgagee under this Deed of Trust or in executing any trust or power hereunder; and

(b) Second, as set forth in Section 6(b) of the Collateral Agency Agreement (but without duplication of the amounts applied in (a) above).

Section 4.14 Indemnity . The Indemnified Parties shall not be liable, in connection with any action taken, for any loss sustained by the Mortgagor resulting from an assertion that the Mortgagee has received funds from the production of Hydrocarbons claimed by third persons or any act or omission of any Indemnified Party in administering, managing, operating or controlling the Collateral INCLUDING SUCH LOSS WHICH MAY RESULT FROM THE ORDINARY NEGLIGENCE OF AN INDEMNIFIED PARTY unless such loss is caused by the willful misconduct or gross negligence of the Indemnified Party seeking indemnity. No Indemnified Party will be obligated to perform or discharge any obligation, duty or liability of the Mortgagor. The Mortgagor shall and does hereby agree to indemnify each Indemnified Party for, and to hold each Indemnified Party harmless from, any and all liability, loss or damage which may or might be incurred by any Indemnified Party by reason of this Deed of Trust or the exercise of rights or remedies hereunder. If any Indemnified Party shall make any expenditure on account of any such liability, loss or damage, the amount thereof, including costs, expenses and reasonable attorneys’ fees, shall be a demand obligation (which obligation the Mortgagor hereby expressly promises to pay) owing by the Mortgagor to such Indemnified Party and shall bear interest from the date of demand therefor until paid at the Default Rate. The Mortgagor hereby assents to, ratifies and confirms any and all actions of each Indemnified Party with respect to the Collateral taken under and in compliance with the terms of this Deed of Trust. The liabilities of the Mortgagor as set forth in this Section 4.14 shall survive the termination of this Deed of Trust.

Section 4.15 Limitations on Rights and Waivers . All rights, powers and remedies herein conferred shall be exercisable by Mortgagee only to the extent not prohibited by applicable law; and all waivers and relinquishments of rights and similar matters shall be effective only to the extent such waivers or relinquishments are not prohibited by applicable law.

 

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ARTICLE V

THE TRUSTEE

Section 5.01 Duties, Rights, and Powers of Trustee . The Trustee shall have no duty to see to any recording, filing or registration of this Deed of Trust or any other instrument in addition or supplemental thereto, or to give any notice thereof, or to see to the payment of or be under any duty in respect of any tax or assessment or other governmental charge which may be levied or assessed on the Collateral, or any part thereof, or against the Mortgagor, or to see to the performance or observance by the Mortgagor of any of the covenants and agreements contained herein. The Trustee shall not be responsible for the execution, acknowledgment or validity of this Deed of Trust or of any instrument in addition or supplemental hereto or for the sufficiency of the security purported to be created hereby, and makes no representation in respect thereof or in respect of the rights of the Mortgagee. The Trustee shall have the right to consult with counsel upon any matters arising hereunder and shall be fully protected in relying as to legal matters on the advice of counsel. The Trustee shall not incur any personal liability hereunder except for the Trustee’s own gross negligence or willful misconduct; and the Trustee shall have the right to rely on any instrument, document or signature authorizing or supporting any action taken or proposed to be taken by him hereunder, believed by him in good faith to be genuine.

Section 5.02 Successor Trustee . The Trustee may resign by written notice addressed to the Mortgagee or be removed at any time with or without cause by an instrument in writing duly executed on behalf of the Mortgagee. In case of the death, resignation or removal of the Trustee, a successor may be appointed by the Mortgagee by instrument of substitution complying with any applicable Governmental Requirements, or, in the absence of any such requirement, without formality other than appointment and designation in writing. Written notice of such appointment and designation shall be given by the Mortgagee to the Mortgagor, but the validity of any such appointment shall not be impaired or affected by failure to give such notice or by any defect therein. Such appointment and designation shall be full evidence of the right and authority to make the same and of all the facts therein recited. Upon the making of any such appointment and designation, this Deed of Trust shall vest in the successor, and the successor shall thereupon succeed to, all of the rights, powers, privileges, immunities and duties hereby conferred upon the Trustee named herein, and one such appointment and designation shall not exhaust the right to appoint and designate an additional successor but such right may be exercised repeatedly until the Release Date. To facilitate the administration of the duties hereunder, the Mortgagee may appoint multiple trustees to serve in such capacity or in such jurisdictions as the Mortgagee may designate.

