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SM Energy (SM) Gains 27.1% in 3 Months: Can it Soar Further?
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SM Energy Company’s (SM - Free Report) shares have jumped 27.1% in the past three months compared with the industry’s 23.3% rise. While the upstream energy industry is rapidly recovering from coronavirus woes, SM Energy has managed to outperform its peers. The Denver, CO-based company — with a market cap of $2.8 billion — is one of the fastest-growing shale producers.
Image Source: Zacks Investment Research
The Zacks Rank #2 (Buy) company beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, delivering a surprise of 38.3%, on average. It continues to benefit from prolific Permian Basin resources.
Can It Retain Momentum?
The answer is yes and here’s why we think so:
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, SM Energy is one of the most attractive players in the exploration and production space. The company has around 155,000 net acres in South Texas, where it is running two rigs. In the Midland Basin, the company has 82,000 net acres and is running three rigs with three completion crews.
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. It has presented encouraging results from the Austin Chalk, wherein breakeven oil price is expected within $12-$28 per barrel NYMEX. Markedly, the wells in the region are producing around 50-80% liquids, which will boost investor value. Coupled with rising oil prices, its massive oil production volumes will generate huge profits.
The company intends to maximize free cash flow by 2025, with which it can fund the debt reduction program. Earlier, it decreased the full-year 2021 capital spending plan by 27% from the February guidance to $650-675 million. Next year, capital expenditure is expected to further decline and remain stable till 2025. Of the total 2021 capital spending plan, 90% will be used for drilling and completion activities. Importantly, this year, the company expects lease operating expense within $4.50-$5 per Boe, indicating a significant decrease 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 further boost its bottom line.
However, there are a few factors that are holding back the stock from reaching its complete potential. For example, at the end of 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 39.4%.Nevertheless, we believe that SM Energy’s systematic and strategic plan of action will drive long-term growth.
Image: Bigstock
SM Energy (SM) Gains 27.1% in 3 Months: Can it Soar Further?
SM Energy Company’s (SM - Free Report) shares have jumped 27.1% in the past three months compared with the industry’s 23.3% rise. While the upstream energy industry is rapidly recovering from coronavirus woes, SM Energy has managed to outperform its peers. The Denver, CO-based company — with a market cap of $2.8 billion — is one of the fastest-growing shale producers.
Image Source: Zacks Investment Research
The Zacks Rank #2 (Buy) company beat the Zacks Consensus Estimate for earnings in three of the trailing four quarters, delivering a surprise of 38.3%, on average. It continues to benefit from prolific Permian Basin resources.
Can It Retain Momentum?
The answer is yes and here’s why we think so:
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, SM Energy is one of the most attractive players in the exploration and production space. The company has around 155,000 net acres in South Texas, where it is running two rigs. In the Midland Basin, the company has 82,000 net acres and is running three rigs with three completion crews.
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. It has presented encouraging results from the Austin Chalk, wherein breakeven oil price is expected within $12-$28 per barrel NYMEX. Markedly, the wells in the region are producing around 50-80% liquids, which will boost investor value. Coupled with rising oil prices, its massive oil production volumes will generate huge profits.
The company intends to maximize free cash flow by 2025, with which it can fund the debt reduction program. Earlier, it decreased the full-year 2021 capital spending plan by 27% from the February guidance to $650-675 million. Next year, capital expenditure is expected to further decline and remain stable till 2025. Of the total 2021 capital spending plan, 90% will be used for drilling and completion activities. Importantly, this year, the company expects lease operating expense within $4.50-$5 per Boe, indicating a significant decrease 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 further boost its bottom line.
However, there are a few factors that are holding back the stock from reaching its complete potential. For example, at the end of 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 39.4%.Nevertheless, we believe that SM Energy’s systematic and strategic plan of action will drive long-term growth.
Other Key Picks
Other top-ranked stocks from the energy space include Murphy Oil Corporation (MUR - Free Report) , Energy Transfer LP (ET - Free Report) and Magellan Midstream Partners, L.P. , each having a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Murphy Oil’s bottom line for 2021 is expected to surge 131.2% year over year.
Energy Transfer’s profits for second-quarter 2021 are expected to jump 84.6% year over year.
Magellan Midstream’s bottom line for 2021 is expected to rise 7.2% year over year.