SM Energy’s 1Q16 Operational Performance, Management Strategies

Is SM Energy’s Rally Justified after Its 1Q16 Earnings Release?

(Continued from Prior Part)

SM Energy’s 1Q16 operational performance

For 1Q16, SM Energy (SM) reported total production of 13.4 MMBoe (million barrels of oil equivalent), which is at the higher end of its 1Q16 production guidance range of 13.1–13.5 MMBoe.

SM Energy’s (SM) 1Q16 production is lower by ~20% when compared with its 1Q15 production of ~16.8 MMBoe. Sequentially, SM’s 1Q16 production is lower by ~10% when compared with 4Q15. For 1Q16, as part of its plan to increase its crude oil (USO) (UWTI) (DWTI) percentage by ~1% per quarter in its production mix, SM Energy has redeployed its capital from the Eagle Ford Shale to the Permian Basin.

This transition from natural gas (UNG) (UGAZ) (DGAZ) to crude oil (SCO) (UCO) resulted in lower volumes and higher cash margins, which is reflected in lower production for the quarter. For 1Q16, SM Energy’s production mix was ~31% crude oil, ~25% natural gas liquids, and ~44% natural gas. Compare this with SM Energy’s 4Q15 production mix, which was ~29% crude oil, ~26% natural gas liquids, and ~45% natural gas.

EP Energy (EPE), Diamondback Energy (FANG), Energen Corporation (EGN), Approach Resources (AREX), and Clayton William Energy (CWEI) also operate in the Permian Basin and have a higher percentage of crude oil in their production mixes.

SM Energy’s production guidance for 2016

For 2016, SM Energy expects total production in the range of 51–55 MMBoe, a midpoint decrease of ~17% when compared with its 2015 production of ~64.2 MMBoe.

Among the upstream companies, EP Energy (EPE), EnCana Corp (ECA), Approach Resources (AREX), and Clayton William Energy (CWEI) are expecting respective ~14%, ~15%, ~18%, and ~25% year-over-year decreases in their 2016 production volumes.

SM Energy’s capital program

Due to the current low crude oil and natural gas (BOIL) (UNL) price environment, SM Energy’s top priority in 2016 is to protect its balance sheet and manage its spending within its projected EBITDAX.

For 2016, SM Energy plans to spend ~$705 million on capital expenditures (or capex), which is ~46% lower when compared with 2015. SM Energy expects its capital spending to be higher in the first half of 2016 than in the second half of the year. The company plans to spend almost ~$600 million on drilling and completion activities. For 1Q16, SM Energy spent ~$205 million in capex.

For 2016, SM Energy plans to keep its debt-to-adjusted EBITDAX ratio below 4x.

Continue to Next Part

Browse this series on Market Realist:

• Part 1 - Analyzing SM Energy’s 1Q16 Earnings Performance

• Part 3 - What Analysts Are Saying about SM Energy after Its 1Q16 Earnings

• Part 4 - Can SM Energy’s Stock Continue to Rally after Its 1Q16 Earnings?