SM Energy Company — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2015. SM Energy is an independent onshore North American oil, gas, and NGL producer. Financial statements are unaudited.
Financial and operating performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Oil, gas, and NGL production revenue | $366.6 million | $617.2 million | $1,201.2 million | $1,895.0 million |
| Net income (loss) | $3.1 million | $208.9 million | $(107.5) million | $334.3 million |
| Diluted earnings (loss) per share | $0.05 | $3.05 | $(1.59) | $4.90 |
| Adjusted EBITDAX (non-GAAP) | $259.4 million | $406.2 million | $908.5 million | $1,228.6 million |
| Cash from operating activities | Not presented separately | Not presented separately | $784.8 million | $1,075.1 million |
- Q3 average production rose 22% year over year to 174.5 thousand BOE per day; nine-month average production rose 27% to 180.6 thousand BOE per day. Growth was driven mainly by the Eagle Ford and Bakken/Three Forks.
- Despite higher volumes, production revenue fell 41% in Q3 and 37% year to date. Realized price per BOE before derivative settlements declined 51% in Q3 and 50% year to date.
- Q3 operating income was $32.1 million, versus $357.0 million a year earlier. Operating expenses included a $212.3 million derivative gain; the gain is sensitive to commodity-price movements and should not be treated as recurring production margin.
- Q3 production expense was $184.6 million, up 3%; DD&A and asset-retirement accretion were $243.9 million, up 33%. The company recorded $56.0 million of proved-property impairment in Q3 and $124.4 million year to date.
Cash, debt, and liquidity
- At September 30, cash was $0.2 million; current assets were $537.7 million and current liabilities $485.2 million. Current assets included $347.3 million of current derivative assets.
- Debt comprised $2.350 billion of senior notes and $184.0 million drawn on the revolving credit facility, or approximately $2.534 billion in total. The comparable December 31, 2014 balances were $2.200 billion and $166.0 million.
- At September 30, reported available revolver capacity was $1.316 billion. After quarter-end, lenders reduced the borrowing base from $2.4 billion to $2.0 billion; lender commitments remained $1.5 billion. The company reported covenant compliance through the filing date.
- Nine-month investing cash use was $934.8 million, including $1.262 billion of capital expenditures and $335.1 million of property-sale proceeds. Financing provided $150.1 million. Cash ended the period at $0.2 million.
- In May, SM Energy issued $500 million of 5.625% notes due 2025 and used proceeds primarily to tender and redeem its $350 million 2019 notes, repay revolver borrowings, and for general purposes. It recorded a $16.6 million debt-extinguishment loss.
Changes, outlook, and notable items
- Mid-Continent assets were sold in Q2 for $316.5 million of proceeds, with an estimated net gain of $108.4 million, subject to post-closing adjustments. The company expected a separate Permian asset sale for approximately $26 million to close in Q4, subject to customary conditions.
- Management expected 2015 capital spending of approximately $1.28 billion; approximately $1.10 billion had been incurred through September on its stated exploration-and-development basis. It intended to keep capital expenditures near adjusted EBITDAX to limit debt growth.
- Management expected full-year 2015 production to exceed 2014 levels, but anticipated production would decline in Q4 from Q3. The company planned four operated Eagle Ford rigs and two Bakken/Three Forks rigs for the rest of 2015; it had released its last operated Permian rig and expected to resume development there in early 2016.
- Commodity hedges provided substantial support: Q3 settlement effects were approximately +$20.02 per oil barrel, +$0.45 per gas Mcf, and +$0.94 per NGL barrel. The company had contracts extending through 2020. Management cautioned that cash flow and adjusted EBITDAX would be materially affected as contracts settle if prices remain low or fall further.
- Low commodity prices and reduced investment led to drilling curtailments, asset impairments and write-downs, rig termination costs, and lower borrowing-base capacity. Management said it expected no material Q4 proved-property impairment based on October 21 price assumptions, but further price declines could prompt reserve revisions or additional impairment.
- A gathering agreement amendment could require deficiency payments if minimum volumes are missed; potential undiscounted payments were approximately $142.7 million for 2017–2022 if no product were delivered. Management did not expect material shortfalls.
- Other items include approximately $9.5 million of Tulsa office exit costs year to date and $5.8 million of net lease obligations through 2022; $4.6 million accrued for royalty claims on certain Federal and Indian leases; and planned pension-plan closure to new participants effective December 31, 2015. Management said pending litigation and claims were not expected to have a material effect.
- Disclosure controls were judged effective at a reasonable assurance level. The 2015 ERP implementation materially affected internal control processes, but management reported no adverse impact.
Important facts for investors to verify
- Whether oil, gas, and NGL prices, realized differentials, and hedge settlements sustain operating cash flow as hedge contracts roll off.
- Capital spending against cash generation, production trends, and management’s plan to limit debt growth.
- Liquidity after the borrowing-base reduction, covenant headroom, and the impact of any further commodity-price or reserve-value decline.
- Final proceeds and gains from divestitures, including post-closing adjustments and completion of the planned Permian sale.
- Potential asset impairments, gathering-volume deficiency exposure, and the resolution of royalty claims.