SM Energy Company (NYSE: SM) — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual filing; fourth-quarter results are noted where relevant. SM Energy is an independent onshore North American oil, gas, and NGL exploration and production company, focused principally on the Eagle Ford and Bakken/Three Forks.
Financial and operating highlights
- Revenue and earnings: Total operating revenues were $2.522 billion, up 10% from $2.293 billion in 2013. Net income was $666.1 million, or $9.79 per diluted share, versus $170.9 million, or $2.51 per diluted share, in 2013.
- Fourth quarter: Net income was $331.7 million on operating revenues of $595.8 million. The quarter included a $616.7 million net derivative gain, substantially reflecting mark-to-market valuation changes.
- Cash flow and investment: Cash from operations was $1.457 billion, compared with $1.339 billion in 2013. Investing cash outflow was $2.479 billion, including $1.975 billion of capital expenditures and $544.6 million for property acquisitions. Operating cash flow less investing cash flow was negative $1.022 billion.
- Production and realized prices: Production rose 14% to 55.1 MMBOE, or 151.1 MBOE per day. Average realized prices before derivative settlements were $80.97 per oil barrel, $4.58 per Mcf of gas, and $33.34 per NGL barrel; realized revenue averaged $45.01 per BOE. Oil and NGL prices declined year over year, while gas prices increased.
- Costs: Production expense was $715.9 million, up 20%. Per BOE, lease operating expense was $4.74, transportation $6.11, and production taxes $2.13. Transportation cost per BOE increased 14%, partly as Eagle Ford production became a larger share of the mix.
- Debt and liquidity: At year-end, senior notes totaled $2.2 billion and credit-facility borrowings were $166 million; cash was $120,000. Working capital was negative $39.6 million. The facility had $1.333 billion of available capacity at year-end, subject to its borrowing conditions. Total debt was approximately $2.366 billion.
- Reserves: Estimated proved reserves increased 28% to 547.7 MMBOE; reserve life rose to 9.9 years. Proved developed reserves were 52%. The standardized measure of discounted future net cash flows was $5.699 billion; pre-tax PV-10 was $7.617 billion. Neither measure is presented as current market value.
Material changes versus 2013
- Production revenue increased 13%, principally from higher production volumes; production grew 14% while realized price per BOE declined 1%.
- Net income benefited significantly from a $583.3 million derivative gain, including a $570.7 million increase in derivative fair value. This valuation gain is not equivalent to cash generated from operations.
- Capital spending and acquisitions expanded: total oil and gas costs incurred were $2.712 billion, versus $1.721 billion in 2013. The company also issued $600 million of 6.125% senior notes due 2022.
- Proved-property impairment fell to $84.5 million from $172.6 million, while unproved-property abandonment and impairment rose to $75.6 million from $46.1 million. Both reflected, in part, late-year commodity price declines and exploration or delineation results.
- The Mitsui carry on certain outside-operated Eagle Ford drilling costs was exhausted in the second quarter; SM Energy thereafter funded its full share.
Outlook, risks, and unusual items
- Management characterized 2015 as a transition year amid lower oil prices. The planned capital program was approximately $1.2 billion, including about $1.0 billion for drilling and completion; 85% of that drilling and completion capital was planned for the Eagle Ford and Bakken/Three Forks. Management planned to reduce activity during the year and fund the program through operating cash flow, planned divestitures, and facility borrowings.
- Management expected service-cost reductions, but also anticipated that transportation cost per BOE would continue rising. The company planned to market its remaining Arkoma Basin and Arklatex assets and close its Tulsa regional office.
- Key exposures include commodity-price volatility, further impairments, reserve-estimation uncertainty, high capital requirements, borrowing-base reductions, debt covenants, and delivery commitments. Contracts require delivery of 1,411 Bcf of gas and 48 MMbbl of oil through 2028; shortfalls could require deficiency payments. Management did not expect material shortfalls.
- The $2.4 billion borrowing base was scheduled for redetermination on April 1, 2015, after substantial oil and NGL price declines. The filing reports compliance with credit-facility covenants as of the filing date.
- Other items include a $10.7 million settlement-related gain recorded in other operating revenues and three exploratory dry holes contributing to exploration expense. The company reported no pending litigation it believed would materially affect its financial position or results.
Important facts for investors to verify
- How much of 2014 earnings and reported equity value depends on non-cash derivative fair-value gains, and how the hedge book affects 2015 cash receipts and realized prices.
- The outcome of the April 2015 borrowing-base redetermination, subsequent facility borrowings, covenant headroom, and liquidity under lower commodity-price assumptions.
- Whether the 2015 capital plan and planned asset sales can be executed while preserving production, acreage, and balance-sheet flexibility.
- Development timing, costs, and economic assumptions for the 48% of proved reserves classified as undeveloped; reserve values are sensitive to prices and estimates.
- Progress on the planned Mid-Continent divestitures, delivery commitments, and implementation of the new ERP system, which began January 1, 2015.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting as of December 31, 2014.