SM Energy Update - Sept 24

[dan_s]

RBC Capital's Equity Research Team held a virtual conference with SM Energy early this week. Below are their notes.

September 24, 2020
SM Energy Company
Virtual NDR Highlights

We hosted meetings with SM's CEO Jay Ottoson and President/COO Herb Vogel.

The primary goal is still reducing leverage metrics and outright debt. SM
noted that its plan going forward will primarily be determined by leverage
metrics. SM wants net debt-to-EBITDAX to decline over time, and plans to
accomplish this by keeping EBITDAX steady or growing while outright debt
balances decline. SM believes the volume growth it plans for 2021 (10%+)
is the best solution to allow the company to reduce its leverage metrics.
2021 details suggest significant benefit from DUCs. With 2Q20 earnings,
SM announced expected 2021 production growth in the double digits for
capex of +10% YoY, although consensus estimates do not reflect anything
like this level of capital efficiency. In the meetings, SM noted that it expects
to drill 80 net wells (+3 vs. 2020) but complete 110 net wells (+42 vs. 2020).
This 62% YoY increase in completions appears largely responsible for the
capital efficiency gap. The 30 net well differential between completions
and drills could save the company roughly $60 million.

Austin Chalk productivity will be proven in 2021. SM thinks its Austin
Chalk acreage has been largely proven up by its nine existing wells, and the
company's large number of Eagle Ford penetrations allows it to forecast
the areas with the highest permeability. However, management sees a
discrepancy between how the market is valuing the Austin Chalk and how
strong the actual productivity is. While the company has yet to settle on
an activity split between the Midland and Chalk in 2021, SM expects to
prove out the productivity to the market next year. SM did note that it is
not currently marketing the South Texas assets, as the bid-ask is too wide.

Austin Chalk and contract maturities should significantly increase South
Texas margins. SM expects a significant improvement in South Texas
margins versus the $3.04/boe figure seen in 1Q20. This is due to a number
of factors including: (1) higher liquids cut Austin Chalk wells, (2) $5/
bbl increase in condensate prices in 2021 due to a contract rolling off,
(3) a $0.25/mcf decrease in transport costs in 2021, and (4) a $0.35/
mcf decrease in transport costs in 2023. Combined, these could increase
margins by $13/boe. SM sees these changes allowing the Austin Chalk to
compete heads up with the Midland on returns.
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MY TAKE:
> My valuation of SM is $7.00 per share. The stocks current price of $2.00 compares to my 2021 operating cash flow per share forecast of $4.97.
> Per note above, SM thinks they can increase production by more than 10% YOY in 2021. My forecast is based on 3.8% YOY production.
> ~50% of SM's production is natural gas and NGLs. < This is why I think their is upside to my valuation.
On September 18th Stifel had a $4.00 price target for SM