SM Energy (SM) Price Target - Jan 23

[dan_s]

From RBC Capital Markets
January 22, 2023
SM Energy Company

RBC Price Target is $50 with an Upside Scenario of $65. My valuation is $58.

Quarterly Check-Up: 4Q22
Our view: SM shares have weakened relative to peers in recent weeks,
in our view attributable to the Austin Chalk exposure to the drop in
natural gas prices and corresponding impact on FCF generation. We think
capital allocation will be a key discussion point. We think the key investor
debates are recent gas price weakness and impact on A/C activity and
returns, 2023 capital allocation between the A/C and Permian, level of
shareholder returns and buybacks given current debt targets, depth/
quality of the Permian inventory as SM continues to test other formations,
and inflationary impacts on 2023 spending.

Key points:
• Our 4Q22 EPS/CFPS estimates decline by $0.26/$0.33 to $1.24/$2.84, < Below my Q4 forecast of $1.54/$3.21.
mostly reflecting final 4Q22 benchmark commodity prices that were
below our prior forecast and assumptions for modest winter weather
downtime. Our estimates are a touch below consensus of $1.26/$2.86.

• We also revise our 2023/2024 EPS/CFPS estimates, reflecting RBC’s most
recent commodity deck update. Please see details in our note. We lower
our price target by $5/share to $50, reflecting the impact of recent lower
natural gas prices on Austin Chalk returns.

• We model 4Q22 production at 141 Mboe/d (63 Mb/d oil), which is up 2%
sequentially. Our estimates are generally consistent with consensus and
just above the company’s 138–143 Mboe/d (44% oil) guidance. We had
forecast top-end guidance performance but tapered our expectations
due to assumptions for weather-related curtailments.

• We expect 4Q22 spending of $247 million, below consensus but near the
$228–258 million guidance midpoint. We calculate FCF of $103 million.

• SM hedged roughly 52% of oil and 47% of natural gas production in 4Q22,
resulting in a cash settled loss of $115 million.

Channel checks and investor topics:

• SM should provide a formal 2023 budget/outlook with 4Q22 earnings
and target maximizing 3-year FCF. The current five rigs generate ~5%
total production growth, but oil may not grow much. We expect a capital
budget of $1.0–1.1 billion, including 15–20% inflation. Cash taxes are
highly dependent on commodity prices and only ~$50 million at strip.

• Activity allocation is an important topic, especially given recent natural
gas price weakness and the gassier Austin Chalk returns. We had
anticipated a more balanced mix but that could change.

• Permian production should increase by 2Q23 with four well pads (20
wells) online in 1Q–2Q23. This also improves the oil-cut.

• SM remains below its 1.0x leverage target and is progressing toward
the $1.0 billion aggregate debt goal. Open debt market premiums make
reducing outstanding notes not as attractive, so SM could focus more on
cash build and target to net debt.

• For shareholder returns, we think management is active with buybacks,
especially given recent SM stock weakness. We model $65 million in
4Q22 and increasing in 1Q23.