SM Energy (SM) Valuation Update - May 2

[dan_s]

I spent several hours last evening and this morning going over my forecast/valuation model for SM Energy.

SM's Q1 production beat my forecast and so did their Adjusted Operating Cash Flow per share, which is the primary driver of all of my stock valuations.

At the time of this post SM was trading for $22.40.

There is NOTHING which I see that comes close to justifying the current share price.
> I have gone over my forecast model line-by-line; being conservative on all of my assumptions for production volumes and expenses.
> SM is going to report a production increase from Q1 to Q2 that will probably exceed 200,000 Boepd, the midpoint of their guidance.
> Q2 production mix should be approximately 54% crude oil, 33% natural gas and 13% NGLs.
> SM's hedging program reduces their risk of lower-for-longer oil prices AND I have large "cushions" in my forecasts for 2H 2025 and 2026.
> The well results in their new Uinta Basin core area have exceeded expectations and they have added more high potential development drilling locations since our last profile on the Company.
> SM's balance sheet is in good shape, and they have no near-term debt issues. They have a large un-drawn credit facility, so they have no liquidity problem.
> Based on my forecast, SM's operating cash flow should be close to $2 billion in 2025, compared to their CapEx budget of $1.3 billion. All of their organic growth (8% to 10% per year) can be fully funded by operating cash flow.
> Free cash flow is way over their current dividends, so they will continue to pay down debt.
> Dividends should increase in 2026.

My current valuation remains at $58 per share, which is only 3.25 X annualized operating cash flow per share. That is a very conservative multiple for a profitable, free cash flow positive, mid-cap with this much "Running Room".

TipRanks: "In the last 3 months, 13 ranked analysts set 12-month price targets for SM. The average price target among the analysts is $41.54." < None of the 13 price targets have been updated since SM announced strong Q1 results.