Quarterly / Earnings Reports | Second Quarter (2Q) Update

SM Energy Details Q2 2019 Well Results, Financials

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SM Energy Co. announced financial and operating results for the second quarter of 2019.

Highlights include:

• Better wells at lower costs - As previously reported, second quarter production of 12.4 MMBoe (136.5 MBoe/d), was up 19% from the second quarter of 2018 and up 16% sequentially, as performance from both the Midland Basin and South Texas exceeded expectations. Oil production of 5.4 MMBbls (60 MBbls/d) was up 24% from the second quarter of 2018 and 12% sequentially. Second quarter 2019 costs incurred in oil and gas activities was $269 millionand total capital spend (total capital spend is a non-GAAP measure; see below for definition and reconciliation) was $261 million. Total capital spend was below guidance and reflects continued cost savings.
• Strong production drove solid earnings and cash flow - Net income was $50.4 million; EPS was $0.45 per diluted common share, and adjusted EPS was $0.01 per diluted common share; net cash provided by operating activities was $259.9 million and adjusted EBITDAX was $263.0 million, up 41% sequentially (adjusted EPS and adjusted EBITDAX are non-GAAP measures; see below for definition and reconciliation).
• Best in class well performance - The Sarah Connor 1050WA well set SM's record as its top performing Midland Basin well to date, based on a peak 30-day IP rate of 2,426 Boe/d (93% oil) from a 10,366 foot lateral. 27 new RockStar wells across five intervals reached 30-day peak IP rates averaging 1,250 Boe/d per well and 87% oil.
• Value enhancement through successful interval tests - Four new horizons have continued to deliver encouraging results, including the Company's previously announced Austin Chalk wells in South Texas and its first Middle Spraberry, Dean and Wolfcamp D tests in RockStar.

President and Chief Executive Officer Jay Ottoson comments: "Our excellent performance is the result of having some of the best assets in the Midland Basin combined with continued outstanding operational execution. This year, operational efforts include well tests from South Texas and the Midland Basin on four new horizons that, while early, remain encouraging for organic inventory growth and value creation. Adjusted EBITDAX for the second quarter was the highest recorded since 2015, despite lower natural gas and NGL prices. We are generating top tier returns, continuing to drive higher operating margins and are on course with our long-term plan to deliver a positive free cash flow yield and de-lever the balance sheet."

Well Results

New well results include RockStar area wells that reached their 30-day peak IP rates subsequent to the Company's May 2019 update and new interval exploration results in both the RockStar area and South Texas.

• Results from 27 new RockStar wells, having an average lateral length of 10,552 feet, delivered 30-day peak IP rates that averaged 1,250 Boe/d per well and 87% oil. This includes wells across five intervals, 24 of which were fully or half bounded.
• By interval, results included 13 Wolfcamp A wells averaging 1,326 Boe/d per well, two Wolfcamp B wells averaging 902 Boe/d per well, and 10 Lower Spraberry wells averaging 1,076 Boe/d per well.
• As previously reported, new interval tests at RockStar targeting the Dean and Wolfcamp D reached 30-day peak rates of approximately 1,550 Boe/d (92% oil) and approximately 1,400 Boe/d (80% oil and naturally flowing), respectively. New interval tests at RockStar continue to be encouraging and the Company plans to include additional tests in future programs.
• All 25 wells that are part of the Merlin Maximus development have now reached their 30-day peak IP rates, averaging approximately 1,400 Boe/d per well and 86% oil.
• As previously reported, the Company's Watson State Austin Chalk test in South Texas continues to show encouraging results with a 30-day peak IP rate that averaged approximately 3,200 Boe/d (3-stream) with approximately 55% liquids from a 12,875 foot lateral. Both Austin Chalk test wells continue to perform well and, based on their success, the Company has planned two additional tests, both of which are expected to start producing in the fourth quarter. The Austin Chalk presents the potential for higher margin and higher return wells due to higher liquids content and lower transportation costs per Boe.

Q2 2019 Results

Second quarter of 2019 production was 12.4 MMBoe, or 136.5 MBoe/d, with 44% oil in the commodity mix. Second quarter realized prices (before the effects of hedges) averaged $32.75 per Boe. The Company realized a $4.1 million, or $0.32 per Boe, gain after the effects of hedges.

Second quarter of 2019 net income was $50.4 million, or $0.45 per diluted common share, compared with net income of $17.2 million, or $0.15 per diluted common share, in the second quarter of 2018. For the first six months of 2019, net loss was ($127.2) million or ($1.13) per diluted common share.

Second quarter of 2019 net cash provided by operating activities was $259.9 million. For the first six months of 2019, net cash provided by operating activities was $378.4 million.

The following paragraphs discuss adjusted net income (loss), adjusted net income (loss) per diluted common share, and adjusted EBITDAX, all of which are non-GAAP measures. Please reference the definitions and reconciliations of these measures to the most directly comparable GAAP financial measures at the end of this release.

Second quarter of 2019 adjusted EBITDAX was $263.0 million. Adjusted EBITDAX is up 17% year-over-year and up 41% sequentially. The increase in adjusted EBITDAX year-over-year was primarily driven by a production increase of 19% and per unit operating costs down by 11%, partially offset by lower realized prices (post-hedge). The sequential increase in adjusted EBITDAX was driven by a 16% increase in total production, including a 12% increase in oil production and a 14% decline in per unit operating costs. For the first six months of 2019, adjusted EBITDAX was $449.5 million.

Second quarter of 2019 adjusted net income was $1.3 million, or $0.01 per diluted common share, compared with adjusted net income of $16.8 million, or $0.15 per diluted common share, in the second quarter of 2018. For the first six months of 2019, adjusted net loss was ($36.4) million, or ($0.32) per diluted common share.

Hedges

As of July 31, 2019, the Company had commodity derivatives in place for the third and fourth quarters of 2019 and fiscal year 2020, including:

• WTI oil hedges for approximately 80% of expected second half 2019 and approximately 50% + of expected 2020 oil production;
• HSC natural gas hedges for approximately 70% of expected second half 2019 production;
• Midland-Cushing differential hedges for approximately 60% of expected second half 2019 and expected 2020 Permian oil production; and
• WAHA natural gas hedges for approximately 70% of expected second half 2019 Permian residue natural gas production

Detailed data on derivatives are provided in the accompanying IR presentation and the Company's Quarterly Report on Form 10-Q for the second quarter of 2019.