SM Energy Company — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. SM Energy is an independent oil, gas, and NGL producer operating in the Midland Basin and South Texas. Financial statements are unaudited.
Key financial and operating metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Oil, gas, and NGL revenue | $559.6 million | $570.8 million | Down 2% |
| Income from operations | $178.4 million | $272.0 million | Down 34% |
| Net income | $131.2 million | $198.6 million | Down 34% |
| Diluted EPS | $1.13 | $1.62 | Down 30% |
| Adjusted EBITDAX (non-GAAP) | $409.0 million | $401.4 million | Up 2% |
| Operating cash flow | $276.0 million | $331.6 million | Down 17% |
| Capital expenditures | $332.4 million | $240.7 million | Up 38% |
| Net production | 13.2 MMBOE | 13.2 MMBOE | Approximately flat |
Production averaged 145.1 MBOE per day, down 1% year over year and 5% sequentially, with the sequential decline attributed mainly to timing of well completions. Oil revenue rose 5% year over year, but gas revenue fell 28% and NGL revenue fell 10%. Realized prices per BOE declined 2% year over year. Production expense was $137.4 million, down 3%; per-BOE expense was $10.41, down 4% year over year but up 7% sequentially.
Cash and cash equivalents were $506.3 million at quarter-end, versus $616.2 million at December 31, 2023. Current assets were $793.0 million and current liabilities $536.1 million. Senior Notes had $1.585 billion principal outstanding ($1.576 billion carrying value); no revolver borrowings were outstanding. Available revolver capacity was $1.248 billion, net of $2.5 million of letters of credit. Fixed-rate debt principal was approximately $1.6 billion. The company reported $53.6 million of cash used in financing activities, including $32.8 million of share repurchases and $20.8 million of dividends.
Operating cash flow was below capital expenditures, resulting in a $56.4 million gap before financing, funded from cash on hand. Cash declined by $109.9 million during the quarter. Working capital changes reduced operating cash flow by $97.7 million. Interest expense was $21.9 million; the effective tax rate was 19.6%.
Material changes and notable items
- Compared with Q1 2023, revenue and net income declined despite essentially unchanged production, reflecting weaker realized gas and NGL prices and a $28.1 million net derivative loss, versus a $51.3 million derivative gain in the prior-year quarter.
- Operating cash flow fell by $55.6 million year over year, primarily due to lower cash receipts net of transportation costs and production taxes and higher cash G&A payments, partly offset by lower cash payments on settled derivatives.
- Derivative settlements generated a $13.3 million gain. The balance-sheet net fair value of commodity derivatives declined to a $15.6 million asset from $57.1 million at year-end.
- Q1 repurchases retired approximately 712,000 shares for $32.8 million, excluding fees and excise taxes. The quarterly dividend was $0.18 per share, up from $0.15 a year earlier. About $182.1 million remained under the $500 million repurchase authorization through December 31, 2024.
- Exploration expense included costs related to one well deemed non-commercial.
Outlook, risks, and contingencies
- Management expects 2024 capital expenditures of $1.14–$1.18 billion, excluding acquisitions, lower than its original expectation due primarily to capital efficiencies and lower-than-expected costs. The program is expected to be funded with operating cash flow; management says liquidity is sufficient under the current commodity-price environment.
- For the remainder of 2024, management anticipates four Midland Basin drilling rigs and one to two completion crews, and two South Texas drilling rigs and an average of one completion crew. Full-year LOE per BOE is expected to increase; transportation expense per BOE to decrease; DD&A per BOE to remain flat; and G&A per BOE to remain relatively flat. Management expects weighted-average interest rates to be relatively flat versus 2023.
- Management expects Midland Basin gas realized prices to be affected by residue pipeline capacity constraints in Q2 and Q3 2024, partly mitigated by derivatives. Commodity prices remain exposed to geopolitical events, OPEC+ production decisions, shipping disruptions, supply-demand changes, infrastructure constraints, and interest-rate and inflation conditions. Derivatives reduce some downside exposure but may limit gains if prices rise substantially.
- A 10% decline in realized commodity prices, based on Q1 production, would have reduced production revenue by approximately $44.1 million for oil, $6.8 million for gas, and $5.1 million for NGLs; derivative settlements would have offset approximately $11.9 million of the combined decline.
- Drilling-rig commitments totaled $31.3 million through Q1 2025; terminating all contracts at quarter-end would have triggered $19.6 million in fees. Lease drilling and completion requirements could result in liquidated damages of up to $96.0 million by March 31, 2026, assuming no further qualifying activity; management expects to meet the requirements.
- The company reported compliance with debt covenants and no pending litigation expected by management to have a material effect. It reported no material changes to the risk factors in its 2023 Form 10-K. Future dividends remain subject to Board discretion and financial and covenant conditions.
Important facts for investors to verify
- Whether operating cash flow will cover the remaining 2024 capital program and planned shareholder returns, particularly if commodity prices weaken.
- Actual production, realized prices, and Midland Basin gas differentials as pipeline constraints and well-completion timing evolve.
- Execution of the $1.14–$1.18 billion capital plan, including cost assumptions, operational activity, and expected production.
- Derivative coverage, settlement outcomes, and the potential effect of hedges on cash flow under changing commodity prices.
- Upcoming debt maturities, including $349.1 million principal of 5.625% Senior Notes due 2025, alongside liquidity and borrowing-base terms.
- Progress against drilling and completion commitments, and the status of the remaining repurchase authorization and dividend policy.