SM Energy Company — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. 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 | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Oil, gas, and NGL production revenue | $284.9 million | $291.1 million | $618.1 million | $503.0 million |
| Net income (loss) | $(119.9) million | $(168.7) million | $(45.5) million | $(515.9) million |
| Net cash from operating activities | $107.1 million | $138.6 million | $242.1 million | $256.9 million |
| Adjusted EBITDAX (non-GAAP) | $154.1 million | $217.1 million | $326.3 million | $399.4 million |
Reported total operating revenue and other income was $120.7 million in Q2 2017, including a $167.1 million net loss on divestiture activity; the comparable 2016 total was $341.8 million, including a $50.0 million gain. Q2 net loss was $1.08 per diluted share. Production revenue rose 23% year over year for the first half, largely reflecting higher realized prices, while Q2 production revenue declined 2% as lower volumes offset price gains.
At June 30, 2017, cash and equivalents were $559.5 million, up from $9.4 million at year-end 2016. The company had no revolver borrowings and $924.8 million of available borrowing capacity, or approximately $1.5 billion of reported liquidity. Current assets were $769.3 million and current liabilities $347.8 million. Senior Notes had $2.801 billion aggregate principal outstanding and Senior Convertible Notes $172.5 million; the balance-sheet carrying amounts totaled approximately $2.902 billion. The company reported compliance with debt covenants. Six-month capital expenditures were $366.7 million, with an additional $88.1 million spent on property acquisitions.
Changes versus comparable periods
- Average daily production fell 21% in Q2 to 124.6 MBOE/d and 15% for the first half to 129.5 MBOE/d, primarily because of asset sales. Production from retained assets increased approximately 11% in Q2 and 13% for the first half, driven mainly by Midland Basin development.
- Realized prices before derivative settlements per BOE increased 23% in Q2 and 45% for the first half year over year. Lower volumes substantially offset the Q2 price improvement.
- Operating cash flow declined 6% for the first half. The company attributed pressure in part to lower production cash receipts and higher interest paid, partly offset by lower operating costs and improved working capital.
- Interest expense increased 31% in Q2 and 41% for the first half, primarily reflecting debt issued in 2016. Six-month DD&A fell 32%, and proved-property impairment expense was $3.8 million versus $269.8 million in the first half of 2016.
Outlook, commentary, and risks
- Management expected full-year 2017 production to be below 2016 levels. The planned 2017 capital program, excluding acquisitions, was approximately $875 million, with about 80% directed to the Midland Basin and 20% to the operated Eagle Ford program. Management expected to maintain seven Midland Basin rigs and three completion crews through year-end and planned to add an Eagle Ford rig in Q3.
- The company sold its outside-operated Eagle Ford assets in March for $747.4 million net proceeds and recorded a $397.4 million gain. It retained its Divide County assets after sale valuations fell short of expectations, recording a further $166.9 million Q2 write-down. Divide County write-downs totaled $526.5 million for the first half.
- Management cited continued commodity-price volatility, supply and demand uncertainty, and potential pressure from increased U.S. drilling. It expected near-term gas prices around then-current levels and NGL prices near current levels through 2017. Derivatives partially hedge price exposure; their fair value was a net asset of $61.9 million at quarter-end.
- Remaining gathering, transportation, processing, and purchase commitments carried approximately $456.4 million of potential undiscounted deficiency payments if minimum quantities are not met; management did not expect material shortfalls. The next borrowing-base redetermination was scheduled for October 1, 2017; the borrowing base had been reduced to $925 million in March.
- Management did not expect material proved-property impairments in Q3 based on July 26 price assumptions, but warned that prices, reserve revisions, drilling results, operating costs, access to capital, and contractual commitments could affect results. No material changes to previously disclosed risk factors were reported. Pending ordinary-course litigation was not expected to have a material effect.
Important facts for investors to verify
- Whether Midland Basin development delivers the anticipated production growth and returns, given declining company-wide production and the planned capital budget.
- The economic assumptions and valuation supporting the $526.5 million Divide County write-down and the decision to retain those assets.
- Liquidity and covenant headroom after the borrowing-base reduction, and the outcome of the scheduled October 2017 redetermination.
- Commodity-price exposure, hedge settlements and fair-value changes, and the company’s ability to meet remaining minimum-volume commitments.