SM Energy Company (NYSE: SM) ("SM Energy" or the "Company")
today reports financial results for the fourth quarter of 2011 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 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 February 23, 2012.
Information for the earnings call can be found below.
MANAGEMENT COMMENTARY
Tony Best, President and CEO, remarked, "During 2011, SM Energy
set many records, including record quarterly production for each of
the previous four quarters, record proved reserves at year end of
1.3 TCFE or approximately 210 MMBOE, and nearly $1 billion in
property transactions. This past year, we set out with the
ambitious goal to grow the Company's production by 50% through
economically sound projects. We executed on that plan by leveraging
off of the significant ground work set up in the preceding years in
our Eagle Ford and Bakken Three Forks programs. Though 2011 was a
great year, our management team is always looking to the future.
For 2012, we intend to maintain our growth trajectory while
generating superior returns. We believe we have the capital
program, financial strength, and asset base in liquid rich plays to
deliver on that plan."
FOURTH QUARTER 2011 RESULTS
SM Energy posted a net loss for the fourth quarter of 2011 of
$(120.7) million, or $(1.89) per diluted share. Adjusted net income
for the fourth quarter was $40.9 million, or $0.60 per adjusted
diluted share. 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:
Reconciliation of Net Income (GAAP)
To Adjusted Net Income (Non-GAAP):
(in thousands, except per share data)
For the ThreeMonths EndedDecember 31,
2011 Actual Net Loss (GAAP) $ (120,711 ) Adjustments, net of
tax:
(1) Change in Net Profits Plan liability (475 )
Unrealized portion of derivative loss 28,380 Loss on divestiture
activity 15,666 Impairment of proved properties 106,911 Abandonment
and impairment of unproved properties 1,913 DD&A adjustment for
Marcellus shale 9,245 Adjusted Net Income (Non-GAAP) $
40,929 Diluted net income (loss) per common share
Actual (GAAP) $ (1.89 ) Adjusted (Non-GAAP) (2) $ 0.60
Diluted weighted-average common shares outstanding Actual
(GAAP) 64,024 Adjusted (Non-GAAP) (2) 67,653 (1) For
the three-month period ended December 31, 2011, adjustments are
shown net of tax and are calculated using an effective tax rate of
37.3% which approximates the Company's statutory tax rate adjusted
for ordinary permanent differences. (2) Adjusted net income
per adjusted diluted share is calculated by assuming the Company
had net income in the period and therefore includes potentially
dilutive securities related to unvested restricted stock units,
in-the-money outstanding options to purchase the Company’s common
stock, contingent Performance Share Units, and shares into which
the 3.50% Senior Convertible Notes may be converted, as calculated
for accounting purposes using the treasury stock method as applied
to the Company's net share settlement option for the notes. On a
GAAP basis, these items were not treated as dilutive securities in
the fourth quarter of 2011 because the Company had a GAAP net loss
for the quarter.
During the fourth quarter of 2011, SM Energy recorded a proved
property impairment of $170.5 million. This non-cash charge
related to dry gas properties in the Company's ArkLaTex region,
including properties targeting the Haynesville and Cotton Valley
intervals. The impairment was triggered by lower natural gas prices
at the end of the fourth quarter. The Company also took a loss on
divestiture activity of $25.0 million in the fourth quarter. This
loss relates to the Company's Marcellus shale assets and arises
from Endeavour Operating Corporation's ("Endeavour") failure to
consummate its agreements with the Company to purchase such assets.
Due to Endeavour's failure, accounting guidance requires that these
assets be reclassified as held for use at their accounting fair
value at the end of the quarter, which resulted in a non-cash
charge. Additionally, DD&A expense associated with these assets
for the period that they were classified as assets held for sale of
approximately $14.7 million is required to be captured in the
current period. The Company has initiated litigation in Harris
County, Texas against Endeavour, asserting that Endeavour breached
its agreements with the Company by failing to close and is seeking
specific performance or, in the alternative, damages.
SM Energy's net cash provided by operating activities for the
fourth quarter of 2011 was $270.8 million. Operating cash flow
was $275.1 million for the same period.
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 for additional information about these measures.
SM Energy's average daily production of 557.9 MMCFE/d (93.0
MBOE/d) for the fourth quarter of 2011 was 13% above the midpoint
of the Company's guidance range of 479 to 509 MMCFE/d. The
production mix for the quarter was 29% oil, 56% gas, and 15% NGLs.
Production growth was driven by strong results in the Company's
Eagle Ford shale and Bakken/Three Forks programs. Production grew
21% sequentially in the fourth quarter of 2011 over the preceding
quarter and 62% over the fourth quarter of 2010. When taking into
account production attributable to divested properties, the Company
grew production by 65% from the fourth quarter of 2010 to the
fourth quarter of 2011.
