SM Energy Company — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing also reports fourth-quarter 2017 results. SM Energy is an independent onshore North American oil and gas exploration and production company, with operations focused on the Midland Basin, Eagle Ford and Rocky Mountain regions.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Total operating revenues and other income | $1.129 billion | $1.217 billion |
| Oil, gas and NGL production revenue | $1.254 billion | $1.178 billion |
| Net loss | $160.8 million | $757.7 million |
| Net loss per diluted share | $1.44 | $9.90 |
| Net cash provided by operating activities | $515.4 million | $552.8 million |
| Adjusted EBITDAX (non-GAAP) | $664.7 million | $790.8 million |
| Cash and cash equivalents at year-end | $313.9 million | $9.4 million |
| Working capital | $(10.1) million | $(190.5) million |
Total operating revenues include a $131.0 million net loss on divestiture activity; production revenue excludes that item. The 2017 quarterly table reports a fourth-quarter net loss of $26.3 million, compared with $89.1 million in the third quarter. Full-year operating cash flow declined 7% year over year.
Average production was 121.8 MBOE per day, down 19% from 2016; total production was 44.5 MMBOE. Production from retained and acquired assets, excluding assets sold in 2016 and 2017, increased approximately 8%. Realized prices before derivative settlements improved: oil to $47.88 per barrel, gas to $3.00 per Mcf and NGLs to $22.35 per barrel. Realized revenue was $28.20 per BOE; production expense was $11.43 per BOE across lease operating, transportation, production and ad valorem costs.
Proved reserves rose 18% to 468.1 MMBOE, and the reserve life index increased to 10.5 years. Proved undeveloped reserves were 54% of the total. The standardized measure of discounted future net cash flows was $3.024 billion, versus $1.152 billion in 2016; this SEC-prescribed measure is not market value.
Material changes versus 2016
- Oil, gas and NGL production revenue rose 6%, as realized prices improved, but production volume fell 20%, largely because of asset sales.
- Net loss narrowed substantially, mainly alongside lower depletion and impairment expense. The company recorded $3.8 million of proved-property impairment and $12.3 million of unproved-property abandonment and impairment in 2017, versus $354.6 million and $80.4 million, respectively, in 2016.
- The company sold its outside-operated Eagle Ford assets for $744.1 million net proceeds and recorded a $396.8 million gain. It also recorded a $526.5 million write-down on Divide County, North Dakota assets after deciding to retain them rather than accept offers received.
- Capital expenditures were $888.4 million, up 41%; net cash used in investing activities was $201.5 million, compared with $1.868 billion in 2016, when the company made major Midland Basin acquisitions.
- Year-end cash increased to $313.9 million. Total debt principal was approximately $2.974 billion; there were no credit-facility borrowings. The borrowing base and lender commitments were reduced from $1.2 billion to $925 million during 2017.
Liquidity, debt and capital allocation
Cash plus available borrowing capacity totaled approximately $1.239 billion at year-end, including $924.8 million available under the credit facility. Long-term debt was 55% of book capitalization. The company reported compliance with its credit-agreement and note covenants. Its fixed-rate senior notes and convertible notes carry maturities from 2021 through 2026; the credit agreement matures in December 2019.
Management expects to fund the approximately $1.27 billion 2018 capital program, excluding acquisitions, with operating cash flow and divestiture proceeds, while retaining borrowing and other financing as alternatives. The company paid $11.1 million in dividends in 2017 ($0.10 per share) and said it did not plan share repurchases in 2018. Debt reduction and improved credit metrics are stated priorities.
Outlook, commentary and risks
- 2018 capital is to be concentrated in the Midland Basin and Eagle Ford, with the majority allocated to the Midland Basin. Planned activity includes approximately 150 gross Midland Basin wells drilled and 125 completed; management expects total production to remain flat versus 2017, while retained-asset production and oil mix are expected to increase.
- A sale agreement for the majority of Powder River Basin assets sets a gross purchase price of $500 million, subject to adjustments, with closing expected in the first quarter of 2018. Closing is not assured. A Schlumberger affiliate sued over consent to the sale; SM Energy disputes the claims and said it did not expect them to prevent the divestiture.
- The 2017 Tax Act reduced the federal corporate rate to 21% and generated a $63.7 million deferred-tax remeasurement benefit in 2017. Management expects a significantly lower effective tax rate and generally positive operating-cash-flow effects in future years; it also noted potential limits on interest deductions.
- Key exposures include volatile commodity prices, reserve-estimation uncertainty, the capital needed to develop reserves, debt and borrowing-base sensitivity, and execution and infrastructure risks. Commodity derivatives had a net fair-value liability of $139.4 million at year-end and can limit benefits from higher prices.
- Minimum delivery commitments extend through 2028; potential undiscounted deficiency payments would total $463.4 million if no product were delivered. Management did not expect material shortfalls, but stated that current production alone is insufficient to cover the commitments.
- Environmental and operating risks include hydraulic-fracturing restrictions, emissions and flaring rules, water availability and disposal, spills, severe weather, and gathering or takeaway constraints. Management noted uncertainty around changing regulation.
Important facts for investors to verify
- Whether the Powder River Basin sale closed, at what net proceeds after adjustments, and whether the related litigation or other conditions affected timing.
- Whether the $1.27 billion 2018 capital program was funded as planned and whether Midland Basin drilling delivered expected production, returns and reserve conversions.
- How production, realized prices and derivative settlements developed relative to management’s flat-production outlook and February 2018 price assumptions.
- Debt reduction, borrowing-base redeterminations, covenant headroom and liquidity after capital spending and divestiture proceeds.
- The scale and nature of delivery-commitment liabilities, including any shortfalls, third-party delivery arrangements or changes after asset sales.
- Reserve quality and development requirements: 54% of proved reserves were undeveloped, with approximately $2.5 billion estimated to develop them; reserve estimates and PV measures depend on prescribed assumptions.
Ernst & Young issued an unqualified audit opinion on the financial statements and internal control over financial reporting.