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Why Investors Should Hold on to SM Energy (SM) Stock for Now

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SM Energy Company (SM - Free Report) is well poised to grow on the back of robust Permian Basin oil reserves and decreasing costs.

SM Energy — with a market cap of $2.2 billion — is an upstream energy company. Based in Denver, CO, the company is engaged in the exploration, development, acquisition, and production of natural gas as well as crude oil in North America. As of Dec 31, 2020, it had proved reserves of 405 MMBoe, of which 43% was crude oil, 43% natural gas and 14% NGLs. It added 89 MMBoe of reserves in 2020.

It beat earnings estimates thrice and missed once in the last four quarters, with an average surprise of 38.3%.

SM Energy Company Price and EPS Surprise

SM Energy Company Price and EPS Surprise

SM Energy Company price-eps-surprise | SM Energy Company Quote

Courtesy of solid prospects, this Zacks Rank #3 (Hold) stock is worth holding on to at the moment.

What’s Driving the Stock?

SM Energy’s attractive hydrocarbon investments, balanced and diverse portfolio of proved reserves as well as development drilling opportunities are expected to create long-term value for shareholders. As such, we view SM Energy as one of the most attractive players in the exploration and production space.

Given the company’s increasing focus on oil, specifically in the Permian Basin and Eagle Ford areas, we believe that it will be able to boost oil-weighted activity in the coming days. Additionally, the company holds meaningful leasehold positions in leading U.S. shale plays like South Texas & Gulf Coast, which will provide it with many years of profitable drilling inventory. Importantly, its high-quality Howard County assets are a huge positive.

To navigate through market volatility, the company decreased the full-year 2021 capital spending plan by 27% from the February guidance to $650-675 million. Moreover, SM Energy has a strong hedging position, which will provide it with cash flow stability.

For 2021, the company expects lease operating expense within $4.50-$5 per Boe, indicating a significant improvement from the 2020 level of $3.97. Transportation costs will likely be in the range of $2.80-$3 per Boe, suggesting a decline from the 2020 figure of $3.06. Lower costs will boost its bottom line.

Downsides

However, there are a few factors that are impeding the growth of the stock lately.

At the end of the first-quarter 2021, SM Energy had $2,321.7 million in net debt but no cash and cash equivalents. High leverage of the upstream player is a cause of concern as it can restrict its financial flexibility. Also, the company’s long-term debt to capitalization of 56.1% is much higher than the industry average of 39.6%.

For the most part of the last three years, SM Energy’s dividend yield had been much lower than the industry it belongs to, reflecting unimpressive returns for investors. Also, despite the recent commodity price recovery, the company might witness a major impact on profitability as a second wave of infections is rapidly spreading in some large economies. This can affect the rate of demand recovery and result in inventory build ups.

To Sum Up

Despite significant prospects as mentioned above, high debt burden and rising COVID-19 cases in some countries are concerns for the company. Nevertheless, we believe that systematic and strategic plan of action will drive its long-term growth.

Key Picks

Some better-ranked players in the energy space include Suburban Propane Partners, L.P. (SPH - Free Report) , Braskem S.A. (BAK - Free Report) and PHX Minerals Inc. (PHX - Free Report) , each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Suburban Propane’s bottom line for 2021 is expected to rise 58.8% year over year.

Braskem’s bottom line for 2021 is expected to rise 231.3% year over year.

PHX Minerals’ bottom line for 2021 is expected to surge 40% year over year.

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