SM Energy Company — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also reports fourth-quarter results. SM Energy is an independent onshore North American oil and gas producer, increasingly focused on oil- and liquids-rich resource plays, particularly the Eagle Ford and Bakken/Three Forks.
Financial and operating results
| Metric | 2012 | 2011 |
|---|---|---|
| Total operating revenues | $1,505.1 million | $1,603.3 million |
| Oil, gas and NGL production revenue | $1,473.9 million | $1,332.4 million |
| Net income (loss) | ($54.2 million); ($0.83) per diluted share | $215.4 million; $3.19 per diluted share |
| Cash provided by operating activities | $922.0 million | $760.5 million |
| Cash used in investing activities | $1,457.3 million | $1,264.9 million |
| Equivalent production | 218.9 BCFE; 598.2 MMCFE/day | 169.7 BCFE; 465.0 MMCFE/day |
| Proved reserves at year-end | 1,760.6 BCFE | 1,259.2 BCFE |
Fourth-quarter 2012 operating revenue was $444.3 million and production was 60.7 BCFE. The company recorded a net loss of $67.1 million, including $170.4 million of proved-property impairment. Fourth-quarter 2011 net loss was $120.7 million and included $170.5 million of impairment.
- Annual production rose 29%; production revenue increased 11% despite a 14% decline in realized revenue per MCFE to $6.73. Realized oil, gas and NGL prices were $85.45/Bbl, $2.98/Mcf and $37.61/Bbl, respectively.
- Production costs increased 35% to $391.9 million. Per-MCFE lease operating expense improved to $0.82 from $0.88, while transportation cost rose to $0.63 from $0.51. DD&A increased 42% to $727.9 million.
- Non-cash impairment of proved properties was $208.9 million: $170.4 million in the fourth quarter, principally for Permian Wolfberry assets following engineering revisions, and $38.5 million for Haynesville assets amid low gas prices. The company also recorded $16.3 million of unproved-property abandonment and impairment.
- Year-end total debt was $1.44 billion: $1.10 billion of senior notes and $340 million drawn under the credit facility. Cash was $5.9 million; available credit capacity was $659.2 million. Working capital was negative $201.0 million. Debt was 50% of book capitalization; the company reported compliance with its covenants.
- PV-10 of proved reserves was $3.85 billion, while the GAAP standardized measure was $3.02 billion. PV-10 is a non-GAAP measure and neither figure is presented as current market value.
Changes and management commentary
- Total operating revenues declined about 6% year over year, while production revenue grew on higher volumes. Lower gas and NGL prices, impairment, higher DD&A and a $27.0 million net loss on divestiture activity contributed to the swing from 2011 profit to 2012 loss. The 2011 comparison included a $220.7 million divestiture gain.
- Proved reserves increased 40%, led by drilling additions of 900.2 BCFE, primarily in the Eagle Ford and Bakken/Three Forks. However, price revisions reduced reserves by 72.7 BCFE, performance revisions reduced them by 92.0 BCFE, and proved undeveloped reserves grew to 43% of the total.
- The company issued $400 million of 6.50% senior notes due 2023 and redeemed/settled its 3.50% convertible notes, paying $287.5 million in cash. Mitsui had funded $277.5 million of its agreed $680 million carry for qualifying non-operated Eagle Ford drilling and completion costs by year-end; the remaining carry was expected to be used over about two years.
- For 2013, management planned approximately $1.5 billion of capital investment, including $1.2 billion for drilling and completion. All drilling and completion capital was allocated to oil and liquids-rich programs; about 90% of drilling capital was expected to go to operated Eagle Ford, Bakken/Three Forks and Permian programs. Management anticipated production growth over the next several years and expected operating cash flow plus credit-facility borrowing to fund the program, while allowing for possible capital-markets or divestiture funding.
Risks, commitments and contingencies
- Commodity-price volatility is material: 2012 average Henry Hub gas and Mont Belvieu NGL prices were down from 2011, and lower prices can reduce cash flow, reserves, borrowing capacity and property values. The company uses swaps and collars, which can also limit gains when prices rise.
- Gathering, processing and transportation contracts require delivery of 1,515 Bcf of gas and 36 million barrels of oil through 2023. The filing states current production alone does not cover the aggregate commitments; management expected future development to meet them and did not anticipate significant shortfalls. Contractual obligations totaled $3.31 billion, including estimated delivery commitments of $858.7 million.
- Developing proved undeveloped reserves was estimated to require about $1.6 billion; estimated PUD development spending was $660 million in 2013, $451 million in 2014 and $359 million in 2015. Delivery shortfalls, infrastructure constraints, lease expirations and execution risks could affect returns and liquidity.
- Hydraulic-fracturing, water-disposal, environmental, climate and other regulatory changes could increase costs or delay operations. The company also cited service availability, weather, reserve-estimation uncertainty, customer concentration and counterparty performance as risks.
- The Texas appellate judgment dismissing the claimed Eagle Ford overriding royalty interest became final after the Texas Supreme Court denied review on February 15, 2013. An Oklahoma royalty class action remained pending, with class certification stayed; the company said it could not estimate the action’s impact. A separate dispute concerned an uncompleted Pennsylvania asset sale; no replacement buyer commitment was reported as of filing.
Important facts for investors to verify
- How 2013 production, realized prices and cash generation compared with the plan, particularly as Eagle Ford and Bakken development expanded.
- Whether reserve additions convert into developed production economically, given the 43% proved-undeveloped share and planned development spending.
- The drivers and potential recurrence of impairments, engineering revisions and divestiture losses.
- Credit-facility availability after borrowing-base redeterminations, debt service needs and liquidity under the planned capital program.
- Progress in meeting transportation commitments and any developments in the Oklahoma royalty litigation or Pennsylvania asset-sale dispute.
The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting as of December 31, 2012.