SM Energy Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. SM Energy is an independent onshore North American oil, gas, and NGL exploration and production company. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Oil, gas, and NGL production revenue | $211.8 million | $393.3 million |
| Net loss | $347.2 million; $5.10 per diluted share | $53.1 million; $0.79 per diluted share |
| Adjusted EBITDAX (non-GAAP) | $182.3 million | $311.9 million |
| Cash from operating activities | $118.3 million | $283.9 million |
| Cash used in investing activities | $189.3 million | $534.5 million |
| Capital expenditures in cash flow statement | $176.4 million | $545.0 million |
Production averaged 147.5 MBOE per day, down 21% year over year. Realized prices before derivative settlements fell 33% per BOE to $15.78. Production expense was $144.5 million, down 26%; lease operating expense was $3.79 per BOE and transportation cost was $6.06 per BOE. The filing reports total operating expenses of $669.8 million and a $526.7 million loss from operations.
At March 31, cash was $51,000. Revolver borrowings were $293.0 million and senior notes, net of financing costs, were $2.271 billion. The company reported a net derivative asset of $355.6 million, including $246.9 million expected to settle in 2016. Net cash provided by financing activities was $71.1 million; cash increased by $33,000 during the quarter.
Material changes versus the prior period
- Production revenue declined 46%, reflecting a 20% decrease in production volumes and a 33% decline in realized prices per BOE. Lower volumes reflected reduced activity and the 2015 sale of Mid-Continent assets.
- Net loss widened to $347.2 million from $53.1 million. Q1 2016 included $269.8 million of proved-property impairment and a $69.0 million net loss on divestiture activity, largely from write-downs of assets held for sale.
- Operating cash flow fell 58%, primarily because lower production and prices reduced cash receipts, including receipts from production and derivative settlements. Investing outflows decreased substantially as capital spending was reduced.
- The company repurchased $46.3 million principal amount of senior notes for $29.9 million, recording a $15.7 million gain on extinguishment of debt. The quarter-end senior-note carrying amount was $2.271 billion.
Outlook, commentary, and risks
- Management planned approximately $705 million of 2016 capital expenditures, about 85% for drilling and completions, and said it expected spending below adjusted EBITDAX to help limit debt. Costs incurred for oil and gas activities were $227.4 million in Q1.
- Management expected production to be relatively flat quarter to quarter for the rest of 2016, with full-year production below 2015. It planned to reduce rig activity, focus investment on core Eagle Ford, Bakken/Three Forks, and Permian programs, and prioritize previously drilled, uncompleted wells and lease obligations.
- On April 8, 2016, after quarter-end, the borrowing base and lender commitments were reduced to $1.25 billion from a $2.0 billion borrowing base and $1.5 billion commitments at March 31. Available borrowing capacity was $955.3 million on April 27. The amendment revised covenants; the company reported compliance through the filing date.
- Management said it believed liquidity was sufficient for its business plan, but noted that lower commodity prices, further borrowing-base reductions, rating downgrades, and reduced access to capital could constrain funding. It expected low commodity prices to persist during 2016.
- Commodity derivatives provide partial price protection, but the company restructured gas contracts so it had no net protection against natural-gas price volatility in 2018 and 2019. Subsequent to quarter-end, it entered into additional oil and gas swaps and oil collars.
- Gathering, processing, and transportation contracts require minimum deliveries through 2034. If no product were delivered, stated undiscounted deficiency payments would total about $1.1 billion, before considering approximately $247.9 million of expected operating income from certain systems. Management did not expect material shortfalls.
- The company recorded $68.3 million of write-downs on assets held for sale and expected to close the marketed asset-sale transactions before December 31, 2016. It also disclosed $4.4 million accrued for estimated royalty-claim exposure on certain Federal and Indian leases.
Important facts for investors to verify
- Progress and proceeds from planned asset sales, and whether further impairments arise as commodity prices and reserve estimates change.
- Liquidity, borrowing-base availability, covenant compliance, and the effect of the April 2016 credit-agreement amendment and required collateral mortgages.
- Realized commodity prices, production trends, derivative settlements, and the remaining hedge protection by commodity and year.
- Execution of the $705 million capital plan, rig reductions, drilled-but-uncompleted well inventory, and the expected production trajectory.
- Exposure to gathering and transportation commitments, especially if production or delivery volumes fall short.