Business context and reporting period
SM Energy Company is an independent onshore North American oil and gas producer, focused on the Eagle Ford and Bakken/Three Forks. This unaudited Form 10-Q covers the three months ended March 31, 2015; comparisons are with Q1 2014 unless noted.
Financial and operating results
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Oil, gas and NGL production revenue | $393.3 million | $623.1 million |
| Total operating revenues and other income | $365.9 million | $632.7 million |
| Operating income (loss) | $(54.4) million | $128.6 million |
| Net income (loss) | $(53.1) million; $(0.79) per diluted share | $65.6 million; $0.96 per diluted share |
| Net cash from operating activities | $283.9 million | $299.7 million |
| Net cash used in investing activities | $(534.5) million | $(345.5) million |
| Adjusted EBITDAX (non-GAAP) | $311.9 million | $398.9 million |
Production rose 35% to 186.4 thousand BOE per day, while realized prices before derivative settlements fell 53% per BOE to $23.44. Oil, gas and NGL revenue declined 37% despite higher volumes. Production expense increased 20% to $196.2 million. The filing does not present a conventional operating-margin figure.
Cash and cash equivalents were $22,000 at quarter-end. Current assets were $669.6 million and current liabilities $696.3 million. Debt comprised $2.2 billion of senior notes and $416.5 million drawn on the revolving facility; the company also reported $808,000 of letters of credit and $1.083 billion of available facility capacity at March 31. The borrowing base was reaffirmed at $2.4 billion on April 6. Q1 net facility borrowings were approximately $250.5 million.
Changes versus the prior comparable period
- Net results shifted from profit to loss as commodity-price declines outweighed 35% production growth.
- Derivative results moved from a $97.7 million loss to a $154.2 million gain, largely reflecting period-end fair-value changes as strip prices fell. Cash derivative settlements were $160.1 million.
- Investing cash outflow increased by $189.0 million, principally reflecting higher capital spending; operating cash flow decreased 5%.
- The company recorded $55.5 million of proved-property impairment, $11.6 million of unproved-property abandonment and impairment, and a $35.8 million loss on divestiture activity. The latter included a $30.0 million write-down of Mid-Continent assets held for sale.
Outlook, risks and unusual items
- Management expected 2015 capital spending of approximately $1.2 billion, including $1.0 billion for drilling and completions; 80–85% of drilling and completion spending was planned for the Eagle Ford and Bakken/Three Forks. Annual production was expected to rise from 2014, but quarterly production to decline through 2015.
- Management planned to scale back rigs and defer some completions amid low prices, while maintaining flexibility and focusing on core assets. Funding was expected from operating cash flow, planned divestitures and facility borrowings, with capital-market access or further asset sales possible.
- After quarter-end, the company agreed to sell its Mid-Continent assets for approximately $324 million, subject to customary adjustments and closing conditions, with closings expected in Q2. It anticipated approximately $10 million of Tulsa office exit and disposal costs; $3.5 million had been recorded by March 31.
- Commodity-price volatility, lower prices, capital access, reserve replacement, asset impairments, leverage and borrowing-base changes were identified risks. Derivatives mitigate some near-term exposure but may limit realized prices; potential new margin rules could increase costs or collateral needs.
- The company reported compliance with debt covenants and no material changes to previously disclosed legal proceedings or risk factors. It implemented a new ERP system effective January 1 and reported disclosure controls effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether the Mid-Continent asset sales closed, at what proceeds, and how proceeds affected debt and liquidity.
- Actual capital spending, production trends and realized prices against management’s 2015 outlook.
- Facility borrowing capacity and covenant headroom following redeterminations, divestitures and commodity-price changes.
- The cash-flow and earnings effects of derivative settlements versus non-cash mark-to-market gains or losses.
- Subsequent impairment charges, Tulsa exit costs, and any changes in planned rig activity or completion deferrals.