SM Energy (SM) Valuation Update - Aug 4

[dan_s]

SM's Q2 results beat my forecast and they have increased their production guidance for 2H 2022. I have increased my current valuation by $5 to $85/share.

At the time of this post SM was trading at $37.05
TipRanks: "In the last 3 months, 8 ranked analysts set 12-month price targets for SM. The average price target among the analysts is $61.97. The 8 price targets range from $54 to $77 but only one has been updated since the Company released Q2 results and fresh guidance. On 8-4-2022 Gabriele Sorbara at Siebert Williams Shank & Co raised his price target to $77.00". Gabriele is rated a 4.5 Star analyst by TipRanks.

Why is my valuation higher:
> SM's operating cash flow is on-track to be $2.051 billion this year, up from $1.042 billion in 2021.
> The high end of SM's Capex Budget for 2022 is now $900 million, so the Company should generate over $1.1 billion of free cash flow this year.
> FCF has been use to payoff debt and SM will soon reach their goal of debt under 1.0 X EBITDA.
> SM's production was 146,615 Boepd in Q2 and they are guiding toward an exit rate of more than 152,000 Boepd in Q4.
> This is KEY: SM's production mix is approximately 47% crude oil, 39% natural gas and 14% NGLs. < The recent pull-back in the oil price (IMO it is now oversold) is being offset by rising natural gas and NGL prices.
> I have increased my valuation multiple from 5.5 to 5.7 X annualized operating cash flow. When the Company starts paying a dividend (expected in Q4 2022) then a multiple of 6.0 X operating CFPS should be justified.
> SM has a much-improved balance sheet and lots of high-quality low-risk development drilling inventory. They can fund 5% to 10% annual production growth with just 50% of their operating cash flow.