SM Energy Q1 Results - July 30

[dan_s]

DENVER , July 30, 2020 /PRNewswire/ -- SM Energy Company (the "Company") (NYSE: SM) today announced operating and financial results for the second quarter 2020 and provided updates to its 2020 operating plan.

During the second quarter of 2020, the Company focused on its priorities of:

Capital discipline. Capital expenditures were 26% below guidance primarily reflecting lower costs as well as timing of certain activity. Capital expenditures of $170.9 million adjusted for decreased capital accruals of $45.7 million totaled $125.2 million .
Significant cash flows . Second quarter net cash provided by operating activities of $114.3 million before net change in working capital of $38.7 million totaled $153.1 million. < This compares to my forecast of $129 million cash flow from operations.
The Company generated free cash flow of $27.9 million. Free cash flow for the first half of 2020 was $108.4 million and on a trailing 12-month basis was $124.7 million , or a 29% yield to market capitalization as of June 30, 2020 .
Absolute debt reduction . The outstanding principal amount of long-term debt was reduced by $219 million as a result of the debt exchange transactions completed in the second quarter. The debt exchange successfully reduced total debt and significantly reduced maturities through 2022 by approximately $250 million .
Net debt-to-Adjusted EBITDAX was 2.45 times at quarter-end.

Capital expenditures for 2020 further reduced. 2020 capital expenditure guidance is further reduced to $610 -630 million to reflect aggressive cost controls for drilling and completion expenditures as well as certain delayed activity. The updated plan continues to prioritize cash flow and leverage metrics through 2020 and beyond.

Chief Executive Officer Jay Ottoson comments: "The second quarter presented our industry with steep challenges and the SM Energy team responded. We aggressively reduced costs, maintained capital discipline, reduced outstanding debt, deferred production volumes and delivered approximately $28 million in free cash flow. We have further modified our operating plan to meet our priorities of generating free cash flow and keeping leverage metrics in-line as we move into the second half of 2020 and through 2021.

"These accomplishments are particularly impressive as our field teams adapt to new COVID-19 related protocols and the rest of us work from home. To date, we have seamlessly managed through the challenges presented by the pandemic, and we continue to make the safety of our employees and contractors our top priority.

"I am also pleased to report that we have further evidenced our commitment to environmental and social stewardship, as our Board of Directors recently delegated to its Nominating and Corporate Governance Committee the responsibility to oversee the development and implementation of the Company's environmental and social policies, programs and initiatives, and renamed the committee the Environmental, Social and Governance Committee. In addition, we are initiating participation in the Carbon Disclosure Project and intend to publish the Company's SASB metrics for oil and gas exploration and production."

[dan_s]

Q2 production beat my forecast. Their realized oil price of $48.06/bbl (including settlements on their hedges) beat my forecast of $45/bbl, but natural gas and NGL prices were much lower. Revenues topped my forecast because of the oil price and much higher natural gas production, offset by lower gas prices.

This is what has saved SM from Chapter 11: < Eagle Ford oil sells at LLS price (a premium to WTI) and ~90% of 2H 2020 oil is hedge at average over $55/bbl.

[dan_s]

SM closed on July 30 at $3.48.
> First Call's price target is $4.93, but none of the forecasts submitted to Reuters have been updated for Q2 results. Despite the reported loss, the quarter was better than I expected.
> In the last 3 months (since the sharp drop in oil prices in April), 8 ranked analysts set 12-month price targets for SM of $3.00 to $8.00. The average price target among the analysts is $4.50.

SM has a lot of debt, but they've been able to manage it and FCF continues to pay down debt; keeping the debt holders at bay. SM is now on-track to generate over $700 million of cash flow from operations this year (thanks to their oil hedges).

HEDGES ARE EXTREMELY IMPORTANT THIS YEAR: SM's cash settlements on their hedges have been $216 million so far in 2020 and likely to exceed $100 million in Q3.

Conclusion: If WTI stays in the low $40's it will be difficult for SM to stay afloat in 2021. If Raymond James' forecast that WTI will ramp up to over $70/bbl in 2021 is correct, SM has a lot of upside for us. At that oil price, SM should surpass their 52-week high of $12.91.