Section 5.03 Retention of Moneys . All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated in any manner from any other moneys (except to the extent required by law) and the Trustee shall be under no liability for interest on any moneys received by him hereunder.

 

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ARTICLE VI

MISCELLANEOUS

Section 6.01 Instrument Construed. This Deed of Trust may be construed as a deed of trust, mortgage, conveyance, assignment, security agreement, hypothecation or contract, or any one or more of them, in order fully to effectuate the Lien hereof and the purposes and agreements herein set forth.

Section 6.02 Releases .

(a) Full Release . Upon the Release Date, (i) all Liens granted hereunder shall automatically be released without any further action on the part of any Person and (ii) the Mortgagee shall forthwith cause satisfaction and discharge of this Deed of Trust to be entered upon the record at the expense of the Mortgagor and shall promptly execute and deliver or cause to be executed and delivered to the Mortgagor such instruments of satisfaction, release, re-conveyance and reassignment or other documents as may be appropriate. Otherwise, this Deed of Trust shall remain and continue in full force and effect.

(b) Partial Release . If any of the Collateral shall be sold, assigned, transferred or otherwise disposed of by the Mortgagor in a transaction that is not prohibited by Section 3.05 of this Deed of Trust, then (i) such Collateral shall be so sold, assigned, transferred or otherwise disposed of free and clear of all Liens thereon granted hereunder (and such Liens on such Collateral shall automatically be released without further action on the part of any Person) and (ii) the Mortgagee, at the request and sole expense of the Mortgagor, shall promptly execute and deliver or cause to be executed and delivered to the Mortgagor such instruments of release, re-conveyance and reassignment or other documents reasonably necessary or desirable for the release of the Liens created hereby on such Collateral.

Section 6.03 Severability . If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect in such jurisdiction and the remaining provisions hereof shall be liberally construed in favor of the Trustee, the Mortgagee and the other Secured Persons in order to effectuate the provisions hereof. The invalidity or unenforceability of any provision hereof in any jurisdiction shall not affect the validity or enforceability of any such provision in any other jurisdiction.

Section 6.04 Successors and Assigns . The terms used to designate any party or group of Persons shall be deemed to include the respective heirs, legal representatives, successors and assigns of such Persons.

Section 6.05 Application of Payments to Certain Obligations . If any part of the Secured Obligations cannot be lawfully secured by this Deed of Trust or if any part of the Collateral cannot be lawfully subject to the Lien hereof to the full extent of the Secured Obligations, then all payments made shall be applied on said Secured Obligations first in discharge of that portion thereof which is not secured by this Deed of Trust.

Section 6.06 Nature of Covenants . The covenants and agreements herein contained shall constitute covenants running with the land and interests covered or affected hereby and shall be binding upon the heirs, legal representatives, successors and assigns of the parties hereto.

 

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Section 6.07 Notices . All notices, requests, consents, demands and other communications required or permitted hereunder shall be in writing and shall be deemed sufficiently given or furnished if delivered by registered or certified United States mail, postage prepaid, or by personal service (including express or courier service) at their respective addresses below:

 

If to Mortgagor:            SandRidge Permian Trust
   c/o The Bank of New York Mellon Trust Company, N.A.
   Institutional Trust Services
   919 Congress Avenue, Suite 500
   Austin, Texas 78701
   Attention: Michael J. Ulrich
If to Mortgagee:    Wilmington Trust, National Association,
   as Collateral Agent
   50 South Sixth Street, Suite 1290
   Minneapolis, MN 55402
   Attention: Renee Kuhl
If to Trustee:    Martha Wach
   c/o Jones Day
   2727 North Harwood Street
   Dallas, Texas 75201
   ph: (214) 969-5121
   fax: (214) 969-5100
   email: mwach@jonesday.com

(unless changed by similar notice in writing given by the particular party whose address is to be changed). Any such notice or communication shall be deemed to have been given either at the time of personal delivery or, in the case of delivery at the address and in the manner provided herein, upon receipt; provided that, service of notice as required by the laws of any state in which portions of the Collateral may be situated shall for all purposes be deemed appropriate and sufficient with the giving of such notice.

