SM Energy Company — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; filed February 24, 2016. This summary covers the full year, with fourth-quarter results noted separately. SM Energy is an independent onshore North American oil, gas, and NGL exploration and production company. Its main development areas were the Eagle Ford, Bakken/Three Forks, and Permian Basin.
Financial and operating performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total operating revenues and other income | $1.557 billion | $2.522 billion |
| Oil, gas, and NGL production revenue | $1.500 billion | $2.482 billion |
| Net income (loss) | $(447.7) million; $(6.61) per diluted share | $666.1 million; $9.79 per diluted share |
| Cash provided by operating activities | $978.4 million | $1.457 billion |
| Capital expenditures | $1.494 billion | $1.975 billion |
| Production | 64.2 MMBOE; 175.9 MBOE/day | 55.1 MMBOE; 151.1 MBOE/day |
| Realized price per BOE, before derivative settlements | $23.36 | $45.01 |
| Long-term debt at year-end | $2.552 billion gross | $2.366 billion gross |
- Production revenue fell 40% as realized prices per BOE dropped 48%; production volume rose 16%. Oil, gas, and NGL production expenses increased 1% to $723.6 million, while lease operating expense declined to $3.73 per BOE from $4.28.
- The company reported an operating loss of $578.8 million and a net loss of $447.7 million. The operating loss was approximately 37% of total operating revenues and other income; the net loss was approximately 29%.
- Impairments included $468.7 million for proved properties, $78.6 million for unproved properties, and $49.4 million for other property and equipment. DD&A and asset retirement obligation accretion totaled $921.0 million.
- Operating cash flow less capital expenditures was approximately negative $515 million. Investing cash use was $1.145 billion, including $357.9 million of oil and gas property sale proceeds; financing provided $166.2 million.
- Year-end cash was only $18,000. Working capital was positive $216.5 million. The credit facility had $202 million drawn and approximately $1.298 billion of available borrowing capacity at year-end, subject to borrowing conditions and the borrowing base.
- Gross debt included $2.350 billion of senior notes and $202 million drawn on the credit facility. Debt represented 58% of book capitalization. The company reported compliance with debt covenants; its debt-to-adjusted-EBITDAX and adjusted current ratios were 2.3 and 4.8, respectively.
- Derivative contracts generated $512.6 million of settlement gains; the reported derivative gain was $408.8 million after a decrease in the fair value of remaining contracts. The year-end derivative position was a net asset of $488.4 million, including $367.7 million expected to settle in 2016.
Material changes and unusual items
- Despite record production, proved reserves fell 14% to 471.3 MMBOE from 547.7 MMBOE. Negative price revisions were 116.5 MMBOE; 79.4 MMBOE of proved undeveloped reserves were removed following development-plan changes and the SEC five-year rule. Positive performance revisions totaled 47.3 MMBOE.
- The standardized measure of discounted future net cash flows fell to $1.869 billion from $5.699 billion; pre-tax PV-10 fell to $1.791 billion from $7.617 billion. These reserve-based estimates are not stated as current market value.
- SM Energy sold its Mid-Continent assets in 2015 for $316.8 million of proceeds and a $108.4 million net gain, and completed other divestitures. Total cash proceeds from property sales were $357.9 million.
- The company issued $500 million of 5.625% senior notes due 2025 and used proceeds in part to redeem $350 million of 6.625% notes due 2019. The transaction extended the earliest senior-note maturity to 2021; extinguishment costs were $16.6 million.
- Fourth-quarter revenue was $303.7 million and net loss was $340.3 million. Fourth-quarter charges included $344.2 million of proved-property impairment, $54.6 million of unproved-property impairment, and $49.4 million of other property and equipment impairment.
- At January 31, 2016 commodity prices, management estimated first-quarter 2016 impairments could be up to approximately $250 million; further price declines could result in additional charges.
Outlook, risks, and contingencies
- For 2016, management planned approximately $705 million of capital spending, about 85% for drilling and completions, focused on the Bakken/Three Forks, Permian, and Eagle Ford. It intended to spend below adjusted EBITDAX to limit pressure on debt and preserve liquidity. Production was expected to decline from 2015 levels; no specific production guidance value is provided in the filing text.
- Management expected an additional borrowing-base reduction in the first half of 2016, but believed the revised base would meet anticipated needs. Moody’s and S&P downgraded the company’s credit ratings in February 2016, potentially increasing borrowing costs or limiting market access.
- Transportation agreements at year-end carried potential undiscounted deficiency payments of $864 million if no product were delivered. Subsequent amendments increased the theoretical aggregate amount to approximately $1.1 billion, while reducing some existing commitments. The company said it did not expect material shortfalls.
- Key risks include volatile commodity prices, further impairments and reserve revisions, capital and borrowing-base constraints, debt and covenant obligations, production decline, reserve replacement, and execution of planned development. Operational and regulatory risks include gathering and takeaway capacity, lease expirations, hydraulic-fracturing and emissions rules, flaring limits, water availability, and environmental liabilities.
- The filing reported $5.3 million accrued for estimated royalty claims on certain Federal and Indian leases. Management said ordinary-course litigation and claims were not expected to have a material effect. The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether 2016 operating cash flow and derivative settlements can support the $705 million capital program as production and commodity prices weaken.
- The outcome and timing of the 2016 borrowing-base redetermination, available liquidity, credit-rating outlook, and covenant headroom.
- Updated impairment tests and reserve estimates, particularly given the disclosed potential first-quarter charge and dependence on commodity-price assumptions.
- Progress on drilled-but-uncompleted wells, production declines, reserve development, and acreage leases scheduled to expire.
- Actual volumes delivered under gathering and transportation agreements and any resulting deficiency payments, including the post-year-end amendments.