SM Energy Company — Form 10-Q Summary
Period: Three months ended March 31, 2018. The filing was signed May 4, 2018. SM Energy is an independent onshore North American oil, gas, and NGL producer, focused primarily on its Midland Basin and Eagle Ford assets.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Oil, gas, and NGL production revenue | $382.9 million | $333.2 million |
| Total operating revenues and other income | $769.6 million | $372.7 million |
| Net income | $317.4 million | $74.4 million |
| Diluted earnings per share | $2.81 | $0.67 |
| Net cash from operating activities | $140.1 million | $135.0 million |
| Capital expenditures | $301.5 million | $154.4 million |
| Adjusted EBITDAX (non-GAAP) | $210.2 million | $172.0 million |
Net income included a $385.4 million net gain on divestiture activity, primarily the estimated gain on the Powder River Basin sale, partly offset by a $24.1 million write-down of assets held for sale. Thus, reported earnings substantially reflect asset-sale accounting rather than recurring operations. Production revenue rose 15%, while total production volume fell 16%. Realized revenue price before derivative settlements increased 37% per BOE to $37.76; the company reported a $2.42-per-BOE derivative settlement loss. Production expense was $120.9 million, down 12%; the filing does not provide a single comparable operating margin that isolates recurring results.
Cash and cash equivalents were $643.3 million at quarter-end, up from $313.9 million at year-end 2017. The company had no revolver borrowings and reported $924.8 million of available borrowing capacity at March 31; subsequent to quarter-end, lender commitments increased to $1.0 billion and the borrowing base to $1.4 billion. Long-term debt carrying values were $2.771 billion of Senior Notes and $141.3 million of Senior Convertible Notes; the revolver balance was zero. Operating cash flow less capital expenditures was negative $161.4 million, before divestiture proceeds and other investing activity.
Material changes versus Q1 2017
- Production revenue increased $49.7 million as higher realized prices more than offset lower volumes. Oil production rose 21%, while gas fell 26%, NGLs fell 43%, and equivalent production declined 16%.
- Permian equivalent production increased 102%, and its share of total production revenue rose to 60% from 28%. The company attributed declines elsewhere mainly to the 2017 sale of outside-operated Eagle Ford assets and lower investment in retained Eagle Ford properties.
- Net derivative results moved from a $114.8 million gain in Q1 2017 to a $7.5 million loss in Q1 2018, including $24.5 million of realized settlement losses in 2018.
- Interest expense declined 8% to $43.1 million; the company attributed the decrease primarily to higher capitalized interest.
- The effective tax rate fell to 23.8% from 37.4%, mainly reflecting the reduction in the federal corporate tax rate under the 2017 Tax Act.
Outlook, management commentary, and risks
- The 2018 capital program, excluding acquisitions, is expected to be approximately $1.27 billion, with about 80% directed to drilling and completion. Management planned to allocate approximately 86% of drilling and completion capital to the Midland Basin and 14% to the Eagle Ford.
- Management expected full-year production to decrease slightly versus 2017 as Midland growth is offset by divestitures and Eagle Ford declines; on a retained-asset basis, it expected production and oil mix to increase. Midland well results were described as stronger than expected.
- The company closed the sale of approximately 112,000 net Powder River Basin acres for $490.8 million net proceeds. It expected second-quarter closings of the Divide County and Halff East sales for total gross consideration of $292.3 million, subject to adjustments and closing conditions. Proceeds were intended to fund capital programs and general corporate purposes, including potential debt reduction.
- Management said cash flow and divestiture proceeds were expected to fund the 2018 capital program and that liquidity was sufficient for the foreseeable future. Commodity prices, production, operating costs, borrowing capacity, and access to capital remain significant uncertainties. Oil prices were expected to remain volatile; near-term gas prices were expected to remain near current levels.
- Outstanding delivery and purchase commitments could entail approximately $461.5 million of undiscounted deficiency payments if minimum quantities are not met; management did not expect material shortfalls. Drilling and completion contracts totaled $158.3 million, with $40.6 million of termination penalties. Management reported compliance with debt covenants and no legal proceedings expected to have a material adverse effect.
- Other notable items: the company recorded $5.6 million of unproved-property abandonment and impairment expense related to lease expirations. It expected no material impairment in Q2 from commodity-price impacts based on price assumptions as of April 25, 2018. Adoption of the new revenue standard did not materially change results; adoption of the lease standard was expected to increase recognized assets and liabilities, with the full impact still under evaluation.
Key facts investors should verify
- Whether the Divide County and Halff East divestitures closed as expected, and the final proceeds and gains after purchase-price adjustments.
- How much of Q1 net income and cash growth arose from divestitures versus recurring production and operations.
- Progress against the $1.27 billion capital plan, production expectations, and Midland Basin well performance, particularly as Eagle Ford and divestiture-related declines continue.
- Commodity-price exposure and the cash-flow effects of hedges, including settlement losses and derivative fair-value changes.
- Debt reduction plans, liquidity after planned capital spending, and compliance with credit-facility covenants as borrowing capacity and reserve values change.
- Ability to meet long-term gathering, transportation, and other minimum-volume commitments, and the eventual balance-sheet impact of lease accounting adoption.