SM Energy Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. SM Energy is an independent oil, gas, and NGL producer operating in Texas, primarily in the Midland Basin and South Texas. Financial statements are unaudited.
Key financial and operating results
| Metric | Q1 2022 | Comparison |
|---|---|---|
| Oil, gas, and NGL production revenue | $858.7 million | Up 103% year over year; up 1% sequentially |
| Net income (loss) | $48.8 million; $0.39 diluted EPS | Prior-year loss of $251.3 million; Q4 2021 income of $424.9 million |
| Net cash from operating activities | $342.1 million | Up from $105.6 million year over year |
| Capital expenditures | $150.1 million | Net operating cash less capital expenditures was $192.0 million |
| Adjusted EBITDAX | $524.6 million | Non-GAAP; up from $215.0 million year over year |
| Production | 153.3 MBOE/day | Up 37% year over year; down 3% sequentially |
| Realized price | $62.25/BOE, before derivative settlements | Up 48% year over year; up 6% sequentially |
| Production expense | $10.49/BOE | Up 4% year over year and 7% sequentially |
| Cash and debt | $419.9 million cash; $1.980 billion Senior Notes, net; no revolver borrowings | Senior Notes carrying value declined from $2.081 billion at year-end |
Q1 net derivative loss was $418.5 million, including $168.2 million of derivative settlement losses. Revenue and strong operating cash flow benefited from higher commodity prices and increased production versus Q1 2021, while derivative losses substantially reduced reported earnings. Net income margin was approximately 5.7% of total operating revenue.
Material changes and liquidity
- Production revenue more than doubled year over year as realized oil, gas, and NGL prices rose 67%, 30%, and 43%, respectively, and production volumes increased 37%. Q1 2021 production was also affected by a Texas cold-weather event.
- Oil production fell 17% sequentially, mainly due to the timing of well completions in the Midland Basin; South Texas production increased.
- Cash rose from $332.7 million at December 31, 2021, to $419.9 million. The company redeemed $104.8 million principal amount of 5.0% notes due 2024 in February, using cash on hand.
- At March 31, the revolving credit facility had a $1.1 billion borrowing base and commitments, with $1.094 billion available after letters of credit. A subsequent redetermination reaffirmed the $1.1 billion amount. The company reported compliance with debt covenants.
- Senior Notes carrying value is not the same as principal outstanding. The filing reports $2.0 billion of fixed-rate debt principal at March 31 and no floating-rate debt.
Outlook, risks, and unusual items
- Management expected 2022 capital spending of approximately $750 million, focused on oil development in both operating areas, and expected operating cash flow to fund the program. Activity could be adjusted as economic conditions change. No full-year production guidance is stated in the provided filing text.
- Management expected 2022 LOE per BOE and transportation costs per BOE to increase versus 2021; DD&A and G&A were expected to decrease. It expected no material oil and gas property impairments in Q2 based on commodity-price assumptions as of April 20, 2022.
- On April 28, after quarter-end, the company announced redemption of all $446.7 million principal amount of its 10.0% Senior Secured Notes due 2025 on June 17, at 107.5% of principal plus accrued interest. This creates a redemption premium and a significant cash use.
- Commodity derivatives were a net liability of $571.2 million at March 31. They reduce some near-term price exposure but can limit the benefit of rising prices; fair-value changes can also cause substantial earnings volatility. Management cited the Russia-Ukraine conflict, sanctions, the pandemic, supply and demand, and market volatility as risks.
- Drilling rig commitments totaled $27.1 million; early termination fees would be $17.3 million. A drilling and completion agreement could entail up to $96.0 million of liquidated damages if minimum footage requirements are not met by March 31, 2024; management expected to meet the requirements.
- Management said ordinary-course litigation was not expected to have a material effect. Disclosure controls were deemed effective at a reasonable assurance level, with no material first-quarter change in internal control over financial reporting.
Important facts for investors to verify
- How the announced secured-note redemption was funded, including its effect on cash, debt, interest expense, and liquidity after June 17, 2022.
- The expected cash-flow and earnings effects of the substantial derivative liability and the company’s hedge volumes, prices, and settlement schedule.
- Whether operating cash flow supports the $750 million capital program while continuing debt reduction under different commodity-price scenarios.
- Progress toward meeting drilling and completion footage requirements and the potential exposure to liquidated damages.
- Subsequent borrowing-base, covenant, and liquidity developments, including the planned replacement credit agreement ahead of its September 2023 maturity.