SM Energy – solid Q3 results.

[Petroleum economist]

SM Energy reported solid Q3 results. Production and profit were as anticipated. Q3 was the last quarter before closing of the XCL Uinta $ 2.12 B acquisition. SM Energy ranks high in my oil and gas company ranking system.

Production
• Q3 production (170 K BoE/d) was above outlook of 163-167 K BoE/d. This was no surprise, as Q3 was the seventh consecutive quarter that SM beat its outlook. SM outlooks are conservative.
• The production was 11.5 K BoE/d above Q2 (158.5 K BoE/d).
• Q4 production will increase with 44 K BoE/d with production from the XCL acquisition.
• SM Energy Q4 guidance is 205-220 K BoE/d. I expect Q4 production to be near the top, if not above the guidance.
• 2024 production guidance is 170-174 K BoE/d. Again, I am at the top of the guidance.
• In 2025 production can grow to 220-230 K BoE/d and to 240-250 K BoE/d in 2028.

Balance sheet
• Due to the impending XCL acquisition, the SM balance sheet is in transition.
• Debt at the end of Q3 ($ 2,717 M) was $ 1.2 B above Q2 ($ 1,576 M), due two senior notes issued in anticipation of the $ 2.1 B XCL acquisition.
• Cash at hand increased to $ 1,753 M.
• Q3 equity ratio (=equity/balance sheet total) was down to 50.0% (57.9% in Q2).
• With the XCL acquisition closing in early October, the equity ratio late 2024 will fall to 46-47%
• The long-term debt late 2024 will increase to $ 3.2-3.3 B.
• 2024 debt/EBITDA ratio will be a high 1.7-1.8, as only one quarter of the XCL production is included.
• The equity ratio and the debt/EBITDA ratio should improve to acceptable values by the end of 2025.
• The balance sheet will restrict shareholder returns in Q4 2024 and in 2025.

Profitability
• Q3 net eps was $ 2.10, well above the $ 1.85 in Q2.
• The eps increase was due to $ 70 M non-cash hedging gains. If I take out the non-cash hedging gains, the adjusted eps is $ 1.61, very close to the $ 1.63 anticipated.
• For 2024 the eps (excluding non-cash hedging results) is heading for $ 6.82. This is equivalent to a medium/low PE of 6.3.
• With WTI at $ 71/bbl, the eps can increase to $ 9.30 (PE=4.6) in 2025 and to $ 11.80 (PE=3.6) in 2028.

Shareholder returns
• In June SM Energy raised its quarterly dividend to $ 0.20 and paid accordingly in Q3.
• I expect the $ 0.20 dividend to continue in Q4.
• In H1 SM Energy bought back shares for $ 83 M. There were no share buybacks in Q3.
• Due to the $ 2.12 B XCL acquisition and the weakening of the balance sheet, I expect that shareholder buybacks in Q4 2024 and in 2025 will be non-existing, only to restart in 2026.
• Based on above, shareholder returns will be moderate 3.1% in 2024 and only 1.9% in 2025.
• After the restoration of the balance sheet late 2025, returns can jump to 8-10% in 2026, increasing thereafter.

With ample reserves, a growing production, an improving balance sheet, good profitability, a medium/low PE and with moderate but increasing shareholder returns, SM Energy justifiable ranks as 5th in the top 10 of my ranking system.

[dan_s]

SM is a rock-solid company with a lot of upside potential for us. I will be updating my forecast/valuation model for SM this afternoon.

My goal is to update the forecast models for the seven companies in the Sweet 16 that have already announced Q3 results.
They are BTE, CTRA, EQT, MGY, MTDR, SM and VRN.

I will then be working on the newsletter all weekend with the goal of publishing it on Monday morning.