SM Energy Company — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited consolidated financial statements; comparisons are with Q1 2011 unless noted.
Business context and reporting period
SM Energy is an independent onshore oil and gas exploration and production company, focused on oil- and NGL-rich resource plays, including the Eagle Ford and Bakken/Three Forks. Average daily production rose 39% to 557.0 MMcfe, led by Eagle Ford development and Bakken/Three Forks production.
Financial and operating performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Oil, gas and NGL production revenue | $362.6 million | $276.3 million |
| Total operating revenues and other income | $377.4 million | $315.3 million |
| Income (loss) from operations | $56.2 million | $(20.0) million |
| Net income (loss) | $26.3 million; diluted EPS $0.39 | $(18.5) million; diluted EPS $(0.29) |
| Net cash provided by operating activities | $188.1 million | $156.7 million |
| Net cash used in investing activities | $(331.8) million | $(273.0) million |
| Net cash provided by financing activities | $24.8 million | $302.6 million |
Net margin was approximately 7.0% of total operating revenues and other income, versus a loss in the prior-year quarter. EBITDAX, a company-defined non-GAAP measure, was $259.0 million versus $178.0 million.
- Production revenue increased 31%, as equivalent volumes rose 40%; realized price per Mcfe fell 7% to $7.15, primarily because of lower natural gas prices.
- Oil revenue rose 49% and NGL revenue 81%; gas revenue declined 12%. Realized prices were $90.67/Bbl oil, $2.90/Mcf gas and $44.67/Bbl NGLs.
- Production expense increased 32% to $87.1 million. DD&A and asset-retirement accretion rose 61% to $169.6 million, reflecting the larger developed asset base; DD&A per Mcfe increased 15% to $3.35.
- Derivative loss fell to $2.2 million from $88.4 million. The prior-year comparison also included a $24.9 million divestiture gain, versus $1.5 million in Q1 2012.
- Operating cash flow less cash capital expenditures was approximately negative $147.0 million. Cash and cash equivalents fell from $119.2 million at year-end to $0.3 million at March 31.
Balance sheet, debt and liquidity
- At March 31, total assets were $3.845 billion and stockholders’ equity was $1.490 billion. Current assets were $343.7 million against current liabilities of $471.5 million; the simple current ratio was approximately 0.73.
- Debt was approximately $1.012 billion: $24.0 million on the credit facility, $287.5 million of 3.50% convertible notes, and $700 million of senior notes. Restricted cash of $114.3 million was contractually dedicated to development activity and is not general-purpose cash.
- The credit facility had a $1.3 billion borrowing base at March 31, subsequently increased to $1.5 billion; lender commitments were $1.0 billion. Available borrowing capacity was reported as $975.2 million at March 31. The company reported covenant compliance, a debt-to-EBITDAX ratio of 1.04 and an adjusted current ratio of 2.96 under the credit agreement.
- Subsequent to quarter-end, holders converted $281.3 million principal amount of the convertible notes; the remaining notes were redeemed May 2. Principal was or will be settled in cash, with any excess conversion value settled in shares or cash. The company said it used and would use credit-facility borrowings to fund these settlements.
Guidance, management commentary and risks
- Management planned 2012 capital spending of $1.4–$1.5 billion, including $1.2–$1.3 billion for drilling and completions. More than 95% of allocated drilling and completion capital was expected to target oilier and NGL-rich projects.
- Planned drilling and completion investment included $650–$700 million in operated Eagle Ford and $160–$185 million in Bakken/Three Forks. Management expected production to increase annually for several years, but gave no specific full-year production guidance in the supplied filing text.
- Mitsui agreed to carry 90% of certain drilling and completion costs for SM Energy’s remaining interest in specified non-operated Eagle Ford acreage, up to $680 million. $61.9 million had been used by March 31, leaving $618.1 million; management expected the carry to fund most of that program for three to four years.
- Commodity prices remain a central risk. Gas prices were under pressure from oversupply, while management noted possible growth in NGL supply. Derivatives covered portions of anticipated production through Q4 2014; they mitigate some price exposure but can constrain participation in favorable price moves. Proposed derivatives regulations could increase costs or collateral requirements.
- Management cited the planned asset sales, commodity-price volatility, access to capital, operating and transportation costs, drilling and reserve uncertainty, and regulatory and environmental requirements as relevant risks. It expected Eagle Ford transportation costs per unit to rise as the play becomes a larger share of production.
- Assets held for sale included $42.2 million of Rocky Mountain properties at quarter-end. After quarter-end, the company began remarketing Marcellus assets and marketing certain Rocky Mountain assets, with aggregate net book value of approximately $55 million; these were not classified as held for sale at March 31.
- In Eagle Ford royalty litigation, plaintiffs were awarded approximately $5.1 million plus attorneys’ fees and costs; the company appealed and said it did not consider an unfavorable ultimate outcome probable. Separately, SM Energy sued Endeavour to enforce a $110 million Pennsylvania asset purchase agreement or seek damages, and began soliciting alternative offers.
- Management stated it believed liquidity was sufficient for planned operations. That assessment depends on operating cash flow, borrowing availability, commodity prices, divestitures and the Mitsui carry.
Most important facts for investors to verify
- Whether operating cash flow and credit availability can fund the $1.4–$1.5 billion 2012 capital program, particularly given quarter-end cash of only $0.3 million and negative cash flow after capital expenditures.
- The actual cash and share impact of the post-quarter convertible-note conversions and redemption, and resulting debt and share dilution.
- Whether production growth and well performance support capital-return expectations as DD&A, transportation costs and development spending rise.
- Commodity-price and derivative exposure, including the coverage volumes, settlement economics and potential collateral requirements.
- Progress and proceeds from planned asset sales, use of the Mitsui carry, and outcomes of the Eagle Ford royalty and Endeavour disputes.