SM Energy: 2013 Guidance

SM Energy Company ( SM - Analyst Report ) has provided its production growth forecast for the next year. The independent oil and gas company also plans to spend more on its Eagle Ford, Bakken/Three Forks, and Permian drilling operations.

The Denver, Colorado-based company expects its 2013 capital outlay to be approximately $1.5 billion, with Eagle Ford and Bakken/Three Forks occupying more than 43% and 19% of the total budget, respectively. The Eagle Ford, where the company has built a premier position, represents an attractive resource potential with its significant liquids content and favorable economics. Development of the Eagle Ford Shale is an important part of SM Energy’s goal to increase stockholder value.

In the production front, the company expects to deliver 255–267 billion cubic feet equivalent/Bcfe (or 42.5–44.5 million barrels of oil equivalent/MMBoe) of hydrocarbon for 2013. This represents about 20% growth from the 2012 level, which will likely be followed by about 15% production growth in 2014 and 2015. Meanwhile, SM Energy maintains this year’s as well as the fourth quarter’s production guidance at 57.5–60.5 Bcfe and 215.5–218.5 Bcfe, respectively.

Given the current tepid gas price scenario, the company intends to increase liquids composition in its portfolio, like its peer Chesapeake Energy Corp. ( CHK - Analyst Report ) . As such, liquids are expected to comprise 50% of production by the end of 2013.

While Eagle Ford will likely accelerate faster than expected because of additional takeaway, the company also remains proactive in its Permian play. Given the company’s increasing focus on oil, specifically in the Permian and Rocky Mountain regions, we believe that SM Energy will be able to boost its oil-weighted activity.

The company’s meaningful leasehold positions of the leading U.S. shale plays, comprising the Bakken, Niobrara, Haynesville, and Granite Wash, will provide it with many years of profitable drilling inventory.

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 (nearly 55% of the third quarter’s production), and may face near-term headwinds in this market from struggling commodity prices. SM Energy’s third quarter adjusted earnings per share fell 77.8% from the year-ago level due to lower price realization. Natural gas was sold at $3.44 per thousand cubic feet/Mcf, down 29.7% from the comparable quarter last year.

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).