SM Energy - Q2 results

[dan_s]

Production beat my forecast and the outlook has improved. I will update the forecast model this evening. - Dan

SM Energy Reports Second Quarter of 2016 Results - Exceeding Expectations Across the Board

- Raising Production Guidance, Lowering Capital Guidance
• Production of 14.3 MMBoe exceeded plan by approximately 1 MMBoe reflecting outperformance from new wells in the Eagle Ford and Permian; oil production of 4.1 MMBoe at mid-point of guidance
• GAAP Net cash provided by operating activities $138.6 MM; Adjusted EBITDAX $217.1 MM
• GAAP Costs incurred $177.3 MM; total capital spend $167.6 MM
• Capital spend and operating cost guidance lowered, production guidance raised
• Operating costs below plan across the board including LOE, transportation and G&A
• Asset divestitures under definitive agreements total $172.5 MM

DENVER--(BUSINESS WIRE)--Aug. 2, 2016-- SM Energy Company (NYSE: SM) today announced financial results for the second quarter of 2016 and provided an operations update. In conjunction with this release, the Company posted an investor presentation on its website at www.sm-energy.com with additional second quarter results and operations detail. This presentation will be referenced during the earnings webcast and conference call scheduled for 8:00 a.m. Mountain Time (10:00 Eastern Time) on August 3, 2016. Further information on the earnings webcast and conference call can be found below.

MANAGEMENT COMMENTARY

President and Chief Executive Officer Jay Ottoson comments:

“The second quarter of 2016 exceeded expectations across the board, a result of outstanding execution and well results. Production volumes reflected continued improvement in performance in both Eagle Ford and Permian wells while operating efficiencies contributed to both lower operating and capital costs. EBITDAX well exceeded capital spend in the quarter, while production grew 7% sequentially. We are focused on delivering differential value for our shareholders through debt-adjusted per share growth in cash flow over the long term, and we believe that our cost discipline and well results demonstrate that we are on that path.”

SECOND QUARTER 2016 RESULTS

Second quarter production of 14.3 MMBoe, or 157,247 Boe per day, was 29% oil, 26% NGLs and 45% natural gas. Production from new wells in both the operated Eagle Ford and Permian outperformed plan. Eagle Ford wells completed during the quarter were primarily located in the natural gas-NGL rich portion of Eagle Ford. Oil production met the mid-point of guidance despite weather related delays in well completions in North Dakota. Total production is up 7% sequentially from the first quarter of 2016 and down 9% from the second quarter of 2015, pro forma for assets sold. For the first half of 2016, total production was 27.7 MMBoe and averaged 152,356 Boe per day.

[dan_s]

I have finished updating my forecast for SM. I have raised my valuation by $1.50/share to $49.50.

> Q2 cash flow from operations beat my forecast
> The company raised their production guidance and lowered their capex budget
> Asset sale that will close in Q3 to shore up an already strong balance sheet

I could easily justify a much higher valuation for SM since the company is on-track to generate over $10/share in cash flow from operations this year. A high percentage of their production is hedged, so near-term oil price dip has very little impact on SM's revenues. Production mix is 43.4% natural gas, 28.7% crude oil and 25.9% NGLs. Natural gas and NGL prices are going a lot higher in six months.

< 66% of Q3 2016 gas hedged at ~$3.13
< 44% of Q3 2016 oil hedged at ~$71.80
< 56% of Q3 2016 NGL hedged at ~$16.14
< 50% of 2017 gas hedge at ~$3.95