Quarterly / Earnings Reports | Fourth Quarter (4Q) Update | Reserves | Financial Results | Capital Markets | Capital Expenditure | Drilling Activity

SM Energy Fourth Quarter, Full Year 2020 Results

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   |    Thursday,February 18,2021

SM Energy Co. announced fourth quarter and full year 2020 operating and financial results, year-end 2020 reserves and the 2021 operating plan.

Highlights:

The Company's strategic priorities in 2020 were to generate positive cash flow and reduce absolute debt while meeting operating objectives for safety and emissions reduction:

• Capital efficiency. Capital efficiency continued to improve with Midland Basin well costs averaging less than $500 per lateral foot in the fourth quarter. For the full year 2020, capital expenditures of $547.8 million, adjusted for decreased capital accruals of $8.0 million, totaled $539.8 million. Fourth quarter capital expenditures before capital accruals were $137.4 million, which was lower than expected due to lower costs per lateral foot and the deferral of five well completions.
• Significant cash flows. For the full year 2020, net cash provided by operating activities of $790.9 million before net change in working capital of $11.6 million totaled $779.4 million. Fourth quarter net cash provided by operating activities before net change in working capital was $204.9 million. For the full year 2020, the Company generated free cash flow of $239.5 million, including fourth quarter free cash flow of $67.4 million (free cash flow is a non-GAAP measure defined and reconciled below).
• Absolute debt reduction. During 2020, the outstanding principal amount of long-term debt was reduced by $492 million, from $2.77 billion to $2.28 billion. At year-end 2020, Net debt-to-Adjusted EBITDAX was 2.3 times (a non-GAAP measure defined and reconciled below).
• Strong well performance. 2020 production was 46.4 MMBoe, or 126.9 MBoe/d, at 50% oil with fourth quarter 2020 production of 11.3 MMBoe, or 122.4 MBoe/d, at 51% oil. Higher than projected fourth quarter production was predominantly due to better-than-expected base production from existing Midland Basin wells.
• Safety is always a top priority. Safety metrics for 2020 exceeded targets and place SM Energy in the top quartile among industry peers, as compared to available 2019 data. Employee and contractor safety required new protocols in 2020 with the pandemic; however, SM Energy field operations and office teams performed seamlessly and safely.
• Emissions reduction. Preliminary estimates of 2020 flaring were 0.8% of total Company gas production, which reflects a greater than 75% reduction in flaring from Midland Basin production from 2019. The reduction was primarily the result of constructing strategic inter-connections that allow the Company to redirect natural gas in the event an individual third-party processor is unable to receive it. Achievement of top quartile safety performance and reduced flaring volumes are components of the Company's compensation plan.

• Optimize activity level for sustainable free cash flow. Establish an optimal activity level to maximize free cash flow and reduce leverage.
• Generate positive free cash flow in 2021. The Company's 2021 operating plan is estimated to generate approximately $100 million in free cash flow (a non-GAAP measure defined below) based on current strip prices, positioning the Company to further reduce leverage.
• Achieve sustainable reinvestment rate in 2022 and beyond. The Company's five-year plan anticipates reducing leverage to less than 2 times Net debt-to-Adjusted EBITDAX (a non-GAAP measure defined below) by year-end 2022 and maintaining a reinvestment rate (a non-GAAP measure defined below) of less than 75% in 2022 and beyond. The plan sets capital activity at the optimal level to support these targets.
• Demonstrate measurable, top tier ESG stewardship. Short-term annual cash bonus and long-term incentive compensation plan targets include key environmental and safety metrics.

President and Chief Executive Officer Herb Vogel comments: "The challenges brought forth in 2020 were met with exceptional resilience by the SM Energy team, generating approximately $240 million in free cash flow and reducing long-term debt by nearly $500 million, well exceeding pre-pandemic plan goals. At the same time, through delineation we have advanced the potential of high value inventory growth in the Austin Chalk in South Texas, improved upon our excellent safety record and significantly reduced GHG emissions. This was exceptional performance. Going forward, we believe our top tier asset base will support a long-term plan that delivers sustainable free cash flow and value creation to our stakeholders."