Total operating revenues and other income for the fourth quarter
of 2011 were $379.5 million. The following table displays, by
product type, the average realized price received by the Company,
as well as the adjusted price received after taking into account
cash settlements for derivative transactions:
Average Realized Commodity Prices for
Quarter Ended December 31, 2011
Before the impactof derivative
cashsettlements
After the impact ofderivative
cashsettlements
Oil ($/Bbl) $ 87.52 $ 80.63 Gas ($/Mcf) $ 3.86 $ 4.36
Natural gas liquids ($/Bbl) $ 54.36 $ 50.37
Equivalent ($/MCFE) $ 7.73 $ 7.58
The table below presents actual production and per MCFE cost
metrics for the quarter, along with previously issued fourth
quarter guidance for 2011:
Production Actual
4Q11 Guidance
Average daily production (MMCFE/d) 557.9
479 - 509
Total production (BCFE) 51.3
44.0 - 47.0
Oil production (as % of total) 29% ~30% Natural gas production (as
% of total) 56% ~58% NGL production (as % of total) 15% ~12%
Costs LOE ($/MCFE) $0.85
$0.90 - $0.96
Transportation ($/MCFE) $0.60
$0.64 - $0.67
Production taxes(% of pre-derivative oil,
gas, and NGL revenue)
4.8% 5% G&A - other cash (per MCFE) $0.50
$0.48 - $0.51
G&A - cash related to NPP (per MCFE) $0.09
$0.11 - $0.13
G&A - non-cash (per MCFE) $0.10
$0.12 - $0.14
Total G&A ($/MCFE) $0.69
$0.71 - $0.78
DD&A ($/MCFE) $3.26
$2.90 - $3.10
Non-cash interest expense ($MM) $3.6 $3.4
PROVED RESERVES AND COSTS INCURRED
The table below reconciles the changes in the Company's proved
reserves from year-end 2010 to year-end 2011:
(BCFE) Beginning of year 984.5
Price revisions (25.3 ) Performance revisions (engineering and
three-stream conversion) 36.8 Discoveries and extensions 491.3
Infill reserves in an existing proved field 34.7 Purchases of
minerals in place — Sales of reserves (93.1 ) Production (169.7 )
End of year 1,259.2 Percentage natural gas 53 %
Percentage proved undeveloped 33 %
SM Energy's estimate of proved reserves as of December 31, 2011,
was 1,259.2 BCFE (209.9 MMBOE), which is an increase of 28% from
984.5 BCFE (164.1 MMBOE) at the end of 2010. These reserves are
comprised of 71.7 MMBbl of oil, 664.0 Bcf of natural gas, and 27.5
MMBbl of NGLs, and are 67% proved developed, compared to 70% proved
developed at the end of 2010. The percentage of proved liquids
reserves increased 73% to 595.2 BCFE (99.2 MMBOE) and reflects the
impact of the Company's focus on liquids rich plays and the
conversion in 2011 to three-stream production reporting to show
volumes consistent with the title transfer for each product.
Drilling reserve replacement, excluding revisions was 310% for the
year. The before income tax PV-10 value of the Company's estimated
proved reserves at December 31, 2011, was $3.5 billion, which was
roughly $1.1 billion higher than the prior year. Approximately 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 $96.19 per barrel of oil, $4.12 per MMBTU
of natural gas, and $59.37 per barrel of NGL, using the trailing
12-month arithmetic average of the first of month price. These
prices are 21% higher and 6% lower than the prices used at the end
of 2010 for oil and natural gas, respectively. As the Company did
not report its production in three streams during 2010 there is no
comparative data for NGL pricing.
In 2011, SM Energy's finding and development costs from
drilling, excluding revisions, was $2.85 per MCFE or $17.10 per
BOE. Drilling and development reserve replacement, excluding
revisions, was 310% in 2011. 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,
2011:
Costs incurred in oil and gas producing activities:
For the Year Ended (in thousands)
December 31, 2011 Development costs $ 1,208,255
Facility costs 112,372 Exploration costs 177,465 Acquisitions:
Unproved properties - other 55,237 Total, including asset
retirement obligation $ 1,553,329
FINANCIAL POSITION AND LIQUIDITY
As of December 31, 2011, SM Energy had total long-term debt of
$985.1 million. This was comprised of $285.1 million, net of debt
discount, related to the Company's 3.50% Senior Convertible Notes,
$350.0 million of its 6.625% Senior Notes, and $350.0 million of
its 6.50% Senior Notes. As of December 31, 2011, the Company had no
borrowings under its long-term secured credit facility and its
gross debt-to-book ratio was 40%. When taking into consideration
cash on hand at December 31, 2011, of $119.2 million, the Company's
net debt-to-book capitalization ratio was 37% as of the end of the
year.
OPERATIONAL UPDATE
Revised 2012 Capital and Performance
Guidance
SM Energy is presenting updated 2012 capital program guidance in
the table below:
2012 Capital Forecast (in
millions) Allocated Capital Operated Eagle Ford $650 -
$700 Operated Bakken/Three Forks $160 - $185 Operated Granite Wash
$60 - $70 Operated Haynesville $35 - $40 Other Operated $130 - $150
Outside Operated $125 - $150 Total Drilling Capital $1,200 - $1,300
Non Drilling Capital $200 - $300 Total Capital $1,400
- $1,500
Note: The Company intends to manage
capital expenditures to a range of$1.4 billion to $1.5 billion.
Totals above are not intended to sum.
Eagle Ford Shale
The Company had 84 wells drilled and completed in its operated
Eagle Ford shale program as of the end of 2011. Of this amount, 44
were drilled and completed during 2011. SM Energy slowed the rate
of increase in operated Eagle Ford activity in the second half of
2011 to accommodate continued investment in the non-operated Eagle
Ford program until the Acquisition and Development Agreement
("ADA") with Mitsui E&P Texas L.P. (“Mitsui”) was
completed.
