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SM Energy Third Quarter 2022 Results

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   |    Thursday,November 03,2022

SM Energy Co. announced operating and financial results for the third quarter 2022 and provided certain fourth quarter and full year 2022 guidance.

Highlights include:

• Driving profitability. Net income in the third quarter and for the first nine months of 2022 was $481.2 million, or $3.87 per diluted common share, and $853.5 million, or $6.87 per diluted common share, respectively. Adjusted net income⁽¹⁾ in the third quarter and for the first nine months of 2022 was $1.82 and $6.00 per diluted common share, respectively. Net cash provided by operating activities in the third quarter and for the first nine months of 2022 was $513.4 million and $1.40 billion, respectively. Adjusted EBITDAX⁽¹⁾ in the third quarter and for the first nine months was $460.2 million and $1.54 billion, respectively.
• Further improving the leverage ratio. Net-debt-to-adjusted EBITDAX⁽¹⁾ was reduced to 0.6 times at third quarter end.
• Initiating return of capital program through share buybacks and increased fixed dividend. As announced on September 7, 2022, the Company launched a return of capital program that includes an increase in the fixed dividend to $0.60 per share annually, to be paid in quarterly increments of $0.15 per share, and authorization for share repurchases of up to $500.0 million. The Company initiated the program by repurchasing approximately 453,000 shares during the quarter and scheduling the first $0.15 quarterly dividend for payment on November 7, 2022.
• Generating noteworthy performance from new wells. In South Texas, five new Austin Chalk wells reached peak IP 30 in the northern portion of the Company's position. The wells averaged approximately 1,300 Boe/d at 72% oil and 89% liquids and are expected to payout in approximately 8 months. In the Midland Basin, the Company recently completed three, high performing new wells in Sweetie Peck that are expected to reach peak IP 30 in November, proving-up an area along the western flank of the position.
• Keeping capital expenditures on track. Third quarter capital expenditures of $226.1 million, adjusted for an increase in capital accruals of $12.8 million totaled $238.9 million.⁽¹⁾ For the full year 2022, capital expenditures (net of the change in capital accruals) are expected to range between $870.0 and $900.0 million, unchanged from earlier guidance.
• Applying new technology to further reduce emissions. The Company initiated its program to conduct monthly flyovers of the majority of its operated facilities in the Midland Basin for enhanced methane detection. In conjunction with this program, the Company designed an automated data integration system that concurrently pulls the data onto internal dashboards, enabling better accuracy and faster response times.

President and Chief Executive Officer Herb Vogel comments: "This is a very exciting time for our Company as we enhance our return of capital to shareholders with a solid, sustainable increase in the annual fixed dividend and a robust share buyback program. We believe that SM Energy has among the highest quality and longest life inventories in our space, and we consider ourselves to be among the top operators in terms of efficiency and organic inventory replacement. Over the past 12 months we have generated more than $1 billion in adjusted free cash flow.⁽¹⁾ We believe we have established the foundation for sustainable and repeatable return of capital through the cycle and provided for upside flexibility during periods of strong commodity prices."

As previously reported, third quarter production volumes were 12.7 MMBoe, or 137.8 MBoe/d. Volumes were approximately 57% from the Midland Basin and 43% from South Texas and were 45% oil.

Note: Totals may not calculate due to rounding.

As previously reported, the third quarter average realized price before the effect of hedges was $65.27 per Boe and the average realized price after the effect of hedges (post-hedge) was $50.58 per Boe.⁽¹⁾

• Benchmark pricing for the quarter included NYMEX WTI at $91.56/Bbl, NYMEX Henry Hub natural gas at $8.20/MMBtu and Hart Composite NGLs at $42.47/Bbl.
• The effect of commodity derivative settlements for the third quarter was a loss of $14.69 per Boe, or $186.3 million.
• The realized price for natural gas was negatively affected by lower realizations in the Midland Basin where NGL revenue is incorporated into the realized natural gas price. The Company expects realizations to remain lower in this region into the fourth quarter due to widened differentials at the regional Waha trading hub.

Financial Results

Net Income

Third quarter 2022 net income was $481.2 million, or $3.87 per diluted common share, compared with net income of $85.6 million, or $0.69 per diluted common share, for the same period in 2021. The current year period included a 10% increase in total oil, gas, and NGL production revenue and other income due to a 23% increase in the average commodity price per Boe as compared to the same period in 2021. The current year period also benefited from a net derivative gain of $137.6 million, a 19% decline in DD&A per Boe and lower interest expense as compared to the same period in 2021. This was partially offset by an income tax expense of $119.4 million versus a negligible amount in the third quarter 2021. For the first nine months of 2022, net income was $853.5 million, or $6.87 per diluted common share, compared with a net loss of $388.7 million, or $3.29 per diluted common share, for the same period in 2021.

