Watch List: SM Energy (SM) Update - Oct 7

[dan_s]

I finally got around to updating my forecast/valuation model for SM Energy.

SM was in our Sweet 16 but they got caught in the "Debt Trap" and the stock traded under $2.00 from March thru October 2020. Since then it has made a big comeback and today is trading for over $30.00.

My valuation TODAY is $32.50, so I would just rate it a HOLD.

Their is upside heading into next year. Here is what needs to happen.
> Stick with their promise to generate free cash flow and pay down debt. IMO their tiny dividend would be better spent paying off debt.
> Production should be up ~5% in 2021 and could increase 12% to 15% in 2022 if their new Austin Chalk program (400 HZ well location) is real.
> Q2 2021 production was 136,522 Boepd (53.7% crude oil, 35.5% natural gas and 10.8% NGLs); stay on the path to an exit rate of 145,000 Boepd.
> SM's hedging program saved them from bankruptcy in 2020, but will cost them over $600 million this year (ouch!)
> They will have less "Bad Hedges" in 2022, so realized commodity prices will improve (from approximately $46.50/bbl oil in 2021 to $55/bbl in 2022)
> The company has a low amount of shares outstanding, 121 million. So, if everything lines up, operating cash flow should go over $10/share next year.
> TipRanks' consensus estimates for 2022 are $2.1 Billion of revenues, $2.30 earnings per share and $10.57 operating cash flow per share.
> Steady payoff of debt could justify a valuation of 5X operating cash flow per share or $53 a year from now.

SM is a classic "Leverage Works Both Ways" company.

What does the Wall Street Gang think?
> 10/7/2021 Keybanc's price target is $31.00
> 9/19/2021 J P Morgan's price target was $27.00
> 8/23/2021 Wells Fargo's price target was $30.00

Conclusion: We have much better choices in the Sweet 16 and our Small-Cap Growth Portfolio.