SM Energy is currently operating five drilling rigs on its
operated acreage in South Texas. The Company plans to operate
a five to six drilling rig program throughout 2012 and has
allocated between $650 million and $700 million to drilling and
completion activities. During 2012, the drilling program will
include three drilling rigs that are designed for pad drilling.
In the non-operated Eagle Ford program, SM Energy expects
substantially all drilling and completion costs will be carried
pursuant to the terms of the ADA with Mitsui. The Company will,
however, remain responsible for investments in items such as
infrastructure net to its proportional ownership.
Bakken / Three Forks
SM Energy is currently operating four drilling rigs in the
Williston Basin with a focus on horizontal development of the
Bakken and Three Forks formations. The Company has allocated
between $160 million to $185 million to drilling and completion
activities in its operated Bakken/Three Forks program. The Company
will focus its drilling program in its Raven and Gooseneck
prospects and will begin drilling infill locations in its Bear Den
prospect.
Granite Wash
SM Energy currently has three operated drilling rigs in its
Granite Wash program, which are focused on the shallower, more
liquid rich washes. The Company has allocated between
$60 million and $70 million for its 2012 operated program in
the Granite Wash.
Haynesville Shale
As gas prices deteriorated in recent months, SM Energy has made
the decision to scale back its operated program in the Haynesville
by removing four of the wells the Company had previously planned to
drill in 2012. As a result of the reduced 2012 drilling activity in
the Haynesville, SM Energy has reduced the capital allocated
for this program to $35 million to $40 million. After the
completion of the currently planned drilling, SM Energy will have
approximately 80% of its operated Haynesville shale acreage held by
production.
Performance Guidance
1Q12
FY 2012 Production (BCFE) 48.5 - 52.0 220 - 227
Average daily production (MMCFE/d) 533 - 571 601 - 620 LOE
($/MCFE) $0.90 - $0.96 $0.90 - $0.96 Transportation ($/MCFE) $0.65
- $0.70 $0.73 - $0.77 Production Taxes (% of pre-hedge O&G
revenue) 5.5% 5.5% G&A - cash NPP ($/MCFE) $0.08 - $0.10
$0.08 - $0.10 G&A - other cash ($/MCFE) $0.45 - $0.48 $0.41 -
$0.45 G&A - non-cash ($/MCFE) $0.09 - $0.11 $0.09 - $0.11
G&A TOTAL ($/MCFE) $0.62 - $0.69 $0.58 - $0.66 DD&A
($/MCFE) $3.35 - $3.55 $3.10 - $3.30 Non-cash interest expense
($MM) $3.7 $6.6 Effective income tax rate range 37.2% -
37.7% % of income tax that is current —%
The production forecast for 2012 is being reduced slightly to a
range of 220 BCFE to 227 BCFE from 225 BCFE to 232 BCFE. The
reduction is due to the aforementioned reduction of activity from
our operated Haynesville shale program.
Due to the ADA with Mitsui, DD&A expense increases
significantly in the first quarter of 2012 as a result of the
Company's transfer of proved reserves to Mitsui; the Company
however retains the associated costs of those transferred proved
reserves on its balance sheet. As SM Energy adds proved reserves
related to its non-operated Eagle Ford program at essentially no
cost, the Company's DD&A rate will decline over the course of
the development of the associated assets.
EARNINGS CALL INFORMATION
The Company has scheduled a teleconference to discuss these
results and other operational matters for February 23, 2012, at
8:00 a.m. Mountain time (10:00 a.m. Eastern time). The call
participation number is 877-445-0811 and the conference ID number
is 48119439. An audio replay of the call will be available
approximately two hours after the call at 855-859-2056, with the
conference ID number 48119439. International participants can dial
617-401-8115 to take part in the conference call, using the
conference ID number 48119439, and can access a replay of the call
at 404-537-3406, using conference ID number 48119439. Replays can
be accessed through March 9, 2012.
This call is being 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 March 9,
2012.
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 factors such as the uncertainty of negotiations to result
in an agreement or a completed transaction, the uncertain nature of
the expected benefits from the actual or expected acquisition,
divestiture, farm down 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, the volatility and level of oil, natural gas, and
natural gas liquids prices, uncertainties inherent in projecting
future rates of production from drilling activities and
acquisitions, 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, the availability of drilling, completion, and operating
equipment and services, 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 2011
Annual Report on Form 10-K which is expected to be filed with the
Securities and Exchange Commission on or around February 23, 2012.
The forward looking statements contained herein speak as of the
date of this announcement. 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.
INFORMATION ABOUT PROVED RESERVES
This press release contains references to certain items
pertaining to the process used to estimate the Company's proved
reserves and their PV-10 value, which is equal to the standardized
measure of discounted future net cash flows from proved reserves on
the applicable date, before deducting future income taxes,
discounted at 10 percent. SM Energy believes that the presentation
of pre-tax PV-10 value is relevant and useful to investors because
it presents the discounted future net cash flows attributable to
the Company's proved reserves prior to taking into account future
corporate income taxes and the Company's current tax structure. The
Company further believes investors and creditors use pre-tax PV-10
value as a basis for comparison of the relative size and value of
the Company's proved reserves to other peer companies. SM Energy's
pre-tax PV-10 value for estimated proved reserves as of December
31, 2011 may be reconciled to its standardized measure of
discounted future net cash flows as of December 31, 2011 by
reducing the Company's pre-tax PV-10 value by the discounted future
income taxes associated with such reserves, and a reconciliation is
provided below.
