SM Energy Company (NYSE: SM) today provides an operational
update, as well as an update of its capital expenditure and
production outlook for 2011 and 2012. In addition, a new
presentation for the second quarter earnings and operational update
will be posted on the Company’s website at www.sm-energy.com. This
presentation will be referenced during the conference call
scheduled for 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time) on
August 2, 2011. Information for the earnings call can be found
below.
MANAGEMENT COMMENTARY
Tony Best, President and CEO, remarked, “The capital expenditure
and production outlook we are providing today is the result of our
successful transformation into a significant North American
resource play company. We have built a portfolio that provides line
of sight to significant growth over the coming years, while
providing the flexibility to allow us to redirect capital when
circumstances dictate. Our disciplined approach to high-grading our
portfolio has positioned us so that we can grow value for our
shareholders while maintaining our strong balance sheet. I hope our
shareholders are as excited about our strong project inventory and
growth potential as I am.”
2011 CAPITAL BUDGET UPDATE
The following table summarizes the changes in the Company’s 2011
capital expenditure budget:
Previously Issued 2011Capital
Plan
Changes
Revised 2011Capital Plan
($ in millions)
Drilling
Capital
Total Eagle Ford shale $500 $295 $795 Bakken/Three Forks 170 20 190
Granite Wash 60 60 Permian Basin Oil 40 10 50 Haynesville shale 75
90 165 Niobrara/Other Oil 25 25 Drilling subtotal $870 $415
$1,285 Non-drilling capital $210 $55 $265 Total
$1,080 $470
$1,550
The primary increase to the 2011 capital budget results from
differences regarding the size and timing of the Company’s
previously announced Eagle Ford shale transactions, compared to
assumptions made when they were originally budgeted. The reduction
in SM Energy’s total Eagle Ford shale position will not be as large
as was assumed at the beginning of the year. The scheduled closing
dates for these transactions are also later in the year than
originally budgeted. As a result, higher amounts of production and
capital expenditures will be recognized by the Company in 2011. The
capital budget is also being increased to reflect the decision to
continue drilling in the Company’s operated Haynesville shale
position in East Texas until its leasehold position is held by
production in 2012. More detailed production and cost guidance for
the remainder of 2011 is provided later in this release.
The increase in capital expenditures is effectively being funded
by proceeds from transactions that the Company has either closed or
announced in 2011. A summary of the estimated gross proceeds from
these transactions is provided in the following table:
Gross Proceeds ($ in millions) Eagle
Ford LaSalle block $225 Non-operated Eagle Ford reimbursements 55
Marcellus shale assets 80 Constitution Field (East Texas) assets 44
Rocky Mountain oil assets 47 Eagle Ford gathering assets 25 Total
gross proceeds $476
The table above does not include any benefit from the $680
million carry that will be applied to the Company’s interests in
its outside operated Eagle Ford assets.
PRELIMINARY 2012 CAPITAL PROGRAM BUDGET
Estimated GrossWells
EstimatedWI%
Estimated
Net Capital
($ in millions) Operated Eagle Ford shale 95 100% $670 - 730
Non-operated Eagle Ford shale 300 14.5% - Operated Bakken/Three
Forks 40 57% 185 - 205 Operated Haynesville 8 95% 85 - 95 Operated
Granite Wash 15 60% 70 - 75 Other Operated TBD Varies 130 - 150
Outside Operated TBD Varies 75 - 100 Range of drilling capital
$1,200 - 1,300 Non-drilling capital $200
Range of total
capital $1,400 - $1,500
NOTE: The above estimated capital ranges are preliminary and are
not intended to sum.
2011 AND 2012 PRODUCTION OUTLOOK
PreviousFY2011Guidance
RevisedFY2011Guidance
PreliminaryFY2012Guidance
Production (BCFE) 146 – 152 162 – 167 225 – 232 Production
growth (year over year) 33 – 38% 47 – 52% 35 – 40%
FUNDING OF 2011 AND 2012 PROGRAMS
Below is a table that summarizes the Company’s estimated net
cash needs for 2011 and 2012 based on the assumptions presented
above:
($ in millions) 2011
2012 Capital program $1,550
$1,400 – $1,500 Less: Projected operating cash flow* 860
1,200 – 1,300 Less: Transaction proceeds 476
- Estimated funding gap $214 $200
* Projected operating cash flow assumes current strip pricing.
