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SM Energy First Quarter 2022 Results

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   |    Friday,April 29,2022

SM Energy Co. announced operating and financial results for the first quarter 2022 and provided certain second quarter 2022 guidance.

Highlights include:

• Advancing on key strategic target, debt reduction. As a result of expected cash flow generation in the first half of 2022, and in support of the Company's objective to reduce absolute debt, the Company announces its intent to redeem the entire outstanding amount of its 10.0% Senior Secured Notes due 2025. The redemption price is equal to 107.5% of the aggregate principal amount outstanding of approximately $446.7 million, plus accrued and unpaid interest. The Company intends to redeem the notes on June 17, 2022.
• Continued strong well performance. Production in the first quarter 2022 was 13.8 MMBoe (153.3 MBoe/d) and was 47% oil. Production met the top of guidance, benefiting from particularly strong well performance from certain RockStar area wells brought on-line in the fall of 2021.
• Bottom line profitability. Net income in the first quarter 2022 was $0.39 per diluted common share, and Adjusted net income⁽¹⁾ was $1.98 per diluted common share.
• Significant cash flow generation. For the first quarter 2022, net cash provided by operating activities of $342.1 million before net change in working capital of $138.0 million totaled $480.1 million⁽¹⁾. First quarter 2022 Adjusted EBITDAX⁽¹⁾ was $524.6 million, a one-quarter record high for the Company, and Free cash flow⁽¹⁾ was $314.3 million.
• Strengthening the balance sheet. At quarter-end, cash and cash equivalents were $419.9 million and Net debt-to-Adjusted EBITDAX⁽¹⁾ was 1.05 times.
• Capital efficiency and discipline. Capital expenditures in the first quarter 2022 of $150.1 million, adjusted for increased capital accruals of $15.6 million totaled $165.8 million⁽¹⁾ and was below guidance of $180.0-$190.0 million due to timing of capital expenditures for facilities and completions.
• Employing innovation to environmental stewardship. In pursuit of our goal to reduce greenhouse gas emissions by 50% by 2030, the Company conducted a controlled methane emissions test that simultaneously evaluated five different technologies to best identify, quantify and address methane emissions.

Chief Executive Officer Herb Vogel comments: "Excellent first quarter results accelerate the accomplishment of our balance sheet objectives for the year. Our objective to reach 1.0 times net debt-to-Adjusted EBITDAX is nearly achieved, and we have made significant progress toward our objective to reduce absolute debt to approximately $1.0 billion, with the redemption in February of the 5.0% Senior Notes due 2024 and planned June redemption of the 10.0% Senior Secured Notes due 2025, for a total of $551.4 million in the first half of 2022. At the same time, we continue to demonstrate the value of our South Texas program, where five wells turned-in-line in January are estimated to payout on average in five months. The outlook for 2022 is very positive."

• Production volumes are approximately 57% from the Midland Basin and 43% from South Texas and were approximately 47% oil, 38% natural gas, and 15% NGLs.
• First quarter production volumes of 13.8 MMBoe (153.3 MBoe/d) were up 37% compared with the prior year period and down 5% sequentially. First quarter 2022 volumes reflect very strong performance from 10 RockStar area wells completed in the fall of 2021, utilizing the larger stimulation design employed in certain wells in 2021. Sequentially, production increased from South Texas and decreased from the Midland Basin, in accordance with expectations that reflect the planned timing of completions over the past year in each region.

Note: Totals may not calculate due to rounding.

In the first quarter, the average realized price before the effect of hedges was $62.25 per Boe and the average realized price after the effect of hedges (post-hedge) was $50.06 per Boe⁽¹⁾.

• Benchmark pricing for the quarter included NYMEX WTI at $94.29/Bbl, NYMEX Henry Hub natural gas at $4.95/MMBtu and Hart Composite NGLs at $48.36/Bbl.
• The effect of commodity derivative settlements for the first quarter was a loss of $12.19 per Boe, or $168.2 million.