Reconciliation of standardized measure
(GAAP) to PV-10 value (Non-GAAP):
As of December 31, 2011
(in millions)
Standardized measure of discounted future
netcash flows (GAAP)
$ 2,580.0
Add: 10 percent annual discount, net of
incometaxes
1,727.6 Add: future income taxes 1,740.4 Undiscounted
future net cash flows $ 6,048.0
Less: 10 percent annual discount without
taxeffect
(2,586.8 ) PV-10 value (Non-GAAP) $ 3,461.2
Additionally, the Company believes its use of an independent
reserve auditor is a fact of interest to investors and analysts who
follow the Company. More information on these items will be
included in the Company's Annual Report on Form 10-K for the year
ended December 31, 2011, to be filed with the Securities and
Exchange Commission on or around February 23, 2012.
ABOUT THE COMPANY
SM Energy Company is an independent energy company engaged in
the acquisition, exploration, development, and production of crude
oil, natural gas, and natural gas liquids in onshore North America.
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.
SM ENERGY COMPANY FINANCIAL HIGHLIGHTS December
31, 2011
Guidance
Comparison
For the Three Months Ended December 31, 2011
Actual Guidance Average daily production
(MMCFE per day) 557.9
479 - 509
Total production (BCFE) 51.3
44.0 - 47.0
Oil production (as % of total) 29% ~30% Natural gas production (as
% of total) 56% ~58% NGL production (as % of total) 15% ~12%
Lease operating expense (per MCFE) $0.85
$0.90 - $0.96
Transportation expense (per MCFE) $0.60
$0.64 - $0.67
Production taxes, as a percentage of
pre-derivative oil, gas, and NGLrevenue
4.8% 5% General and administrative - other cash (per MCFE)
$0.50
$0.48 - $0.51
General and administrative - cash related to Net Profits Plan (per
MCFE) $0.09
$0.11 - $0.13
General and administrative - non-cash (per MCFE) $0.10
$0.12 - $0.14
General and administrative - TOTAL (per MCFE) $0.69
$0.71 - $0.78
Depreciation, depletion, and amortization (per MCFE) $3.26
$2.90 - $3.10
Non-cash interest expense ($MM) $3.6 $3.4
For the
Twelve Months Ended December 31, 2011 Actual
Guidance Effective income tax rate 36.5%
36.6% - 37.1%
% of income tax that is current
—%
15% - 18%
SM ENERGY COMPANY FINANCIAL HIGHLIGHTS December 31, 2011
Production
Data
For the Three Months
EndedDecember 31,
For the Twelve Months
EndedDecember 31,
2011 2010
PercentChange
2011 2010
PercentChange
Average realized sales price, before the effects
of derivative cash settlements: (1) Oil (per Bbl) $ 87.52 $
77.46 13 % $ 88.23 $ 72.65 21 % Gas (per Mcf) 3.86 5.23 (26 )% 4.32
5.21 (17 )% NGL (per Bbl) 54.36 — NM
53.32 — NM Equivalent (MCFE) $ 7.73 $
7.90 (2 )% $ 7.85 $ 7.60 3 %
Average realized sales
price, including the effects of derivative cash settlements:
(1) Oil (per Bbl) $ 80.63 $ 70.30 15 % $ 78.89 $ 66.85 18 % Gas
(per Mcf) 4.36 6.00 (27 )% 4.80 6.05 (21 )% NGL (per Bbl)
50.37 — NM 47.90 —
NM Equivalent (MCFE) $ 7.58 $ 7.98 (5 )% $ 7.58 $ 7.82 (3 )%
Production: (1) Oil (MMBbls) 2,461 1,832 34 % 8,080 6,359 27
% Gas (Bcf) 28,794 20,690 39 % 100,309 71,855 40 % NGL (MMBbls)
1,295 — NM 3,491 — NM BCFE (6:1) 51,329
31,682 62 % 169,734 110,007 54 %
Average daily
production: (1) Oil (MBbls per day) 26.7 19.9 34 % 22.1 17.4 27
% Gas (MMcf per day) 313.0 224.9 39 % 274.8 196.9 40 % NGL (MBbls
per day) 14.1 — NM 9.6 — NM MMCFE per
day (6:1) 557.9 344.4 62 % 465.0 301.4 54 %
Per MCFE
Data:
Realized price before the effects of
derivativecash settlements
$ 7.73 $ 7.90 (2 )% $ 7.85 $ 7.60 3 % Lease operating expense (0.85
) (1.06 ) (20 )% (0.88 ) (1.10 ) (20 )% Transportation costs (0.60
) (0.22 ) 173 % (0.51 ) (0.19 ) 168 % Production taxes (0.37 )
(0.52 ) (29 )% (0.32 ) (0.48 ) (33 )% General and administrative
(0.69 ) (1.00 ) (31 )% (0.70 ) (0.97 )
(28 )%
Operating profit, before the effects of
derivativecash settlements
$ 5.22 $ 5.10 2 % $ 5.44 $ 4.86 12 % Derivative cash settlements
(0.15 ) 0.08 (288 )% (0.27 )
0.22 (223 )%
Operating profit, including the effects
ofderivative cash settlements
$ 5.07 $ 5.18 (2 )% $ 5.17 $ 5.08 2 %
Depletion, depreciation, amortization, and asset retirement
obligation liability accretion $ (3.26 ) $ (2.99 ) 9 % $ (3.01 ) $
(3.06 ) (2 )%
(1) NGL production volumes, revenues, and
prices for 2010 have not been reclassified to conform to the
currentpresentation given the immateriality of the volumes in that
period. Please refer to additional discussion in the Company'sForm
10-Q for the quarter ended March 31, 2011.
