SM Energy Company — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. The filing also reports fourth-quarter operating results. SM Energy is an independent oil and gas producer operating primarily in the Midland Basin and South Texas.
Financial and operating results
| Metric | 2022 | 2021 |
|---|---|---|
| Oil, gas and NGL production revenue | $3.346 billion | $2.598 billion |
| Net income | $1.112 billion | $36.2 million |
| Diluted earnings per share | $8.96 | $0.29 |
| Net cash from operating activities | $1.686 billion | $1.160 billion |
| Capital expenditures (cash-flow basis) | $879.9 million | $674.8 million |
| Net cash used in investing activities | $880.3 million | $667.2 million |
| Adjusted EBITDAX (non-GAAP) | $1.918 billion | $1.225 billion |
| Cash and cash equivalents at year-end | $445.0 million | $332.7 million |
| Senior Notes, net, at year-end | $1.572 billion | $2.081 billion |
Production averaged 145.1 MBOE per day, up 3%; total annual production was 53.0 MMBOE. Realized prices before derivative settlements rose 40% for oil, 29% for gas and 6% for NGLs. Production expense was $620.9 million, or $11.72 per BOE, up 23% in total and 19% per BOE. Interest expense declined 25% to $120.3 million.
Fourth-quarter 2022 production was 13.1 MMBOE, production revenue was $669.3 million and net income was $258.5 million. Average daily production was 142.9 MBOE.
Changes versus the prior year
- Revenue rose 29%, reflecting higher realized prices and 3% higher equivalent production. South Texas production increased 37%, while Midland Basin production fell 14%; oil declined to 45% of total production from 54%.
- Net income increased substantially from $36.2 million. Results included a $374.0 million net derivative loss, compared with a $901.7 million loss in 2021; derivative settlement losses were $710.7 million and $749.0 million, respectively.
- Operating cash flow exceeded investing cash outflow by $806.1 million. The company used cash to redeem the remaining 2024 Senior Notes and 2025 Senior Secured Notes, reducing total debt principal by $551.4 million.
- Proved reserves increased 9% to 537.4 MMBOE; reserve life index rose to 10.1 years from 9.6. Reserves were 56% liquids and 59% proved developed. Additions and revisions included 103.2 MMBOE of infill reserves, while 19.9 MMBOE of proved undeveloped reserves were removed from the five-year development plan.
- Costs incurred rose 34% to $961.7 million, reflecting higher activity, particularly in South Texas, and inflation.
Liquidity, capital returns and outlook
At December 31, 2022, the company had no revolver borrowings and $1.244 billion of available borrowing capacity, net of letters of credit. Its credit agreement had a $2.5 billion borrowing base and $1.25 billion of lender commitments; the next borrowing-base redetermination was scheduled for April 1, 2023. The company reported compliance with its debt covenants. Current assets were $737.2 million and current liabilities were $598.6 million.
Management expects 2023 capital spending of approximately $1.1 billion, funded with operating cash flow, focused on economic oil development in the Midland Basin and South Texas. Production is expected to remain relatively flat versus 2022, with a slight decrease in oil’s share of production. Management expects per-BOE lease operating expense to rise, transportation cost per BOE to decline in the second half, and DD&A and G&A to increase slightly. These expectations are subject to commodity prices, inflation, operating performance and other uncertainties.
The board raised the fixed annual dividend to $0.60 per share, payable quarterly at $0.15, and authorized up to $500 million of repurchases through December 31, 2024. The company repurchased and retired 1.365 million shares for $57.2 million in 2022; $442.8 million remained authorized at year-end. Dividends and repurchases remain discretionary and subject to covenants and business conditions.
Risks, contingencies and unusual items
- Commodity-price volatility is a central risk. Derivatives reduce some downside exposure but can limit gains when prices rise; the filing attributes derivative losses to higher benchmark prices and reports material cash settlement losses.
- Inflation, supply-chain and service-provider constraints, rising interest rates, geopolitical events, and possible recession could pressure costs, prices, liquidity and development plans. Environmental, methane, climate, hydraulic-fracturing, water-disposal, permitting and extreme-weather requirements may add costs or constrain operations.
- Proved undeveloped reserves were 41% of total proved reserves. Estimated future development costs for those reserves were $2.8 billion; reserve values depend on SEC-prescribed prices, costs and assumptions and are not estimates of market value.
- Minimum delivery commitments include 18 MMBbl of oil through 2026, 26 Bcf of gas through the first half of 2023 and 11 MMBbl of produced water through 2027. Estimated aggregate deficiency payments would be about $45.7 million if no committed volumes were delivered; management did not expect material shortfalls.
- A drilling and completion agreement could expose the company to liquidated damages of up to $60.3 million if minimum footage requirements are not met by March 31, 2024; management did not expect material damages. Other commitments include rig, office, power, sand and compression contracts.
- Redemption of the 2025 Senior Secured Notes produced a $67.2 million extinguishment loss, including premiums and accelerated recognition of financing costs and discount. The company recorded $7.5 million of unproved-property abandonment and impairment expense and no proved-property impairment in 2022.
- The filing reports no pending legal proceedings expected to have a material adverse effect and no material cybersecurity incident in 2022. The financial statement audit and internal-control audit received unqualified opinions.
Important facts for investors to verify
- Whether realized commodity prices, derivative settlements and hedge coverage support cash generation under lower-price scenarios.
- Whether the 2023 capital program, production outlook and inflation assumptions are being achieved, especially in the Austin Chalk and Midland Basin.
- Reserve revisions, proved-undeveloped conversion pace and development spending versus the $2.8 billion estimated cost to develop proved undeveloped reserves.
- Debt maturities, borrowing-base redeterminations, covenant headroom and available revolver capacity as commodity prices and reserves change.
- Actual share repurchases and dividends, their funding, and remaining authorization; these are not guaranteed by the board’s announced program.
- Exposure to delivery and drilling commitments, environmental rules, water disposal and other contingent costs; management’s expectation of no material shortfalls or penalties is not a guarantee.