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Why Is SM Energy (SM) Up 1.6% Since Last Earnings Report?

It has been about a month since the last earnings report for SM Energy (SM). Shares have added about 1.6% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is SM Energy due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

SM Energy's Loss in Q4 Wider Than Expected

SM Energy Company reported a loss of 18 cents in fourth-quarter 2018, wider than the Zacks Consensus Estimate of a loss of 11 cents. The reported figure was also wider than a loss of 8 cents incurred in the year-ago quarter. Lower realized prices in the quarter led to the underperformance.

Total revenues surged to $394.2 million from $340.5 million in the prior-year quarter and beat the Zacks Consensus Estimate of $383 million on the back of year-over-year increased production.

Operational Performance:

Equivalent Production Rises

The company’s fourth-quarter production was 122.8 thousand barrels of oil equivalent per day (MBoe/d), up 9% from the year-ago level of 112.6 MBoe/d. The upside can be mainly attributed to higher oil production.

SM Energy produced 277 million cubic feet per day of natural gas in the quarter, down 2% year over year. However, oil production increased 33% year over year to 55.3 thousand barrels per day (MBbls/d). Natural gas liquids contributed 21.3 MBbls/d to total production volume, down 11% from the fourth-quarter 2017 level.  

Realized Prices Fell

Due to hedging, the average equivalent price per barrel of oil equivalent (Boe) was $31.74 (including the effects of derivative settlements) compared with $32.16 in the year-ago quarter. Including hedging activities, average realized price of natural gas fell 25% year over year to $3.01 per thousand cubic feet. Average realized prices of oil fell 2% to $47.94 per barrel, while that of natural gas liquids grew 3% from the prior-year quarter to $19.36.

Costs Per Boe

On the cost front, unit lease operating expenses (LOE) declined 2% year over year to $4.98 per Boe. Transportation expenses fell to $4.19 per Boe from $5.01 in the year-ago quarter. General and administrative expenses also declined 15% to $2.69 per Boe from the prior-year level of $3.15. Additionally, depletion, depreciation and amortization (DD&A) expenses were up 27% to $16.10 per Boe from the year-ago level of $12.69.   

Expenses

Exploration expenses fell to $14.3 million from $15.8 million in the year-ago quarter.

Reserves Grow

SM Energy boosted its reserves by 18% through 2018 to 503 million barrels of oil equivalent (MMBoe).

Liquidity

Net cash from operating activities increased to $179.5 million during the quarter from $144.8 million in the year-ago period. As of Dec 31, SM Energy had a cash balance of $78 million and long-term debt of $2,596.3 million. The company had a debt-to-capitalization ratio of 47.1%.

Guidance

SM Energy announced its 2019 production guidance within 45-48 MMBoe or 123.3-131.5 MBoe/d, of which 43-44% is expected to be oil. Per barrel LOE, transportation and DD&A expenses are expected at $5.00, $4.25 and $17, respectively. For full-year 2019, the company expects capital spending in the range of $1,000-1,070 million. Notably, the mid-point of the range represents a 22% fall from the 2018 level. Around 90% of the total capital spending is expected to be allocated toward drilling & completion works. The operations plan for 2019 is expected to lead to free cash flow generation in the second half of the year.

In the Permian Basin, the company intends to boost production by 20% year over year. SM Energy has five operating rigs in the region. The number is expected to be increased to six in March and plans of adding three completion crews are also underway. The company expects 2019 production from the Eagle Ford Shale to be in line with 2018 levels.

Production for first-quarter 2019 is projected within 10.5-10.9 MMBoe or 116.7-121.1 MBoe/d, of which 45% is expected to be oil. The guidance assumes a continuing force majeure in a natural gas plant in the Permian Basin. First-quarter capital expenditure is expected in the range of $325-350 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -4166.67% due to these changes.

VGM Scores

At this time, SM Energy has a subpar Growth Score of D, though it is lagging a bit on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise SM Energy has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.


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