Section 6.08 Counterparts . This Deed of Trust is being executed in several counterparts, all of which are identical,. Each of such counterparts shall for all purposes be deemed to be an original and all such counterparts shall together constitute but one and the same instrument.

Section 6.09 Governing Law . Insofar as permitted by otherwise applicable law, this Deed of Trust shall be construed under and governed by the laws of the State of Texas.

 

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Section 6.10 Exculpation Provisions . E ACH OF THE PARTIES HERETO SPECIFICALLY AGREES THAT IT HAS A DUTY TO READ THIS D EED OF T RUST ; AND AGREES THAT IT IS CHARGED WITH NOTICE AND KNOWLEDGE OF THE TERMS OF THIS D EED OF T RUST ; THAT IT HAS IN FACT READ THIS D EED OF T RUST AND IS FULLY INFORMED AND HAS FULL NOTICE AND KNOWLEDGE OF THE TERMS , CONDITIONS AND EFFECTS OF THIS D EED OF T RUST ; THAT IT HAS BEEN REPRESENTED BY INDEPENDENT LEGAL COUNSEL OF ITS CHOICE THROUGHOUT THE NEGOTIATIONS PRECEDING ITS EXECUTION OF THIS D EED OF T RUST ; AND HAS RECEIVED THE ADVICE OF ITS ATTORNEY IN ENTERING INTO THIS D EED OF T RUST ; AND THAT IT RECOGNIZES THAT CERTAIN OF THE TERMS OF THIS D EED OF T RUST RESULT IN ONE PARTY ASSUMING THE LIABILITY INHERENT IN SOME ASPECTS OF THE TRANSACTION AND RELIEVING THE OTHER PARTY OF ITS RESPONSIBILITY FOR SUCH LIABILITY . E ACH PARTY HERETO AGREES AND COVENANTS THAT IT WILL NOT CONTEST THE VALIDITY OR ENFORCEABILITY OF ANY EXCULPATORY PROVISION OF THIS D EED OF T RUST ON THE BASIS THAT THE PARTY HAD NO NOTICE OR KNOWLEDGE OF SUCH PROVISION OR THAT THE PROVISION IS NOT CONSPICUOUS .”

Section 6.11 Amendments . Subject to the provisions of the Collateral Agency Agreement, this Deed of Trust may be amended or modified by the Mortgagor and the Mortgagee in writing.

Section 6.12 Entire Agreement; Collateral Agency Agreement Controlling . THIS WRITTEN DEED OF TRUST AND THE OTHER PRINCIPAL DOCUMENTS TOGETHER REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. In the event of a conflict between any provision hereof and any provision of the Collateral Agency Agreement, the provisions of the Collateral Agency Agreement shall govern and control.

Section 6.13 Execution of Financing Statements . Pursuant to the Applicable UCC, the Mortgagor authorizes the Mortgagee, its counsel or its representative, at any time and from time to time, to file or record financing statements, continuation statements, amendments thereto and other filing or recording documents or instruments with respect to the Collateral without the signature of the Mortgagor in such form and in such offices as the Mortgagee reasonably determines appropriate to perfect the security interests of the Mortgagee under this Deed of Trust.

In that regard, the following information is provided:

 

Name of Debtor:    SandRidge Permian Trust
Address of Debtor:            c/o The Bank of New York Mellon Trust Company, N.A.
   Institutional Trust Services
   919 Congress Avenue, Suite 500
   Austin, Texas 78701
   Attention: Michael J. Ulrich
State of FormationLocation:    Delaware

Section 6.14 References . The words “herein,” “hereof,” “hereunder” and other words of similar import when used in this Deed of Trust refer to this Deed of Trust as a whole, and not to any particular article, section or subsection. Any reference herein to a Section shall be deemed to refer to the applicable Section of this Deed of Trust unless otherwise stated herein. Any reference herein to an exhibit or schedule shall be deemed to refer to the applicable exhibit or schedule attached hereto unless otherwise stated herein. The words “include,” “includes” and “including” as used in this Deed of Trust shall be deemed to be followed by the phrase “without limitation.”