Projected operating cash flow is a non-GAAP financial
measure intended to be an estimate of future operating
cash flow that provides internally
generated funds for exploration, development, acquisitions,
and to service debt. The Company computes historical operating cash
flow as net cash provided by operating activities adjusted for
changes in current assets and liabilities and exploration, less
exploratory dry hole expense, and stock-based compensation expense
included in exploration. A reconciliation of projected operating
cash flow to projected net cash provided by operating activities is
not provided due to uncertainties in projecting future changes in
current assets and liabilities and other reconciling items.
SM Energy issued $350 million in 6.625% senior notes earlier in
2011 to partially fund its 2011 and 2012 capital programs. As of
the end of the quarter, there were no outstanding borrowings on the
revolving credit facility, which has a $1.0 billion commitment
amount at the present time. Management believes that the Company is
appropriately capitalized to fund the capital programs detailed
above, while maintaining the strength of its balance sheet. The
Company expects that it will achieve double-digit production growth
within operating cash flow in 2013.
OPERATIONAL UPDATE
Eagle Ford Shale
SM Energy is currently operating four (4) drilling rigs on its
operated acreage in South Texas. The focus of drilling activity
during the second quarter of 2011 was to drill spacing pilots and
test alternative completion designs. Data from this testing should
be available to guide development activities during 2012. During
the second quarter, the build-out of operated midstream facilities
was commissioned to an outside party under the terms of a
previously disclosed gas gathering services contract. Gas takeaway
capacity during the quarter continued to be below contracted
amounts due to restrictions on downstream third-party
infrastructure. Previously announced capacity from another outside
provider is anticipated to be available to the Company late in the
third quarter of 2011.
As previously announced, during the second quarter of 2011 the
Company entered into two separate transactions related to its Eagle
Ford shale assets. These transactions are scheduled to close during
the third quarter. Post-closings, SM Energy will have
approximately 196,000 net acres in the play.
Bakken / Three Forks
SM Energy is currently operating two (2) drilling rigs in the
Williston Basin, with a focus on horizontal development of the
Bakken and Three Forks formations in the Company’s prospects in
Divide and McKenzie Counties, North Dakota. During the second
quarter of 2011, the Company, along with other operators,
experienced flooding which delayed drilling and completion
operations and required some production to be shut-in. All shut-in
production is expected to come back online early in the third
quarter of 2011 as the flood waters recede. A third drilling rig is
being added to this play in the third quarter of 2011.
Niobrara
SM Energy continues to test its Niobrara position in the
northern extension of the DJ Basin in southern Wyoming. During the
second quarter, three (3) new operated wells were drilled. The
Polaris (SM 38% WI) was completed during the quarter and had a
7-day average production rate of roughly 950 BOE/d. The remaining
two (2) wells are expected to be completed later this year.
The Company has also started permitting for several wells in the
Powder River Basin in Wyoming where SM Energy has recently added to
its acreage holdings. The Company now has 63,000 net acres in the
Powder River Basin. In total, SM Energy has 89,000 total net acres
in eastern Wyoming with potential in the emerging Niobrara
play.
ArkLaTex Region
During the quarter, SM Energy maintained activity in its
operated Haynesville position in San Augustine County, Texas, using
a two (2) rig program. Due to strong well results and the presence
of additional highly prospective up-hole intervals, the Company has
decided to continue drilling its acreage in East Texas until the
acreage is held by production, which it believes can be achieved by
the third quarter of 2012 with a one (1) drilling rig program.
Mid-Continent Region
SM Energy operated one (1) drilling rig in its Granite Wash
program during much of the second quarter of 2011, focusing on the
liquids rich wash intervals. During the second quarter, SM Energy
completed a Cottage Grove well, the Ruth 4-60 (SM 44% WI) in
Wheeler County, Texas, which had a 7-day average initial production
of approximately 1,378 BOE/d, of which 82% was oil. The Company
plans to continue a one (1) to two (2) drilling rig program for the
remainder of the year on its Granite Wash acreage, all of which is
held by production.
Permian Region
The Company operated one (1) drilling rig in the Permian region
during the second quarter of 2011, aimed at drilling down-spacing
pilots in the Wolfberry tight oil and testing Mississippian
targets.