Financial Overview

First quarter 2022 net income was $48.8 million, or $0.39 per diluted common share, compared with a net loss of $(251.3) million, or $(2.19) per diluted common share, for the same period in 2021. The current year period included a 94% increase in total oil, gas, and NGL production revenue and other income due to a 37% increase in production and a 48% increase in the average commodity price per Boe. This is partially offset by a derivative settlement loss of $168.2 million in the current year period versus a derivative settlement loss of $107.9 million in the prior year period. The current year period also benefited from a 30% decline in DD&A per Boe.

First quarter 2022 net cash provided by operating activities of $342.1 million before net change in working capital of $138.0 million totaled $480.1 million⁽¹⁾, which was up $323.0 million, or 206%, from the same period in 2021 with net cash provided by operating activities of $105.6 million before net changes in working capital of $51.4 million totaling $157.1 million⁽¹⁾. The increase in net cash provided by operating activities before net change in working capital was primarily due to the increases in both production volumes and realized prices after the effect of hedges.

First quarter 2022 Adjusted EBITDAX⁽¹⁾ was $524.6 million, up $309.6 million, or 144%, from $215.0 million in the same period in 2021. The increase in Adjusted EBITDAX⁽¹⁾ was due to the increases in both production volumes and realized prices after the effect of hedges.

First quarter 2022 Adjusted net income⁽¹⁾ was $245.9 million, or $1.98 per diluted common share, which compares with Adjusted net loss⁽¹⁾ of $(5.7) million, or $(0.05) per diluted common share, for the same period in 2021.

At March 31, 2022, Net debt-to-Adjusted EBITDAX⁽¹⁾ was 1.05 times.

Liquidity & Capital Expenditures

On March 31, 2022, the outstanding principal amount of the Company's long-term debt was $2.03 billion with zero drawn on the Company's senior secured revolving credit facility, and cash and cash equivalents of $419.9 million. Net debt⁽¹⁾ was $1.61 billion. Subsequent to quarter-end, the Company's borrowing base and commitments under its senior secured revolving credit facility were reaffirmed at $1.1 billion providing more than $1.5 billion in available liquidity. The Company announces today the planned redemption of the entire outstanding amount of its 10.0% Senior Secured Notes due 2025. The redemption price is equal to 107.5% of the aggregate principal amount outstanding of approximately $446.7 million, plus accrued and unpaid interest. The Company intends to redeem the notes on June 17, 2022.

First quarter 2022 capital expenditures of $150.1 million adjusted for increased capital accruals of $15.6 million were $165.8 million⁽¹⁾. During the first quarter 2022, the Company drilled 23 net wells, of which 9 were in South Texas and 14 were in the Midland Basin, and added 18 net flowing completions, of which 13 were in South Texas and 5 were in the Midland Basin.

Hedging

As entered into as of April 21, 2022, commodity derivative positions for the second through fourth quarters 2022 include:

• Oil - Approximately 50% of expected oil production is hedged to WTI at an average price of $55.53/Bbl (weighted-average of collar ceilings and swaps).
• Oil, Midland Basin differential - Approximately 7,300 MBbls is hedged to the local price point at a positive $1.15/Bbl basis.
• Natural gas - approximately 40-45% of expected natural gas production is hedged. 20,724 BBtu is hedged to HSC at an average price of $2.39/MMBtu, and 9,231 BBtu is hedged to WAHA at an average price of $2.17/MMBtu.
• NGL hedges are by individual product and include propane swaps and collars.

A detailed schedule of these and other derivative positions are provided in the 1Q22 accompanying slide deck.

2022 Operating Plan & Guidance

The Company is unable to provide a reconciliation of forward-looking non-GAAP capital expenditures because components of the calculation are inherently unpredictable, such as changes to, and timing of, capital accruals. The inability to project certain components of the calculation would significantly affect the accuracy of a reconciliation.

• Guidance metrics for full year 2022 are unchanged.

• Capital expenditures: $230-250 million. In the second quarter 2022, the Company expects to drill 27 net wells, of which 12 are planned for South Texas and 15 are planned for the Midland Basin, and turn-in-line 20 net wells, of which 12 are planned for South Texas and 8 are planned for the Midland Basin.
• Production: 13.0-13.3 MMBoe, or 143-146 MBoe/d, at approximately 45% oil and 60% liquids. The expected slight decline in sequential production reflects the lower number of new flowing completions in the fall of 2021 and first quarter 2022.