SM Energy (SM) Valuation Update - Dec 22

[dan_s]

SM Energy is now one of the "Elite Eight" in our Sweet 16 Growth Portfolio and my Top Pick for 2025.
Harry van Neck recently moved SM up to the #1 most under-valued stock in his database of 82 energy companies.
SM closed at $36.59 on Friday, December 20th, down slightly YTD despite outstanding 2024 financial results.
I have updated my current valuation by $7 to $81 per share, primarily because 2025 is set up to be the most profitable year per share in the company's history.
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From SM Energy's Q3 2024 press release dated 10-31-2024

Portfolio expansion sets up for an exciting 2025 with significantly increased scale:

• Utah adds a third core area to the Company’s top-tier portfolio. On October 1, 2024, the Company
completed the previously announced $2.1 billion acquisition of an undivided 80 percent interest in the Uinta
Basin assets of XCL Resources (and affiliated entities) and Altamont Energy (the “Uinta Basin
Acquisitions”), adding high oil content production, approximately 63,300 net acres and multiple years of
incremental quality drilling inventory. This acquisition of low breakeven assets is expected to be accretive to
all financial metrics. < SM is going to report a BIG ( ~42,500 Boepd with ~37,250 BOPD) increase in production from Q3 to Q4 2024.

• Three recent wells in Utah reached peak 30-day initial production rates testing the Douglas Creek in the
Upper Cube. The test wells averaged 870 Boe/d per well at 94% oil.

• Increased scale supports an increased borrowing base and lender commitments under the Company’s
senior secured revolving credit facility. The borrowing base was increased to $3.0 billion and lender
commitments to $2.0 billion.

• Activity in the Klondike area of the Midland Basin includes the completion of eight wells that confirm oil
saturated sandstone and the conventional nature of the play, in-line with the Company’s geologic modeling.
Two Klondike wells with average lateral lengths of approximately 11,500 feet have reached peak 30-day
initial production rates, which averaged 918 Boe/d per well at 93% oil.

• Initial wells targeting the Woodford-Barnett in the Sweetie Peck area continue to perform well with
cumulative oil production exceeding the peer average in the area to date by more than 50%.

• In South Texas, the Company has successfully fulfilled its obligation under its drill-to-earn arrangement to
add 8,663 net acres in the northern, high oil/liquids content Austin Chalk.

President and Chief Executive Officer Herb Vogel comments: “2024 is proving to be a highly successful year for SM
Energy. Exceptional operational performance, magnified by increased top-tier portfolio scale and substantial oil
production growth, supports a strong balance sheet and upside value creation opportunity.

“Looking ahead, we are keenly focused on our Utah operations. Along with the investment community, we are
invigorated by the opportunity to unlock value in an overlooked basin, and we expect to deliver results attributable to
the crude profile, high margins and substantial scale that the Uinta Basin Acquisitions provide. In the fourth quarter,
we expect to sequentially grow our oil and total production volumes by around 40% and 25%, respectively, and
execute a smooth integration of the Utah operations. We will diligently work to develop a 2025-2027 operating plan
that will optimize capital efficiency and demonstrate the value of our expanded portfolio.

“We are very excited to be among the core operators in Utah. We welcome our new employees and look forward to
becoming actively involved in our new communities.”

[dan_s]

SM made a presentation on November 21st at the Stephens Annual Investment Conference, which I recommend you take the time to review.
Go to this link to view the slides that their CEO spoke from: https://www.sm-energy.com/investors

It will help you understand why I am so high on the stock.

TipRanks: "In the last 3 months, 11 ranked analysts set 12-month price targets for SM. The average price target among the analysts is $52.09. The eleven price targets range from $42 to $60 by KeyBanc on 12/9/2024."

SM's production mix in Q4 2024 through 2025 should be approximately 51% crude oil, 33% natural gas and 16% NGLs. Their current drilling program is focused on more oil prone areas.