Third quarter 2022 net cash provided by operating activities of $513.4 million before net change in working capital of $(96.5) million totaled $416.9 million,⁽¹⁾ which was up $109.9 million, or 36%, from the same period in 2021 with net cash provided by operating activities of $328.1 million before net change in working capital of $(21.1) million totaling $307.0 million.⁽¹⁾ The increase in net cash provided by operating activities before net change in working capital for the third quarter 2022 compared with the same period in 2021 was primarily due to the increase in realized prices, lower realized derivative settlement losses and lower interest expense. For the first nine months of 2022, net cash provided by operating activities of $1,398.0 million before net change in working capital of $13.3 million totaled $1,411.3 million, which was up $733.3 million from the same period in 2021. The increase in net cash provided by operating activities before net change in working capital for the first nine months of 2022 compared with the same period in 2021 was primarily due to the increases in both production volumes and realized prices.

Third quarter 2022 Adjusted EBITDAX⁽¹⁾ was $460.2 million, up $113.5 million, or 33%, from $346.7 million for the same period in 2021. For the first nine months of 2022 Adjusted EBITDAX⁽¹⁾ was $1.5 billion compared with $818.5 million for the same period in 2021.

Third quarter 2022 Adjusted net income⁽¹⁾ was $226.0 million, or $1.82 per diluted common share, which compares with Adjusted net income⁽¹⁾ of $91.5 million, or $0.74 per diluted common share, for the same period in 2021. For the first nine months of 2022, Adjusted net income⁽¹⁾ was $744.8 million, or $6.00 per diluted common share, compared with an Adjusted net income⁽¹⁾ of $86.7 million, or $0.73 per diluted common share, for the same period in 2021.

At September 30, 2022, Net debt-to-Adjusted EBITDAX⁽¹⁾ was 0.6 times.

On September 30, 2022, the outstanding principal amount of the Company's long-term debt was $1.6 billion with zero drawn on the Company's senior secured revolving credit facility, and cash and cash equivalents of $498.4 million. Net debt⁽¹⁾ was $1.1 billion.

Third quarter 2022 capital expenditures of $226.1 million adjusted for increased capital accruals of $12.8 million were $238.9 million⁽¹⁾, coming in below guidance of $250-270 million. During the third quarter 2022, the Company drilled 18 net wells, of which 8 were in South Texas and 10 were in the Midland Basin, and added 31 net flowing completions, of which 17 were in South Texas and 14 were in the Midland Basin.

Hedging

As entered into as of October 31, 2022, commodity derivative positions for the fourth quarter of 2022 include:

• Oil - Approximately 52% of expected oil production is hedged to WTI at an average price of $56.01/Bbl (weighted-average of collar ceilings and swaps).
• Oil, Midland Basin differential - Approximately 2,500 MBbls are hedged to the local price point at a positive $1.15/Bbl basis.
• Natural gas - Approximately 48% of expected natural gas production is hedged. 7,000 BBtu is hedged to HSC at a weighted-average price of $2.47/MMBtu, and 3,100 BBtu is hedged to Waha at a weighted-average price of $2.22/MMBtu.
• NGL hedges are by individual product and include propane swaps and collars.

The Company expects to hedge less than 30% of 2023 production.

A detailed schedule of these and other derivative positions are provided in the 3Q22 accompanying slide deck.

2022 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.

• Capital expenditures (net of the change in capital accruals): Full year $870-900 million, unchanged. Fourth quarter $228-258 million. For the full year 2022, the Company expects to complete approximately 81 net wells.
• Production: 52.5-53.0 MMBoe or 144-145 MBoe/d, as previously reported, at ~46% oil. Fourth quarter 12.7-13.2 MMBoe, or 138-143 MBoe/d, at ~44% oil.
• LOE: $5.10-$5.15/Boe, reflecting higher second half inflation. Fourth quarter ~$5.60/Boe.
• Transportation: ~$3.00/Boe, unchanged. Fourth quarter ~$3.25/Boe.
• Production and ad valorem taxes: ~$3.90/Boe, increased due to higher mid-year commodity prices and higher property tax assessments, respectively. Fourth quarter ~$3.50/Boe.
• DD&A: ~$11.50/Boe, unchanged: Fourth quarter ~$11.50/Boe.
• Exploration expense: ~$55 million, up slightly.
• G&A: ~$110 million, unchanged.