SM Energy Company — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. SM Energy is a Texas-focused oil and gas producer operating in the Midland Basin and South Texas.
Financial and operating results
| Metric | 2020 | 2019 |
|---|---|---|
| Oil, gas and NGL production revenue | $1,126.2 million | $1,585.8 million |
| Net income (loss) | $(764.6) million | $(187.0) million |
| Adjusted EBITDAX (non-GAAP) | $975.4 million | $993.4 million |
| Cash provided by operating activities | $790.9 million | $823.6 million |
| Cash used in investing activities | $555.6 million | $1,013.3 million |
| Average net daily production | 126.9 MBOE/day | 132.3 MBOE/day |
| Proved reserves at year-end | 404.6 MMBOE | 462.0 MMBOE |
Revenue declined 29%, reflecting lower realized prices and 4% lower equivalent production. Before derivative settlements, realized prices fell 31% for oil, 25% for gas and 19% for NGLs. Derivative settlements provided $351.3 million of gains; the reported net derivative gain was $161.6 million after mark-to-market changes. Production expense was $8.43 per BOE, down from $10.38; realized price before derivative settlements was $24.26 per BOE. The filing does not provide a single comparable operating-margin percentage.
The net loss included $1.016 billion of impairment expense, primarily a $956.7 million impairment of South Texas proved properties and related facilities. Debt extinguishment gains of $280.1 million and the $161.6 million derivative gain partly offset the loss. Q4 revenue was $320.2 million and Q4 net loss was $165.2 million.
Liquidity, debt and capital allocation
- Year-end cash was $10,000. Current assets were $203.7 million versus current liabilities of $583.7 million.
- Year-end revolving-credit borrowings were $93.0 million, with $965.0 million of available capacity under a $1.1 billion borrowing base and lender commitment. The borrowing base was scheduled for redetermination on April 1, 2021.
- Long-term debt principal declined about 18% to approximately $2.3 billion from $2.8 billion. The debt balance reported net of discounts and financing costs was $2.214 billion. Debt exchanges and discounted open-market repurchases contributed to the reduction.
- Operating cash flow exceeded investing cash use by approximately $235 million in 2020. The company budgeted 2021 capital expenditures of $650–675 million, expected to be funded with operating cash flow.
- The 2020 dividend was $0.02 per share, down from $0.10 in 2019. Management said it intended to continue dividends, subject to financial condition, covenants and Board discretion, and did not plan common-stock repurchases in 2021.
Changes, outlook and material matters
- The COVID-19 pandemic and oil-market disruption drove lower prices, voluntary production curtailments and reduced development spending. The company cut its original 2020 capital budget by more than 25%.
- Midland Basin production grew 11%, while South Texas production declined 21%. Management expected total production and oil’s share of production to increase in 2021, focusing on Midland Basin development and Austin Chalk projects in South Texas.
- Proved reserves fell 12%; lower SEC pricing and production were major factors. The company also removed 65.0 MMBOE of proved undeveloped reserves from its five-year plan, including Eagle Ford locations as it shifted South Texas development toward Austin Chalk. Year-end standardized discounted future net cash flows were $2.682 billion, down 35% from 2019; this SEC measure is not an estimate of market value.
- In 2020, the company exchanged notes for $446.7 million of 10% second-lien notes due 2025, paid cash to certain convertible-note holders and issued warrants for up to approximately 5.9 million shares. The warrants became exercisable in January 2021 and may be exercised through June 2023. The remaining $65.5 million of 1.5% secured convertible notes matured July 1, 2021; management expected to use the revolver to meet the obligation.
- Credit ratings were downgraded by three agencies during 2020. Management reported covenant compliance through the filing date, but warned that commodity-price declines could reduce borrowing capacity and affect debt service and investment plans.
- Key risks include commodity-price volatility, pandemic-related uncertainty, reserve-estimation and impairment risk, environmental and climate regulation, hydraulic-fracturing restrictions, transportation constraints and fixed delivery commitments. Minimum delivery commitments included 16 million barrels of oil and 257 Bcf of gas through 2024; the company did not expect material shortfalls.
- The Chieftain royalty class action was subject to a settlement agreement requiring court approval. A separate dispute with SPM NAM over a Powder River Basin sale was in discovery; the company said it intended to defend the claims. Management did not expect pending litigation and claims to have a material financial effect.
Important facts for investors to verify
- Whether 2021 operating cash flow and commodity prices supported the $650–675 million capital program and planned debt reduction.
- The outcome of the April 2021 borrowing-base redetermination and the company’s ability to address the 2021 convertible-note maturity.
- Potential dilution and warrant exercise following the January 2021 trigger, including the warrants’ terms and remaining shares issuable.
- South Texas asset performance, reserve revisions and the assumptions underlying the large 2020 impairment and reserve valuations.
- Approval and final terms of the Chieftain settlement, developments in the SPM dispute, and any changes in delivery commitments or deficiency-payment exposure.
Ernst & Young issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting as of December 31, 2020.