SM Energy Company — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly figures below refer to Q4 2019. SM Energy is an independent oil and gas exploration and production company focused on Texas, principally the Midland Basin and South Texas.
Financial and operating results
| Metric | 2019 | 2018 |
|---|---|---|
| Total operating revenues and other income | $1.590 billion | $2.067 billion |
| Oil, gas and NGL production revenue | $1.586 billion | $1.636 billion |
| Net income (loss) | $(187.0) million | $508.4 million |
| Net cash from operating activities | $823.6 million | $720.6 million |
| Net cash used in investing activities | $(1.013) billion | $(587.9) million |
| Adjusted EBITDAX (non-GAAP) | $993.4 million | $900.4 million |
| Net production | 48.3 MMBOE; 132.3 MBOE/day | 43.9 MMBOE; 120.3 MBOE/day |
| Realized price before derivative settlements | $32.84/BOE | $37.27/BOE |
| Production expense | $10.38/BOE | $11.10/BOE |
In Q4 2019, operating revenues and other income were $451.7 million, operating expenses were $540.0 million, and net loss was $102.1 million. Q4 production was 12.8 MMBOE. Management said operating cash flow exceeded investing cash flow in Q4, but the filing text does not provide a clear Q4 amount for that difference. The filing does not present a single comparable operating-margin measure.
Liquidity, debt and reserves
- Year-end cash was approximately $10,000; working capital deficit was $219.4 million. The company had $122.5 million drawn on its revolving facility and $1.0775 billion of available capacity at December 31, 2019.
- Reported long-term debt carrying value was approximately $2.733 billion, including $2.453 billion of senior notes, $157.3 million of convertible notes, and $122.5 million drawn on the revolver. The filing separately reports $2.772 billion in contractual principal obligations.
- Capital expenditures were $1.024 billion. Operating cash flow therefore did not cover full-year investing cash use; financing activities provided $111.8 million.
- Proved reserves fell 8% to 462.0 MMBOE; reserve life index declined to 9.6 years from 11.5. Additions of 98.4 MMBOE were largely offset by 94.7 MMBOE of downward revisions, primarily from lower commodity prices.
- Standardized measure of discounted future net cash flows was $4.104 billion, down from $4.654 billion. This SEC-prescribed reserve measure is not an estimate of market value.
Material changes and management outlook
- Production increased 10% year over year, driven chiefly by 25% growth in the Midland Basin. Oil production revenue rose 11%, while gas and NGL revenues fell 26% and 35%; total production revenue declined 3% as lower prices offset higher volumes.
- Realized oil, gas and NGL prices declined 5%, 30% and 37%, respectively. A $97.5 million net derivative loss in 2019 contrasted with a $161.8 million gain in 2018; cash settlements were a $39.2 million gain in 2019 versus a $135.8 million loss in 2018.
- 2018 results included $426.9 million of net divestiture gains, a major contributor to the year-over-year earnings comparison. No material divestitures occurred in 2019.
- 2020 capital budget was $825–$850 million, about 20% below 2019. Management expected slightly lower total production, with oil volumes growing but not fully offsetting expected gas and NGL declines; oil was expected to be about 50% of the production mix.
- Management’s stated priorities were improving operating margins and cash flow, reducing absolute debt and improving leverage. It expected to fund 2020 capital spending primarily from operating cash flow, with revolver borrowings as needed. The company reported covenant compliance through filing.
Risks, contingencies and unusual items
- Commodity-price exposure, regional gas takeaway constraints and differentials, and potential infrastructure interruptions could affect realized prices, reserves, cash flow and borrowing capacity. The next borrowing-base redetermination was scheduled for April 1, 2020.
- Minimum delivery commitments covered 24 MMBbl of oil and 424 Bcf of gas through 2023, plus 18 MMBbl of produced water through 2027. If no product were delivered, estimated aggregate deficiency payments were $218.5 million; management did not expect material shortfalls.
- Q4 included $18.2 million of one-time charges for expected payments tied to lease drilling/completion obligations and rig termination fees. A separate organizational reorganization was expected to generate total charges of $8.0–$8.5 million, including $4.2 million incurred in Q4.
- Two disclosed lawsuits remained pending: a putative Oklahoma royalty-owner class action and a Texas dispute concerning an agreement’s tag-along provisions. Management said it intended to defend the claims; it did not expect pending litigation and claims to have a material effect, but outcomes remain uncertain.
- Other principal risks include reserve-estimation uncertainty, environmental and regulatory changes, hydraulic-fracturing restrictions, unplanned operating costs, and the possibility of insufficient cash generation or reduced credit availability. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether operating cash flow and commodity prices support the 2020 capital plan and planned debt reduction.
- Borrowing-base outcome, covenant headroom, and refinancing requirements—particularly the 2021 convertible notes and 2022 senior notes.
- Progress in converting proved undeveloped reserves and replacing production, given the reserve decline and price-driven revisions.
- Actual gas takeaway capacity and performance under the substantial minimum-volume commitments.
- Final costs and timing for the restructuring, lease obligations, rig terminations, and the two pending legal matters.