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SM Energy Lags Ests, Grows YoY

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SM Energy Company’s (SM - Analyst Report) first-quarter 2012 adjusted earnings of 48 cents per share increased by over 14% from the year-ago earnings of 42 cents. First quarter earnings recorded a jump on the back of greater production and higher oil realized prices. However, the results came in below the Zacks Consensus Estimate of 50 cents.

Total revenue of $377.4 million grew nearly 20% from $315.3 million in the prior-year quarter but missed the Zacks Consensus Estimate of $401 million. Oil, gas and natural gas liquid (NGL) production revenues contributed $362.6 million (up more than 31% year over year) to the total revenue.

Operational Performance

The company’s first-quarter production came in at 557.0 million cubic feet equivalent per day (MMcfe/d), up 39% year over year, and 1% above the midpoint of management’s target range of 533–571 MMcfe/d.

SM Energy produced 314.9 million cubic feet per day (MMcf/d) of natural gas in the quarter, reflecting a 30% year-over-year improvement. Oil production also grew 39% year over year to 27.6 thousand barrels per day (MBbls/d). Natural gas liquids contributed 12.8 MBbls/d to the total volume, up 87% from the first quarter of 2011.

Including the effect of hedging, the average equivalent price per thousand cubic feet equivalent (Mcfe) was $7.29 compared with $7.43 in the year-ago period. Average realized prices (inclusive of hedging activities) were $3.60 per Mcf of natural gas and $86.35 per barrel of oil, down nearly 29% and up 15%, respectively, from the comparable quarter last year.

On the cost front, unit lease operating expense (LOE) decreased 15% year over year to 78 cents per Mcfe in the quarter. Transportation expenses increased substantially to 56 cents per Mcfe (from 41 cents in the year-ago period); general and administrative expenses were 56 cents per Mcfe (down 22%); while depletion, depreciation and amortization (DD&A) expenses increased 15% to $3.35 per Mcfe from the year-earlier level of $2.92 per Mcfe.

Liquidity

Net cash provided by operating activities improved to $188.1 million during the quarter, as against $156.7 million in the year-ago quarter. As of March 31, 2012, SM Energy had a cash balance of $286,000 and long-term debt of $1,011.5 million, with a debt-to-capitalization ratio of 40.4%.

Guidance

For the second quarter of 2012, SM Energy’s production forecast is in the range of 50 Bcfe to 54.0 Bcfe. The estimated LOE per Mcfe is 83 cents to 88 cents while DD&A is projected in the $3.20–$3.40 range.    

For 2012, SM Energy has maintained its production forecast in the range of 220–227 Bcfe and capital spending within $1,400 million to $1,500 million.

Outlook

Denver, Colorado-based oil and gas company, SM Energy remains proactive in its attempt to hold a significant position in emerging shale plays and focus more on resource, with an inventory of repeatable drilling prospects and a high rate of return. We believe that the company’s emerging core portfolio is a positive catalyst for visible organic growth over the next several years.

During the quarter, SM Energy’s production came in line with its guidance by leveraging off the considerable ground work set up in the preceding years in the Eagle Ford as well as Bakken Three Forks programs. The company holds an equally positive outlook for the remainder of 2012 as it has the financial strength and asset base in liquid rich plays that will facilitate growth.

However, SM Energy’s results are vulnerable to fluctuations in natural gas markets as it has natural gas-weighted reserves. The company derives a significant portion of its operating revenues from natural gas. The proposed liquid-rich drilling activities by the company clearly suggests that low natural gas prices have little ability to pick up in the near term.

SM Energy’s competitor, Range Resources Corporation’s first-quarter 2012 earnings beat the Zacks Consensus Estimate on higher production level and lower unit costs.

We currently maintain a long-term Neutral recommendation on SM Energy. The company holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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