Energy Prospectus

Strong production drove solid earnings and cash flow - Net income was $50.4 million; EPS was $0.45 per diluted common share, and adjusted EPS was $0.01 per diluted common share. < Compares to my forecast of a loss of $13.6 million (-$0.12/share);
Net cash provided by operating activities was $259.9 million < Compares to my forecast of $196.2 million.
Adjusted EBITDAX was $263.0 million, up 41% sequentially.

Always remember that Reported Net Income or "GAAP" net income is a worthless number for any upstream company with a lot of production hedged. The SEC refuses to change their very misleading accounting rules for derivatives.

SM is still outspending cash flow from operations, but they are moving toward being able to fund their growth internally.

If WTI moves over $60/bbl, a $20/share valuation is reasonable for this one. Several analysts upgraded it to a BUY after SM's operational update in mid-July. Price targets range from $15 to $23 per share.

Hi Dan,

I was pleasently surprised by SM's report, but There is a BIG overhanging problem on all these E&Ps as i see it.
And that is the super low NG prices created to some degree by all the excess NG due to all the Fracking for crude.
A company like SM which is simply FLaring a lot of its NG because it can't do anything with it, and any other company that relies to any extent on selling NG for some profits will find it hard to make any money with its NG.
I also don't see NG prices recovering much soon. And if Oil prices happen to rise into the 60s, there will be so much Fracking activity, that we will again be faced with more glut of NG.

LNG holds a great promise of exporting a lot of this NG, but we don't have enought mature plants and infrastructure on line for that to make a serious impact... maybe in 3-4 years.
So what is your take, will the E&Ps simply be discounted down to these rock bottom prices as long as NG is around $2.?

Thanks for your insight,

d4v

The big problem for natural gas and NGL prices at the wellhead is in the Permian Basin. Q3 prices will still be bad (some getting less than $1.00/mcf) but West Texas gas prices should improve in Q4 as more pipeline access comes online.

The four large gassers in the Sweet 16 have no exposure in West Texas. AR's realized gas price net of cash settlements on their hedges was $2.86/mcf in Q2. RRC's realized gas price was $2.54/mcf in Q2. These aren't great prices, but they are still good enough for them to generate solid cash flow from operations.

All of the Permian companies that I follow get most of their revenues from oil sales.

It is extremely important that you know the production mix and hedges that each company has. I show them at the bottom of each forecast/valuation model.