SM Energy Company — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports fourth-quarter 2013 results. SM Energy is an onshore North American oil and gas exploration and production company focused on oil and liquids-rich resource plays, particularly the Eagle Ford and Bakken/Three Forks.
Financial and operating highlights
| Metric | 2013 | 2012 |
|---|---|---|
| Total operating revenues and other income | $2.293 billion | $1.505 billion |
| Oil, gas and NGL production revenue | $2.200 billion | $1.474 billion |
| Operating income (loss) | $368.3 million | $(20.0) million |
| Net income (loss) | $170.9 million; $2.51 diluted EPS | $(54.2) million; $(0.83) diluted EPS |
| Cash from operating activities | $1.339 billion | $922.0 million |
| Production | 48.3 MMBOE; 132.4 MBOE/day average | 36.5 MMBOE; 99.7 MBOE/day average |
| Proved reserves at year-end | 428.7 MMBOE | 293.4 MMBOE |
| Capital spending and acquisitions | $1.554 billion cash capital expenditures; $1.721 billion costs incurred for oil and gas activities | $1.508 billion cash capital expenditures |
Production grew 32% and average daily production rose 33%, led by Eagle Ford development. Higher volumes and improved realized prices lifted production revenue 49%; realized price per BOE increased 13% to $45.50. Per-BOE lease operating expense declined 2% to $4.82, while transportation costs rose 40% to $5.34 and production taxes rose 10% to $2.19.
Year-end total assets were $4.705 billion and stockholders’ equity was $1.607 billion. Working capital was positive $8.4 million, compared with a $201.0 million deficit in 2012. Cash and cash equivalents were $282.2 million, including a large balance following divestitures; an additional $96.7 million was restricted cash. Long-term debt was $1.600 billion, all in senior notes; no credit-facility borrowings were outstanding. The company reported $1.299 billion of available capacity under its $1.3 billion credit commitment and was in compliance with covenants.
Operating cash flow increased 45%. Investing activities used $1.193 billion, including $424.8 million of net proceeds from property sales; financing activities provided $130.7 million. The company reported non-GAAP EBITDAX of $1.477 billion, up from $1.032 billion. Proved-reserve PV-10 was $5.529 billion and the GAAP standardized measure was $4.009 billion; neither measure represents current market value.
Fourth-quarter results
Fourth-quarter total operating revenues and other income were $636.7 million, operating income was $40.3 million, and net income was $7.0 million ($0.10 per diluted share). Production was 13.2 MMBOE, or an average 143.8 MBOE/day. The quarter included $110.9 million of proved-property impairment expense.
Material changes and notable items
- Net income swung from a 2012 loss to profit in 2013, reflecting growth in production and realized prices, lower proved-property impairments, and a gain on divestitures. 2013 included a $28.0 million net divestiture gain versus a $27.0 million loss in 2012.
- Proved reserves increased 46% to 428.7 MMBOE; drilling added 195.5 MMBOE, primarily in the Eagle Ford and Bakken/Three Forks. Reserves were 54% liquids, but 51% were proved undeveloped.
- The company sold 18.2 MMBOE of reserves and received $445.8 million in gross proceeds, principally from the December sale of Anadarko Basin assets. Reported net cash sale proceeds were $424.8 million.
- Proved-property impairment was $172.6 million and unproved-property abandonment and impairment was $46.1 million. The proved impairments related to Mississippian assets, Olmos dry-gas properties and other underperforming assets.
- SM Energy issued $500 million of 5.0% senior notes due 2024 and used the net proceeds to reduce revolving-credit borrowings. Senior-note debt rose from $1.1 billion to $1.6 billion, while year-end revolver borrowings fell from $340 million to zero.
- A $23.1 million expense related to a clarification of royalty-payment provisions on certain South Texas acreage was included in other operating expense; $9.6 million remained payable at year-end.
Outlook, risks and contingencies
- Management planned a 2014 capital program of approximately $1.9 billion, including about $1.7 billion for drilling and completions; approximately 85% of drilling capital was expected to go to the Eagle Ford, Bakken/Three Forks and Permian shale programs. Management anticipated continued production growth on retained properties.
- Management expected 2014 per-BOE transportation costs and lease operating expense to increase, principally with Eagle Ford growth and higher ad valorem taxes; it expected per-BOE G&A and DD&A to decline. The Mitsui carry of 90% of certain non-operated Eagle Ford drilling and completion costs was expected to be exhausted in early 2014.
- The 2014 capital program was expected to be funded by operating cash flow, divestiture proceeds and, if needed, the credit facility; management also retained the option to access capital markets. The filing cautions that commodity-price declines could reduce cash flow and borrowing capacity.
- Commodity prices, reserve-estimate uncertainty, drilling performance, service availability, and gathering and takeaway capacity are significant business risks. The company had fixed delivery commitments of 1,807 Bcf of natural gas and 53 MMbbl of oil, with deficiency payments possible; management did not expect material shortfalls.
- Three customers represented approximately 54% of 2013 production revenue: Regency Gas Services (26%), Anadarko (16%) and Plains Marketing (12%). Anadarko marketing agreements carry throughput commitments for up to 10 years and expose the company to certain counterparty-performance risks.
- Hydraulic-fracturing, water, environmental and climate-related regulation could increase costs, delay operations or constrain development. The filing also identifies risks from uninsured environmental events and infrastructure interruptions.
- Pending matters include an Oklahoma royalty class action for which the company could not estimate potential impact, and litigation seeking enforcement or damages under a Pennsylvania asset sale. The company stated that other pending proceedings were not expected to have a material adverse effect. The 2013 financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Investor verification points
- Review the fourth-quarter impairment and other items affecting the low quarterly profit, including the $110.9 million proved-property impairment.
- Assess the quality, development schedule and funding needs of proved undeveloped reserves: 219.9 MMBOE, with estimated future development costs of approximately $1.2 billion in 2014, $980 million in 2015 and $355 million in 2016.
- Reconcile capital spending measures: $1.554 billion of cash capital expenditures versus $1.721 billion of accrual-based costs incurred for oil and gas activities.
- Monitor execution and funding of the $1.9 billion 2014 capital plan as the Mitsui carry ends, alongside transportation-cost trends and production growth.
- Check the April 2014 borrowing-base redetermination, credit-facility covenant headroom, debt service requirements and sensitivity to commodity prices.
- Track customer concentration, contractual delivery obligations, the Oklahoma royalty action, and final post-closing adjustments for 2013 divestitures.