SM Energy Company — 2023 Form 10-K
Business context and reporting period. SM Energy is an independent oil and gas exploration and production company operating primarily in Texas’s Midland Basin and South Texas. This annual report covers the year ended December 31, 2023; selected fourth-quarter results are also reported.
Key financial and operating metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Oil, gas and NGL production revenue | $2.364 billion | $3.346 billion |
| Net income | $817.9 million | $1.112 billion |
| Diluted earnings per share | $6.86 | $8.96 |
| Net cash from operating activities | $1.574 billion | $1.686 billion |
| Adjusted EBITDAX (non-GAAP) | $1.712 billion | $1.918 billion |
| Net production | 55.5 MMBOE; 152.0 MBOE/day | 53.0 MMBOE; 145.1 MBOE/day |
- Fourth-quarter 2023 production revenue was $606.9 million and net income was $247.1 million. The filing’s quarterly table does not provide corresponding fourth-quarter 2022 results.
- Realized prices fell year over year: oil 19%, gas 61%, and NGLs 35%. Realized revenue per BOE declined 33% to $42.60.
- Production expense was $563.5 million, or $10.16/BOE, down 9% in total and 13% per BOE. DD&A was $690.5 million, up 14%; G&A was $121.1 million, up 6%.
- Net derivative gain was $68.2 million, versus a $374.0 million loss in 2022. This included a $26.9 million settlement gain in 2023, compared with a $710.7 million settlement loss in 2022.
- Capital expenditures were $989.4 million and cash paid for property acquisitions was $109.9 million. Costs incurred, an accrual-based measure, totaled $1.235 billion.
- At year-end, cash and cash equivalents were $616.2 million; the company had no revolving-credit borrowings and $1.248 billion of available borrowing capacity. Senior Notes had $1.585 billion of principal outstanding, with maturities from 2025 through 2028. The company reported compliance with debt covenants.
- Total proved reserves rose 13% to 604.9 MMBOE; 56% were proved developed. The standardized measure of discounted future net cash flows fell 37% to $6.280 billion, primarily due to lower benchmark prices. This measure is not fair market value.
Material changes versus 2022
- Production increased 5%, led by 20% growth in South Texas, partly offset by a 7% decline in the Midland Basin.
- Lower realized commodity prices drove production revenue down 29% and net income down approximately 26%, despite higher volumes and a substantially improved derivative result.
- Operating cash flow decreased $112.0 million; investing cash use increased $218.4 million, principally reflecting higher capital spending and Midland Basin acquisitions.
- SM Energy acquired approximately 20,000 net acres in Dawson and northern Martin counties, Texas, and added approximately 9,100 net Midland Basin acres through leasing. Acquisition consideration for 2023 transactions was $109.9 million.
- The company repurchased and retired 6.9 million shares for $228.0 million and paid $71.6 million in dividends. The annual fixed dividend was raised 20% to $0.72 per share beginning in 2024.
Outlook, commentary and risks
- For 2024, management expects capital spending of $1.16–$1.20 billion, excluding acquisitions, funded from operating cash flow and cash on hand. The program targets economic oil development in both core areas.
- Management expects 2024 production to increase slightly from 2023, with a slight increase in oil’s share of production. It expects LOE per BOE to rise, transportation costs per BOE to fall, and DD&A and G&A per BOE to remain broadly flat.
- Management expects to continue share repurchases in 2024; $214.9 million remained authorized as of the filing. Future repurchases and dividends remain discretionary and subject to market conditions, cash flows, and debt covenants.
- Reserve estimates include 263.6 MMBOE of proved undeveloped reserves, or 44% of total proved reserves, with estimated future development costs of $2.8 billion. The company removed 30.8 MMBOE from proved undeveloped reserves after revising its development schedule, partly in response to lower gas prices and lease obligations.
- Key exposures include volatile commodity prices, inflation and service costs, reserve-estimation uncertainty, drilling and completion execution, transportation and takeaway constraints, lease expirations, environmental and emissions regulation, water availability and disposal, and cybersecurity. A 10% decrease in realized commodity prices, based on 2023 production, was estimated to reduce production revenue by approximately $236.4 million before derivative offsets.
- Existing delivery commitments include minimum deliveries of 5 million barrels of oil through July 2026 and 11 million barrels of produced water through June 2027. Estimated aggregate deficiency payments would be about $11.5 million if no product were delivered; management does not expect material shortfalls.
- The filing reports no pending legal proceedings expected to have a material adverse effect and no material cybersecurity incidents during 2023. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
- Tax benefits from a completed multi-year R&D credit study contributed to a 10.5% effective tax rate, down from 20.3% in 2022. Management also cited a one-time property-tax relief benefit in 2023.
Important facts for investors to verify
- Whether production growth and the 2024 capital plan deliver expected returns amid lower gas prices and anticipated higher LOE per BOE.
- Commodity-price sensitivity, the coverage and settlement profile of derivatives, and the effects of any derivative caps on upside pricing.
- The pace and cost of converting proved undeveloped reserves to developed reserves, including the $2.8 billion estimated development requirement and 2024–2026 spending schedule.
- Liquidity and debt maturities, the April 1, 2024 borrowing-base redetermination, covenant headroom, and capacity to fund capital spending and shareholder returns.
- Whether acreage obligations, delivery contracts, environmental requirements, and water-disposal constraints create unanticipated costs or production limitations.