My 2025 forecast is based on what I believe will prove to be conservative assumptions of 225,000 Boepd of production with realized commodity prices net of cash settlements on their hedges of $73.75/bbl of oil, $2.96/mcf of natural gas and $24.00/bbl of NGLs. Based on my forecast, SM should generate close to $21/share of operating cash flow in 2025.

No company of this size with high-quality "Running Room" in three of America's top oil and gas basins, should be trading for less than 3X operating CFPS. TipRanks' consensus operating CFPS forecast for 2025 is $17.93 based on much lower natural gas prices than the current NYMEX strip.

My updated forecast for SM will be posted to the EPG website this afternoon. All of the "Elite Eight" (DVN, FANG, EOG, EQT, MTDR, OVV, PR and SM) forecast models have now been updated through 2026.

I will now start updating the other 8 companies in the Sweet 16.

[Petroleum economist]

SM Energy has moved over the last month up to the top of the oil and gas companies ranking. The logic for that is two-fold:
• SM fundamentals are strong (see below).
• The SM share price, due to for me obscure reasons, has reduced by 20.5% over the last month (from $ 46.03 on the 20th November to $ 36.59 at the end of last week).

SM Energy acquired the XCL assets in the Uinta basin at the start of Q4 for $ 2.1 B. I believe this was a very good acquisition. The acquisition was paid fully in cash, thus not causing any dilution in the eps. The balance sheet will need some to recover, but I believe this can happen rather fast, albeit at the expense of shareholder returns in 2025.

Production
• With XCL included, production can grow with 26.5% from 170-174 K BoE/d (2024) to 224 K BoEd (2025).
• With ample reserves, after 2025 production can increase with 3-4%/year to 240-252 K BoE/d in 2028.

Balance sheet
• With the XCL acquisition included the equity ratio late 2024 will fall to below average 47% and with only one quarter of XCL included the debt/EBITDA ratio late 2024 will be a high 1.52.
• In late 2025 the balance sheet will have recovered. The equity ratio to 50.6% and the debt/EBITDA ratio to 0.97. The recover will continue in 2026 onwards.

Profitability
• SM Energy is a very profitable company.
• With WTI=$ 70/bbl, due to the higher production and higher gas prices, the eps in 2025 can increase to $ 8.87 (PE=5.1) and in 2026 to $ 9.92 (PE=4.6).

Shareholder returns
• SM pays a fixed interim dividend of $ 0.20 per quarter.
• SM was buying back shares in H1 2024 but stopped in Q3 anticipating the XCL payments.
• I expect the dividends will continue, but that buybacks in 2025 will be limited as the free cash flow will be used for the repayments of loans for the XCL acquisition.
• In 2026 share buybacks can restart
• Shareholder returns in 2025 thus will be a meagre 3.7%. Shareholder returns 2026 onwards can be a high 10-14%.

The low PE, an acceptable balance sheet, growing production, a good profitability and high returns puts SM Energy to the top of the ranking.

[dan_s]

SM Energy should be VERY PROFITABLE in Q4 and 2025

Here is how my forecast for 2025 compares to TipRanks consensus forecast. Keep in mind that most of the 11 analysts that have submitted forecasts to TipRanks are still using natural gas prices in 2025 that are much lower than the NYMEX strip. I am using a WTI oil price of $75/bbl in 2025 that appears to be close to what most of the Wall Street Gang is using.

My Forecast / TipRanks' Forecast
Full Year 2025
> Revenue: $3,873 million / $3,329 million
> Net Income: $1,133 million, $9.86 per share / $841 million, $7.34 per share
> Adjusted Operating Cash Flow: $2,410 million, $20.96 per share / $2,062 million, $17.93 per share

SM has not announced their capital expenditures budget for 2025, buy my guess is that it will be less than $1,400 million, so free cash flow should be over $1 billion in 2025.

In a more "logical" market, SM should be trading for at least 4X operating cash flow per share.