DETAILED 2011 PRODUCTION AND COST GUIDANCE
3Q11E
4Q11E FY 2011E Production
(BCFE) 42.0 – 44.5 44.0 – 47.0 162.0 – 167.0 Average daily
production (MMCFE/d) 453 – 481 479 – 509 437 – 464 Oil production
(as % of total) ~30% ~31% ~30% Natural gas production (as % of
total) ~55% ~55% ~57% NGL production (as % of total) ~15% ~14% ~13%
LOE ($/MCFE) $0.90 – $0.96 $0.90 – $0.96 $0.88 – $0.93
Transportation ($/MCFE) $0.59 – $0.62 $0.58 – $0.61 $0.50 – $0.53
Production Taxes (% of pre-derivative oil, gas, and NGL revenue) 6
– 7% 6 – 7% 5.5 – 6% G&A - cash NPP ($/MCFE) $0.11 –
$0.13 $0.11 – $0.13 $0.12 – $0.14 G&A - other cash ($/MCFE)
$0.47 – $0.50 $0.47 – $0.50 $0.47 – $0.50 G&A - non-cash
($/MCFE) $0.12 – $0.14 $0.11 – $0.13 $0.11 – $0.13 G&A TOTAL
($/MCFE) $0.70 – $0.77 $0.69 – $0.76 $0.70 – $0.77 DD&A
($/MCFE) $2.90 – $3.10 $2.90 – $3.10 $2.90 – $3.10 Non-cash
interest expense ($MM) $3.4 $3.5 $18.1 Effective income tax rate
range 37.0% - 37.5% % of income tax that is current ~5%
EARNINGS CALL INFORMATION
The Company has scheduled a teleconference to discuss second
quarter results and other operational matters on August 2, 2011, at
8:00 a.m. Mountain Time (10:00 a.m. Eastern Time). The call
participation number is 800-573-4842 and the participant passcode
is 91627792. An audio replay of the call will be available
approximately two hours after the call at 888-286-8010, with the
passcode 51587016. International participants can dial 617-224-4327
to take part in the conference call, using passcode 91627792, and
can access a replay of the call at 617-801-6888, using passcode
51587016. Replays can be accessed through August 9, 2011.
This call will be webcast live and can be accessed at SM Energy
Company’s website at www.sm-energy.com. An audio recording of the
conference call will be available at that site through August 9,
2011.
INFORMATION ABOUT FORWARD LOOKING STATEMENTS
This release contains forward looking statements within the
meaning of securities laws, including forecasts and projections.
The words “will,” “believe,” “budget,” “anticipate,” “plan,”
“intend,” “estimate,” “forecast,” and “expect” and similar
expressions are intended to identify forward looking statements.
These statements involve known and unknown risks, which may cause
SM Energy’s actual results to differ materially from results
expressed or implied by the forward looking statements. These risks
include such factors as the volatility and level of oil, natural
gas, and natural gas liquids prices, the uncertain nature of the
expected benefits from the acquisition, divestiture, or joint
venture of oil and gas properties, the uncertain nature of
announced divestiture, joint venture, farm down or similar efforts
and the ability to complete such transactions, uncertainties
inherent in projecting future rates of production from drilling
activities and acquisitions, the ability of midstream service
providers to purchase or market the Company’s production, the
ability of purchasers of production to pay for those sales, the
availability of debt and equity financing for purchasers of oil and
gas properties, the ability of the banks in the Company’s credit
facility to fund requested borrowings, the ability of derivative
counterparties to settle derivative contracts in favor of the
Company, the imprecise nature of estimating oil and gas reserves,
the availability of additional economically attractive exploration,
development, and property acquisition opportunities for future
growth and any necessary financings, unexpected drilling conditions
and results, unsuccessful exploration and development drilling,
drilling and operating service availability, the risks associated
with the Company’s commodity price risk management strategy,
uncertainty regarding the ultimate impact of potentially dilutive
securities, and other such matters discussed in the “Risk Factors”
section of SM Energy’s 2010 Annual Report on Form 10-K and
subsequent quarterly reports filed on Form 10-Q. Although SM Energy
may from time to time voluntarily update its prior forward looking
statements, it disclaims any commitment to do so except as required
by securities laws.
ABOUT THE COMPANY
SM Energy Company is an independent energy company engaged in
the exploration, exploitation, development, acquisition, and
production of natural gas, natural gas liquids and crude oil. SM
Energy routinely posts important information about the Company on
its website. For more information about SM Energy, please visit its
website at www.sm-energy.com.
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