SM Energy (SM) Valuation Update - Oct 17

[dan_s]

SM is down today because Q3 production came in below previous guidance. Important to note that well completion delays were caused by supply-chain problems (lack of tubulars) that have been fixed.

DENVER, Oct. 17, 2022 /PRNewswire/ -- SM Energy Company (the "Company") (NYSE: SM) today provides the schedule for reporting third quarter 2022 financial and operating results and provides certain preliminary third quarter results.

THIRD QUARTER 2022 PRODUCTION AND REALIZED PRICES UPDATE
The Company provides the following preliminary results regarding third quarter production and realized prices.

See table in the press release: https://finance.yahoo.com/news/sm-energ ... 00565.html

Preliminary third quarter 2022 production volumes reflect slightly higher than expected base production from both South Texas Austin Chalk and Midland Basin wells as well as the impact of lower than expected September volumes, which was caused by delayed well completions (largely related to the supply chain) and higher than estimated impacts associated with offset activity. The Company completed 31 net wells during the quarter, including 14 net wells in the Midland Basin and 17 net wells in South Texas. All of the delayed Midland Basin wells are currently on production, while the South Texas wells are scheduled to turn-in-line by early November.

Certain events discussed above are expected to carry over into the fourth quarter, including completion delays related to broader supply chain problems that affect the Company's service providers, shut-ins associated with offset activity and the rolling effect of completions pushed into the fourth quarter. As a result, the Company expects full year production to range between 52.5 and 53.0 MMBoe, or approximately 144-145 MBoe/d. The Company expects to complete 81 net wells as planned. Importantly, the revised full year production guidance relates to third party events and temporary delays, as base production continues to meet or exceed expectations in both South Texas and the Midland Basin.
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At the time of this post, SM was trading at $41.46.

TipRanks: "In the last 3 months, 7 ranked analysts set 12-month price targets for SM. The average price target among the analysts is $62.25. The 7 price targets range from $51 to $82."

My current valuation adjusts down by $10 to $72.00.

SM is still on-track for free cash flow of over $900 million this year AND if the supply chain problems are resolved it should ramp up production into year-end. Two analysts published new price targets today:
> Leo Mariani at MKM Partners rates SM a BUY with a price target of $56.00
> Gabriele Sorbara at Siebert Williams Shank & Co rates SM a BUY with a price target of $82.00

[ChuckGeb]

Are you adjusting down solely on the basis of this announcement of deferred production? Seems like a slight miss and reserves are intact. Your adjustment is pretty significant!

[dan_s]

I reduced the valuation multiple from 5.5 to 5.0 X operating cashflow. Q3 is going to be the 3rd quarter in a row of production decline. That is not a good sign.

[ChuckGeb]

Good to know your reasoning. I think supply chain issues and inflation is going to be a major headwind for all of the smaller producers, if not all of the energy names.