Q4/Full Year 2020 Results

Production

• Fourth quarter 2020 production volumes were 122.4 MBoe/d, 51% oil. Production exceeded guidance, predominantly due to better-than-expected base production from existing Midland Basin wells.

• Full year 2020 production averaged 126.9 MBoe/d, down 4% from 2019, as development activity was significantly scaled back starting in the second quarter, and certain production was curtailed in response to macroeconomic effects of the pandemic and global supply-demand imbalances. Net well completions were reduced from 94 in the original budget to 77 for the year.

• Benchmark pricing for the fourth quarter was NYMEX WTI at $42.66/Bbl, NYMEX Henry Hub natural gas at $2.66/MMBtu and Hart Composite NGLs at $21.68/Bbl.
• Realized oil differentials were ($2.00) in the Midland Basin and ($3.55) in South Texas. The South Texas differential improved significantly compared with prior quarters, subsequent to the roll-off of a legacy condensate sales contract.
• The average realized price per Boe before the effect of hedges was $28.42, up 17% sequentially and down 19% compared with the fourth quarter of 2019. Including the effect of hedges, the average price per Boe was $34.19, up 13% sequentially and down 6% compared with the fourth quarter of 2019. Realized net hedge gains were $65.0 million for the quarter.

• Benchmark pricing for 2020 was NYMEX WTI at $39.40/Bbl, NYMEX Henry Hub natural gas at $2.08/MMBtu and Hart Composite NGLs at $17.96/Bbl, which were down 31%, 21% and 20%, respectively, compared with 2019.
• The average 2020 realized price per Boe before the effect of hedges was $24.26, down 26% from $32.84 in 2019. Including the effect of hedges, the average price per Boe was $31.82, down 5% compared with $33.65 in 2019.
• Lease operating expenses of $3.97 per Boe were down 15% compared with 2019, primarily due to aggressive cost management, increased operational efficiencies and fewer workovers. Transportation costs of $3.06 per Boe were down 21% compared with 2019, primarily due to reduced South Texas production, where transportation costs are higher, as well as a relative increase in production from the Austin Chalk, which has lower transportation costs per Boe.

Financials

Fourth quarter 2020 net loss was $165.2 million, or $1.44 per diluted common share, compared with a net loss of $102.1 million, or $0.90 per diluted common share, in the same period in 2019. The current period included a $152.7 million net derivative loss versus a net derivative loss of $101.0 million in the prior year period. For the full year 2020, net loss was $764.6 million, or $6.72 per diluted common share, compared with a net loss of $187.0 million, or $1.66 per diluted common share, in the same period in 2019. In 2020, the Company recorded impairment charges of $1.0 billion compared with $33.8 million in 2019, partially offset by a $280.1 million gain on extinguishment of debt in 2020 versus no gain on extinguishment recorded in 2019.

Fourth quarter 2020 net cash provided by operating activities of $256.9 million before net change in working capital of $52.0 million totaled $204.9 million, which was down $32.0 million, or 14%, from $236.9 million in the same period in 2019. For the full year 2020, net cash provided by operating activities of $790.9 million before net change in working capital of $11.6 million totaled $779.4 million, which was down $27.3 million, or 3%, from $806.7 million in 2019. For the fourth quarter and full year 2020, the decline in net cash provided by operating activities before net change in working capital was primarily due to the decline in production. Including the effects of realized hedges, the operating margin for the fourth quarter and full year 2020 were higher than the corresponding periods in 2019, as lower production costs and lower general and administrative costs offset lower realized prices.

The following paragraphs discuss non-GAAP measures including Adjusted EBITDAX, adjusted net loss, adjusted net loss per diluted share and Net debt-to-Adjusted EBITDAX. Please reference the definitions and reconciliations of these measures to the most directly comparable GAAP financial measures at the end of this release.

