SM Energy - Share price versus Fundamentals

[Petroleum economist]

In 2025 SM Energy thus has been one of the worst performing stocks. The share price of SM Energy dropped with -44.1%. Only Crescent Energy (-46.9%) and Lotus Creek (-46.1%)ek have fared worse.

The drop of the Lotus Creek and Crescent Energy share price I can understand. The future of Lotus Creek is a complete unknown after it sold off most of its assets in late 2024. Crescent Energy has low reserves and reserves bookings and a weak balance sheet after the $ 980 M Ridgemar acquisition, which with the current low oil prices will not quickly recover.

The drop of the SM share price however is inexplicable. As a consequence of the share price drop. SM Energy currently sits at the top of my ranking system.

Reserves and production
SM reserves are industry average (8.8 years) and the annual reserves replacement ratio (RRR 20192024 =1.19) is well above average. SM already for years is on a steady upward production trend as shown below.

SM production.jpg (29.67 KiB) Viewed 1011 times

Profitability
Profit, eps. and PE are oil price dependent. I varied the WT oil price form $ 60-65-70/bbl. The impact of the oil price is limited in 2025 due to hedging. After 2026 the impact is more significant, but under oil price scenario the eps varies from $ 5.50 ($ 60/bbl) to $ 8.80 ($ 70/bbl).

SM profit.jpg (44.22 KiB) Viewed 1011 times

The Price Earnings ratio (PEP varies from 2.5 ($ 70/bbl) to 3.8 ($ 60/bbl). For all oil price scenarios, the PE is low and well below an acceptable ratio = 7.0.

Balance sheet
SM is recovering from the $ 2.0 B XCL acquisition in 2024. By the end of 2025 the recovery will be almost complete.
In a sound balance sheet Ilke to see the equity ratio well above 50% and the debt/EBITDA ratio well below 1.2. Under all oil price scenarios SM Energy can comply with this and still return decent shareholder returns.

sm balance.jpg (50.83 KiB) Viewed 1011 times

Shareholder returns
I have modified this week my ranking model. Previously I had calculated manually timing and amount of shareholder returns based on $ 70/bbl. In the update of the model shareholder returns automatically increase with higher oil prices and fall and/or are delayed with lower oil prices.

Under all oil price scenarios SM Energy is creating a strong FCF which allows decent shareholder returns, varing from $ 650 M to $ 1,100 M per year. With strengthening of the balance sheet, the percentage of the FCF returned to shareholders can rise from 30% (2025) to 60% (2029).

Due to the low share price, the shareholder returns can be very high (15%-30% in 2029.

Conclusions
The drop of the SM Energy share price has no basis. Under low oil price scenarios, the SM Energy financials are robust, and shareholder returns are high. SM Energy is one of the best buys amongst the oil and gas companies.

[Petroleum economist]

Below the chart for the FCF and the shareholder returns.
Returns have started start with the $ 0.20 quarterly returns but will gô up overtime.

SM returns.jpg (59.02 KiB) Viewed 1006 times

[dan_s]

I agree that SM is grossly oversold. My valuation of $64.50 compares to First Call's price target of $49.40. My valuation is based on just 3.5 X annualized operating cash flow per share. Since SM generates a lot of free cash flow, that is a very low valuation multiple. Granted, my current valuation is based on $70 WTI in 2025 and $75 in 2026.

At the time of this post SM was trading at $28.17.

SM should report solid Q1 2025 results. Reported net income will include a BIG MTM gain on their hedges.

SM's production mix and hedging program should insulate it a bit from the recent dip in oil prices, which I believe will reverse when the Tariff War settle out before July 4th or when the U.S. gets tough on Iran.

Lots of upside on this one and very little downside risk unless you think the Right Price for WTI oil is $50/bbl.

[mrbill]

I can't help but notice a "divergence" in enthusiasm between Dan and Harry on CRGY. Could it be Harry sees it as an oil play whereas Dan sees it as a natgas play? Does Harry think the Uinta/Ridgmar assets are lackluster.

Harry, thanks for the great research on the Gulf of Mexico/America shrimp market. Just like your oil analysis. The Shrimpers have no official voice for their group and tariffs might save them. I have a friend who visits Thailand with the Gulf of Tonkin shrimp available there and he raves that the GOM ones are much better. quality. Me and my big mouth are enlightening locals to the results of your research.

[dan_s]

I remain bullish on CRGY because (if you take the time to look at my forecast model) it is a very profitable company and it has a high percentage of oil hedged at good prices. It also produces a lot of natural gas and NGLs in South Texas, which has lots of pipeline access to the Gulf Coast.

TipRanks: "In the last 3 months, 8 ranked analysts set 12-month price targets for CRGY. The average price target among the analysts is $16.86."

Plus, KKR supports CRGY.

SM Energy is also in good shape.

There is a lot of confusion about where oil & gas prices are heading right now, but the recent dip in the oil price is not sustainable in my opinion.