SM Energy Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. SM Energy is an independent oil and gas producer operating in the Midland Basin and South Texas. Financial statements are unaudited.
Financial and operating results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Oil, gas and NGL revenue | $570.8 million | $858.7 million | Down 34% |
| Income from operations | $272.0 million | $101.7 million | Up 167% |
| Net income | $198.6 million | $48.8 million | Up 307% |
| Diluted EPS | $1.62 | $0.39 | Up $1.23 |
| Adjusted EBITDAX (non-GAAP) | $401.4 million | $524.6 million | Down 24% |
| Operating cash flow | $331.6 million | $342.1 million | Down $10.5 million |
| Capital expenditures (cash basis) | $240.7 million | $150.1 million | Up $90.6 million |
Operating income and net income rose despite lower revenue, chiefly because the prior-year quarter included a $418.5 million net derivative loss, compared with a $51.3 million net derivative gain in Q1 2023. These fair-value derivative effects make reported earnings and operating margin less directly comparable; operating margin was approximately 47% versus 12%, respectively. Adjusted EBITDAX declined.
Production averaged 146.4 MBOE per day, down 4% year over year and up 2% sequentially. Midland Basin output fell 15% year over year, partly offset by 10% growth in South Texas. Realized prices before derivative settlements declined year over year: oil 21%, gas 46%, and NGLs 32%. Production expense was $10.80/BOE, up 3% year over year and down 6% sequentially.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $477.9 million at March 31, up from $445.0 million at year-end 2022.
- Senior Notes had $1.585 billion principal outstanding and a $1.573 billion carrying value. No revolver borrowings were outstanding; $1.244 billion of capacity was available after $6 million of letters of credit.
- The credit facility borrowing base was $2.5 billion and lender commitments were $1.25 billion; the subsequent redetermination reaffirmed both. The company reported compliance with debt covenants.
- Operating cash flow less cash capital expenditures was approximately $90.9 million. The company spent $40.1 million on share repurchases and paid $18.3 million in dividends during the quarter.
Material changes and management outlook
- Revenue fell 34% year over year, reflecting lower commodity prices and 4% lower production. Operating cash flow was modestly lower; capital spending was higher.
- Q1 repurchases totaled 1.414 million shares for $40.0 million, at a weighted-average $28.32 per share. The $500 million program had $402.8 million remaining at quarter-end. The quarterly dividend declared was $0.15 per share.
- Management expects a 2023 capital program of approximately $1.1 billion, excluding acquisitions, funded from operating cash flow. Planned activity: three Midland Basin rigs and about one completion crew; two South Texas rigs and one completion crew.
- Management expects full-year 2023 LOE per BOE, DD&A, and G&A to increase versus 2022; transportation cost per BOE is expected to decrease. Interest expense is expected to decline versus 2022, primarily following 2022 debt redemptions.
- An R&D credit study expected to be completed in late 2023 may favorably affect the effective tax rate and future tax obligations; no credit had been recorded as of filing. Management estimated 8%–10% of 2023 income tax expense would be current, subject to change.
Risks, contingencies and unusual items
- Commodity-price volatility, differentials, inflation, service costs, supply-chain disruptions, geopolitical events, interest rates and infrastructure constraints may affect results and plans. Management noted that derivatives reduce, but do not eliminate, price exposure and can limit gains if prices rise.
- A 10% decrease in realized prices, based on Q1 production, would have reduced production revenue by approximately $42.1 million for oil, $9.4 million for gas and $5.6 million for NGLs; derivative settlements would have offset an estimated $13.0 million in total.
- Exploration expense increased to $18.4 million, primarily due to unsuccessful exploration activity on one well that experienced drilling-phase technical issues.
- Drilling-rig commitments totaled $30.3 million through Q2 2024; termination of all contracts would incur $18.8 million in early termination fees. No material penalties were expected for the remainder of 2023.
- Management said pending ordinary-course litigation and claims were not expected to materially affect financial position, results or cash flows. No material risk-factor changes from the 2022 Form 10-K were reported.
Important facts for investors to verify
- Whether commodity prices, realized differentials and derivative settlements support the planned capital program and shareholder returns.
- Execution of the approximately $1.1 billion 2023 capital program, including production trends in Midland Basin and South Texas.
- Cash-flow coverage of capital spending, dividends and repurchases, and remaining authorization under the buyback program.
- Debt maturities, revolver availability, covenant compliance and the impact of future interest-rate changes.
- Actual cost trends, outcomes of the R&D credit study, and any changes in drilling commitments or exploration results.