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Independent oil and gas company SM Energy Company’s (SM - Analyst Report) fourth-quarter 2012 adjusted earnings of 45 cents per share comfortably beat the Zacks Consensus Estimate of 23 cents on record production. However, the quarterly figure decreased 25.0% from the year-ago earnings of 60 cents due to lower price realization.

Total revenue was $444.3 million in the quarter, showing an improvement of 17.1% from $379.5 million in the prior-year quarter. The revenue, however, also surpassed the Zacks Consensus Estimate of $414.0 million.

Full-year 2012 adjusted earnings of $1.17 per share beat our expectation of 95 cents by 23.2%. However, the reported figure dropped fell 54.3% from the year-earlier profit level of $2.56 per share.

Total revenue in 2012 was $1,505.1 million, representing a 6.1% decrease from 2011. However, it surpassed our projection of $1,480.0 million.

Operational Performance

The company’s fourth-quarter production came in at 659.6 million cubic feet equivalent per day (MMcfe/d), exceeding the company’s guidance range of 625–658 MMcfe/d. It also showed an improvement of 18.2% from the year-ago level of 557.9 MMcfe/d. The outperformance was mainly attributable to its Eagle Ford and Bakken/Three Forks program.

SM Energy produced 347.1 million cubic feet per day (MMcf/d) of natural gas in the quarter, up almost 11% year over year. Oil production also grew 17.2% year over year to 31.3 thousand barrels per day (MBbls/d). Natural gas liquids contributed 20.8 MBbls/d to the total volume, up 47.5% from the fourth quarter of 2011.

Full-year 2012 total production was 218.9 MMcfe/d versus the year-ago level of 169.7 MMcfe/d. The almost 30% increment came on the back of a high rate of return on oil and liquid-rich programs in the Eagle Ford shale and Bakken/Three Forks. The reported figure also exceeded the company’s guided range of 215.5–218.5 MMcfe/d.

Including the effect of hedging, the average equivalent price per thousand cubic feet equivalent (Mcfe) was $7.21 compared with $7.58 in the year-ago period. Average realized prices (inclusive of hedging activities) were $3.83 per Mcf of natural gas (down 12.2% from the comparable quarter last year), $84.76 per barrel of oil (up 5% approximately), and $37.32 per barrel of natural gas liquid (down 25.9%).

On the cost front, unit lease operating expense (LOE) decreased 7.1% year over year to 79 cents per Mcfe in the quarter. Transportation expenses increased to 71 cents per Mcfe (from 60 cents in the year-ago period); general and administrative expenses were 47 cents per Mcfe (down 32%); while depletion, depreciation and amortization (DD&A) expenses increased 3.4% to $3.37 per Mcfe from the year-earlier level of $3.26 per Mcfe.

Liquidity

Net cash provided by operating activities decreased to $268.4 million during the quarter from $270.8 million in the year-ago quarter. As of Dec 31, 2012, SM Energy had a cash balance of $5,926.0 million and long-term debt of $1,440.0 million, with a debt-to-capitalization ratio being 49.4%.

Guidance

For the first quarter of 2013, SM Energy’s production forecast is 661 MMcfe/d to 695 MMcfe/d. The estimated LOE per Mcfe is 78 cents to 82 cents while DD&A is projected in the $3.20–$3.40 range.

SM Energy reaffirmed its 2013 production forecast in the band of 699–732 MMcfe/d. Given the current tepid gas price scenario, the company intends to increase the 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.

The company also remains upbeat on its New Ventures plan. The program has already taken additional acreage in the Permian Basin and in East Texas. These resources have significant potential to boost its oil-weighted inventory.

Zacks Rank

SM Energy currently retains a Zacks Rank #3 (Hold). There are other stocks in the oil and gas industry like Range Resources Corporation and Memorial Production Partners L.P. (MEMP - Snapshot Report) that appear more attractive. Both hold a Zacks Rank #2 (Buy).
 

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