SM Energy Co. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. SM Energy is an independent oil and gas producer focused on the Midland Basin and South Texas, both in Texas. Financial statements are unaudited.
Financial and operating results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Production revenue | $354.2 million | $340.5 million |
| Operating loss | $481.1 million | $185.3 million |
| Net loss | $411.9 million; $3.64 per diluted share | $177.6 million; $1.58 per diluted share |
| Operating cash flow | $218.1 million | $118.5 million |
| Capital expenditures, cash basis | $139.3 million | $249.3 million |
| Adjusted EBITDAX (non-GAAP) | $286.0 million | $186.5 million |
- Production averaged 135.9 thousand BOE per day, up 14% year over year. Midland Basin production rose 32%; South Texas production fell 5%.
- Oil, gas and NGL prices before derivative settlements declined 7%, 44% and 30%, respectively. Total production revenue nevertheless rose 4% as higher volumes, particularly oil, partly offset lower prices.
- Total production costs were $9.67 per BOE, down 15% year over year. Realized revenue before derivatives was $28.64 per BOE, down 10%.
- Net derivative gain was $545.3 million, including a $471.9 million mark-to-market gain and $73.4 million from settled contracts. The gain substantially offset price pressure in reported results, but much of it was non-cash.
- Impairment expense was $989.8 million, including $956.7 million for South Texas proved properties and related facilities, following lower commodity-price forecasts. This was the principal driver of the larger net loss.
- Cash and cash equivalents were $15,000 at March 31. Operating cash flow less cash capital expenditures was approximately $78.8 million.
Balance sheet, debt and liquidity
- At March 31, total assets were $5.62 billion, total stockholders’ equity was $2.34 billion, and current assets exceeded current liabilities ($625.2 million versus $383.5 million). Current assets included $464.0 million of current derivative assets.
- Debt carrying amounts included $72.0 million drawn on the revolving facility, $2.414 billion of senior notes, and $159.7 million of senior convertible notes. The convertible notes had $172.5 million principal outstanding and mature July 1, 2021.
- At March 31, the credit facility commitment was $1.2 billion, with $72.0 million drawn and $1.128 billion available. On April 29, after quarter-end, lenders reduced the borrowing base and commitments to $1.1 billion; with $93.5 million drawn, reported availability was $1.0065 billion.
- The company repurchased $40.7 million principal of its 2022 senior notes for $28.3 million cash and recorded a $12.2 million extinguishment gain. It also reduced revolver borrowings by $50.5 million during the quarter.
- Management reported compliance with debt covenants through filing. Credit-agreement limits include a maximum funded-debt-to-trailing adjusted EBITDAX ratio of 4.00 to 1.00 and a minimum adjusted current ratio of 1.0 to 1.0.
Material changes and outlook
- The COVID-19 pandemic and the Russia–Saudi Arabia oil-market dispute sharply weakened demand and increased supply, driving extreme commodity-price volatility. Management said impacts could intensify and could not reliably estimate their duration or full effect.
- The 2020 capital program, initially budgeted at $825–$850 million, was expected to be reduced by approximately 20%. Management expected full-year production to decline compared with 2019 and planned to prioritize its most economic oil projects. Activity plans remained subject to market conditions.
- Management expected significant 2020 oil production coverage from derivatives at prices of at least $55 per barrel, but cautioned that curtailments, storage constraints or delivery disruptions could prevent the company from producing or delivering volumes needed to realize hedge value.
- After quarter-end, the credit amendment permitted up to $900 million of second-lien debt to refinance unsecured senior debt at no more than par before the next scheduled redetermination. It also reduced the annual dividend limit from $50 million to $12 million. The next borrowing-base redetermination was scheduled for October 1, 2020.
- The quarterly dividend was $0.01 per share, versus $0.05 a year earlier. The company said it did not plan common-stock repurchases for the rest of 2020. Three major credit-rating agencies had recently downgraded the company.
- Other exposures include the possibility of additional property impairments, production curtailments or shut-ins, reduced storage and transport access, counterparty and financing risks, and pressure on NYSE listing compliance. A Texas Railroad Commission production-proration proposal was under consideration but had not been implemented by filing.
- Drilling-rig commitments totaled $22.3 million after amendments; termination as of filing would have triggered $12.9 million in fees. A separate drilling-footage agreement carried potential liquidated damages up to $42 million if minimum requirements were not met by March 31, 2021; management expected to meet them. Management did not expect pending litigation to materially affect results, financial position or cash flows.
Important facts for investors to verify
- Whether the reduced borrowing base, future redeterminations, covenant headroom and any second-lien financing provide adequate liquidity through a prolonged low-price period.
- How much of the derivative gain is realized in cash, and whether storage, curtailments or delivery constraints limit the ability to fulfill hedged production volumes.
- Whether lower prices, reserve revisions or changed development plans lead to further impairments or affect the value supporting borrowing capacity.
- Actual capital spending, production, operating costs and debt reduction relative to management’s revised plans and full-year production outlook.
- Whether the company meets the minimum drilling-footage requirements and avoids rig-termination or other contractual penalties.