SM Energy Company (NYSE: SM) — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. SM Energy is an independent oil, gas, and NGL producer operating in the Midland Basin and South Texas. The unaudited financial statements are prepared under U.S. GAAP.
Financial and operating performance
| Metric | Q2 2023 | Comparable period / change |
|---|---|---|
| Oil, gas, and NGL production revenue | $546.6 million | Down 44.8% from $990.4 million in Q2 2022; down 4% sequentially |
| Operating income | $209.4 million | Compared with $512.8 million in Q2 2022 |
| Net income | $149.9 million; $1.25 diluted EPS | Compared with $323.5 million; $2.60 diluted EPS in Q2 2022 |
| Operating cash flow | $383.3 million | Compared with $542.6 million in Q2 2022 |
| Adjusted EBITDAX (non-GAAP) | $390.2 million | Compared with $559.7 million in Q2 2022 |
| Average net daily production | 154.4 MBOE/day | Up 5% sequentially; up from 149.9 MBOE/day in Q2 2022 |
| Realized price per BOE, before derivative settlements | $38.89 | Down 10% sequentially; down 40% year to date versus 2022 |
Q2 production revenue was pressured by lower commodity prices. Versus Q2 2022, realized oil, gas, and NGL prices declined to $72.12/Bbl, $2.07/Mcf, and $20.83/Bbl, respectively. Production costs were $145.6 million, or $10.36/BOE. Net derivative gains were $11.7 million, including $15.6 million of settlement gains.
For the six months ended June 30, revenue was $1.12 billion, down 40% year over year; net income was $348.4 million versus $372.2 million. Operating cash flow was $714.9 million versus $884.7 million. Capital expenditures were $550.0 million, and cash paid for acquired properties was $88.8 million. Cash and cash equivalents were $378.2 million at period end.
Balance sheet, debt, and liquidity
- Senior Notes had $1.585 billion principal outstanding and $1.574 billion carrying value; no revolving-credit borrowings were outstanding at June 30.
- The credit facility had $1.25 billion of lender commitments, $2.5 billion borrowing base, and $1.248 billion available borrowing capacity after letters of credit. The next borrowing-base redetermination was scheduled for October 1, 2023.
- Total assets were $5.99 billion and stockholders’ equity was $3.30 billion. Current assets of $679.0 million exceeded current liabilities of $564.0 million.
- The company reported compliance with its financial and non-financial debt covenants through the filing date. Two credit-rating agencies upgraded the company’s rating during Q2, according to management.
Material changes and capital returns
- Year-to-date revenue fell 40%, chiefly reflecting lower realized commodity prices; average production was broadly flat year over year, as South Texas growth offset lower Midland Basin volumes.
- Interest expense declined to $44.6 million for the first half from $74.9 million, largely following 2022 debt redemptions. The prior-year period included a $67.6 million loss on extinguishment of debt.
- The company repurchased 3.96 million shares for $108.8 million in the first half, including 2.55 million shares for $68.7 million in Q2. It declared Q2 dividends of $0.15 per share; $334.0 million remained authorized for repurchases under the program.
- On June 30, the company acquired approximately 20,000 net acres in Dawson and northern Martin Counties, Texas, for $88.8 million after purchase-price adjustments; it also added 2,800 net acres through leasing.
Outlook, commentary, and risks
- Management expected full-year 2023 capital spending of approximately $1.05 billion, excluding acquisitions and leasing, $50 million below its original expectation due primarily to lower-than-expected costs. It expected to fund the program primarily from operating cash flow and cash on hand.
- Management expected a slight increase in full-year production versus 2022, with growth supported by South Texas activity and reduced production curtailments as oil-handling capacity expands. Planned activity included two South Texas drilling rigs and an additional Midland Basin rig in Q4.
- Management anticipated higher full-year LOE per BOE, DD&A, and G&A than in 2022, while transportation cost per BOE was expected to decline in the second half following the expiration of a South Texas contract.
- Commodity prices, differentials, infrastructure constraints, inflation, service costs, interest rates, geopolitical events, supply-chain disruption, and regulatory or tax changes could affect results and capital plans. Derivatives partly reduce near-term price and basis exposure but can limit gains if prices rise.
- A multi-year R&D tax-credit study was expected to be completed in late 2023 and could favorably affect the effective tax rate and future tax obligations; no credit had been recorded as of filing. Management said pending litigation and claims were not expected to have a material effect. No material risk-factor changes from the 2022 Form 10-K were reported.
- Disclosure controls were assessed as effective at a reasonable-assurance level, and no material Q2 change in internal control over financial reporting was reported. Adjusted EBITDAX is a non-GAAP measure and should not be viewed as a substitute for GAAP results or cash flows.
Important facts for investors to verify
- Whether commodity prices, realized differentials, and hedge settlements support the expected cash generation and production outlook.
- Execution and funding of the approximately $1.05 billion capital program, including acquisition and leasing spending excluded from that estimate.
- Results of the October 2023 borrowing-base redetermination and continued covenant compliance.
- The balance between debt reduction, share repurchases, and dividends, and the remaining authorization and conditions governing capital returns.
- Completion and impact of the R&D tax-credit study, and any material changes in costs, taxes, litigation, or operating risks.