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SM Energy Beats on Higher Volume

CHK SM

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SM Energy Company’s (SM - Analyst Report) third-quarter 2012 adjusted earnings of 14 cents per share beat the Zacks Consensus Estimate of 7 cents on record production. However, the quarterly figure decreased 77.8% from the year-ago earnings of 63 cents due to lower price realization.

Total revenue of $379.0 million was down 28.6% from $530.6 million in the prior-year quarter but surpassed the Zacks Consensus Estimate of $362.0 million.

Operational Performance

The company’s third-quarter production came in at 619.6 million cubic feet equivalent per day (MMcfe/d), exceeding the company’s guidance range of 565–603 MMcfe/d and up by an impressive 34.1% from the year-ago level of 462.1 MMcfe/d. The positive performance was mainly attributable to its Eagle Ford program. Average daily production from the company's operated Eagle Ford shale program expanded 90% year over year during the quarter.

SM Energy produced 340.3 million cubic feet per day (MMcf/d) of natural gas in the quarter, reflecting a 21.0% year-over-year improvement. Oil production also grew 33.0% year over year to 28.6 thousand barrels per day (MBbls/d). Natural gas liquids contributed 18.0 MBbls/d to the total volume, up significantly by 109.3% from the third quarter of 2011.

Including the effect of hedging, the average equivalent price per thousand cubic feet equivalent (Mcfe) was $6.76 compared with $7.40 in the year-ago period. Average realized prices (inclusive of hedging activities) were $3.44 per Mcf of natural gas (down 29.7% from the comparable quarter last year), $82.15 per barrel of oil (up 9.5%), and $37.39 per barrel of natural gas liquid (down 24.8%).

On the cost front, unit lease operating expense (LOE) decreased 12.8% year over year to 82 cents per Mcfe in the quarter. Transportation expenses increased to 65 cents per Mcfe (from 56 cents in the year-ago period); general and administrative expenses were 56 cents per Mcfe (down 20.0%); while depletion, depreciation and amortization (DD&A) expenses increased 17.0% to $3.38 per Mcfe from the year-earlier level of $2.89 per Mcfe.

Liquidity

Net cash provided by operating activities improved to $243.3 million during the quarter from $119.8 million in the year-ago quarter. As of September 30, 2012, SM Energy had a cash balance of $0.2 million and long-term debt of $1,013.0 million, with a debt-to-capitalization ratio of 40.7 (versus 43.2% in the second quarter).

Guidance

For the fourth quarter of 2012, SM Energy’s production forecast is in the range of 625 MMcfe/d to 658 MMcfe/d. The estimated LOE per Mcfe is 82 cents to 87 cents while DD&A is projected in the $3.20–$3.40 range.

For 2012, SM Energy has raised its production forecast to the range of 589–597 MMcfe/d, comprising 28% oil, 55% natural gas and 17% NGL. The earlier guidance for total daily production stood in a band of 573 MMcfe to 593 MMcfe.

Outlook

Denver, Colorado-based SM Energy Company, previously known as St. Mary Land & Exploration Company, is an independent oil and gas company engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America.

Given the significant liquids content and favorable economics, the Eagle Ford represents an attractive resource potential where the company has built a premier position. Development of the Eagle Ford Shale is an important part of SM Energy’s goal to increase stockholder value. We also believe that SM Energy’s emerging core portfolio will support visible organic growth for the next several years.

While Eagle Ford will likely accelerate faster than expected because of additional takeaway, the company also remains proactive in its Permian play. The additional acreage addition to its Permian play validates the potential of the basin.

However, we remain bearish on account of the depressed natural gas price environment. The company derives a significant portion of its operating revenues from natural gas, and may face near-term headwinds in this market from struggling commodity prices. Natural gas provider Chesapeake Energy Corp.’s (CHK - Analyst Report) adjusted third quarter 2012 earnings plunged by more than 86% from the year-earlier profit in the wake of a 59.1% decline in average price realizations for natural gas.

Again, in terms of geographic diversification, SM Energy’s lack of exposure to overseas refining prospects weakens its competitive position to some extent. With the majority of its capacity located in North America, the company’s results are heavily tied to refining margins in a single market.

Considering the fundamentals, we maintain our Neutral recommendation on the stock for the long term, which is supported by a Zacks #3 Rank (short-term Hold rating).

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