SM Energy Company (NYSE: SM) today reports financial results for
the fourth quarter of 2010 and provides an update on the Company’s
operating and financial activities. In addition, a new presentation
for the fourth quarter earnings and operational update has been
posted on the Company’s website at sm-energy.com. This presentation
will be referenced in the conference call scheduled for 8:00 a.m.
Mountain time (10:00 a.m. Eastern time) on February 25, 2011.
Information for the earnings call can be found below.
MANAGEMENT COMMENTARY
Tony Best, CEO and President, remarked, “Last year was a
transformational year for SM Energy. We entered 2010 with a plan to
advance our resource plays in inventory and get them ready for
full-scale development. Our focus became centered on oil and
liquids rich plays such as the Eagle Ford shale and Bakken/Three
Forks and we saw continued success in these programs. For the year,
SM Energy replaced nearly 350% of its production organically, while
keeping a strong balance sheet. We are well positioned as we enter
2011 and we remain focused on building shareholder value with the
continued growth in our key resource plays.”
FOURTH QUARTER 2010 RESULTS
SM Energy posted net income for the fourth quarter of 2010 of
$37.1 million, or $0.57 per diluted share. This compares to $990
thousand, or $0.02 per diluted share, for the same period in 2009.
Adjusted net income for the fourth quarter was $29.7 million, or
$0.46 per diluted share, versus $20.1 million, or $0.31 per diluted
share, for the fourth quarter of 2009. Adjusted net income excludes
certain items that the Company believes affect the comparability of
operating results. Items excluded are generally one-time items or
are items whose timing and/or amount cannot be reasonably
estimated. A summary of the adjustments made to arrive at adjusted
net income is presented in the table below.
For the Three Months Ended December 31, 2010
2009 Weighted-average diluted share count (in
millions) 64.9 64.1
$ inmillions
PerDilutedShare
$ inmillions
PerDilutedShare
Reported net income $37.1 $0.57 $1.0 $0.02
Adjustments net of
tax: Change in Net Profits Plan liability ($3.0 ) ($0.05 ) $4.3
$0.07 Unrealized derivative loss $8.2 $0.13 $2.0 $0.03 Gain on
property sales ($14.7 ) ($0.23 ) ($13.8 ) ($0.21 ) Bad debt
recovery associated with SemGroup, L.P. - - ($3.1 )
($0.05 ) Adjusted net income (loss), before impairments
$27.8 $0.43 ($9.5 ) ($0.15 )
Non-cash
impairments net of tax: Impairment of proved properties $3.9
$0.06 $13.5 $0.21 Abandonment and impairment of unproved properties
($1.9 ) ($0.03 ) $15.7 $0.24 Impairment of materials inventory -
- $0.5 $0.01 Adjusted net income
$29.7 $0.46 $20.1 $0.31 NOTE:
Totals may not sum due to rounding
Operating cash flow was $176.4 million for the fourth quarter of
2010 compared to $144.2 million for the same period in 2009. Net
cash provided by operating activities was $78.7 million for the
fourth quarter of 2010 compared with $83.1 million for the same
period in 2009.
Adjusted net income and operating cash flow are non-GAAP
financial measures – please refer to the respective reconciliation
in the accompanying Financial Highlights section at the end of this
release.
SM Energy reported average daily production of 344.4 MMCFE/d for
the fourth quarter, which was above the guidance range of 305 to
330 MMCFE/d. Production growth was driven by strong results in the
Company’s Eagle Ford shale and Haynesville shale programs.
Sequentially, reported production grew 15% in the fourth quarter of
2010 over the preceding quarter.
Total operating revenues and other income for the fourth quarter
of 2010 was $294.1 million compared to $242.0 million for the same
period in 2009. In the fourth quarter, the Company’s average
equivalent price, net of hedging, was $7.98 per MCFE, which is an
increase of 4% from the $7.69 per MCFE realized in the comparable
period in 2009. Average realized prices, inclusive of hedging
activities, for the fourth quarter were $6.00 per Mcf, which was
essentially flat from the same quarter in 2009, and $70.30 per
barrel, which was an increase of 9% from 2009. SM Energy
reports its gas volumes on a “wet gas” basis, meaning that revenue
dollars associated with natural gas liquids (“NGLs”) are reported
within the Company’s natural gas revenues.
Lease operating expense (“LOE”) in the fourth quarter was $1.06
per MCFE, which is below the Company’s guidance of $1.15 to $1.20
per MCFE. This represents a 19% decrease from the $1.31 per MCFE in
the comparable period last year. Sequentially, lease operating
expense remained flat in the fourth quarter of 2010 from the third
quarter.
