SM Energy Q3 Results

[dan_s]

Updating my forecast model now. It will be posted to the website later today.

Q3 production was slightly below my forecast:
Third quarter production of 14.2 MMBoe, or 153,880 Boe per day, was 31% oil, 25% NGLs and 44% natural gas. Production was down 12% compared with the third quarter of 2015, primarily due to decreased activity in the Eagle Ford, and down approximately 1% compared with the second quarter of 2016, as expected declines in Eagle Ford natural gas production as well as an early closing on the New Mexico divestiture were largely offset by increased oil production from the Permian and Williston Basins.

The Company’s adjusted EBITDAX for the third quarter of 2016 was $205.1 million, compared with $259.4 million in the prior year period. The year-over-year decline in adjusted EBITDAX was predominantly due to higher cash derivative settlement gains in the 2015 period. Compared sequentially with the second quarter of 2016, adjusted EBITDAX was down $12.0 million, with the second quarter benefiting from a slightly higher margin per Boe, which included the benefit from hedge gains. Adjusted EBITDAX for the first nine months of 2016 was $604.6 million, compared with $908.5 million in the prior year period.

Cash flow from operations remains strong and should cover this year's capex budget of $700 million (not including the big acquisitions they've made).

FINANCIAL POSITION AND LIQUIDITY

At September 30, 2016, the outstanding principal balance on the Company’s long-term debt included $2.8 billion in senior notes plus $172.5 million in senior convertible notes. The Company’s senior secured credit facility was undrawn. Also at quarter-end, the Company had a cash balance of $980.7 million, which the Company applied to closing the Rock Oil acquisition on October 4, 2016.

As previously announced, during the quarter, the Company:
• issued $500 million 6.750% senior unsecured notes due 2026;
• issued $172.5 million 1.500% senior unsecured convertible notes due 2021;
• issued 18.4 million shares of common stock for gross proceeds of $552 million; and
• closed $195 million in asset divestitures, subject to pre- and post-closing adjustments.

Also as previously announced, subsequent to quarter-end, the Company:
• closed on the acquisition of Midland Basin assets from Rock Oil Holdings LLC for $991 million, subject to post-closing adjustments;
• announced a definitive agreement to acquire Midland Basin assets from QStar LLC and a related entity for $1.6 billion; under these agreements the sellers will be issued approximately 13.4 million shares of SM Energy common stock to fund $500 million of the purchase price;
• announced a definitive agreement to sell the Company’s properties in the Williston Basin located outside of Divide County, North Dakota to Oasis Petroleum for $785 million, subject to pre- and post-closing adjustments; and
• continued the marketing process for its interests in third party-operated Eagle Ford assets, including its ownership in associated midstream assets.

Closings of the QStar acquisition in the Midland Basin and closing of the Williston Basin divestiture are both anticipated in December 2016. The closings of these transactions are subject to the satisfaction of customary closing conditions, and there can be no assurance that either of these transactions will close on-time or at all.

Currently, the Company’s senior secured revolving credit facility has a borrowing base of $1.35 billion and lender commitments of $1.25 billion.

[dan_s]

SM Energy has a lot of moving parts. Until they complete all of their A&D activities and provide production guidance it is difficult to forecast 2017 results. That said, this stock is trading at less than 5X operating cash flow per share, which compares to the Sweet 16 average of 13X operating CFPS.

I have updated my forecast model, assuming production of 152,000 Boepd in 2017. If they put several rigs to work in the Permian Basin, it should be higher than that.

I have lowered my valuation by $3.00 per share to $49.00, which compares to First Call's price target of $47.57.

My forecast model will be posted to the EPG website later today.