SM Energy - St. Mary Land & Exploration Company to the front
Posted: Tue Jun 25, 2024 2:58 am
Introduction
SM energy is a funny name for an oil and gas company. This until you find out that it is derived from St. Mary Land & Exploration Company. Then the name gets something pristine. I will admit the original name was too long, but maybe they should have abbreviated it to SML Energy or something like that. Whatever, SM Energy it is since 2010.
SM Energy is a mid-cap company (market value = $ 5.6 B), operating 302,000 acres of light tight oil in the Midland basin (60%) and Austin Chalk (40%) in the Permian in Texas.
Summary
Dan is full right in picking SM energy for his sweet 16. SM Energy is an excellent company. SM Energy has ample reserves, growing production, a solid balance sheet, is very profitable and pays a decent shareholder returns. St. Mary Energy looks like a very attractive investment.
Reserves
• SM Energy has ample reserves.
• Proven reserves have grown 31% from 462 M BoE (2019) to 605 M BoE (2023)
• 2023 reserves (605 M BoE) are equivalent to a 10.1 years of 2024 production (industry average 9.5-10.10 years)
• The RRR over the period 2019-2023 was 1.35, well above the industry average of 1.02.
• 2023 RRR was an excellent 2.22.
• The reserves and the high RRR allow SM Energy to grow the production with 4-5% per year.
Production
• SM Energy has a growing production.
• Production grew from 133 K BoE/d (20219) to 152 K BoE/d (2023).
• Q1 2024 production (145.1 K BoE/d) was 5.5% below Q4 2023 (153.5 K BoE/d), mostly due to winter weather.
• In Q2 production will pick up. SM outlook is 155-157 K BoE/d. I expect a production of158-159 K BoE/d, as SM energy tends to be conservative in their outlooks.
• 2024 outlook is 156-164 K BoE/d, 5% above 2023 (152 K BoE/d). I expect 159 K BoE/d as I am not sure where the growth in H2 is coming from with a falling capex.
• 2025 onwards production can grow with 4-5%/year to 190-195 K BoE/d in 2029-2030
• Fluids consists of oil (44%), NGL (17.0%) and gas (39%_.
• Fluids (44/17/39) are not in line with the reserves (38/20/42) and over time production can become a bit gassier.
Balance sheet
• SM has a very solid balance sheet.
• Solvency increased from 56.7% (Q4 2023) to 57.8% (Q1 2024).
• With 45-50% of the 2024 free cash flow directed towards the balance sheet, solvency late 2024 and also in 2025 and beyond should be > 60%.
• The debt/EBITDA ratio late 2024 should be very healthy < 0.80 dropping further thereafter
• The high solvency and the low debt/EBITDA ratio allow generous shareholder returns.
Profitability
• SM is a very profitable company.
• 2024-unit costs are an industry average $ 28.11/BoE, making SM reasonably robust under lower oil prices.
• SM has hedged 26% of its 2024 oil production.
• SM has hedged 24% of its 2024 gas production.
• Q1 adjusted profit was eps of $ 1.41.
• For 2024, with WTI = $ 80-85/bbl, I expect a net profit (ignoring non-cash hedging) of $ 775-845 M (eps= $ 6.70-7.30, PE = 6.8-7.4.
• With growing production and higher gas prices, the eps in 2025 can increase to $ 7.85-8.75 (PE=5.7-6.3) and in 2026 to $ 8.60-9.55 (PE=5.2-5.8).
Shareholder returns
• SM intends to return 50-55% of the 2024 free cash flow to shareholders.
• SM pays a fixed interim dividend of $ 0.18, but pays no variable dividends.
• Share buyback in Q1 was limited to 712 K shares. This was due to the low free cash flow ($ 68 M).
• Buybacks should pick up in the rest of 2024 with higher production and increasing free cash flows.
• I expect the total share buyback in 2024 to come close to 2023 (6.9 M shares).
• Dividends and buybacks combined should give shareholders a solid 2024 return of 5.5-6.0%.
• In 2025 and beyond - with further strengthening of the balance sheet and growing production – shareholder returns can increase.
Conclusion
SM energy is an attractive investment. Reserves are ample and production is growing. The balance sheet is sound and the company is very profitable. Profitability is good. Shareholder returns are reasonable and will grow over time. The PE is still reasonable. SM Energy ranks a high 11th in my oil and gas ranking system.
