OKLAHOMA CITY — SandRidge Energy Inc.’s most important assets are at the epicenter of Oklahoma’s ongoing earthquake problem.

The driller’s precarious financial position, combined with the risk it faces from temblor swarms near its wastewater injection wells, could cause the company to become insolvent if regulators shut down its disposal wells.

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Regulators’ efforts to reduce earthquake risk in the most seismically active area of the state could put the company at risk, because its operations are so narrowly focused in one area.

The first warning sign came in February. The ground rumbled close to a new SandRidge disposal well. Oklahoma Corporation Commission officials ordered the company to stop operations at the Alfalfa County well. Forty percent of SandRidge’s wells are within a 9-mile radius in the county, near hundreds of earthquakes in northern Oklahoma and southern Kansas in the Mississippi Lime formation.

The company is the only independent, publicly traded driller that doesn’t have a major stake in other oil and gas formations. And the company’s cash crunch prevents it from moving operations to another region; it has several billion dollars of debt and is racing to cut spending and maintain cash flow. However, in November it announced a $190 million plan to buy assets in Colorado’s Niobrara Shale.

Other drillers also operate dozens of disposal wells in the area regulators and state geologists are examining. Devon Energy Corp. has 61, Chesapeake Energy Corp. has 29 and American Energy Partners LP has 27 in the same earthquake-burdened rock, the Arbuckle formation. But those other companies have less to fear because each has assets around the country.

Drillers suck out oil and gas from rock layers in the Mississippi, then inject wastewater byproducts thousands of feet lower, into the Arbuckle rock layer. Disposal wells are the key to making the Mississippi Lime play economical.

SandRidge invested more than $200 million in infrastructure to ship salty, toxic wastewater from petroleum wells through pipes to disposal wells nearby. One in six wells the OCC put under a microscope belongs to SandRidge, accounting for nearly 85 percent of the company’s 125 active disposal sites.

If the Oklahoma Corpo­ration Commission requires dramatic cutbacks for all of SandRidge’s wells, the company might not be able to afford to move the water elsewhere. One geologist estimated that reducing the volume from one disposal means redistributing to about four wells to reduce earthquake risk. And SandRidge can’t produce oil and gas if it can’t dispose of all the wastewater.

Oklahoma’s oil and gas regulatory agency is scrambling to reduce seismic risk. The Oklahoma Corporation Commission placed more restrictions in the last two years on new wastewater disposal wells, cutting back on the fluid injected underground and stalling on permits because some of those wells could be triggering earthquakes.

Oklahoma is examining 601 wells across the state. Since July, operators made 137 wells shallower, creating more space between the bottom of the wells and the Arbuckle formation. Operators also reduced volumes in 61 wells.

But no one knows if the agency will take more drastic steps. Kansas halved the amount of wastewater companies can inject in 72 wells, 44 of which belong to SandRidge. Arkansas shut down four wells suspected of triggering quakes.

OCC spokesman Matt Skinner said all options are on the table to reduce earthquake hazard. The agency’s response to seismic activity is based on the best available science and will continue to evolve, he said. When the OCC first began to ask operators to make changes to wells, staff approached companies on a well-by-well basis.

But earthquakes in­­creased dramatically in 2014, and research began to emerge showing more severe risk. So OCC staff switched to a broader approach in 2015, notifying operators it would examine all Arbuckle disposal wells within a 6-mile radius of a quake to ensure those wells weren’t too deep.

“We need to do something on a more macro approach,” Skinner said. “We’re looking at cutting back volumes, because we tried various well closures and it didn’t have an impact.”

The U.S. Environmental Protection Agency noted in an October review of OCC’s disposal well program that the state agency needed to pay more attention to reducing volume as a means to mitigate earthquake risk. And that could increase the hazard to SandRidge’s future.

The Mississippi Lime isn’t a great place to get oil and gas. But SandRidge and a few others figured out how to fracture the porous limestone and inject wastewater to a much deeper layer, the Arbuckle. But what makes the Mississippi Lime and Arbuckle rock formations such a successful combination also makes them an earthquake hazard.

Three characteristics make the Arbuckle layer below the Mississippi Lime more susceptible to temblors, according to researchers at Stanford University and the Oklahoma Geological Survey. Wells in the area produce 10 times more waste than other regions, because a prehistoric sea covered the state millions of years ago. The Arbuckle is the favored formation for wastewater injection. But there are hundreds of tiny, previously unknown faults in that rock layer. Fluid can trigger earthquakes once it gets into those faults.

Scientists discovered in the 1970s that fluid disposal into faults can trigger earthquakes. But it’s difficult for researchers to correlate a single disposal well with a particular earthquake or series of temblors. Oklahoma has about 4,000 disposal wells that pock the landscape, and thousands of temblors have rumbled across the state since 2013.

For regulators who are trying to reduce the problem, and scientists who study the phenomenon, making that correlation between disposal wells and quakes is even more complicated. It’s like trying to figure out which driver was responsible for a 100-car pileup on the freeway.

Stanford professor Mark Zoback’s research tied earthquakes in the region where SandRidge operates to disposal deep into the Arbuckle. Injecting that wastewater into a shallower rock layer may not have the same effect, his study suggests.

So SandRidge is experimenting with putting wastewater back into the same rock layer from which it came. But it’s too soon to know if those two test wells have reduced the temblors, said OCC’s Oil and Gas Conservation Division Director Tim Baker.

SandRidge won’t discuss how evolving rules for disposal wells affect its overall operations, nor will other operators with oil and gas wells in the Mississippi Lime and disposal wells in the Arbuckle formation.

