SM Energy Company — Q2 2015 Form 10-Q
Business context and reporting period
Independent onshore North American oil, gas, and NGL producer. This unaudited report covers the quarter and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless noted.
Financial and operating results
| Metric | Q2 2015 | Six months 2015 |
|---|---|---|
| Oil, gas and NGL production revenue | $441.3 million, down 33% | $834.6 million, down 35% |
| Net income (loss) | $(57.5) million; $(0.85) per diluted share | $(110.6) million; $(1.64) per diluted share |
| Adjusted EBITDAX (non-GAAP) | $337.3 million, versus $423.4 million | $649.1 million, versus $822.3 million |
| Net cash provided by operating activities | Quarterly value not clearly presented in the main cash-flow statement | $549.5 million, down 23% |
| Net cash used in investing activities | Quarterly value not provided | $646.7 million |
| Capital expenditures | $974.1 million cash outflow for the six months |
Average production was 181.0 thousand BOE/day in Q2, up 23%; first-half average was 183.7 thousand BOE/day, up 29%. Higher volumes did not offset lower prices: realized revenue per BOE fell 45% in Q2 and 49% in the first half. Q2 realized prices before derivative settlements were $51.45/bbl oil, $2.53/Mcf gas, and $16.85/bbl NGLs. Q2 operating costs included DD&A and asset-retirement accretion of $219.7 million; lease operating expense was $3.26/BOE and transportation was $5.64/BOE.
At June 30, cash was $82,000. Debt comprised $2.35 billion of Senior Notes and $122 million drawn on the revolving facility. The facility had $1.378 billion available at June 30; the company reported covenant compliance. Current assets were $525.7 million and current liabilities $522.2 million. Net derivative assets were $391.4 million, versus $592.1 million at year-end 2014.
Material changes versus prior comparable periods
- Production growth was outweighed by sharply lower realized commodity prices; total production revenue declined despite higher volumes.
- The company sold its Mid-Continent assets for $316.5 million of proceeds and reported an estimated total net gain of $107.8 million. Q2 operating results included a $71.9 million net gain on divestiture activity; asset-held-for-sale write-downs totaled $99.9 million in the first half.
- Proved-property impairment was $68.4 million in the first half, versus none in 2014, reflecting lower commodity-price forecasts, reduced development investment in certain prospects, and weaker performance at some non-core assets. Unproved-property abandonment and impairment was $17.4 million.
- Q2 included a $16.6 million loss from extinguishing the 2019 Notes. The company issued $500 million of 5.625% notes due 2025 and used proceeds in part to tender and redeem its $350 million of 2019 Notes and repay revolver borrowings.
- First-half operating cash flow declined, while investing cash outflow was lower than 2014, partly due to $335.0 million of property-sale proceeds. Cash capital expenditures were $974.1 million.
Outlook, management commentary and risks
- Management expected a 2015 capital program of approximately $1.28 billion, $50 million above its original budget. First-half exploration and development costs incurred were approximately $819.1 million, excluding specified acquisitions and other items. Management expected materially lower spending in the second half as rig counts and service costs declined.
- Management expected 2015 production to exceed 2014 levels, but forecast sequential production declines for the remainder of 2015. It described 2015 as a transition year and aimed to preserve flexibility for 2016.
- Management expected to fund the remaining 2015 program with operating cash flow and divestiture proceeds, supplemented by revolver borrowings; it said additional asset sales or capital-market access could also be considered. These plans depend on commodity prices, production, costs, and credit availability.
- Commodity prices were volatile and under pressure. Management cited global oil supply, storage levels, and weak prices; it also warned lower prices could reduce cash flow, access to capital, borrowing capacity, and asset values. Its derivatives partially hedge exposure but can limit upside and expose the company to counterparty and regulatory risks.
- The April borrowing-base redetermination maintained the $2.4 billion base; the next was scheduled for October 1, 2015. Current lender commitments were $1.5 billion. Credit agreements include financial covenants and restrictions on dividends and other payments.
- The Tulsa office closure was expected to generate approximately $10 million of exit and disposal costs; $8.5 million had been recorded in the first half. The company also had approximately $7 million of net remaining lease obligations through 2022, subject to potential subleasing. It accrued $4.7 million for royalty claims on certain Federal and Indian leases; management did not expect pending litigation and claims to have a material effect.
Important facts for investors to verify
- Whether operating cash flow, divestiture proceeds, and available borrowing capacity can support the planned capital program if commodity prices or production weaken.
- The October borrowing-base redetermination, covenant headroom, and subsequent revolver usage.
- Realized commodity prices, derivative settlements and fair values, and the extent to which hedge coverage supports future cash flow.
- Further impairments, asset-sale adjustments, and the final net proceeds and gain from the Mid-Continent divestitures.
- Actual second-half capital spending and production against management’s outlook, including Tulsa closure costs and royalty-claim developments.