SM ENERGY COMPANY FINANCIAL HIGHLIGHTS
December 31, 2011
Consolidated
Statements of Operations
(In thousands, except per share amounts)
For the Three Months
EndedDecember 31,
For the Twelve Months
EndedDecember 31,
2011 2010 2011 2010 Operating revenues
and other income:
Oil, gas, and NGL production revenue $ 396,914 $ 250,160 $
1,332,392 $ 836,288 Realized hedge (loss) gain (6,159 ) 2,694
(20,707 ) 23,465 Gain (loss) on divestiture activity (24,986 )
23,094 220,676 155,277 Marketed gas system revenue 13,630 16,083
69,898 70,110 Other operating revenue 143 2,087 1,059
7,694 Total operating revenues and other income
379,542 294,118 1,603,318 1,092,834
Operating expenses: Oil, gas, and NGL production expense 93,204
56,961 290,111 195,075
Depletion, depreciation, amortization, and
assetretirement obligation liability accretion
167,298 94,806 511,103 336,141 Exploration 19,950 21,027 53,537
63,860 Impairment of proved properties 170,512 6,127 219,037 6,127
Abandonment and impairment of
unprovedproperties
3,051 (3,012 ) 7,367 1,986 General and administrative 35,568 31,560
118,526 106,663 Change in Net Profits Plan liability (758 ) (4,656
) (25,477 ) (34,441 )
Unrealized and realized derivative
(gain)loss (note 10)
46,786 12,994 (37,086 ) 8,899 Marketed gas system expense 12,653
14,176 64,249 66,726 Other operating expense 11,417 956
17,567 3,027 Total operating expenses 559,681
230,939 1,218,934 754,063 Income
(loss) from operations (180,139 ) 63,179 384,384 338,771
Nonoperating income (expense): Interest income 84 53 466 321
Interest expense (12,213 ) (4,727 ) (45,849 ) (24,196 )
Income (loss) before income taxes (192,268 ) 58,505 339,001 314,896
Income tax (expense) benefit 71,557 (21,366 ) (123,585 )
(118,059 )
Net income (loss) $ (120,711 ) $ 37,139
$ 215,416 $ 196,837 Basic
weighted-average common shares outstanding 64,024 63,131
63,755 62,969
Diluted weighted-average common
sharesoutstanding
64,024 64,919 67,564 64,689
Basic net income (loss) per common share $ (1.89 ) $ 0.59 $
3.38 $ 3.13 Diluted net income (loss) per
common share $ (1.89 ) $ 0.57 $ 3.19 $ 3.04
* As of January 1, 2011, the Company elected to de-designate
all commodity derivative contracts that had previously been
designated as cash flow hedges as of December 31, 2010, and to
discontinue hedge accounting prospectively. Accordingly, beginning
January 1, 2011, gains and losses from commodity price management
activities, both realized and unrealized, will be included in the
income statement on the line titled “Unrealized and realized
derivative (gain) loss”. Hedging balances accounted for in the
balance sheet line titled “Accumulated other comprehensive loss” as
of December 31, 2010, will now be recognized in the income
statement line titled “Realized hedge (loss) gain” as they are
realized. For the three-month period ended December 31, 2011, SM
Energy's adjusted oil price was negatively impacted by $16.9
million of realized oil derivative cash settlements, the Company's
adjusted natural gas price was positively impacted by $14.4 million
of realized natural gas derivative cash settlements, and SM
Energy's adjusted NGL price was negatively impacted by $5.2 million
of realized NGL derivative cash settlements. For the twelve-month
period ended December 31, 2011, the Company's adjusted oil price
was negatively impacted by $75.4 million of realized oil derivative
cash settlements, SM Energy's adjusted natural gas price was
positively impacted by $48.0 million of realized natural gas
derivative cash settlements, and the Company's adjusted NGL price
was negatively impacted by $18.9 million of realized NGL derivative
cash settlements.
