SM Energy – Expectations for Q3 results

[Petroleum economist]

SM Energy will report on the 31st of October its Q3 results. Q3 will be the last quarter without the XCL Uinta $ 2.12 B acquisition. This closed on the 2nd of October 2024. SM Energy has many positives: ample reserves, a growing production, a decent balance sheet, and good profitable. SM pays moderate shareholder returns, to be increased later. SM Energy is the second highest (7th) out of Dan’s sweet 16 in my oil and gas ranking system. From the sweet 16, only Vital Energy (2nd) ranks higher.

Production
• Q2 production (158.5 K BoE/d) was above the Q2 outlook (155-157 K BoE/d).
• SM provided a Q3 outlook of 163-167 K BoE/d.
• My ranking model is based on a conservative 165 K BoE/d for Q3. However, I would not be amazed if SM would be at the high end of the outlook if not above it. SM has beaten their forecasts in each of the last six quarters.
• Q4 production should jump to > 210 K BoE/d due to the 44 K BoE/d from to the XCL acquisition.

Balance sheet
• Debt at the end of Q2 was $ 1,576 M.
• I expect debt at the end of Q3 to drop to $ 1,490 M. Debt can be a bit higher if most of the XCL acquisition costs have been booked in Q3.
• At the end of Q2, the equity ratio (=equity/balance sheet total) was 57.9%.
• Late Q3, I except the equity ratio to have improved to 59.1%.
• Due to the acquisition of XCL, the equity ratio late 2024 will plunge to a mediocre 46.7%.
• The long-term debt will increase to $ 3.7 B in late 2024.
• The 2024 debt/EBITDA ratio will be a high 1.85 as only one quarter of the XCL production is included.
• The equity ratio (51.8%) and the debt EBITDA ratio (0.87) should improve quickly by the end of 2025.
• The balance sheet will restrict shareholder returns in H2 2024 and in 2025.

Profitability
• Q2 eps was $ 1.83.
• For Q3, I expect the eps to drop to $ 1.63, mostly due the -7.9% drop in oil prices and due to the extra costs for the XCL acquisition.
• If most of the XCL acquisition cost are booked in Q3 and not in Q4, then the eps can be a bit lower.
• For 2024 the eps (excluding non-cash hedging results) is heading for $ 6.78. This is equivalent to a medium low PE of 6.5.

Shareholder returns
• SM raised in June its quarterly dividend to $ 0.20.
• I expect the $ 0.20 quarterly dividend to continue in Q3 and Q4.
• In H1 SM bought back shares for $ 83 M.
• Due to the $ 2.12 B XCL acquisition and the consequential weakening of the balance sheet, I expect that shareholder buybacks in the rest of 2024 and in 2025 will be stopped, only to restart in 2026.
• Based on above shareholder returns in 2024 will be moderate 3.1%.
• After the restoration of the balance sheet late 2025, returns can jump to 8-10% in 2026, increasing thereafter to levels well above 10%.

With ample reserves, growing production, an improving balance sheet, good profitability, a medium low PE and moderate but increasing shareholder returns, SM Energy justifiable ranks in the top 10 of my ranking system.

[dan_s]

Good work!

My forecast for Q3 is a bit lower, but I agree with you that SM is likely to beat their production guidance for the 7th quarter in a row.

Since 2021 SM has made incredible progress. Operating cash flow topped $1 billion in 2022, $1.5 billion in 2023 and they should top $1.7 billion in 2024. The Unita Basin Acquisition from XCL, should push operating cash flow over $2.5 billion in 2025 ($22.54/share based on my forecast).

My current valuation of SM is $71/share. If their Q4 results and 2025 guidance match my forecast model, a 12-month price target of $100 should be reasonable.