SM Energy Company — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results. SM Energy is an independent oil and gas producer focused on onshore North America, with operations primarily in the Permian Basin and South Texas.
Key financial and operating metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Oil, gas and NGL production revenue | $340.5 million | $382.9 million |
| Net income (loss) | $(177.6) million | $317.4 million |
| Diluted earnings (loss) per share | $(1.58) | $2.81 |
| Cash provided by operating activities | $118.5 million | $140.1 million |
| Capital expenditures (cash basis) | $249.3 million | $301.5 million |
| Adjusted EBITDAX (non-GAAP) | $186.5 million | $210.2 million |
- Production averaged 118.7 MBOE per day, up 5% year over year; Permian production rose 34% while Rocky Mountain production ceased following 2018 divestitures.
- Realized price before derivative settlements was $31.86 per BOE, down 16%. Production expense was $121.3 million; DD&A and asset-retirement accretion were $177.7 million. Per-BOE DD&A rose 29% to $16.63, and lease operating expense rose 5% to $5.20.
- Net cash, cash equivalents and restricted cash fell $78.0 million during the quarter to $14,000. The company reported $46.5 million drawn on its revolving credit facility at March 31.
- Debt included $2.477 billion principal of senior notes, $172.5 million of convertible notes, and $46.5 million on the revolver—approximately $2.70 billion in gross principal. Interest expense was $38.0 million, down from $43.1 million.
- At March 31, available revolver capacity was $953.5 million. An April 18 amendment increased lender commitments to $1.2 billion and the borrowing base to $1.6 billion; as of April 25, available capacity was $1.16 billion. The company reported compliance with debt covenants.
Material changes and comparison
- Revenue declined 11% year over year despite higher total production, primarily because realized commodity prices fell. Permian growth was partly offset by the absence of Rocky Mountain production and lower South Texas volumes.
- The company reported a $177.1 million net derivative loss, principally a $172.1 million non-cash mark-to-market loss as oil prices strengthened. Cash derivative settlements were a $5.0 million loss, versus a $24.5 million loss in Q1 2018.
- The large year-over-year earnings swing also reflects Q1 2018’s $385.4 million net gain on divestiture activity, mainly from the Powder River Basin sale. Q1 2019 divestiture gain was negligible.
- Operating cash flow decreased 15%. Capital expenditures were lower, but Q1 2018 investing cash flow benefited from substantial divestiture proceeds.
Outlook, commentary and risks
- 2019 capital spending guidance, excluding acquisitions, was $1.00–$1.07 billion, with approximately 80% of drilling and completion capital allocated to the Midland Basin. Management expected 2019 production and oil’s share of the product mix to increase slightly versus 2018; South Texas production was expected to remain broadly flat.
- Management said expected operating cash flow, year-end 2018 cash and revolver borrowings should fund the capital program, while prioritizing improved credit metrics and financial flexibility. The company did not plan share repurchases during the remainder of 2019; the quarterly dividend was $0.05 per share.
- Management expected commodity prices to remain volatile, gas prices to stay near current levels in the near term, and Midland Basin gas realizations to be affected by midstream force majeure events and tight takeaway capacity. Derivatives mitigate, but do not eliminate, price and basis risk.
- Operating lease liabilities recognized on adoption of lease accounting were approximately $50 million. Q1 total lease costs were $175.3 million, including short-term and variable costs. Drilling and completion service commitments totaled $105.3 million as of filing; terminating all such contracts would entail $50.0 million in fees. Management did not expect stated potential contract penalties to be incurred.
- Management did not expect pending litigation to have a material effect; the filing reported no material changes to previously disclosed risk factors. Key risks include commodity-price volatility, reserve and drilling uncertainty, service and takeaway availability, borrowing-base changes, leverage and covenant compliance.
Important facts for investors to verify
- How much of the reported loss and future earnings volatility is driven by non-cash derivative marks versus realized hedge settlements, and how the hedge portfolio affects realized prices.
- Whether Midland Basin growth and the guided capital program generate sufficient operating cash flow to fund investment while improving leverage and preserving liquidity.
- The effect of gas takeaway constraints and regional price differentials on South Texas and Permian realizations, alongside expected production growth.
- Revolver availability and covenant headroom following borrowing-base redeterminations, particularly if commodity prices weaken or capital needs change.