SM Energy (SM) Valuation Update - Nov 7

[dan_s]

SM closed at $46.09 on Friday, Nov 4.

TipRanks: "In the last 3 months, 6 ranked analysts set 12-month price targets for SM. The average price target among the analysts is $57.67. The six price targets range from $46 to $70, with $70 being the only one dated after SM announced Q3 results."

I have updated my forecast/valuation model for SM strong Q3 results and updated guidance. My valuation stays at $72/share.

I am concerned that SM's production has declined for 3 quarters in a row, from 158,262 Boepd in Q4 2021 to 137,800 Boepd in Q3 2023.
The mid-point of their Q4 guidance is 140,500 Boepd.

SM has focused most of their free cash flow on debt repayment and their balance sheet is now in good shape.
> They are now paying a dividend of $0.15 per quarter and they've started buying back their shares.
> My 2023 forecast is based on modest production growth to an average of 146,000 Boepd in 2023 (44% oil)
> SM had some really bad hedges in 2022, but it is still on pace to generate $1,840 million of operating cash flow and over $900 million of FCF.
> 2023 should generate increasing revenues (thanks to higher realized oil & gas prices), increasing dividends and declining outstanding shares.
> My $72 valuation is 4.5 X annualized operating CFPS for 2022+2023

My updated forecast model will be posted to the EPG website this afternoon.