Transportation expense in the fourth quarter was $0.22 per MCFE,
which is within the guidance range of $0.20 to $0.22 per MCFE. The
reported per unit expense increased 10% from the comparable period
in 2009. Transportation expense also increased 22% from $0.18 per
MCFE in the third quarter of 2010. The increase in transportation
reflects the growth in production in areas where higher
transportation costs exist.
Production taxes for the fourth quarter of 2010 were $0.52 per
MCFE, which was essentially flat from the same period a year ago.
Sequentially, production taxes increased 33% from the third quarter
of 2010. This increase was the result of production tax credits
realized in the third quarter of 2010 related to severance tax
holidays. The Company’s realized production tax rate for the fourth
quarter was 6.5%, which was essentially within the provided
guidance of 7% of pre-hedge oil and natural gas revenue.
Total general and administrative (“G&A”) expense for the
fourth quarter of 2010 was $1.00 per MCFE, which is above the
guidance range of $0.88 to $0.96 per MCFE. Cash G&A expense was
$0.73 per MCFE for the quarter, compared to a guidance range of
$0.54 to $0.58 per MCFE. Non-cash G&A for the quarter was $0.16
per MCFE versus a guidance range of $0.18 to $0.20 per MCFE.
G&A related to cash payments from the Company’s legacy Net
Profits Plan (“NPP”) program was $0.11 per MCFE in the quarter
compared to a guidance range of $0.16 to $0.18 per MCFE. The total
G&A expense variance from guidance is largely the result of
higher compensation costs related to annual performance-based bonus
accruals for 2010. On a sequential basis, G&A expense increased
4% from the third quarter of 2010.
Depletion, depreciation and amortization expense (“DD&A”)
was $2.99 per MCFE in the fourth quarter of 2010, which was within
the Company’s guidance range of $2.90 to $3.20 per MCFE. DD&A
increased 4%, or $0.11 per MCFE, between the fourth quarters of
2010 and 2009. Sequentially, DD&A in the fourth quarter of 2010
decreased 2% from $3.05 per MCFE in the third quarter. The
Company’s DD&A rate is impacted by a number of factors,
including year-end proved reserves and divestitures.
PROVED RESERVES AND COSTS INCURRED
Below is a roll-forward of the Company’s proved reserves from
year-end 2009 to year-end 2010.
(BCFE) Beginning of year 772.2
Revisions of previous estimate
(engineering, price, and agedPUD locations)
24.7 Discoveries and extensions 270.2 Infill reserves in an
existing proved field 114.0 Purchases of minerals in place 0.2
Sales of reserves (86.8) Production (110.0) End of year
984.5
SM Energy’s estimate of proved reserves as of December 31, 2010,
was 984.5 BCFE, which is an increase of 27% from 772.2 BCFE at the
end of 2009. These reserves are comprised of 57.4 MMBbl of oil and
640.0 Bcf of natural gas, and are 70% proved developed, compared to
82% proved developed at the end of 2009. The before income tax
PV-10 value of the Company’s estimated proved reserves at December
31, 2010 was $2.3 billion, which was roughly $1.0 billion
higher than the prior year. Over 80% of SM Energy’s estimated
proved reserves by value were audited by an independent reserve
engineering firm.
Prices used at year-end to calculate the Company’s estimate of
proved reserves were $4.38 per MMBTU of natural gas and $79.43 per
barrel of oil, using the trailing 12-month arithmetic average of
the first of month price. These prices are 13% and 30% higher than
the prices used at the end of 2009 for natural gas and oil,
respectively.
In 2010, SM Energy realized $2.14 per MCFE in drilling finding
costs, excluding revisions, which is an improvement of 38% from
$3.44 per MCFE realized in 2009. Drilling reserve replacement,
excluding revisions, increased to 349% in 2010 from 100% in
2009.
Finding costs and reserve replacement ratios are non-GAAP
financial measures – please refer to the respective definitions in
the accompanying Financial Highlights section at the end of this
release.
Below is a table detailing the Company’s costs incurred in oil
and gas producing activities for the year ended December 31,
2010.
Costs incurred in oil and gas producing activities:
For the Year Ended December 31, 2010 (in
thousands) Development costs $299,308 Facility costs 80,328
Exploration costs 443,888 Acquisitions: Proved properties 664
Unproved properties – other
53,192
Total, including asset retirement obligation $877,380
FINANCIAL POSITION AND LIQUIDITY
As of December 31, 2010, SM Energy had total long-term debt of
$323.7 million. This was comprised of $275.7 million, net of debt
discount, related to the Company’s 3.50% Senior Convertible Notes
and $48.0 million drawn on the long-term credit facility. The
Company’s debt-to-book capitalization ratio was 21% as of the end
of the quarter.
