SM Energy Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited results; comparisons are with Q1 2016 unless noted. SM Energy is an independent North American oil, gas, and NGL exploration and production company.
Financial results and position
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Oil, gas, and NGL production revenue | $333.2 million | $211.8 million |
| Total operating revenues and other income | $372.7 million | $143.1 million |
| Income (loss) from operations | $165.6 million | $(526.7) million |
| Net income (loss) | $74.4 million | $(347.2) million |
| Diluted earnings (loss) per share | $0.67 | $(5.10) |
| Net cash provided by operating activities | $135.0 million | $118.3 million |
| Adjusted EBITDAX, non-GAAP | $172.2 million | $182.3 million |
- Production revenue rose 57%, as realized prices before derivative settlements improved 75% per BOE, partly offset by a 10% decline in production volume to 12.1 million BOE. Average net daily production was 134.4 MBOE, down 9%.
- Production expense was $138.0 million, down 4%; production expense per BOE was $11.42, including lease operating expense of $3.82 and transportation costs of $5.88. Production revenue less production expense was $195.2 million; this is not a company-reported operating margin.
- Reported earnings included a $114.8 million net derivative gain, primarily a mark-to-market gain, and a $37.5 million net gain on divestiture activity. The latter reflected the $398.1 million gain on the Eagle Ford sale, substantially offset by a $359.6 million write-down of Divide County assets held for sale.
- Cash and equivalents were $659.1 million at March 31, versus $9.4 million at year-end. Investing activities provided $517.3 million, including $744.3 million of property-sale proceeds; capital expenditures were $154.4 million and property acquisitions used $75.1 million.
- Senior Notes had $2.801 billion aggregate principal outstanding; Senior Convertible Notes had $172.5 million principal outstanding. The revolver had no balance, with $924.8 million available after letters of credit. Balance-sheet carrying values were $2.766 billion for Senior Notes and $132.9 million for convertible notes. Cash less principal debt was approximately $2.315 billion.
- Total assets were $6.400 billion and stockholders’ equity was $2.616 billion at March 31. The company declared a $0.05 per-share dividend.
Material changes versus Q1 2016
- Net income replaced a substantial loss, driven by higher commodity prices, the Eagle Ford divestiture gain, and derivative gains. The comparison is affected by Q1 2016 proved-property impairments of $269.8 million and a $15.7 million debt-extinguishment gain.
- Oil, gas, and NGL production revenue rose $121.4 million, despite lower volumes. Realized prices before derivatives increased to $47.55 per barrel of oil, $2.98 per Mcf of gas, and $22.06 per barrel of NGLs.
- Operating cash flow increased $16.7 million, but adjusted EBITDAX fell $10.1 million. Interest expense increased 51% to $47.0 million, reflecting debt issued in 2016 and higher weighted-average interest rates.
- The share count increased to 111.3 million weighted-average diluted shares from 68.1 million, primarily reflecting 2016 equity offerings.
Outlook, risks, and unusual items
- Management expected 2017 capital expenditures, excluding acquisitions, of approximately $875 million, with about 80% directed to the Midland Basin and 20% to the operated Eagle Ford program. The company expected full-year 2017 production to decline versus 2016, with Midland Basin growth expected to begin offsetting divestiture-related declines.
- The company expected to sell its remaining Divide County assets in Q2 2017; a further reduction in the borrowing base was anticipated after that sale. Management said proceeds from divestitures would support 2017 and 2018 capital programs and might be used to reduce debt, depending on market conditions.
- On March 31, the borrowing base and lender commitments were reduced to $925 million from $1.165 billion. The next scheduled redetermination was October 1, 2017. The company reported compliance with credit and note covenants through the filing date.
- Management cited volatile commodity prices, possible lower borrowing capacity, execution and production risks, and uncertainty in divestitures and acquisitions. It expected prices to remain volatile; near-term drilling activity could pressure oil prices, while gas and NGL prices were expected to remain near then-current levels.
- Remaining gathering, processing, and transportation commitments could require $458.8 million of undiscounted deficiency payments if no product were delivered; management did not expect material shortfalls. Drilling-rig commitments were $30.1 million, with $19.0 million of potential early-termination penalties.
- Adoption of share-based compensation guidance produced a $44.7 million cumulative-effect increase to retained earnings at January 1, 2017. This accounting adjustment was not operating income or cash flow.
Important facts for investors to verify
- Whether the Divide County sale closed as expected, at what proceeds, and how the sale affected the borrowing base and debt-reduction plans.
- How much of reported earnings and derivative gains was noncash or transaction-related, and the resulting underlying operating performance and cash generation.
- Progress against the $875 million capital program, Midland Basin development plans, and the forecast decline in full-year production.
- Commodity-price exposure, hedge volumes and terms, and the effects of price and production changes on cash flow and liquidity.
- Debt, covenant headroom, future borrowing-base redeterminations, and the capacity to fund planned investment while maintaining the dividend.