SM Energy Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. SM Energy is an independent oil and gas producer operating in the Midland Basin and South Texas.
Financial and operating results
| Metric | Q1 2021 | Comparable period |
|---|---|---|
| Oil, gas and NGL production revenue | $423.2 million | $354.2 million in Q1 2020; up 19% |
| Total operating revenues and other income | $443.8 million | $355.7 million in Q1 2020 |
| Operating loss | $210.9 million | $481.1 million loss in Q1 2020 |
| Net loss / diluted loss per share | $251.3 million / $2.19 | $411.9 million / $3.64 in Q1 2020 |
| Adjusted EBITDAX, non-GAAP | $215.0 million | $286.0 million in Q1 2020 |
| Cash from operating activities | $105.6 million | $218.1 million in Q1 2020 |
| Capital expenditures | $147.6 million | $139.3 million in Q1 2020 |
| Average net daily production | 111.6 MBOE/day | 135.9 MBOE/day in Q1 2020; down 18% |
Higher realized commodity prices lifted production revenue, but lower volumes and a substantial derivative loss weighed on results. The $344.7 million net derivative loss included a $236.8 million mark-to-market loss as commodity prices strengthened and $107.9 million of losses on settled contracts. Q1 2020 included a $545.3 million derivative gain and a $956.7 million impairment of proved South Texas properties; Q1 2021 had no proved-property impairment and recorded $8.8 million of unproved-property impairment.
Production costs were $100.9 million, or $10.04 per BOE, up 4% per BOE year over year. Interest expense was $39.9 million. Cash operating activities less capital expenditures was approximately negative $42.0 million, a simple calculation from reported figures.
Balance sheet, debt and liquidity
- Cash and cash equivalents were zero at March 31, 2021, compared with $10,000 at year-end 2020.
- Total debt was $2.261 billion, including $135.0 million drawn on the revolving credit facility and $2.126 billion of Senior Notes, net. Debt increased from $2.214 billion at December 31, 2020.
- Available borrowing capacity under the $1.1 billion borrowing base and lender commitments was $965.0 million at March 31. The company reported covenant compliance.
- Stockholders’ equity was $1.770 billion, down from $2.016 billion at year-end, primarily reflecting the quarterly net loss.
- The $65.5 million principal amount of 1.50% secured convertible notes is due July 1, 2021; management intends to repay it in cash using revolver borrowings. The revolver is scheduled to mature September 2023, but could mature earlier in August 2022 if specified 2022-note refinancing and availability conditions are not met.
Material changes and management outlook
- Production revenue rose 32% sequentially and 19% year over year as realized prices improved; average daily production declined 9% sequentially and 18% year over year. Management attributed lower volumes to reduced capital spending and the Texas Weather Event.
- The February 2021 freeze and power and gathering interruptions caused well shut-ins for about 14 days and delayed drilling and completions. Management did not expect a material full-year impact from the event.
- The 2021 capital program budget was $650–$675 million, expected to be funded primarily from operating cash flow. Planned activity averaged about three Midland Basin rigs and one to two completion crews, and one to two South Texas rigs and one completion crew. South Texas activity is focused on the Austin Chalk.
- Management expected 2021 LOE per BOE to rise versus 2020, transportation expense per BOE to decline, DD&A to decline, and total G&A to remain relatively flat. It said it did not expect material property impairments in Q2 2021 based on commodity price assumptions as of April 21.
- Management cited improved credit ratings and balance-sheet flexibility, while noting that the pandemic and commodity-market recovery remained uncertain. It expects commodity-price volatility and uses derivatives to reduce, but not eliminate, exposure; hedges may limit gains if prices rise.
- Derivative liabilities were $439.4 million gross, with derivative assets of $34.4 million, for a net derivative liability of about $405.0 million. The company’s reported fair value is sensitive to changes in forward commodity curves.
Risks, commitments and unusual items
- Drilling rig contracts represented $23.5 million of commitments through Q2 2022; early termination fees would be $14.0 million. Minimum drilling and completion requirements could result in liquidated damages of up to $51.3 million by March 31, 2022, though the company expected to meet the requirements.
- Commodity prices, production volumes, infrastructure and operating costs, the pandemic, and weather events are key uncertainties. A 10% decrease in realized prices before derivatives would have reduced Q1 production revenue by approximately $42.4 million; derivative settlements would have offset approximately $36.1 million of that modeled decline.
- A Texas lawsuit remained in discovery, with trial scheduled for November 8, 2021. Management did not expect pending litigation and claims to have a material effect; the filing reported no material change to previously disclosed risk factors.
- After quarter-end, holders cashlessly exercised 3.1 million warrants, and the company issued approximately 3.1 million restricted common shares. Warrants had become exercisable in January 2021 and may be exercised through June 2023.
- The company declared a $0.01-per-share dividend for the quarter and said it did not plan share repurchases during the remainder of 2021.
Investor facts to verify
- Whether stronger prices and planned capital activity translate into production and operating cash flow sufficient to fund the $650–$675 million capital program.
- Debt repayment and refinancing progress, particularly the July 2021 convertible-note maturity and conditions tied to the revolver’s potential earlier maturity.
- How hedge settlements and changes in derivative fair value affect reported earnings, cash flow and realized prices.
- Whether the company meets its drilling and completion commitments and avoids potential liquidated damages.
- The impact of warrant exercises on shares outstanding and per-share value; the filing reported 117,797,778 shares outstanding as of April 21, 2021, before the subsequent warrant-share issuance described in the filing.