SM Energy (SM) Q1 Results - April 28

[dan_s]

SM definitely deserves to be trading at a much higher multiple of operating cash flow per share.

DENVER, April 27, 2023 /PRNewswire/ -- SM Energy Company (the "Company") (NYSE: SM) today announced operating and financial results for the first quarter 2023 and provided certain second quarter 2023 guidance.

Highlights include:

Growing profitability. In the first quarter 2023, net income was $198.6 million, or $1.62 per diluted common share, up more than 300% compared with the prior year period.
Adjusted net income was $1.33 per diluted common share. < Beat my forecast of $1.17 EPS.
Net cash provided by operating activities was $331.6 million. < In line with my forecast.

Exceeding production guidance. Production for the first quarter 2023 was 13.2 MMBoe, or 146.4 MBoe/d, at 43% oil. < Beat my forecast.
Production was approximately 178,000 Boe above the mid-point of guidance, primarily due to outperformance from new South Texas wells, including outperformance from a seven-well pad that turned-in-line one week earlier than initially planned.

Delivering capital returns to stockholders. The Company repurchased 1,413,758 shares of its common stock during the first quarter. In combination with the $0.15 per share quarterly dividend paid February 6, 2023, return of capital to stockholders totaled $58.3 million in the quarter. Since announcing the return of capital program, the Company has returned $133.9 million to stockholders, inclusive of dividends and common stock repurchases.

Driving capital efficiency. First quarter capital expenditures of $240.7 million, adjusted for an increase in capital accruals of $66.9 million, totaled $307.6 million. Capital expenditures included $9.9 million for leasehold acquisitions in the Midland Basin that were not considered in guidance.

Maintaining low leverage and strong liquidity. In April 2023, the Company's lenders under its senior secured revolving credit facility reaffirmed the borrowing base at $2.5 billion and lender commitments at $1.25 billion, a testament to the quality of the Company's asset base in a changing commodity price environment. At first quarter-end, there was zero drawn on the Company's credit facility and Net debt-to-Adjusted EBITDAX was 0.6 times.

Stewardship recognition. SM Energy received a score of A- from CDP for supplier engagement, exceeding CDP's North American regional and E&P peer group averages. The Company considers environmental stewardship one component of being a premier operator.

President and Chief Executive Officer Herb Vogel comments: "During the first quarter, we delivered on each of our core strategic objectives for 2023. Return of capital to stockholders totaled $58.3 million in the quarter and $133.9 million since inception of the program in September 2022. This equates to an approximate 4% yield to market capitalization over a less than 8-month period. Our focus on operational execution delivered higher than projected production, early completion of a seven-well pad in South Texas and pads with top tier lateral length wells in the Midland Basin, while our emphasis on building inventory led to the acquisition of approximately 6,300 net leasehold acres in the Midland Basin. We are off to a strong start in 2023."

[dan_s]

Tim Rezvan, CFA at KeyBanc 4/27/2023

After two challenging quarterly reports, SM Energy started 2023 off with a bang, reporting a high-quality earnings beat from a lower
than expected capital program, lower cash unit expense, and stronger total realizations. While full-year guidance was maintained,
the Company did introduce stronger than expected 2Q production guidance and lower than expected 2Q capex guidance. Both
enforce our view there is conservatism in these full-year outlooks. We understand the conservatism, given prolonged shut-ins in
the Midland Basin in 2022 and continued service cost inflation, and we hope to get more insight on these topics on Friday's call. Of
note in the quarter, SM increased its Midland Basin footprint by 7% and delivered another batch of seven strong Austin Chalk wells
(five oil, two liquids-rich gas). We come away from the print incrementally positive, as we believe the return of the "how conservative
is the full-year guide" debate is a better setup for the multiple expansion we believe is merited than the "are their Midland Basin
wells degrading" debate, which has dominated investor discussions since November.

[dan_s]

Hedging program reduces risk

As entered into as of April 24, 2023, commodity derivative positions for the second through fourth quarters of 2023 include:

Oil: Approximately 30% of expected 2Q-4Q 2023 oil production is hedged to contract prices in the Midland Basin at an average price of $75.29/Bbl (weighted-average of collar floors and swaps, excludes basis swaps).

Oil, Midland Basin differential: Approximately 4,100 MBbls are hedged to the local price point at a positive $0.92/Bbl basis.

Natural gas: Slightly less than 30% of 2Q-4Q 2023 expected natural gas production is hedged at an average price of $4.03/MMBtu (weighted-average of collar floors and swaps, excludes basis swaps).

A detailed schedule of these and other derivative positions are provided in the 1Q23 accompanying slide deck.

[dan_s]

I have updated my forecast/valuation model for SM and I have increased my current valuation by $3 to $52 per share.

At the time of this post, SM was trading at $28.12. < Just 2.2 X my current operating cash flow per share forecast for 2023.

TipRanks: "In the last 3 months, 10 ranked analysts set 12-month price targets for SM. The average price target among the analysts is $39.22." < The Company's strong Q1 results should draw more Wall Street Gang love.