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SM Energy Q4, Full Year 2022 Results; Plans 85-90 Wells for 2023

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   |    Wednesday,February 22,2023

SM Energy Co. announced certain fourth quarter and full year 2022 operating and financial results, year-end 2022 estimated proved reserves and its 2023 operating plan.

Highlights include:

• Substantial growth in profitability. Net income for the full year 2022 and fourth quarter 2022 was $1.11 billion and $258.5 million, or $8.96 and $2.09 per diluted common share, respectively. Adjusted net income⁽¹⁾ for the full year 2022 and fourth quarter 2022 was $7.29 and $1.29 per diluted common share, respectively.
  
  
• Increased return of capital to stockholders through share buybacks and fixed dividend. The Company repurchased 1,365,255 shares from announcement of its return of capital program on September 7, 2022 through year-end and initiated payment of the $0.15 quarterly dividend on November 7, 2022.
  
  
• Proved reserves growth. Estimated proved reserves at year-end 2022 totaled 537 MMBoe, a 9% increase from year-end 2021, replacing 2022 production by 205%. The ratio of estimated proved reserves at year-end 2022 to 2022 production is 10.1 years. The standardized measure of discounted future net cash flows from estimated proved reserves was $9.96 billion, up 43% from year-end 2021.
  
  
• Significant cash flow generation. For the full year 2022, net cash provided by operating activities of $1.69 billion before net change in working capital of $72.1 million totaled $1.76 billion.⁽¹⁾ Fourth quarter net cash provided by operating activities of $288.4 million before net change in working capital of $58.8 million was $347.2 million.⁽¹⁾ For the full year 2022, the Company generated Adjusted free cash flow⁽¹⁾ of $848.7 million, more than double the Adjusted free cash flow generated in 2021.
  
  
• Production at high end of guidance. Production for the full year 2022 was 53.0 MMBoe or 145.1 MBoe/d, up 3% from 2021. Fourth quarter production was 13.1 MMBoe or 142.9 MBoe/d.
  
  
• Strengthened balance sheet. Cash and cash equivalents at year-end 2022 were $445.0 million. Utilizing cash generated in 2022, and in support of the Company's objective to reduce absolute debt, the Company redeemed $551.4 million of long-term debt and ended 2022 with a net debt-to-Adjusted EBITDAX⁽¹⁾ ratio of 0.59 times.
  
  
• Stewardship targets on track. The Company made substantial progress in 2022 and is committed to achieving its short-to-medium-term targets for flaring, Scope 1 and 2 greenhouse gas emissions reductions, and methane intensity. For full year 2022, the Company had de minimis routine flaring and non-routine flaring was less than 1% at all SM Energy operations. Scope 1 and 2 greenhouse gas emissions intensity was down an estimated 40% from base year 2019 and methane intensity was estimated at less than 0.04 mT CH4/MBoe.

2023 Strategic Objectives:

• Deliver increased return of capital to stockholders. Continue the Company's sustainable capital return program through the increased fixed annual dividend of $0.60 per share, to be paid in quarterly increments, and share repurchases of up to $500.0 million in total through 2024, while maintaining a strong balance sheet.
  
  
• Focus on operational execution. Optimize capital efficiency, demonstrate innovation and maintain focus on ESG stewardship.
  
  
• Continue to replace/build top-tier inventory. Repeat the Company's track record of inventory replacement and growth, applying the Company's differential strength in geosciences and development optimization.

Chief Executive Officer Herb Vogel comments: "We are very pleased to report our results and achievements for 2022, which exceeded our strategic objectives. We generated Adjusted free cash flow⁽¹⁾ of $848.7 million, a 20% yield to market capitalization⁽¹⁾ at year-end. We outperformed our leverage objective and initiated a capital return program via an increased dividend and share repurchases. Proved reserves increased to 537 million Boe, which resulted in a Pre-tax PV-10⁽¹⁾ value of $12.15 billion and demonstrated our high-quality asset base. Our strategy is to be a premier operator of top tier assets and our 2023 objectives are intended to drive value creation, differential performance and increased stockholder returns."

2023 Capital Plans

Key Assumptions:

• Price deck approximates early February strip prices at $80.00 per Bbl WTI; $3.00 per MMBtu natural gas; $34.00 per Bbl NGLs.
  
  
• Hedges currently in place.
  
  
• Processing ethane for the full year.

• Production volumes year-over-year are expected to remain flat to low single digit growth at 52.5-54.5 MMBoe, or 144-150 MBoe/d at 43% oil.
  
  
• Capital expenditures adjusted for capital accruals⁽¹⁾: are expected to be approximately $1.1 billion, excluding acquisitions.
  
  
• The capital program increased the allocation to Midland Basin activity due to the expectation of lower natural gas prices in 2023. The allocation of drilling and completion capital is expected to be roughly 60% to the Midland Basin and 40% to South Texas.
  
