SM Energy Company (10-Q) — Quarter Ended June 30, 2022
Business context and reporting period
SM Energy is an independent oil and gas producer operating in Texas, primarily in the Midland Basin and South Texas. This unaudited filing covers the second quarter and first six months of 2022. Amounts below are in U.S. dollars; financial statement amounts are in millions unless otherwise indicated.
Key financial and operating metrics
| Metric | Q2 2022 | Six months 2022 |
|---|---|---|
| Oil, gas and NGL production revenue | $990.4 | $1,849.1 |
| Net income | $323.5 | $372.2 |
| Diluted earnings per share | $2.60 | $3.00 |
| Net cash provided by operating activities | $542.6 | $884.7 |
| Capital expenditures, cash basis | Not separately stated for Q2 | $365.7 |
| Adjusted EBITDAX, non-GAAP | $559.7 | $1,084.3 |
| Average net daily production | 146.6 MBOE/day | 149.9 MBOE/day |
At June 30, cash and cash equivalents were $267.1 million. Senior Notes, net, were $1,570.6 million; there were no revolving-credit borrowings. The existing facility had $1.094 billion of available capacity after letters of credit. Total current assets were $633.1 million and current liabilities were $1,013.8 million. The company reported a $434.8 million net derivative liability.
Changes versus comparable periods
- Q2 production revenue rose 76% from $562.6 million in Q2 2021; net income improved from a $223.0 million loss to $323.5 million of income. Higher commodity prices drove much of the revenue increase.
- For the first half, production revenue increased 88% year over year, while average daily production increased 21% to 149.9 MBOE. Q2 daily production declined 4% sequentially, mainly because of the timing of well completions.
- First-half operating cash flow increased to $884.7 million from $402.0 million. Cash capital expenditures were similar to the prior-year period: $365.7 million versus $370.2 million.
- Q2 production expense was $165.6 million, up 32% year over year; expense per BOE was $12.41, up 18% sequentially. Management cited higher production taxes and lease operating costs.
- First-half net derivative loss was $522.8 million, compared with $715.0 million in the prior-year period. The derivative settlement loss was $408.8 million. These losses offset part of the benefit from higher realized commodity prices.
Debt, outlook, risks and unusual items
- The company redeemed all $446.7 million of its 10.0% Senior Secured Notes due 2025 in June, paying $480.2 million including premium, plus accrued interest. The redemption resulted in a $67.2 million extinguishment loss. It also redeemed $104.8 million of 5.0% Senior Notes due 2024 in February.
- On August 2, 2022, after quarter-end, SM Energy entered a new revolving credit agreement: $1.25 billion of initial lender commitments, a $2.5 billion initial borrowing base, and scheduled maturity in 2027 subject to specified conditions. The company reported covenant compliance through the filing date.
- 2022 capital program guidance was $870–$900 million, increased from the original $750 million estimate due to inflation and adjustments to support continuous, efficient operations. Management expected operating cash flow to fund the program, while retaining borrowing and other financing as alternatives.
- Management expected full-year 2022 lease operating expense per BOE to increase slightly, transportation costs to rise, and DD&A and G&A to decrease versus 2021. It did not expect material property impairments in Q3 based on commodity-price assumptions as of July 20.
- Management cited commodity-price volatility, the Russia-Ukraine conflict, COVID-19 uncertainty, inflation, supply-chain disruptions and rising interest rates as risks that could affect costs, prices and activity. Derivatives reduce some near-term price exposure but can limit gains when prices rise.
- Commitments include $24.9 million of drilling-rig contracts through Q3 2023; termination as of the filing date would trigger $17.4 million in fees. A drilling and completion agreement could entail liquidated damages up to $92.3 million if minimum footage requirements are not met by March 2024; management expected to meet them. Management did not expect pending ordinary-course litigation to have a material effect.
Important facts for investors to verify
- Whether production volumes, commodity prices and the elevated capital budget translate into sustained free cash flow and continued debt reduction.
- How derivative settlements and mark-to-market losses affect realized cash returns; review the hedge volumes, prices and maturities disclosed through 2025.
- Post-quarter liquidity under the new credit agreement, including borrowing-base redeterminations, covenant headroom and the facility’s maturity provisions.
- Actual capital spending versus the $870–$900 million plan, and performance and costs in the Midland Basin and South Texas programs.
- Progress against drilling commitments and exposure to the stated potential termination fees and liquidated damages.