SM Energy Company — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021; unaudited. SM Energy is an independent oil and gas producer operating in Texas, principally in the Midland Basin and South Texas.
Key financial and operating metrics
| Metric | Q2 2021 | Six months 2021 |
|---|---|---|
| Oil, gas and NGL revenue | $562.6 million | $985.7 million |
| Net loss | $223.0 million; $1.88 per diluted share | $474.3 million; $4.07 per diluted share |
| Net cash from operating activities | $296.4 million | $402.0 million |
| Capital expenditures | Not separately stated for Q2 in the provided text | $370.2 million |
| Adjusted EBITDAX (non-GAAP) | $256.9 million | $471.9 million |
| Average net daily production | 136.5 MBOE/day | 124.2 MBOE/day |
Q2 production expense was $125.5 million; production costs averaged $10.10 per BOE. Revenue less production expense was approximately $437.1 million, before DD&A, exploration, G&A, derivatives and other expenses. Net derivative losses were $370.3 million in Q2 and $715.0 million for the half year, substantially affecting reported results. Q2 operating loss was $180.6 million.
At June 30, cash was zero. Total debt was $2.192 billion, down from $2.214 billion at December 31, 2020; debt comprised $52.5 million drawn on the revolving facility and $2.140 billion of Senior Notes, net. The $1.1 billion borrowing base and lender commitments left $1.048 billion of available capacity at June 30. Stockholders’ equity was $1.553 billion. The company reported compliance with debt covenants.
Changes versus comparable periods
- Q2 revenue increased 232% from $169.8 million in Q2 2020. For the first half, revenue rose 88% from $524.0 million in 2020.
- Q2 net loss widened from $89.3 million in Q2 2020, while first-half net loss improved from $501.1 million in 2020, when the company recorded $956.7 million of proved-property impairment.
- First-half operating cash flow increased to $402.0 million from $332.5 million. Management attributed the increase mainly to working-capital timing; higher production receipts were partly offset by increased cash derivative settlements.
- First-half production declined 4% year over year to 124.2 MBOE/day. Midland Basin production rose 5%, while South Texas production fell 19%.
- Q2 production rose 22% sequentially, partly recovering from February’s Texas freeze and power outages. Sequential Q2 revenue increased 33% and net loss narrowed from $251.3 million in Q1.
- Q2 2021 included a $370.3 million derivative loss, versus $167.2 million in Q2 2020. The 2020 comparison included a $227.3 million Q2 gain on debt extinguishment; Q2 2021 recorded a $2.1 million loss.
Outlook, commentary and risks
- 2021 capital-program budget: $650–$675 million, expected to be funded by operating cash flow, with revolver borrowings or other financing also possible. Management said it would adjust activity as conditions warrant.
- Management expected two to three Midland Basin drilling rigs and one to two completion crews at times for the rest of 2021; South Texas plans called for one to two rigs and one completion crew, focused on the Austin Chalk.
- Management expected full-year LOE per BOE to increase from 2020, transportation cost per BOE to decrease, G&A to remain relatively flat, and DD&A to decrease. Based on commodity assumptions as of July 21, management did not expect material property impairments in Q3.
- In June, the company issued $400 million of 6.5% Senior Notes due 2028 and used proceeds to repurchase or redeem 2022 and 2024 notes. The 2021 convertible notes matured July 1, 2021; $65.5 million was repaid at par using revolver borrowings.
- Commodity prices, COVID-19 developments, production volumes, service costs and derivatives remain significant uncertainties. Derivative contracts reduce some price exposure but can limit upside; their fair value was a net liability of $616.5 million at June 30.
- Commitments included $16.1 million for drilling rigs, with $9.7 million of potential early-termination fees; up to $45.1 million of liquidated damages if minimum drilling and completion requirements were missed by March 31, 2022; and a new lease with an estimated $26.1 million obligation through 2033. Management expected to meet these commitments.
- Management said pending litigation was not expected to have a material effect, but identified an ongoing Texas case with trial scheduled for November 8, 2021. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How commodity prices and derivative settlements affect realized cash flows, reported earnings and the sizable derivative liability.
- Whether operating cash flow can fund the remaining 2021 capital program while supporting debt reduction and liquidity.
- The impact of the October 1, 2021 borrowing-base redetermination and ongoing compliance with credit-facility covenants.
- Production trends by basin, particularly South Texas declines, and whether planned Austin Chalk development delivers expected returns.
- The resolution and potential financial exposure of the pending litigation and contractual drilling commitments.
- Share-count changes: 5.9 million shares were issued through cashless warrant exercise in Q2; assess dilution alongside future equity compensation and the status of any repurchase plans.