SM energy is a funny name for an oil and gas company. This until you find out that it is derived from St. Mary Land & Exploration Company. Then the name gets something pristine. I will admit the original name was too long, but maybe they should have abbreviated it to SML Energy or something like that. Whatever, SM Energy it is since 2010.
SM Energy is a mid-cap company (market value = $ 5.6 B), operating 302,000 acres of light tight oil in the Midland basin (60%) and Austin Chalk (40%) in the Permian in Texas.
Summary
Dan is full right in picking SM energy for his sweet 16. SM Energy is an excellent company. SM Energy has ample reserves, growing production, a solid balance sheet, is very profitable and pays a decent shareholder returns. St. Mary Energy looks like a very attractive investment.
Reserves
• SM Energy has ample reserves.
• Proven reserves have grown 31% from 462 M BoE (2019) to 605 M BoE (2023)
• 2023 reserves (605 M BoE) are equivalent to a 10.1 years of 2024 production (industry average 9.5-10.10 years)
• The RRR over the period 2019-2023 was 1.35, well above the industry average of 1.02.
• 2023 RRR was an excellent 2.22.
• The reserves and the high RRR allow SM Energy to grow the production with 4-5% per year.
Production
• SM Energy has a growing production.
• Production grew from 133 K BoE/d (20219) to 152 K BoE/d (2023).
• Q1 2024 production (145.1 K BoE/d) was 5.5% below Q4 2023 (153.5 K BoE/d), mostly due to winter weather.
• In Q2 production will pick up. SM outlook is 155-157 K BoE/d. I expect a production of158-159 K BoE/d, as SM energy tends to be conservative in their outlooks.
• 2024 outlook is 156-164 K BoE/d, 5% above 2023 (152 K BoE/d). I expect 159 K BoE/d as I am not sure where the growth in H2 is coming from with a falling capex.
• 2025 onwards production can grow with 4-5%/year to 190-195 K BoE/d in 2029-2030
• Fluids consists of oil (44%), NGL (17.0%) and gas (39%_.
• Fluids (44/17/39) are not in line with the reserves (38/20/42) and over time production can become a bit gassier.
Balance sheet
• SM has a very solid balance sheet.
• Solvency increased from 56.7% (Q4 2023) to 57.8% (Q1 2024).
• With 45-50% of the 2024 free cash flow directed towards the balance sheet, solvency late 2024 and also in 2025 and beyond should be > 60%.
• The debt/EBITDA ratio late 2024 should be very healthy < 0.80 dropping further thereafter
• The high solvency and the low debt/EBITDA ratio allow generous shareholder returns.
Profitability
• SM is a very profitable company.
• 2024-unit costs are an industry average $ 28.11/BoE, making SM reasonably robust under lower oil prices.
• SM has hedged 26% of its 2024 oil production.
• SM has hedged 24% of its 2024 gas production.
• Q1 adjusted profit was eps of $ 1.41.
• For 2024, with WTI = $ 80-85/bbl, I expect a net profit (ignoring non-cash hedging) of $ 775-845 M (eps= $ 6.70-7.30, PE = 6.8-7.4.
• With growing production and higher gas prices, the eps in 2025 can increase to $ 7.85-8.75 (PE=5.7-6.3) and in 2026 to $ 8.60-9.55 (PE=5.2-5.8).
Shareholder returns
• SM intends to return 50-55% of the 2024 free cash flow to shareholders.
• SM pays a fixed interim dividend of $ 0.18, but pays no variable dividends.
• Share buyback in Q1 was limited to 712 K shares. This was due to the low free cash flow ($ 68 M).
• Buybacks should pick up in the rest of 2024 with higher production and increasing free cash flows.
• I expect the total share buyback in 2024 to come close to 2023 (6.9 M shares).
• Dividends and buybacks combined should give shareholders a solid 2024 return of 5.5-6.0%.
• In 2025 and beyond - with further strengthening of the balance sheet and growing production – shareholder returns can increase.
Conclusion
SM energy is an attractive investment. Reserves are ample and production is growing. The balance sheet is sound and the company is very profitable. Profitability is good. Shareholder returns are reasonable and will grow over time. The PE is still reasonable. SM Energy ranks a high 11th in my oil and gas ranking system.