SM SM Energy Company

SM Energy Company’s (SM) fourth-quarter 2011 adjusted earnings of 60 cents per share increased by over 30% from the year-ago earnings of 46 cents. The results also beat the Zacks Consensus Estimate of 56 cents.

Full-year 2011 adjusted earnings increased nearly 87% to $2.56 per share from last year’s profit level of $1.37.

Fourth quarter earnings recorded a jump on the back of greater production. Production growth was driven by robust results in the company's Eagle Ford shale and Bakken/Three Forks programs.

Total revenue of $379.5 million leaped 29% from $294.1 million in the prior-year quarter and surpassed the Zacks Consensus Estimate of $347 million. Oil, gas and natural gas liquid (NGL) production revenues contributed $396.9 million (up almost 59% year over year) to the total revenue. Total revenues decreased compared to oil, gas and natural gas liquid (NGL) production revenues, due to hedging losses and loss on divestiture operations.

Full-year 2011 total revenue increased nearly 47% to $1,603.3 million from the year-earlier level of $1,092.8 million.

Operational Performance

The company’s fourth-quarter production came in at 557.9 million cubic feet equivalent per day (MMcfe/d), up 62% year over year, and 13% above the midpoint of management’s target range of 479–509 MMcfe/d.

SM Energy produced 313.0 million cubic feet per day (MMcf/d) of natural gas in the quarter, reflecting a 39% year-over-year growth. Oil production also climbed 34% year over year to 26.7 thousand barrels per day (MBbls/d). Natural gas liquids contributed 14.1 MBbls/d to the total volume.

Including the effect of hedging, average equivalent price per thousand cubic feet (Mcf) was $7.58 compared with $7.98 in the year-ago period. Average realized prices (inclusive of hedging activities) were $4.36 per Mcf of natural gas and $80.63 per barrel of oil, down 27% and up nearly 15%, respectively, from the comparable quarter last year.

On the cost front, unit lease operating expense (LOE) decreased 20% year over year to 85 cents per Mcfe in the quarter. Transportation expenses increased substantially to 60 cents per Mcfe (from 22 cents in the year-ago period); general and administrative expenses were 69 cents per Mcfe (down 31%); while depletion, depreciation and amortization (DD&A) expenses increased 9% to $3.26 per Mcfe from the year-earlier level of $2.99 per Mcfe.

Liquidity

Operating cash flow improved to $275.1 million during the quarter from $176.4 million in the year-ago quarter. At the end of the quarter, SM Energy had a cash balance of $119.2 million and long-term debt of $985.1 million, with a debt-to-capitalization ratio of 40.2%.

Guidance

For the first quarter of 2012, SM Energy’s production forecast is in the range of 48.5 Bcfe to 52.0 Bcfe. The company’s LOE per Mcfe will likely be in the range of 90 cents to 96 cents while, DD&A will remain in the $3.35–$3.55 range.  

For 2012, SM Energy has slightly reduced its forecast to a range of 220–227 Bcfe from 225–232 Bcfe, to reflect the reduction of activity in the Haynesville shale program.

SM Energy’s 2012 capital spending is expected to remain within $1,400 million to $1,500 million.

Outlook

Denver, Colorado-based oil and gas company, SM Energy remains proactive in its attempt to hold a significant position in emerging shale plays and focus more on resource, with an inventory of repeatable drilling prospects and a high rate of return. We believe that the company’s emerging core portfolio is a positive catalyst for visible organic growth over the next several years.

During the year, SM Energy had set a production growth target of 50% which it achieved by leveraging off the considerable ground work set up in the preceding years in the Eagle Ford as well as Bakken Three Forks programs. The company holds an equally positive outlook for 2012 as it has the financial strength and asset base in liquid rich plays which will facilitate growth.

However, our long-term Outperform recommendation stems from SM Energy’s natural gas-weighted reserves. The company derives a significant portion of its operating revenues from natural gas.

SM Energy’s competitor, Range Resources Corporation (RRC) also reported stellar fourth-quarter 2011 earnings piggybacking on higher production level, realized prices and lower unit costs.

We currently maintain a long-term Outperform recommendation on SM Energy. However, the company holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

 
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