SM Energy Company — Q3 2020 Form 10-Q
Business context and period: Unaudited results for the quarter and nine months ended September 30, 2020. SM Energy is an independent oil and gas producer focused on the Midland Basin and South Texas. The filing describes significant effects from COVID-19 and related commodity-market disruption.
Key financial results and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Oil, gas and NGL production revenue | $282.0 million | $389.4 million | $806.0 million | $1,136.7 million |
| Net income (loss) | $(98.3) million | $42.2 million | $(599.4) million | $(84.9) million |
| Net income (loss) per diluted share | $(0.86) | $0.37 | $(5.28) | $(0.76) |
| Net cash provided by operating activities | $201.6 million | $203.2 million | $534.1 million | $581.6 million |
| Adjusted EBITDAX (non-GAAP) | $232.5 million | $257.8 million | $720.0 million | $707.2 million |
- Q3 production averaged 126.3 MBOE/day, down 6% year over year; nine-month average was 128.3 MBOE/day, down 1%.
- Q3 realized prices before derivative settlements were $37.69/bbl for oil, $1.90/Mcf for gas and $14.07/bbl for NGLs. Production costs were $8.20/BOE, versus $10.41/BOE in Q3 2019.
- Nine-month capital expenditures were $419.8 million, compared with $788.6 million in 2019. Investing cash outflow was $426.8 million.
- At September 30, cash was $10,000; current assets were $274.9 million and current liabilities $377.3 million. Debt carrying value totaled $2.353 billion, including $178.0 million drawn on the revolver. Available revolver capacity was $880.0 million, after letters of credit.
- Debt was down from $2.733 billion at December 31, 2019. Stockholders’ equity was $2.185 billion, down from $2.749 billion.
- Quarterly dividend was $0.01 per share, versus $0.05 in Q3 2019. Credit amendments capped annual dividends at $12 million.
Material changes and notable items
- Production revenue fell 28% in Q3 and 29% for the first nine months, reflecting lower realized prices and lower volumes. Q3 South Texas production declined 22%, partly offset by 7% growth in the Midland Basin.
- Nine-month results included $956.7 million of impairment on South Texas proved properties and related facilities, plus $50.6 million of unproved-property abandonment and impairment. Total impairment was $1.007 billion, versus $25.1 million in the 2019 period.
- Q3 included a $63.9 million net derivative loss, largely due to a $134.2 million downward mark-to-market adjustment as commodity prices strengthened; settled contracts generated a $70.3 million gain. Nine-month derivative results were a $314.3 million net gain, including $286.3 million of settlement gains.
- Debt exchanges and repurchases reduced principal obligations. The company exchanged $718.9 million of old notes for $446.7 million of 10% secured notes due 2025, paid $53.5 million in connection with the private exchange, and issued warrants for up to approximately 5.9 million shares. Nine-month debt extinguishment gains totaled $264.5 million.
- Cost reductions lowered Q3 production expense 26% year over year and general and administrative expense 25%.
Outlook, risks and contingencies
- Management reduced its original $825–$850 million 2020 capital program by approximately 25%. It expected full-year 2020 production to be below 2019 and anticipated lower lease operating costs per BOE. No specific full-year production target is provided in the filing text.
- Management said operating cash flows were expected to fund the 2020 capital program, with revolver borrowings available for remaining needs. The fall 2020 borrowing-base redetermination was still in process; the next scheduled redetermination was April 1, 2021.
- Management reported compliance with debt covenants. The revolver requires funded debt to trailing adjusted EBITDAX of no more than 4.00:1 and an adjusted current ratio of at least 1.00:1. Certain debt-maturity provisions could accelerate the revolver maturity or create refinancing needs.
- Key risks include continuing pandemic effects, uncertain oil and gas demand and prices, possible further property impairments, counterparty and capital-market risks, and potential NYSE delisting if the stock fails the exchange’s minimum-price standard. Management warned delisting could give holders of $65.5 million of 2021 secured convertible notes a right to demand repayment.
- Drilling and completion agreements could require liquidated damages of up to $35.7 million and $11.5 million if specified activity requirements are not met. Management expected to meet both requirements. Drilling-rig commitments were $12.2 million, with $5.7 million of potential early-termination fees. Pending litigation was not expected by management to have a material effect; one case’s trial was postponed to Q1 2021.
- CEO Javan Ottoson planned to retire November 2, 2020, and the board appointed President and COO Herbert Vogel as his successor. The filing also notes a $21.5 million noncash warrant value and $800,000 in proposed post-retirement payments to Ottoson under a noncompetition agreement.
Important facts for investors to verify
- Whether commodity prices, production volumes and derivative settlements support operating cash flow and debt reduction, and how much protection the hedge book provides.
- Outcome of the borrowing-base redetermination, revolver availability, covenant headroom and refinancing requirements for near-term maturities.
- Assumptions behind the South Texas impairment and the possibility of further impairments if commodity prices remain depressed.
- Progress against capital-spending plans and drilling/completion commitments, including potential liquidated damages.
- Potential dilution and trigger conditions for the warrants, and the effects of CEO succession and NYSE listing compliance.