SM Energy Company — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Unaudited results; comparisons are with the same 2012 periods unless stated otherwise. SM Energy is an onshore North American oil and gas producer focused on oil- and liquids-rich plays, including the Eagle Ford, Bakken/Three Forks, and Permian.
Financial and operating results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Oil, gas and NGL production revenue | $601.8 million | $373.9 million | $1,605.9 million | $1,049.1 million |
| Total operating revenue | $613.1 million | $379.0 million | $1,656.6 million | $1,060.8 million |
| Income (loss) from operations | $137.5 million | $(42.8) million | $328.0 million | $65.8 million |
| Net income (loss) | $70.7 million | $(38.3) million | $163.9 million | $12.9 million |
| Diluted EPS | $1.04 | $(0.58) | $2.41 | $0.19 |
| Average daily production | 138.8 MBOE | 103.3 MBOE | 128.6 MBOE | 96.3 MBOE |
| EBITDAX (non-GAAP) | $410.4 million | $260.9 million | $1,081.8 million | $733.6 million |
Q3 production increased 34%, and production revenue rose 61%, reflecting higher volumes and a 20% increase in realized price per BOE. For the first nine months, production grew 33% and revenue increased 53%. Q3 realized prices were $96.44/Bbl for oil, $3.81/Mcf for gas, and $34.01/Bbl for NGLs. Q3 net margin was approximately 11.5% of total operating revenue, compared with a loss in the prior-year quarter.
Production expense rose 55% in both the quarter and year-to-date periods. Transportation expense was a particular pressure: per-BOE transportation cost increased 38% in Q3 and 43% year to date, which management attributed mainly to Eagle Ford mix, compression and fuel costs, and contract terms. Per-BOE lease operating expense decreased 2% in both periods; per-BOE DD&A decreased 24% in Q3 and 11% year to date.
Cash flow, debt and liquidity
- Nine-month cash flow: Operating cash flow was $1,000.9 million, up 53%. Investing cash outflow was $1,166.4 million, including $1,121.4 million of capital expenditures and $62.0 million of property acquisitions. Financing cash inflow was $159.8 million. Ending cash was $0.2 million.
- Capital spending: Cash expenditures for exploration and development and proved and unproved property acquisitions totaled approximately $1.2 billion in the first nine months. The company expected its 2013 capital budget to be $1.65 billion, with $1.24 billion for development.
- Debt: At September 30, revolving-credit borrowings were $28 million and senior notes totaled $1.6 billion, including $500 million of 5.0% notes due 2024 issued in May. Total stated debt was approximately $1.628 billion. The notes’ carrying amounts are reported at historical value.
- Available borrowing: Credit-facility borrowing base was increased to $2.2 billion in September; lender commitments were $1.3 billion. Available capacity was $1,271.2 million at September 30 and $1,240.2 million on October 23. The facility matures April 12, 2018.
- The company reported compliance with debt covenants; at September 30, its debt-to-EBITDAX ratio was 1.2 against a maximum of 4.0, and its adjusted current ratio was 2.6 against a minimum of 1.0. It reported $1.6 billion of fixed-rate debt and $28 million of floating-rate debt.
Material changes, outlook and risks
- Q3 performance benefited chiefly from Eagle Ford development; that region supplied 64% of quarterly production. Management expected production to continue increasing and planned continued development in the Eagle Ford, Bakken/Three Forks and Permian. More than 90% of development capital was allocated to those programs.
- Management expected remaining 2013 capital spending to be funded with operating cash flow and divestiture proceeds, with credit-facility borrowing available for any shortfall. It said the Mitsui carry was expected to continue through 2013 and into the first half of 2014; approximately $493.9 million of the original $680 million carry had been spent by September 30.
- Commodity prices remain a key uncertainty. Management cited potential near-term pressure on NGL pricing from supply growth, ongoing gas-supply pressure, and volatility in oil markets. Derivatives partially mitigate price exposure but can limit upside; Q3 recorded a $39.9 million derivative loss, while nine-month results included a $14.7 million derivative gain. The company had oil, gas and NGL contracts extending through Q2 2018.
- Assets held for sale were $400.4 million at September 30, with a related $25.3 million asset-retirement obligation. Planned sales in the Mid-Continent and Rocky Mountain regions were subject to closing conditions. The company recorded $61.7 million of proved-property impairment in the first nine months and $10.1 million of held-for-sale write-downs.
- Other operating expenses and accrued liabilities included $17.8 million for ongoing discussions about royalty provisions on certain South Texas and Gulf Coast leases. A separate Oklahoma royalty class action remains unresolved; the company said it could not estimate the action’s financial impact.
- Marketing agreements entered into in Q3 carry throughput commitments of up to 10 years. If no product were delivered, aggregate deficiency payments could total approximately $265.8 million. A new office lease has $12.9 million of minimum payments over its initial 12-year term.
- The IRS proposed disallowing $4.6 million of research-and-development tax credits for 2007–2010; the company appealed and maintains it is entitled to the credits. Management described ordinary-course litigation and claims as not expected to have a material effect, while noting that the Oklahoma class-action impact cannot yet be estimated.
- No formal earnings or production-per-share guidance was provided. Management’s outlook statements are forward-looking and subject to commodity-price, operating, drilling, service-provider, infrastructure, financing, regulatory and litigation risks.
Important facts for investors to verify
- Whether production growth and the $1.65 billion 2013 capital plan were achieved, and how much was funded by operating cash flow, divestitures, credit borrowings and the Mitsui carry.
- Current borrowing-base capacity, covenant headroom and debt levels, particularly after subsequent asset sales or changes in commodity prices.
- Closing status and proceeds for the $400.4 million of assets held for sale, and any further impairments or changes to the estimated value.
- Developments in the Oklahoma royalty case, the South Texas lease royalty discussions, and the disputed IRS tax credits.
- Actual exposure under gathering, transportation and processing commitments, and the impact of rising transportation costs and derivative settlements on realized cash flows.