SM ENERGY COMPANY FINANCIAL
HIGHLIGHTS December 31, 2011
Consolidated
Balance Sheets
(In thousands, except per share amounts)
December 31,
December 31, ASSETS 2011 2010
Current assets: Cash and cash equivalents $ 119,194 $ 5,077
Accounts receivable 210,368 163,190 Refundable income taxes 5,581
8,482 Prepaid expenses and other 68,026 45,522 Derivative asset
55,813 43,491 Deferred income taxes 4,222 8,883 Total
current assets 463,204 274,645 Property and
equipment (successful efforts method), at cost: Land 1,548 1,491
Proved oil and gas properties 4,378,987 3,389,158 Less -
accumulated depletion, depreciation, and amortization (1,766,445 )
(1,326,932 ) Unproved oil and gas properties 120,966 94,290 Wells
in progress 273,428 145,327 Materials inventory, at lower of cost
or market 16,537 22,542 Oil and gas properties held for sale 246
86,811 Other property and equipment, net of accumulated
depreciation of $23,985 in 2011 and $15,480 in 2010 71,369
21,365
Total property and equipment, net
3,096,636 2,434,052 Other noncurrent assets:
Derivative asset 31,062 18,841 Restricted cash 124,703 — Other
noncurrent assets 83,375 16,783 Total other
noncurrent assets 239,140 35,624
Total
Assets $ 3,798,980 $
2,744,321 LIABILITIES AND STOCKHOLDERS'
EQUITY Current liabilities: Accounts payable and accrued
expenses $ 456,999 $ 417,654 Derivative liability 42,806 82,044
Other current liabilities 6,000 2,355 Total current
liabilities 505,805 502,053 Noncurrent
liabilities: Long-term credit facility — 48,000 3.50% Senior
Convertible Notes, net of unamortized discount of $2,431 in 2011
and $11,827 in 2010 285,069 275,673 6.625% Senior Notes 350,000 —
6.50% Senior Notes 350,000 — Asset retirement obligation 87,167
69,052 Asset retirement obligation associated with oil and gas
properties held for sale 1,277 2,119 Net Profits Plan liability
107,731 135,850 Deferred income taxes 568,263 443,135 Derivative
liability 12,875 32,557 Other noncurrent liabilities 67,853
17,356 Total noncurrent liabilities 1,830,235
1,023,742 Stockholders' equity: Common stock, $0.01
par value - authorized: 200,000,000 shares; issued: 64,145,482
shares in 2011 and 63,412,800 shares in 2010; outstanding, net of
treasury shares: 64,064,415 shares in 2011 and 63,310,165 shares in
2010 641 634 Additional paid-in capital 216,966 191,674 Treasury
stock, at cost: 81,067 shares in 2011 and 102,635 shares in 2010
(1,544 ) (423 ) Retained earnings 1,251,157 1,042,123 Accumulated
other comprehensive loss (4,280 ) (15,482 ) Total stockholders'
equity 1,462,940 1,218,526
Total
Liabilities and Stockholders' Equity $ 3,798,980
$ 2,744,321 SM ENERGY
COMPANY FINANCIAL HIGHLIGHTS December 31, 2011
Consolidated
Statements of Cash Flows
(In thousands)
For the Three Months For the Twelve
Months Ended December 31, Ended December 31,
2011 2010 2011 2010 Cash flows from
operating activities: Net income (loss) $ (120,711 ) $ 37,139 $
215,416 $ 196,837
Adjustments to reconcile net income (loss)
to net cash provided byoperating activities:
Loss (gain) on divestiture activity 24,986 (23,094 ) (220,676 )
(155,277 )
Depletion, depreciation, amortization, and
asset retirementobligation liability accretion
167,298 94,806 511,103 336,141 Exploratory dry hole expense 228 —
277 289 Impairment of proved properties 170,512 6,127 219,037 6,127
Abandonment and impairment of unproved properties 3,051 (3,012 )
7,367 1,986 Stock-based compensation expense * 7,274 6,890 26,824
26,743 Change in Net Profits Plan liability (758 ) (4,656 ) (25,477
) (34,441 ) Unrealized derivative (gain) loss 45,263 12,994 (62,757
) 8,899 Amortization of debt discount and deferred financing costs
3,601 3,442 18,299 13,464 Deferred income taxes (40,462 ) 28,822
123,789 114,517 Plugging and abandonment (2,914 ) (1,208 ) (5,849 )
(8,314 ) Other (75 ) (908 ) (6,027 ) (3,993 ) Changes in current
assets and liabilities: Accounts receivable (21,211 ) (42,216 )
(41,998 ) (47,153 ) Refundable income taxes (5,581 ) (7,111 ) 2,901
24,291 Prepaid expenses and other 1,644 (35,875 ) 16,376 (35,363 )
Accounts payable and accrued expenses 23,485 6,075 (18,073 ) 53,198
Excess income tax benefit from the exercise of stock awards 15,155
522 — (854 )
Net cash provided by operating
activities 270,785 78,737 760,532 497,097
Cash flows from investing activities: Net proceeds
from sale of oil and gas properties 39,469 52,003 364,522 311,504
Capital expenditures (551,476 ) (179,604 ) (1,633,093 ) (668,288 )
Acquisition of oil and gas properties — 21 — (664 ) Other 4,001
2,367 3,661 (4,125 )
Net cash used in
investing activities (508,006 ) (125,213 ) (1,264,910 )
(361,573 ) Cash flows from financing activities: Proceeds
from credit facility 206,500 256,500 322,000 571,559 Repayment of
credit facility (206,500 ) (210,500 ) (370,000 ) (711,559 ) Debt
issuance costs related to credit facility — — (8,719 ) — Net
proceeds from 6.625% Senior Notes — — 341,122 — Net proceeds from
6.50% Senior Notes 343,120 — 343,120 — Proceeds from sale of common
stock 1,734 3,324 7,327 6,440 Dividends paid (3,201 ) (3,153 )
(6,382 ) (6,297 ) Excess income tax benefit from the exercise of
stock awards (15,155 ) (522 ) — 854 Other (6 ) (1,185 ) (9,973 )
(2,093 )
Net cash provided by (used in) financing activities
326,492 44,464 618,495 (141,096 ) Net
change in cash and cash equivalents 89,271 (2,012 ) 114,117 (5,572
) Cash and cash equivalents at beginning of period 29,923
7,089 5,077 10,649
Cash and cash
equivalents at end of period $ 119,194 $ 5,077 $ 119,194 $
5,077 * Stock-based compensation expense is a component of
exploration expense and general and administrative expense on the
consolidated statements of operations. For the three-month periods
ended December 31, 2011 and 2010, approximately $1.9 million and
$2.0 million, respectively, of stock-based compensation expense was
included in exploration expense. For the three-month periods ended
December 31, 2011 and 2010, approximately $5.4 million and $4.9
million, respectively, of stock-based compensation expense was
included in general and administrative expense. For the
twelve-month periods ended December 31, 2011 and 2010,
approximately $6.8 million and $7.7 million, respectively, of
stock-based compensation expense was included in exploration
expense. For the twelve-month periods ended December 31, 2011 and
2010, approximately $20.0 million and $19.0 million, respectively,
of stock-based compensation expense was included in general and
administrative expense.
