SM Energy (SM) Q2 Preview - July 11
Posted: Mon Jul 11, 2022 10:13 am
Note below from RBC Capital with my comments in blue.
July 11, 2022
SM Energy Company
Quarterly Check-Up: 2Q22
Our view: We expect production to be at the high end of guidance, but
our estimates are still slightly below consensus. We believe management
is likely to increase its budget given industry inflationary pressures. We
think the key investor debates are timing of the shareholder return plan,
inflationary pressures, and the medium- to longer-term inventory depth.
Key points:
• Our 2Q22 EPS/CFPS estimates of $2.15/$4.02 are unchanged following < Compares to my forecast of $2.00 EPS and $3.99 CFPS.
our recent update for our increased commodity price forecast, which
included final 2Q22 benchmark commodity prices. Our estimates are
slightly below consensus of $2.21/$4.11, which we think could be related
to commodity price realization assumptions.
• We model 2Q22 production at 146 Mboe/d (67 Mb/d oil), which is down < Compares to my forecast of 145,000 Boepd (65,250 BOPD).
5% sequentially but in line with consensus and at the high end of the
company’s 143–146 Mboe/d guidance. The decrease is largely driven by
limited completions in the Permian, but we expect sequential production
growth restarting in 3Q22.
• We expect 2Q22 capital spending of $240 million, above consensus of
$229 million but at the midpoint of the $230–250 million guidance. We
calculate FCF generation of $259 million. < SM's strong free cash flow is why I added it to the Sweet 16.
• There was approximately 55% of oil and 43% of natural gas production
hedged in 2Q22, resulting in a cash loss of $243 million. < The amount of unhedged production increases each quarter.
Channel checks and investor topics:
• SM is completing its mid-year budget review. Given industry inflationary
trends, we expect an increase of at least $50 million to $800+ million.
This amounts to an overall 20+% increase for 2022, consistent with SMid
peers. We think SM is ahead on activity given operational efficiencies;
normally it would take a break with its service providers but it is not likely
to this year because it wants to retain its current crews.
• Management remains steadfast on not getting ahead of timing for
shareholder returns and plans to wait until it reaches its targets of 1.0x
leverage ratio and $1 billion in absolute debt. SM has reached its leverage
ratio goal, which we model closer to 0.7x at 2Q22, but the $1 billion debt
level will likely occur around the 3Q22 earnings release. < This is why I think SM could make a big move in Q4.
• Until then, the first draw on free cash flow will be debt reduction and
targeting the 2025 and 2026 notes that are callable. Management hasn’t
indicated a preference for specific return mechanisms but is focused on
having a program that is sustainable at low commodity prices. We think
this may initially take the form of a quarterly fixed dividend (1.0–1.5%
yield) and a share repurchase program.
• We think that the Austin Chalk remains an upside asset, but more positive
success in the play is necessary to build investor confidence. Data for the
enhanced completions might be an early-2023 event.
• Robust commodity prices increased our cash tax expectations and we see
around $10 million accrued for in 2Q22.
July 11, 2022
SM Energy Company
Quarterly Check-Up: 2Q22
Our view: We expect production to be at the high end of guidance, but
our estimates are still slightly below consensus. We believe management
is likely to increase its budget given industry inflationary pressures. We
think the key investor debates are timing of the shareholder return plan,
inflationary pressures, and the medium- to longer-term inventory depth.
Key points:
• Our 2Q22 EPS/CFPS estimates of $2.15/$4.02 are unchanged following < Compares to my forecast of $2.00 EPS and $3.99 CFPS.
our recent update for our increased commodity price forecast, which
included final 2Q22 benchmark commodity prices. Our estimates are
slightly below consensus of $2.21/$4.11, which we think could be related
to commodity price realization assumptions.
• We model 2Q22 production at 146 Mboe/d (67 Mb/d oil), which is down < Compares to my forecast of 145,000 Boepd (65,250 BOPD).
5% sequentially but in line with consensus and at the high end of the
company’s 143–146 Mboe/d guidance. The decrease is largely driven by
limited completions in the Permian, but we expect sequential production
growth restarting in 3Q22.
• We expect 2Q22 capital spending of $240 million, above consensus of
$229 million but at the midpoint of the $230–250 million guidance. We
calculate FCF generation of $259 million. < SM's strong free cash flow is why I added it to the Sweet 16.
• There was approximately 55% of oil and 43% of natural gas production
hedged in 2Q22, resulting in a cash loss of $243 million. < The amount of unhedged production increases each quarter.
Channel checks and investor topics:
• SM is completing its mid-year budget review. Given industry inflationary
trends, we expect an increase of at least $50 million to $800+ million.
This amounts to an overall 20+% increase for 2022, consistent with SMid
peers. We think SM is ahead on activity given operational efficiencies;
normally it would take a break with its service providers but it is not likely
to this year because it wants to retain its current crews.
• Management remains steadfast on not getting ahead of timing for
shareholder returns and plans to wait until it reaches its targets of 1.0x
leverage ratio and $1 billion in absolute debt. SM has reached its leverage
ratio goal, which we model closer to 0.7x at 2Q22, but the $1 billion debt
level will likely occur around the 3Q22 earnings release. < This is why I think SM could make a big move in Q4.
• Until then, the first draw on free cash flow will be debt reduction and
targeting the 2025 and 2026 notes that are callable. Management hasn’t
indicated a preference for specific return mechanisms but is focused on
having a program that is sustainable at low commodity prices. We think
this may initially take the form of a quarterly fixed dividend (1.0–1.5%
yield) and a share repurchase program.
• We think that the Austin Chalk remains an upside asset, but more positive
success in the play is necessary to build investor confidence. Data for the
enhanced completions might be an early-2023 event.
• Robust commodity prices increased our cash tax expectations and we see
around $10 million accrued for in 2Q22.