On February 7, 2011, the Company closed the private offering of
$350 million of 6.625% Senior Notes due 2019, which are unsecured
and were issued at par value. The net proceeds will be used to
repay outstanding balances under the credit facility, fund a
portion of the Company’s 2011 capital program and for general
corporate purposes. As a result of the offering, the borrowing base
for the long-term credit facility was automatically reduced from
$1.1 billion to $1.0 billion; however, the Company’s commitment
amount under the credit facility of $678 million was not changed.
SM Energy’s debt-to-book capitalization ratio, pro forma for
this offering, would be 34%.
OPERATIONAL UPDATE
Eagle Ford Shale
SM Energy is currently operating two (2) drilling rigs on its
operated acreage in South Texas. The Company plans to increase its
operated rig count to six (6) drilling rigs by the end of 2011. A
third drilling rig is expected to arrive at the beginning of March
2011.
The Company continues to make improvements in its drilling times
in the play. During 2010, drilling time per 1,000 ft. of
penetration was reduced to 24 hours from 32 hours, a 25%
improvement. A number of pilots to test downspacing potential and
retained energy fracture stimulations are planned this year, both
of which will provide important data regarding the ultimate spacing
for the Company’s development plans.
SM Energy has previously announced its intention to sell down a
portion of its total 250,000 net acre Eagle Ford shale position.
The data room for this planned transaction opened earlier this week
and the Company expects to have an agreement completed in the
second quarter of 2011.
Bakken / Three Forks
Two (2) drilling rigs are currently operating for SM Energy in
the Williston Basin with a focus on horizontal development of the
Bakken and Three Forks formations. A third operated rig is expected
to arrive in April of 2011. The Company has increased its acreage
position in the prospective portion of North Dakota to
approximately 85,000 net acres, up from the previously reported
81,000 net acres.
Marcellus Shale Divestiture
Update
To date, the Company has not received acceptable cash offers for
its Marcellus shale position in north central Pennsylvania where it
holds the rights to approximately 43,000 net acres. SM Energy
continues to negotiate with interested parties.
Performance Guidance
The Company’s guidance for the first quarter and the full year
of 2011 is as follows:
1Q11 FY 2011 Production
(BCFE) 30 – 33 128 – 132 LOE ($/MCFE) $1.10 – $1.15 $1.07 – $1.12
Transportation ($/MCFE) $0.30 – $0.35 $0.40 – $0.45 Production
Taxes (% of pre-hedge O&G revenue) 7% 7% G&A - cash
NPP ($/MCFE) $0.16 – $0.18 $0.16 – $0.18 G&A - other cash
($/MCFE) $0.54 – $0.57 $0.55 – $0.58 G&A - non-cash ($/MCFE)
$0.12 – $0.14 $0.13 – $0.15 G&A TOTAL ($/MCFE) $0.82 – $0.89
$0.84 – $0.91 DD&A ($/MCFE) $2.95 – $3.15 $2.95 – $3.15
Non-cash interest expense ($MM) $3.6 $15.0 Effective income tax
rate range 37.4% - 37.9% % of income tax that is current Drilling,
excluding revisions - numerator defined as the sum of development
costs and exploration costs and facility costs divided by a
denominator defined as the sum of discoveries and extensions and
infill reserves in an existing proved field. To consider the impact
of divestitures on this metric, further include sales of reserves
in denominator. > Drilling, including revisions -
numerator defined as the sum of development costs and exploration
costs and facility costs divided by a denominator defined as the
sum of discoveries and extensions, infill reserves in an existing
proved field, and revisions. To consider the impact of divestitures
on this metric, further include sales of reserves in denominator.
> All-in - numerator defined as total costs incurred,
including asset retirement obligation divided by a denominator
defined as the sum of discoveries and extensions, infill reserves
in an existing proved field, purchases of minerals in place, and
revisions. To consider the impact of divestitures on this metric,
further include sales of reserves in denominator.
Reserve Replacement
Ratio Definitions:
> Drilling, excluding revisions - numerator defined as the sum
of discoveries and extensions and infill reserves in an existing
proved field divided by production. To consider the impact of
divestitures on this metric, further include sales of reserves in
denominator. > Drilling, including revisions - numerator
defined as the sum of discoveries and extensions, infill reserves
in an existing proved field, and revisions divided by production.
To consider the impact of divestitures on this metric, further
include sales of reserves in denominator. > All-in -
numerator defined as the sum of discoveries and extensions, infill
reserves in an existing proved field, purchases of minerals in
place, and revisions divided by production. To consider the impact
of divestitures on this metric, further include sales of reserves
in denominator.
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