SM ENERGY COMPANY
FINANCIAL HIGHLIGHTS December 31, 2011
Adjusted Net
Income
(In thousands, except per share data) Reconciliation of net
income (GAAP)
For the Three Months For the Twelve
Months to Adjusted net income (Non-GAAP):
Ended December
31, Ended December 31, 2011 2010
2011 2010 Actual net income (loss) (GAAP) $
(120,711 ) $ 37,139 $ 215,416 $ 196,837 Adjustments net of
tax: (2) Change in Net Profits Plan liability (475 ) (2,956 )
(15,974 ) (21,529 ) Unrealized derivative (gain) loss 28,380 8,249
(39,349 ) 5,563 (Gain) loss on divestiture activity 15,666 (14,660
) (138,364 ) (97,061 ) Impairment of proved properties 106,911
3,889 137,336 3,830 Abandonment and impairment of unproved
properties 1,913 (1,912 ) 4,619 1,241 DD&A adjustment for
Marcellus shale 9,245 — 9,245 — —
Adjusted net income (Non-GAAP) (3) $ 40,929 $ 29,749
$ 172,929 $ 88,881 Diluted net income per
common share Actual (GAAP) $ (1.89 ) $ 0.57 $ 3.19 $
3.04 Adjusted (Non-GAAP) (4) $ 0.60 $ 0.46 $
2.56 $ 1.37 Diluted weighted-average common
shares outstanding Actual (GAAP) 64,024 64,919 67,564
64,689 Adjusted (Non-GAAP) (4) 67,653 64,919
67,564 64,689
.
(2) For the three and twelve-month periods ended December 31, 2011,
adjustments are shown net of tax and are calculated using an
effective tax rate of 37.3%, which approximates the Company's
statutory tax rate adjusted for ordinary permanent differences. For
the three and twelve-month periods ended December 31, 2010,
adjustments are shown net of tax using the effective income tax
rate as calculated by dividing the income tax expense by income
before income taxes as shown on the consolidated statement of
operations for the respective period. (3) Adjusted net
income excludes certain items that the Company believes affect the
comparability of operating results. Items excluded generally are
non-recurring items or are items whose timing and/or amount cannot
be reasonably estimated. These items include non-cash adjustments
and impairments such as the change in the Net Profits Plan
liability, unrealized derivative (gain) loss, impairment of proved
properties, abandonment and impairment of unproved properties,
(gain) loss on divestiture activity, and DD&A adjustment for
Marcellus shale. The non-GAAP measure of adjusted net income is
presented because management believes it provides useful additional
information to investors for analysis of SM Energy's fundamental
business on a recurring basis. In addition, management believes
that adjusted net income is widely used by professional research
analysts and others in the valuation, comparison, and investment
recommendations of companies in the oil and gas exploration and
production industry, and many investors use the published research
of industry research analysts in making investment decisions.
Adjusted net income should not be considered in isolation or as a
substitute for net income, income from operations, cash provided by
operating activities or other income, profitability, cash flow, or
liquidity measures prepared under GAAP. Since adjusted net income
excludes some, but not all, items that affect net income and may
vary among companies, the adjusted net income amounts presented may
not be comparable to similarly titled measures of other companies.
(4) Adjusted net income per adjusted diluted share is
calculated by assuming the Company had income in the period by
using potentially dilutive securities related to unvested
restricted stock units, in-the-money outstanding options to
purchase the Company’s common stock, contingent Performance Share
Awards, and shares into which the 3.50% Senior Convertible Notes
may be converted, as calculated for accounting purposes using the
treasury stock method as applied to the Company's net share
settlement option for the notes. On a GAAP basis, these items were
not treated as dilutive securities in the fourth quarter of 2011 as
the Company had a GAAP loss for the quarter.
