SM Energy Company (NYSE: SM) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. SM Energy is an independent oil and gas exploration and production company operating in Texas, principally in the Midland Basin and South Texas.
Financial and operating performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Oil, gas and NGL production revenue | $639.7 million | $827.6 million | $1,757.0 million | $2,676.7 million |
| Net income | $222.3 million | $481.2 million | $570.8 million | $853.5 million |
| Diluted EPS | $1.88 | $3.87 | $4.75 | $6.87 |
| Net cash provided by operating activities | $383.0 million | $513.4 million | $1,097.9 million | $1,398.0 million |
| Adjusted EBITDAX (non-GAAP) | $475.6 million | $460.2 million | $1,267.2 million | $1,544.4 million |
- Q3 revenue fell 23% year over year, while net income fell 54%. For the first nine months, revenue declined 34% and net income declined 33%, largely reflecting lower realized commodity prices.
- Sequentially, Q3 production revenue increased 17% from Q2 to $639.7 million, as realized prices per BOE rose 16%; average daily equivalent production was broadly flat at 153.7 thousand BOE.
- Q3 operating income included a $75.4 million net derivative loss, versus a $137.6 million derivative gain in Q3 2022. Q3 net income also included a $46.0 million income tax benefit; the reported effective tax rate was negative 26.1%.
- Production expense was $9.78 per BOE in Q3, down 6% sequentially. DD&A and asset-retirement accretion were $13.39 per BOE, up 19% sequentially.
- Cash and cash equivalents were $402.0 million at September 30, 2023. Senior Notes had $1.585 billion principal outstanding; the revolver was undrawn, with $1.248 billion available after letters of credit. The company reported compliance with debt covenants.
- Nine-month investing cash outflow was $875.4 million, including $766.8 million of capital expenditures and $109.3 million for oil and gas property acquisitions. Financing cash outflow was $265.5 million, including $205.2 million of share repurchases and $54.2 million of dividends.
Material changes and capital allocation
- Relative to the first nine months of 2022, operating cash flow decreased $300.1 million, principally due to lower production receipts net of transportation costs and production taxes; reduced cash paid on settled derivatives and lower interest payments partially offset the decline.
- SM Energy acquired approximately 20,000 net acres in Dawson and northern Martin Counties, Texas, for $88.9 million. It also acquired additional working interests in certain Midland Basin wells.
- The company repurchased and retired 6.3 million shares for $205.1 million in the first nine months; $237.7 million remained under its $500 million authorization as of September 30. It paid a quarterly dividend of $0.15 per share.
Outlook, risks and notable items
- Management expects 2023 capital spending of approximately $1.1 billion, excluding acquisitions and certain leasing efforts, and expects to fund the program with operating cash flows. It expects a slight increase in full-year 2023 production compared with 2022.
- The Board approved an intended fixed dividend increase to $0.18 per share per quarter beginning in Q1 2024. Future dividends remain subject to Board discretion, financial results, covenants and other factors.
- Management cited commodity-price volatility, geopolitical developments, inflation, supply-chain disruptions, interest rates and infrastructure constraints as risks. Derivatives partially mitigate near-term price and basis exposure but can limit upside; a 10% decrease in realized prices would have reduced nine-month revenue by an estimated $134.3 million for oil, $24.5 million for gas and $16.8 million for NGLs, before derivative offsets.
- Drilling-rig commitments totaled $34.9 million, with potential early termination fees of $22.0 million; extended power-purchase contracts carried $43.9 million of remaining obligations. Management did not expect pending litigation or claims to have a material effect.
- A completed R&D credit study reduced expected tax obligations; $52.3 million of net R&D credit carryovers was recorded for future use. Management estimated $10 million to $15 million of full-year 2023 income tax expense would be current.
- Management stated disclosure controls were effective at a reasonable-assurance level. No material changes to risk factors or internal control over financial reporting were reported.
Important facts for investors to verify
- How realized oil, gas and NGL prices, production volumes and derivative settlements affect future revenue and cash generation.
- Execution of the approximately $1.1 billion 2023 capital program, including cost inflation, well completion timing and production expectations.
- Cash-flow capacity to fund capital spending, repurchases and the planned 2024 dividend increase while maintaining liquidity and covenant compliance.
- Debt maturities: Senior Notes are due in 2025, 2026, 2027 and 2028; the revolver matures in 2027 subject to the agreement’s earlier-maturity provisions.
- Potential changes in tax benefits, including realization of R&D credits, and the effect of commodity prices and market conditions on derivative values.