Energy Prospectus

Summary
SM Energy reported solid 2024 results. Reserves were as expected, although the 2024 RRR was a bit low. 2024 production was close to expectation and has grown significantly since 2023. Production growth can continue at low rates. The balance sheet has been impacted by the XCL acquisition and needs 2025 to recover. Profitability is good and the PE is very low. Shareholder returns in 2025 are at a reasonable level and can climb to higher levels starting 2026.

Reserves
• 2024 proven reserves (678 M BoE) are up 73 M BoE (=12%) from the 605 M BoE in 2023. The increase was solely due to the XCL acquisition in Q4.
• The 2024 Reserves Replacement Ratio (RRR) was a lowish 0.53, mainly due to 45 M BoE of volumes being de-hooked under the 5-year rule and due to energy price impacts. Without these volumes, RRR would have been a solid 1.26.
• The 2019-2024 RRR was 1.19, well above industry average of 0.85-0.90.
• 2024 proven reserves are equivalent to 8.8 years of 2025 production. This slightly below industry average of 9.5-10 years.
• The reserves and RRR combined allow a moderate 2-3% near term annual growth.

Production
• Q4 production (208 K BoE/d) was near the bottom end of the 204-220 K BoE/d guidance. Production was reduced by 3 K BoE/d due to 3rd parties shutdowns. I had expected a production of 212 K BoE/d.
• Q4 production (208 K BoE/d) was well above 170 K BoE/d from Q3, thanks to 44 K BoE/d from the recent XCL acquisition. Without the XCL contribution, production was flat.
• 2024 production (170.5 K BoE/d) was well above 2023 (152 K BoE/d). Half of the growth was autonomous and half due to XCL.
• 2025 guidance is 200-215 K BoE/, indicating a moderate growth compared to Q4 (204 K BoE/d).
• I expect a 2025 production of 210 K BoE/d, to grow to 228-230 K BoE/d in 2028/2029.
• Q1 production guidance (191-198 K BoE/d) indicates it will be down versus the 204 K BoE/d from Q4. The reason for the low Q1 production most likely will be weather and/or shutdown related. No details were provided.
• Produced fluids are 43% oil, 17% NGL and 10% gas, Reserves are 44%, 18%, and, 38%. As such fluids over time will not change significantly.

Balance sheet
• SM had a very solid balance sheet, but this has eroded in 2024 due to the XCL acquisition.
• Long-term debt at the end of 2024 ($ 3.068 M) was $ 1.5 B above late 2023 ($ 1,575 M). The increase was due to the $ 2.04 B XCL acquisition, paid in cash.
• Late 2024 equity ratio (=equity/balance sheet total) as a consequence was down to 49.4% (56.7% in late 2023)
• With only one quarter of XCL included, the debt/EBITDA ratio late 2024 was too high at 1.55.
• In late 2025 the debt/EBITDA will have recovered to well below 1.0.
• The balance sheet restricts shareholder returns in 2025.

Profitability
• 2024 adjusted profit was $ 765 M (eps $ 6.80), almost spot on with my expectation.
• Realized oil, NGL and gas prices were all higher than I expected, all narrowing margins to WTI, Mont Belvieu and Henry Hub prices.
• The depreciation/amortization costs were higher than anticipated due to the impact of XCL. Interest was lower than expected.
• For 2-25, with WTI at $ 70-75/bbl, I expect an eps of $ 8.80-9.40. This combined with the current share price, gives a very low PE of 3.9-4.1.
• Over time the eps can increase to $ 10.10-11.60 in 2029 (PE=3.3-3.8)

Shareholder returns
• Annual dividends are $ 0.80, equivalent to a yield of 2.1%
• SM has indicated that share buybacks will restart after debt/EBITDA falls to < 1.0. This can happen in H2 2025.
• I can see share buybacks of $ 200-250 M in H2 2025, adding 4.5-5.5% to the 2025 returns.
• From 2026 onwards returns can increase to 12-14%

Conclusions
SM Energy reported solid 2024 results. Reserves were as expected, although the 2024 RRR was a bit low. Production was close to expectation and has grown significantly since 2023. Production growth can continue at low rates. The balance sheet has been impacted by the XCL acquisition and needs 2025 to recover. Profitability is good and the PE is very low. Shareholder returns in 2025 are at a reasonable level and can climb to higher levels starting 2026.

In my oil and gas company ranking SM ranks a high 7th out of 84 companies.

SM is definitely a "Keeper". I will update my forecast/valuation model tomorrow. I spent a lot of time on InPlay Oil and Vital Energy today.

Of special note, the Uinta Basin acquisition appears to be a real winner with wells competing with economics of Permian and very oily. They didn’t take over operations until end of year. Substantial DUCs at year end include 35 drills with 50 completions in Uinta in 2025. Also Midland has 40 drills and 60 completions and South Texas 30 drills and 40 completions. Seems like a coiled spring ready to spring.