SM ENERGY
COMPANY
FINANCIAL
HIGHLIGHTS
December 31,
2011
Operating Cash
Flow
(In thousands) Reconciliation of net cash provided by
operating activities
For the Three Months For the Twelve
Months (GAAP) to Operating cash flow (Non-GAAP):
Ended
December 31, Ended December 31, 2011 2010
2011 2010 Net cash provided by operating
activities (GAAP) $ 270,785 $ 78,737 $ 760,532 $ 497,097
Changes in current assets and liabilities (13,492 ) 78,605 40,794
5,881 Exploration 19,950 21,027 53,537 63,860 Less:
Exploratory dry hole expense (228 ) — (277 ) (289 ) Less:
Stock-based compensation expense included in exploration (1,869 )
(1,952 ) 6,761 (7,676 ) Operating cash
flow (Non-GAAP) (5) $ 275,146 $ 176,417 $ 861,347
$ 558,873 (5) Operating cash flow is computed
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. The non-GAAP measure of operating cash flow is
presented because management believes that it provides useful
additional information to investors for analysis of SM Energy's
ability to internally generate funds for exploration, development,
acquisitions, and to service debt. In addition, operating cash flow
is widely used by professional research analysts and others in the
valuation, comparison, and investment recommendations of companies
in the oil and gas exploration and production industry, and many
investors use the published research of industry research analysts
in making investment decisions. Operating cash flow should not be
considered in isolation or as a substitute for net income, income
from operations, net cash provided by operating activities or other
income, profitability, cash flow, or liquidity measures prepared
under GAAP. Since operating cash flow excludes some, but not all
items that affect net income and net cash provided by operating
activities and may vary among companies, the operating cash flow
amounts presented may not be comparable to similarly titled
measures of other companies. See the consolidated statements of
cash flows herein for more detailed cash flow information.
SM ENERGY
COMPANY
FINANCIAL
HIGHLIGHTS
December 31,
2011
Information on
Proved Reserves and Costs Incurred
Costs incurred in
oil and gas producing activities:
For the Year Ended December 31, 2011
Development costs $ 1,208,255 Facility costs 112,372 Exploration
costs 177,465 Acquisitions: Proved properties — Unproved properties
- other 55,237 Total, including asset retirement obligation (6) (7)
$ 1,553,329 (6) Includes capitalized interest of $10.8
million for the year ended December 31, 2011. (7) Includes amounts
relating to estimated asset retirement obligations of $19.3 million
for the year ended December 31, 2011.
Proved oil and
gas reserve quantities:
For the
Year Ended December 31, 2011
Oil orCondensate
Gas NGL Equivalents
ProvedDeveloped
ProvedUndeveloped
(MMBbl) (Bcf) (MMBbl) (BCFE)
(BCFE) (BCFE) Total proved reserves Beginning of year
57.4 640.0 — 984.5 687.3 297.2 Revisions of previous estimate (0.9
) (76.7 ) 15.6 11.5 36.5 (25.0 ) Discoveries and extensions 26.9
223.5 17.8 491.3 303.8 187.5 Infill reserves in an existing proved
field 2.8 14.8 0.5 34.7 20.1 14.6 Purchases of minerals in place —
— — — — — Sales of reserves (6.4 ) (37.3 ) (2.9 ) (93.1 ) (68.6 )
(24.5 ) Production (8.1 ) (100.3 ) (3.5 ) (169.7 ) (169.7 ) —
Conversions — 34.6 (34.6 ) End
of year 71.7 664.0 27.5 1,259.2 844.0
415.2 PV-10 value (in millions) $ 3,461.2 $
2,836.3 $ 624.9 Proved developed reserves Beginning of year
46.0 411.0 — 687.3 End of year 50.3
451.2 15.2 844.0
SM ENERGY
COMPANY
FINANCIAL
HIGHLIGHTS
December 31,
2011
Finding Cost and
Reserve Replacement Ratios: (8)
Finding Costs in $
per MCFE
Drilling, excluding revisions $2.85 Drilling, including revisions
$2.79 All-in $2.89
Reserve Replacement
Ratios
Drilling, excluding revisions
310%
Drilling, including revisions
317%
All-in
317%
(8) Finding costs and reserve replacement ratios are common
metrics used by professional research analysts and others in the
valuation, comparison, and investment recommendations of companies
in the oil and gas exploration and production industry. The metrics
are easily calculated from information provided in the sections
"Costs incurred in oil and gas producing activities" and "Proved
oil and gas reserve quantities" above. Finding cost provides some
information as to the cost of adding proved reserves from various
activities. Reserve replacement provides information related to how
successful a company is at growing its proved reserve base.
Consistent with industry practice, future capital costs to develop
proved undeveloped reserves are not included in "Costs incurred in
oil and gas producing activities." The Company uses the reserve
replacement ratio as an indicator of the Company’s ability to
replenish annual production volumes and grow its reserves. It
should be noted that the reserve replacement ratio is a statistical
indicator that has limitations. The ratio is limited because it
typically varies widely based on the extent and timing of new
discoveries and property acquisitions. Its predictive and
comparative value is also limited for the same reasons. In
addition, since the ratio does not embed the cost or timing of
future production of new reserves, it cannot be used as a measure
of value creation.
Finding Costs
Definitions:
> 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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