Fourth quarter 2020 Adjusted EBITDAX was $255.4 million, down $30.8 million, or 11%, from $286.2 million in the same period in 2019. The decrease in Adjusted EBITDAX was due to lower realized prices including the effect of hedge gains and lower production, partially offset by lower costs per unit. For the full year 2020, Adjusted EBITDAX was $975.4 million compared with $993.4 million in 2019.

Fourth quarter 2020 adjusted net income was $2.7 million, or $0.02 per diluted common share, which compares with adjusted net loss of $5.0 million, or $0.04 per diluted common share, for the same period in 2019. For the full year 2020, adjusted net loss was $25.7 million, or $0.23 per diluted common share, compared with an adjusted net loss of $53.5 million, or $0.48 per diluted common share, in 2019.

At December 31, 2020, Net debt-to-Adjusted EBITDAX was 2.3 times (a non-GAAP measure defined and reconciled below).

Liquidity & Capital Expenditures

As of December 31, 2020, the outstanding principal amount of the Company's long-term debt was $2.28 billion, down from $2.77 billion as of December 31, 2019. Long-term debt was comprised of $1.67 billion in unsecured senior notes, $446.7 million in secured senior notes, $65.5 million in secured senior convertible notes, plus $93.0 million drawn on the Company's senior secured revolving credit facility.

As of December 31, 2020, the Company's borrowing base and commitments under its senior secured revolving credit facility were $1.1 billion. The Company's available liquidity was $965 million, which includes $93.0 million drawn and a $42 million letter of credit. The cash balance was approximately zero.

Capital expenditures before capital accruals for the fourth quarter of 2020 were $137.4 million. During the fourth quarter 2020, the Company drilled 26 net wells and added 23 net flowing completions. For the full year 2020, capital expenditures before capital accruals were $539.8 million and the Company drilled 98 net wells and added 77 net flowing completions. Fourth quarter capital expenditures before capital accruals were less than guidance, due primarily to lower drilling and completion costs per lateral foot in the Midland Basin and the deferral of five well completions in South Texas, which were scheduled to be turned-in-line in 2021.

Commodity Derivatives

Commodity hedge positions as of February 17, 2021:

• OIL: Approximately 75-80% of expected 2021 oil production is hedged to WTI at an average price of $41.37 (weighted average of collar floors and swaps).
• OIL, Midland Basin differential: Approximately 60-65% of expected 2021 Midland Basin oil production is hedged to the local price point at a positive $0.77/Bbl basis.
• NATURAL GAS: Approximately 85% of expected 2021 natural gas production is hedged in 2021. ~50,250 BBtu is hedged to HSC at an average price of $2.44/MMBtu and ~29,490 BBtu is hedged to WAHA at an average price of $1.81/MMBtu.
• NGLs are hedged by individual product and include propane and normal butane swaps.

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

Reserves

Proved reserves at year-end 2020 were 405 MMBoe with 43% oil, 43% natural gas and 14% NGLs. Reserves were 57% PD and 43% PUD.

• Proved reserves/production imply a 9-year reserve life.
• Reserve additions through drilling and net performance revisions were 89 MMBoe, replacing nearly 2 times 2020 annual production.
• Oil reserves increased from 40% to 43% of total reserves.
• Reserves were down 57 MMBoe compared with year-end 2019, primarily due to a (65) MMBoe adjustment under the "five-year rule" as the Company scaled back development activity in its five-year plan to an optimal activity level aimed at maximizing free cash flow. The majority of these economic reserves were removed from the proved category but retained in the Company's longer term development plans.
• SEC pricing was $39.57 Bbl oil, $1.99 Mcf natural gas and $17.64 Bbl NGLs, down 29%, 23% and 22%, respectively, from 2019 SEC pricing. Despite the significant drop in SEC pricing, pricing revisions totaled only (33) MMBoe, predominantly South Texas gas reserves, reflecting the quality of the Company's proved reserves.