  
• The capital program includes approximately $45 million for facilities, including extension of the South Texas oil facilities, as well as $22 million for capitalized interest.
  
  
• Total net wells drilled is expected to approximate 85-90, roughly split equally between Midland Basin and South Texas. Total net wells completed is expected to approximate 50 in Midland Basin and 40 in South Texas.
  
  
• Midland Basin operations are expected to continue to co-develop zones and is expected to include activity across the RockStar position as well as in Sweetie Peck. The scheduling of the Guitar consolidated development, a previously discussed project that includes 20 wells on four adjacent pads, has been modified with all wells completed by the end of the second quarter and turned-in-line by early in the third quarter.
  
  
• South Texas activity is expected to be concentrated on Austin Chalk development.
  
  
• Production costs:
  
  
• LOE is expected to average between $5.75-6.00/Boe, which includes workover activity;
  
  
• Transportation is expected to approximate $2.50/Boe, which includes a reduction to South Texas natural gas transportation costs of approximately $0.35/Mcf starting in July 2023;
  
  
• Production and ad valorem taxes are expected to average between $2.90-3.00/Boe.
  
  
• G&A: is expected to approximate $120 million.
  
  
• Exploration/Capitalized overhead: is expected to approximate $45 million.
  
  
• DD&A: is expected to average between $12-13/Boe.

• Capital expenditures: are expected to range between $320-330 million, which includes drilling approximately 22 net wells, completing approximately 25 net wells and facilities costs. Capital expenditures are weighted to the first half of the year, which includes approximately 60% of 2023 well completions and facilities costs.
  
  
• Production: is expected to range between 12.9-13.1 MMBoe, or 143-146 MBoe/d, at 42-43% oil. Production volumes consider the expected effects of offset activity and curtailments.

2022 Proved Reserves

Estimated proved reserves at year-end 2022 were 537 MMBoe. Estimated proved reserves were 52% in South Texas and 48% in the Midland Basin, and were comprised of 38% oil, 44% natural gas and 18% NGLs. Reserves were 59% proved developed and 41% proved undeveloped.

• The ratio of estimated proved reserves at year-end 2022 to 2022 production is 10.1 years.
  
  
• Proved reserve additions and revisions related to infill and performance were 108.8 MMBoe, replacing 2022 production by 205%.
  
  
• 2022 SEC pricing was $93.67 per Bbl oil, $6.36 per Mcf natural gas and $42.52 per Bbl NGLs, up 41%, 77% and 16%, respectively, compared to 2021 SEC pricing.
  
  
• The nominal increase in proved reserves due to price revisions is a testament to the high-quality and commodity price resiliency of the Company's reserve base.
  
  
• South Texas proved reserves increased 40 MMBoe compared with 2021 as a result of continued Austin Chalk success.
  
  
• PDP reserves of 308 MMBoe surpassed the Company's previous peak of 297 MMBoe, set at the end of 2021.

Standardized Measure

The standardized measure of discounted future net cash flows from estimated proved reserves was $9.96 billion at year-end 2022, up from $6.96 billion at year-end 2021. The 43% increase in the standardized measure compared with year-end 2021 is predominantly due to the increase in reserves and SEC pricing across commodities used in the calculation. Pre-tax PV-10⁽¹⁾ was $12.15 billion, the highest value in Company history.

Q4 & Full Year 2022 Operating Results

• Fourth quarter production volumes of 13.1 MMBoe (142.9 MBoe/d) were up 4% sequentially, near the high end of guidance, and were 43% oil.
  
  
• Fourth quarter volumes in South Texas reflect approximately 0.08 MMBoe shut-in due to inclement weather in December. South Texas infrastructure was designed as a dry gas system supporting Eagle Ford production and the Company experiences intermittent curtailments at certain wells due to high line pressures associated with the high liquids content of Austin Chalk wells. During the fourth quarter 2022, the effect of high line pressures curtailed an estimated 0.2 MMBoe of production, which was largely considered in guidance. The Company continues to work with its midstream partners to upgrade facilities in the region to accommodate the higher liquids production.

• Full year production volumes of 53.0 MMBoe (145.1 MBoe/d) were up 3% from 2021.
  
  
• Production volumes were 56% from the Midland Basin and 44% from South Texas. Volumes were 45% oil, 15% NGLs and 40% natural gas.
  
  
• Oil volumes from South Texas reflect a 78% increase over the prior year period as the Company continued delineation drilling and initiated development drilling of the Austin Chalk on its 155,000-acre South Texas position.

• In the fourth quarter, the average realized price before the effect of hedges was $50.92 per Boe and the average realized price after the effect of hedges was $42.12 per Boe.⁽¹⁾ For the full year, the average realized price before the effect of hedges was $63.18 per Boe and the average realized price after the effect of hedges was $49.76 per Boe.⁽¹⁾
  
  
• In the fourth quarter, benchmark pricing included NYMEX WTI at $82.64/Bbl, NYMEX Henry Hub natural gas at $6.26/MMBtu and Hart Composite NGLs at $33.03/Bbl. For the full year, benchmark pricing included NYMEX WTI at $94.23/Bbl, NYMEX Henry Hub natural gas at $6.64/MMBtu and Hart Composite NGLs at $43.48/Bbl.
  
