In its latest Form 10-Q regulatory filing SandRidge Mississippian Trust II (NYSE: SDR) provided a detailed analysis of its financial conditions and operational results. As it turns out, weak oil prices are taking a heavy toll on the company’s financial performance. The company warned of fading cash distribution to shareholders as production falls and oil prices remain weak.
Weak commodity prices and SandRidge Mississippian Trust II (NYSE: SDR)
In the regulatory filing, management of SandRidge Mississippian Trust II (NYSE: SDR) acknowledged that the firm operates in a volatile industry. The volatility is disrupting revenues and earnings. Management said that distribution for the period beginning January 2016 would be lower compared to the prior period because hedging arrangements saved the day in the prior periods.
Volume and price factor in revenue
In the three month quarter ended March 31, 2016, SandRidge’s royalty income totaled $4.9 million, a steep decline from $12.9 million in the same period a year ago. About $3.5 million of revenue hit in the latest quarter was contributed to by a decline in production volumes. The management of SandRidge also revealed that about $4.5 million hit to revenue came as a result of weak commodity prices.
SandRidge’s royalty income is a function of volumes sold and associated prices.
Wells in production
One of the major causes of a drop in production volume in the latest quarter was that fewer wells were in operation compared to a similar period last year. SandRidge Mississippian Trust II (NYSE: SDR) said that producing wells during the quarter ended March 31, 2016 were 35% fewer than producing wells in the corresponding quarter of 2015. The idle of some wells was because not every well could produce economically given the depressed commodity prices.
For 1Q2016 or the three months to March 31, 2016, SandRidge Mississippian Trust II (NYSE: SDR) revealed in the filing that distributable income was $6.8 million. That was a sharp decline from $15 million in the like period last year. Continued pressure on commodity pressures could see SandRidge’s distributable income shrink further, thus eroding distributions to shareholders.