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SM Energy First Quarter 2020 Results

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SM Energy Co. announced operating and financial results for the first quarter 2020 and provided updates to its 2020 operating plan.

Highlights include:

• Production at the high end of prior guidance. First quarter 2020 production was 12.4 MMBoe (135.9 MBoe/d) at 51% oil, driven by continued growth in Midland Basin production.
• Significant cash flows. First quarter net cash provided by operating activities of $218.1 million before net change in working capital of $18.5 million was $236.6 million. Capital expenditures of $139.3 million before increase in capital expenditure accruals and other of $16.8 million was $156.1 million, which resulted in free cash flow of $80.5 million (a non-GAAP measure defined and reconciled below.)
• Absolute debt reduction. Cash flows generated in the first quarter 2020 were applied to open market purchases of outstanding bonds and reduction in the balance of the Company's senior secured credit facility, reducing total principal amount of debt by $91.2 million. Net debt-to-Adjusted EBITDAX was reduced to 2.45 times (a non-GAAP measure defined and reconciled below.)
• Borrowing base redetermination completed. Subsequent to quarter-end, the borrowing base and commitments on the Company's senior secured revolving credit facility were redetermined at $1.1 billion, providing $1.0 billion in liquidity pro forma at quarter-end.
• Capital activity reduced. 2020 capital expenditure pace is expected to be reduced significantly, down by approximately 20% versus earlier guidance.

President and Chief Executive Officer Jay Ottoson comments: "As our industry faces unprecedented circumstances, our priorities are: first, the safety of our employees and contractors under the conditions of the pandemic; and second, maintaining a sustainable business plan under the contracted macro-economic environment. We have implemented a wide range of changes from modifying our capital activity to adopting new daily safety protocols for field teams. Our pace of capital spending has been reduced, and we have a strong hedge position in 2020 to bolster our cash flows during a time of considerable uncertainty."

Q1 2020 Production

• Production volumes of 12.4 MMBoe, or 135.9 MBoe/d, were 51% oil, driven by growth in oil production from both the Midland Basin and South Texas. Total net daily production is up 14% compared with the first quarter of 2019 and down 2% sequentially. Net daily oil production is up 30% compared with the first quarter of 2019 and up 4% sequentially.
• Benchmark pricing for the quarter included NYMEX WTI at $46.17/Bbl, NYMEX Henry Hub natural gas at $1.95/MMBtu and Hart Composite NGLs at $17.02/Bbl, all of which are down significantly both year-over-year and sequentially.
• The average realized price per Boe of $28.64 was down 19% sequentially from $35.17. Including the effect of realized hedges, the average price was $34.58, down 5% sequentially, resulting in approximately $73.4 million of realized net hedge gains for the quarter.

Financial Results

First quarter 2020 net loss was ($411.9) million, or ($3.64) per diluted common share. This compared with a net loss of ($177.6) million, or ($1.58) per diluted common share, in the comparable prior year period. The current period included an impairment of $989.8 million ($775.0 million net of tax) related predominantly to the write-down of South Texas proved oil and gas properties and related support facilities. The impairment was due to the significant decrease in commodity prices at the end of the first quarter of 2020, which was partially offset by higher production and realized hedge gains.

First quarter 2020 GAAP net cash provided by operating activities was $218.1 million, or $236.6 million before net change in working capital. Net cash provided by operating activities before net change in working capital is up $97.9 million, or 71%, from $138.7 million in the comparable prior year period. The significant increase in cash flow was due to 32% net daily production growth in the Midland Basin, which has high operating margins, as well as the benefit from realized hedge gains.

First quarter 2020 Adjusted EBITDAX was $286.0 million, up $99.5 million, or 53%, from $186.5 million in the comparable prior year period. The significant increase in Adjusted EBITDAX was due to 32% net daily production growth in the Midland Basin as well as the benefit from realized hedge gains.

First quarter 2020 adjusted net loss was ($5.6) million, or ($0.05) per diluted common share, which compares with adjusted net loss of ($37.7) million or ($0.34) per diluted common share in the comparable prior year period.

Leverage improved during the first quarter of 2020 due to strong Adjusted EBITDAX and reduced absolute debt. At March 31, 2020, net debt-to-Adjusted EBITDAX was 2.45 times.

Liquidity & Capital Expenditure

On March 31, 2020, the outstanding principal amount of the Company's long-term debt was comprised of $2.4 billion in senior notes, plus $172.5 million in senior convertible notes, plus $72.0 million drawn on the Company's senior secured revolving credit facility. The outstanding balance of the senior notes reflects $40.7 million principal amount of Senior Notes due 2022 repurchased for $28.3 million during the first quarter. Together, the reduction in the principal amount of the outstanding senior notes and the reduction in the senior secured revolving credit facility was $91.2 million. The cash balance was approximately zero.

Subsequent to March 31, 2020, the Company's lenders redetermined its senior secured revolving credit facility borrowing base at $1.1 billion and commitment level at $1.1 billion. Pro forma for the revised lender commitments, the Company had $1.0 billion of liquidity at March 31, 2020. The Company and its lenders also entered into the Third Amendment to the Credit Agreement (details of which are provided in the Company's First Quarter 2020 Form 10-Q.)

Capital expenditures for the first quarter of 2020 were $139.3 million, or $156.1 million before accruals. During the first quarter 2020, the Company drilled 25 net wells and completed 20 net wells.

Hedging

Commodity hedge positions include approximately:

• 14,340 MBbls 2Q-4Q oil production hedged to WTI. The average floor price on collars is $55/Bbl and the average price on swaps is $57/Bbl;
• 11,330 MBbls of 2Q-4Q Midland Basin production hedged to the local price point at $(0.53)/Bbl;
• 28,985 BBtu of 2Q-4Q natural gas production hedged; and
• NGL hedges are by individual product.

The Company has certain other hedge positions in 2020 and added positions in 2021 and 2022. Please see the 1Q20 slide deck for detail.

2020 Plan - Revised

Significant changes in the macro-economic outlook have occurred since the Company issued its 2020 operating plan and guidance. The economy has been severely impacted by COVID-19 virus response, and the resulting oversupply of oil has driven oil prices to 20-year lows.  As a result, the Company has reduced its well completion and drilling pace, and expects capital spending for the remainder of 2020 to drop by approximately 30% versus its original plan, which is expected to result in a full year decrease in capital spending of approximately 20%.  The Company is currently operating five rigs in the Midland Basin and one in South Texas and has one active completions crew in the Midland Basin and none in South Texas. The Company expects to reduce activity in the Midland Basin to four rigs in July.

Worldwide production of oil remains higher than demand, and oil storage capacity is nearly full, increasing the potential for forced shut-in of production. Government entities are actively considering pro-rationing of production, and economic conditions may also result in well shut-ins to reduce economic loss. Given the difficulty of accurately forecasting production volumes in this environment, the Company is withdrawing its previously issued production guidance for 2020.

• Capital expenditures: Down approximately 20%. Second quarter 2020 expected to range $165-$175 million.
• G&A: ~$110 million, a reduction of approximately $15 million. The reduction in G&A guidance reflects the decision to reduce the salary of Company executives, effective May 1, 2020, and to postpone salary increases for all employees.
• Exploration/Capitalized overhead: ~$40 million, a reduction of $10 million.