  
• The effect of commodity derivative settlements for the fourth quarter and full year was a loss of $8.80 per Boe, or $115.6 million, and a loss of $13.42 per Boe, or $710.7 million, respectively.

For additional operating metrics and regional detail, please see the Financial Highlights section below and the accompanying slide deck.

Financials

Fourth quarter 2022 net income was $258.5 million, or $2.09 per diluted common share, compared with net income of $424.9 million, or $3.43 per diluted common share, for the same period in 2021. The current year period included a 21% decrease in operating revenues and other income, compared with the same period in 2021, due to lower production partially offset by higher realized prices for oil and NGLs after the effect of derivative settlements, as well as increased production costs. For the full year 2022, net income was $1.11 billion, or $8.96 per diluted common share, compared with net income of $36.2 million, or $0.29 per diluted common share, for the full year 2021. Full year net income reflects a 28% increase in operating revenues and other income, a 22% decrease in DD&A expense, and lower net derivative loss, which was partially offset by higher production expenses per Boe and higher income tax expense.

Fourth quarter 2022 net cash provided by operating activities of $288.4 million before net change in working capital of $58.8 million totaled $347.2 million,⁽¹⁾ which was down $17.2 million, or 5%, from $364.4 million⁽¹⁾ in the same period in 2021. For the full year 2022, net cash provided by operating activities of $1.69 billion before net changes in working capital of $72.1 million totaled $1.76 billion,⁽¹⁾ which was up $716.1 million, or 69%, from $1.04 billion⁽¹⁾ in 2021.

Fourth quarter 2022 Adjusted EBITDAX⁽¹⁾ was $373.9 million, down $33.0 million, or 8%, from $406.9 million in the same period in 2021. The decrease in Adjusted EBITDAX⁽¹⁾ was due to lower production and higher production costs per Boe, partially offset by a higher realized price per Boe after the effect of derivative settlements. For the full year 2022, Adjusted EBITDAX⁽¹⁾ was $1.92 billion, compared with $1.23 billion in 2021. The 57% increase in Adjusted EBITDAX was due to a 3% increase in production, 38% increase in the average realized price per Boe after the effect of derivative settlements, and lower cash interest expense, which was partially offset by higher production costs per Boe.

Fourth quarter 2022 adjusted net income⁽¹⁾ was $159.2 million, or $1.29 per diluted common share, which compares with adjusted net income⁽¹⁾ of $141.5 million, or $1.14 per diluted common share, for the same period in 2021. For the full year 2022, adjusted net income⁽¹⁾ was $904.0 million, or $7.29 per diluted common share, compared with adjusted net income⁽¹⁾ of $228.3 million, or $1.85 per diluted common share, in 2021.

At December 31, 2022, Net debt-to-Adjusted EBITDAX⁽¹⁾ was 0.59 times.

At year-end 2022, the outstanding principal amount of the Company's long-term debt was $1.59 billion with zero drawn on the Company's senior secured revolving credit facility. At year-end 2022, cash and cash equivalents were $445.0 million and net debt⁽¹⁾ was $1.14 billion, down $663.7 million from year-end 2021. As of December 31, 2022, the Company's borrowing base and commitments under its senior secured revolving credit facility were $2.50 billion and $1.25 billion, respectively, providing $1.70 billion in available liquidity.

In the fourth quarter 2022, capital expenditures of $288.1 million adjusted for decreased capital accruals of $20.8 million were $267.3 million.⁽¹⁾ During the fourth quarter of 2022, the Company drilled 26 net wells and added 21 net flowing completions. For the full year 2022, capital expenditures of $879.9 million adjusted for increased capital accruals of $29.8 million totaled $909.7 million⁽¹⁾ and the Company drilled 90 net wells and added 79 net flowing completions. Fourth quarter and full year capital expenditures adjusted for capital accruals exceeded guidance by approximately $10 million primarily due to the unplanned pre-purchase of pipe for 2023 activity.

Hedging

Commodity hedge positions as of February 15, 2023:

• Oil: Slightly less than 30% of expected 2023 oil production is hedged to contract prices in the Midland Basin at an average price of $74.10/Bbl (weighted-average of collar floors and swaps, excludes basis swaps).
  
  
• Oil, Midland Basin differential: Approximately 5,400 MBbls is hedged to the local price point at a positive $0.94/Bbl basis.
  
  
• Natural gas: Slightly less than 30% of expected 2023 natural gas production is hedged at an average price of $3.97/MMBtu (weighted-average of collar floors and swaps, excludes basis swaps).

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