SandRidge representatives declined to grant interviews after repeated requests from The Journal Record. Investor Relations and Strategy Vice President Duane Gruber wrote in an email message the company continues to have an open and constructive dialogue with regulators. The company has been proactive in following and developing best practices, Grubert wrote.

It’s not surprising that SandRidge wouldn’t say much, said Kim Hatfield, the Oklahoma Independent Petroleum Association’s industry liaison for the governor’s seismic coordinating council. If a company admits it’s difficult to get a permit for a wastewater disposal well, analysts would scrutinize growth projections, he said. And if a public company knowingly misleads investors about its assets, it violates SEC regulations.

But the company has admitted regulatory adjustments could cause changes to its operations.

In an annual SEC filing posted Nov. 5, the company noted that Texas, Oklahoma and Kansas have made changes to disposal well programs. It did not provide details about how many of its wells face scrutiny. The risk statement noted that any new laws, regulations or directives that restrict wastewater disposal or that shut down disposal wells could also force the company to shut down a substantial number of oil and gas wells. That could have a material and adverse effect on the company’s business, financial condition and operational results, according to the filing.

SandRidge directors promoted James Bennett to CEO in June 2013 with the hope that he could improve the company’s teetering balance sheet. The driller’s founder and former chief executive, Tom Ward, left behind a fiscal mess, ousted after a months-long public dispute with an activist investor. Bennett is still facing a U.S. Department of Justice antitrust investigation, which includes allegations that Ward’s family profited from selling land leases to SandRidge.

The driller reported $4.6 billion in debt in July, which it has struggled to pay down.

That hasn’t helped its ailing stock price, which has remained at less than $1 per share since June 26. That doesn’t meet the stock exchange’s minimum threshold for trading, which puts the company at risk of being delisted.

SandRidge received the de­­listing notice from New York Stock Exchange on July 23.

The company planned to hold a special meeting Nov. 6 to vote on a reverse stock split, which would decrease the number of shares and increase the share price. The company canceled the meeting, according to an Oct. 28 SEC filing.

“While the company intends to regain compliance with the listing requirement, the board has now determined that it is in the best interests of stockholders to cancel the special meeting,” according to the filing. “To the extent necessary, the company will seek stockholder approval at its 2016 annual meeting of stockholders with respect to actions it may pursue to regain compliance with the NYSE listing requirement.”

SandRidge started as a collection of smaller energy companies founder Tom Ward purchased in 2006. Those companies had stakes across Texas’ historically prolific plays: the Permian Basin, west Texas, the gassy field in east Texas, along the Gulf Coast and in the Gulf of Mexico.

From 2006 to 2012, Ward purchased private companies with assets in Colorado, and more in the Gulf of Mexico.

In 2008, more than 60 percent of the company’s production came from the Pinon natural gas field in west Texas.

In 2011, Ward began plowing money into the Mississippi Lime formation. He launched two public trusts, which brought in money from an initial public offering and allowed unit holders to get a share of royalties from Mississippi Lime wells.

He continued expansion into the Gulf, buying Dynamic Offshore Resources in February 2012. Most of the assets were shallow wells, 300 feet below the sea.

Bennett sold underperforming assets in the Gulf of Mexico in 2014 and has slashed its rig count by 60 percent since January to reduce spending and increase cash flow.

Subsidiary drilling contractor Lariat Services laid off 265 people and shuttered its Odessa, Texas, field office in February. SandRidge laid off 132 more employees in April, about one-fifth of its workforce. And it’s expanding Oklahoma City headquarters is listed for sale, though it plans to lease back space for its workers.

SandRidge executives are in the process of spinning off its midstream subsidiary, which could provide a few hundred million dollars to keep the company afloat. U.S. Securities and Exchange Commission rules prevent executives from discussing an initial public offering while bids are sought.

By the time SandRidge reported its third-quarter earnings on Nov. 4, its production was only in two basins. Oil from the Mid-Continent accounted for 88 percent of the company’s production.

Bennett is working to diversify the company’s assets, announcing on Nov 4. a plan to purchase 136,000 acres in the Niobrara Shale play in northeastern Colorado. The $190 million cash acquisition could allow the company to use strengths it developed in drilling in Oklahoma to the rock layers in the North Park Basin.

As it stands, economists are divided about the company’s future. SunTrust Robinson and Humphrey energy research managing director Neal Dingmann said a situation in which the OCC would shut down all of SandRidge’s disposal, and harm the company’s ability to extract petroleum, is extreme and unlikely.

However, University of Tulsa energy business assistant professor Tom Seng said SandRidge’s exposure in the Mississippi Lime makes the company’s situation different than others facing the commodity downturn. Seng said he wouldn’t be surprised if the company filed for bankruptcy.

“Just about two weeks ago their credit rating was downgraded to junk status. They have all their eggs in one basket and they are teetering,” Seng said.

Agee said SandRidge executives will have to rethink their economic model for how profitable Mississippi Lime wells could be with reduced disposal capacity.

The driller’s chief executive must be transparent about the company’s risks, and that his plan to drill in the Niobrara is a good value, Agee said.

“I know the officers and the directors, they are always capable as long as they communicate with stockholders, creditors and analysts,” he said.

The company has the liquidity to weather the downturn in commodity prices, but it depends on how long the down cycle lasts, Agee said.

Seng said lenders are an important key to the company surviving its unique situation. Banks don’t want to lose money, so it’s in a financier’s best interest to restructure credit agreements that are favorable to a driller with high debt.

If SandRidge could get $1 billion in cash to help it drill in the Niobrara play, that could help it remain solvent, Seng said.

“I don’t know what they can do without an infusion of new money,” Seng said. “They are just hanging on, hoping oil prices go back up.”

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