SM Energy Company — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. SM Energy is an independent oil and gas producer operating in Texas, with assets in the Midland Basin and South Texas. Amounts are in U.S. dollars.
Key financial and operating metrics
| Metric | Q3 2021 | Comparison |
|---|---|---|
| Production revenue | $759.8 million | Up 35% sequentially from Q2 2021; up from $282.0 million in Q3 2020 |
| Net income (loss) | $85.6 million; $0.69 diluted EPS | Q2 2021 net loss was $223.0 million; Q3 2020 net loss was $98.3 million |
| Average net daily production | 155.8 MBOE/day | Up 14% sequentially and 21% year over year |
| Realized price before derivative settlements | $53.02/BOE | Up 17% sequentially |
| Production costs | $9.47/BOE | Down 6% sequentially |
| Net cash from operating activities | $328.1 million | $296.4 million in Q2 2021 |
| Operating cash flow less investing cash flow | $153.3 million | Management cited this as supporting debt reduction |
- For the first nine months, revenue was $1.75 billion, up 117% year over year. Net loss was $388.7 million, compared with a $599.4 million loss in the prior-year period. Operating cash flow was $730.1 million, versus $534.1 million.
- Q3 operating expenses included $209.1 million of net derivative losses and $43.4 million of other operating expense, primarily related to legal settlements. Derivative losses are sensitive to changes in commodity forward prices; Q3 cash derivative settlement losses were $213.6 million.
- At September 30, cash was $29.8 million, with no revolver borrowings and $1.1 billion of available borrowing capacity, net of letters of credit. Current liabilities were $1.10 billion, including $552.0 million of current derivative liabilities.
- Senior Notes had a net carrying value of $2.08 billion; total debt principal was approximately $2.12 billion. Fixed-rate debt principal was approximately $2.1 billion, with no floating-rate debt outstanding at quarter-end. The company reported covenant compliance.
- For the nine months, capital expenditures were $550.3 million and net cash used in investing activities was $544.8 million. Stockholders’ equity was $1.64 billion at September 30, down from $2.02 billion at year-end 2020.
Material changes versus comparable periods
- Higher commodity prices and greater production drove the Q3 revenue and earnings improvement. Q3 oil production rose 21% sequentially; gas realized prices rose 53% and NGL realized prices 30% sequentially.
- Year-to-date production increased 5%; Midland Basin production rose 16%, while South Texas production declined 13% versus the first nine months of 2020.
- Year-to-date derivative results shifted to a $924.2 million loss from a $314.3 million gain in 2020, substantially offsetting improved production revenue. The prior-year period also included $1.01 billion of impairment expense; 2021 impairment expense was $26.3 million, with no proved-property impairment.
- Debt principal declined by $118.0 million during Q3, according to management. In June, the company issued $400 million of 6.5% notes due 2028 and used proceeds primarily to repurchase or redeem 2022 and 2024 notes. The 2021 secured convertible notes matured and were repaid in July.
Outlook, risks, and contingencies
- Management’s 2021 capital program budget was $650 million to $675 million. It expected operating cash flow to fund the remaining program and planned to continue prioritizing debt reduction, leverage improvement, and returns from its Texas assets. Activity could be adjusted as conditions warrant.
- Management expected full-year 2021 LOE per BOE to increase versus 2020, transportation cost per BOE to decrease, and G&A to be relatively flat in absolute terms. It did not expect material proved-property impairments in Q4 based on commodity-price assumptions as of October 21, 2021.
- Commodity prices, the COVID-19 pandemic and variants, geopolitical developments, production volumes, infrastructure constraints, and service costs could affect results and liquidity. Derivatives reduce some price exposure but may limit gains when prices rise; the derivative portfolio was a net liability of $612.1 million at quarter-end.
- Potential drilling-footage liquidated damages were up to $25.9 million if minimum requirements were not met by March 31, 2022; management expected to meet the requirements. Drilling-rig contracts totaled $8.6 million, with $5.1 million of potential early-termination fees. A new operating lease carried estimated obligations of $25.8 million through 2033.
- The company settled the SPM NAM LLC litigation in August 2021. Management said pending litigation and claims were not expected to materially affect financial position, results, or cash flows. The filing does not provide a clear amount for the settlement.
- The quarterly dividend was $0.01 per share. Management said it did not plan common-share repurchases for the remainder of 2021.
Important facts for investors to verify
- Whether production growth, commodity prices, and realized prices persist, and how much derivative settlements reduce realized cash proceeds.
- Debt principal, upcoming maturities, revolver availability, covenant headroom, and the company’s progress toward debt reduction.
- Actual spending against the $650 million to $675 million capital budget and whether operating cash flow continues to cover investment needs.
- The cash and accounting effects of legal settlements and the basis for the $43.4 million Q3 other operating expense.
- Performance of South Texas assets, the drilling-footage commitment, and any changes to production, cost, or impairment expectations.