[SIGNATURES BEGIN NEXT PAGE]

 

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Executed on this 19th day of August, 2011, to be effective as of the Effective Date.

 

SANDRIDGE PERMIAN TRUST

By:   THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as Trustee

By:    /s/ Michael J. Ulrich                        

Michael J. Ulrich

Vice President

 

STATE OF TEXAS    §      
   §      
COUNTY OF TRAVIS                            §      

This instrument was acknowledged before me on August 19, 2011 by Michael J. Ulrich, Vice President of The Bank of New York Mellon Trust Company, N.A., a national banking association, on behalf of said association as the Trustee of SandRidge Permian Trust, a Delaware statutory trust.

 

/s/ Sarah Newell
Notary Public

Seal:   Sarah Newell

            My Commission Expires

            February 16, 2014

Signature Page—Trust Deed of Trust


EXHIBIT A

 

(i) Term Overriding Royalty Interest Conveyance (Development) from SandRidge Exploration and Production, LLC to Mistmada Oil Company, Inc., effective April 1, 2011, filed for record on August 17, 2011, under File Number 11-2998 in the Office of the County Clerk of Andrews County, Texas;

 

(ii) Term Overriding Royalty Interest Conveyance (PDP) from SandRidge Exploration and Production, LLC to Mistmada Oil Company, Inc., effective April 1, 2011, filed for record on August 17, 2011, under File Number 11-2999 in the Office of the County Clerk of Andrews County, Texas;

 

(iii) Perpetual Overriding Royalty Interest Conveyance (Development) from SandRidge Exploration and Production, LLC to Trust, effective April 1, 2011, filed for record on August 17, 2011, under File Number 11-2996 in the Office of the County Clerk of Andrews County, Texas;

 

(iv) Perpetual Overriding Royalty Interest Conveyance (PDP) from SandRidge Exploration and Production, LLC to Trust, effective April 1, 2011, filed for record on August 17, 2011, under File Number 11-2997 in the Office of the County Clerk of Andrews County, Texas; and

 

(v) Assignment of Overriding Royalty Interest from Mistmada Oil Company, Inc. to Trust, effective April 1, 2011, filed for record on August 17, 2011, under File Number 11-3000 in the Office of the County Clerk of Andrews County, Texas.

Exhibit A – Page 1

Exhibit 31.1

Certification

I, Michael J. Ulrich, certify that:

1. I have reviewed this quarterly report on Form 10-Q of SandRidge Permian Trust, for which The Bank of New York Mellon Trust Company, N.A., acts as Trustee;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition of the registrant as of, and for, the periods presented in this report;

4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) or for causing such controls and procedures to be established and maintained, for the registrant and I have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. I have disclosed, based on my most recent evaluation, to the registrant’s auditors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves any persons who have a significant role in the registrant’s internal control over financial reporting.

In giving the foregoing certifications in paragraphs 4 and 5, I have relied to the extent I consider reasonable on information provided to me by SandRidge Energy, Inc.

 

/s/ Michael J. Ulrich

Michael J. Ulrich

Vice President

The Bank of New York Mellon Trust Company, N.A.,

as Trustee of SandRidge Permian Trust

Date: May 14, 2012

Exhibit 32.1

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

 

RE: Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

Ladies and Gentlemen:

In connection with the Quarterly Report of SandRidge Permian Trust (the “Trust”) on Form 10-Q for the quarterly period ended March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, not in its individual capacity but solely as the Trustee of the Trust, certifies pursuant to 18 U.S.C. § 1350, that to its knowledge:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Trust.

The above certification is furnished solely pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350) and is not being filed as part of the Form 10-Q or as a separate disclosure document.

 

/s/ Michael J. Ulrich

Michael J. Ulrich

Vice President

The Bank of New York Mellon Trust Company,

N.A., as Trustee of SandRidge Permian Trust

May 14, 2012