What: Shares of midcontinent-focused driller SandRidge Energy (NYSE:SD) are down more than 6% today. While part of the sell-off is due to another dip in oil prices, that's not the biggest driver behind SandRidge Energy's stock drop today. The main fuel here is the fact that the company is delaying its third-quarter financial report after the SEC found an issue in its annual report.
So What: Anytime the SEC begins to question a company's reporting it causes investors to take a step back. In this case the SEC is looking into how the company accounts for penalties paid under an agreement it has with Occidental Petroleum (NYSE:OXY) to supply it with carbon dioxide. When SandRidge Energy doesn't meet its minimum carbon supply volume target, it is required to pay Occidental Petroleum a fee. However, the SEC is looking into the timing of SandRidge Energy's accrual of the carbon dioxide underdelivery penalty, which could cause the company to restate nearly two years of quarterly results.
Typically, SandRidge Energy accrues a liability for the annual penalty on an annual basis. However, the SEC wants the company to reassess this practice and consider whether the liability should be accrued on a quarterly basis. While it won't have much of an impact, as the carbon dioxide business isn't material to SandRidge Energy's core business, it might force the company to shift some of the liability to other periods, causing net income in those periods to be less than previously stated. But that would not have an impact on the company's cash balances as the penalty is paid on an annual basis.
Now What: SandRidge Energy was expected to file its third-quarter report tomorrow, which is a crucial report for the company. While the company does intend to discuss its operational results at that time, it won't have a financial report until it has closed the matter with the SEC. Investors shouldn't be too worried, however -- CEO James Bennett calls this nothing more than a "distraction" that the company needs to remedy so it can get back to its core business.
Matt DiLallo owns shares of SandRidge Energy. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.