SM Energy Company — FY 2021 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2021, not a standalone fourth-quarter filing. SM Energy is an independent oil and gas exploration and production company operating in Texas, principally in the Midland Basin and South Texas. The company filed the report on February 25, 2022.
Financial and operating performance
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Oil, gas and NGL production revenue | $2.598 billion | $1.126 billion |
| Net income (loss) | $36.2 million | $(764.6) million |
| Diluted earnings (loss) per share | $0.29 | $(6.72) |
| Net cash provided by operating activities | $1.160 billion | $790.9 million |
| Net cash used in investing activities | $667.2 million | $555.6 million |
| Adjusted EBITDAX (non-GAAP) | $1.225 billion | $975.4 million |
| Average net daily production | 140.7 MBOE | 126.9 MBOE |
- Revenue rose 131%, reflecting higher production and commodity prices. Average realized prices increased 83% for oil, 169% for gas and 141% for NGLs.
- Net derivative loss was $901.7 million, including $749.0 million of settlement losses, versus a $161.6 million net derivative gain and $351.3 million settlement gain in 2020. The derivative impact substantially offset the benefit of higher production revenue.
- Production expense increased 29% to $505.4 million. Production expense was $9.84 per BOE, including lease operating expense of $4.39 per BOE and transportation costs of $2.71 per BOE.
- Cash capital expenditures were $674.8 million; costs incurred on oil and gas property acquisition, exploration and development were $718.0 million. Operating cash flow exceeded investing cash use.
- At year-end, cash was $332.7 million, with no revolving-credit borrowings and $1.1 billion of borrowing capacity. Senior Notes had $2.1 billion aggregate principal outstanding; their balance-sheet carrying value, net of discounts and financing costs, was $2.081 billion. The company reported compliance with debt covenants.
- Proved reserves increased 22% to 492.0 MMBOE; 61% were proved developed and reserve life index was 9.6 years. Standardized measure of discounted future net cash flows was $6.963 billion, versus $2.682 billion in 2020. These reserve measures use prescribed assumptions and are not estimates of market value.
Material changes versus 2020
- Net income improved from a substantial loss to a modest profit. The 2020 result included $956.7 million of proved-property impairment; no proved-property impairment was recorded in 2021. 2021 included $35.0 million of unproved-property abandonment and impairment expense.
- Production increased 11%, led by an 18% increase in Midland Basin output; South Texas production declined 2%. Oil rose to 54% of production, from 50%.
- Cash flow from operations increased $368.9 million. Net debt declined: total outstanding long-term debt principal was $2.1 billion at year-end, compared with $2.3 billion a year earlier; cash increased to $332.7 million from $10,000.
- Proved reserves increased from 404.6 MMBOE. Additions from extensions and infill were partly offset by production and the removal of 40.6 MMBOE of proved undeveloped reserves from the five-year development plan.
- Net derivative results reversed sharply from a gain in 2020 to a loss in 2021 as benchmark commodity prices rose. G&A expense increased 13% to $111.9 million, primarily due to compensation expense.
Outlook, commentary and risks
- Management expects a 2022 capital program of approximately $750 million, funded from operating cash flows, focused on economic oil development in the Midland Basin and South Texas, including Austin Chalk development. Production is expected to remain relatively flat with 2021; oil’s share of production is expected to decrease. Management expects per-BOE lease operating and transportation costs to increase slightly and expects DD&A and G&A to decrease.
- Management’s stated priorities include generating cash flow, reducing absolute debt, improving leverage and optimizing development. Management cited continuing commodity-price volatility, COVID-19 uncertainty and geopolitical risks, including Russia-Ukraine tensions.
- Key exposures include volatile oil, gas and NGL prices; commodity hedges that can limit upside; reserve-estimation and development risks; service-cost and supply constraints; pipeline and processing capacity; and environmental, methane, flaring, hydraulic-fracturing, water-disposal and induced-seismicity regulation. The credit facility’s $1.1 billion borrowing base is subject to semiannual redetermination; the next was scheduled for April 1, 2022.
- Firm delivery and transportation commitments included minimum deliveries through 2024 for oil and gas and through 2027 for produced water. Disclosed aggregate undiscounted deficiency payments were approximately $96.9 million, excluding certain oil commitments whose payments could not be estimated; management did not expect material shortfalls.
- The SPM NAM litigation was settled in August 2021; management said no pending litigation was expected to have a material effect. The company recorded legal-settlement-related operating expense during 2021. The financial statement audit and internal-control audit received unqualified opinions; the auditor identified DD&A estimates as a critical audit matter.
Important facts for investors to verify
- Review the full derivative note and current hedge schedule: settlement losses were material in 2021, and hedges may limit gains if prices rise.
- Assess debt maturities, interest costs and covenant headroom, along with the borrowing-base redetermination and the subsequent February 2022 redemption of $104.8 million of 2024 Senior Notes.
- Test reserve assumptions and development funding needs: proved undeveloped reserves were 191.8 MMBOE, with estimated future development costs of $1.4 billion.
- Monitor whether the 2022 capital program can be funded from operating cash flow while maintaining production and meeting delivery commitments.
- Track commodity prices, realized-price differentials, service costs, regulatory changes and South Texas development results against management’s outlook.