Exhibit 99.1
For Information
Brent A. Collins
303-861-8140

FOR IMMEDIATE RELEASE


SM ENERGY REPORTS RESULTS FOR SECOND QUARTER OF 2010


·  
Quarterly production of 276 MMCFE/d exceeds guidance of 253 – 274 MMCFE/d

·  
Company reports net income of $18.1 million, or $0.28 per diluted share

·  
Adjusted net income of $10.2 million, or $0.16 per diluted share


DENVER, August 2, 2010 – SM Energy Company (NYSE: SM), formerly named St. Mary Land & Exploration Company, today reports financial results from the second quarter of 2010.  In addition, a new presentation for the second quarter earnings and operational update will be posted on the Company’s website at sm-energy.com.  This presentation will be referenced during the conference call scheduled for 8:00 a.m. Mountain time (10:00 a.m. Eastern time) on August 3, 2010.  Information for the earnings call can be found below.

MANAGEMENT COMMENTARY

Tony Best, CEO and President, remarked, “SM Energy has had another strong quarter.  We beat production targets and performed very well on most of our cost guidance.  Through mid-year, we continue to execute well on our business plan for 2010.  We are well positioned with a strong inventory of projects and ample liquidity to fund our programs through the second half of this year.”

SECOND QUARTER 2010 RESULTS

SM Energy posted net income for the second quarter of 2010 of $18.1 million, or $0.28 per diluted share.  This compares to a net loss of ($8.3 million), or ($0.13) per diluted share, for the same period in 2009.  Adjusted net income for the quarter was $10.2 million, or $0.16 per diluted share, versus an adjusted net income of $15.2 million, or $0.24 per diluted share, for the second quarter of 2009.  Adjusted net income excludes certain items that the Company believes affect the comparability of operating results.  Items excluded generally are one-time items or are items whose timing and/or amount cannot be reasonably estimated.  A summary of the adjustments made to arrive at adjusted net income is presented in the table below.

   
For the Three Months Ended June 30,
  
   
2010
    
2009
  
Weighted-average diluted share count (in millions)
           64.6             62.4  
   
$ in millions
    
Per Diluted Share
    
$ in millions
    
Per Diluted Share
  
Reported net income (loss)
   $ 18.1     $ 0.28     $ (8.3 )   $ (0.13 )
Adjustments net of tax:
                                
Change in Net Profits Plan liability
   $ (3.9 )   $ (0.06 )   $ 1.5     $ 0.02  
Unrealized derivative (gain) loss
   $ (1.2 )   $ (0.02 )   $ 7.0     $ 0.11  
Gain on divestiture activity
   $ (4.2 )   $ (0.06 )   $ (0.8 )   $ (0.01 )
Loss related to hurricanes
     -       -     $ 3.1     $ 0.05  
                                 
Adjusted net income (loss), before impairments
   $ 8.8     $ 0.14     $ 2.5     $ 0.04  
                                 
Non-cash impairments net of tax:
                                
Impairment of proved properties
     -       -     $ 3.7     $ 0.06  
Abandonment and  impairment of unproved properties
   $ 1.4     $ 0.02     $ 7.2     $ 0.12  
Impairment of materials inventory
     -       -     $ 1.7     $ 0.03  
                                 
Adjusted net income
   $ 10.2     $ 0.16     $ 15.2     $ 0.24  
                                 
NOTE:  Totals may not add due to rounding
                                


Operating cash flow increased to $119.2 million for the second quarter of 2010 from $117.8 million in the same period last year.  Net cash provided by operating activities decreased to $116.3 million for the second quarter of 2010 from $116.6 million in the same period in 2009.

Adjusted net income and operating cash flow are non-GAAP financial measures – please refer to the respective reconciliation in the accompanying Financial Highlights section at the end of this release for additional information about these measures.
 
SM Energy reported quarterly production of 276.4 MMCFE/d, which was above the guidance range of 253 to 274 MMCFE/d.  Production came in above guidance primarily due to strong results in the Eagle Ford.

Revenues and other income for the quarter were $211.7 million compared to $205.2 million for the same period in 2009.  For the second quarter of 2010, the average equivalent price per MCFE, net of hedging, was $7.36 per MCFE, which is an increase of 10% from the $6.68 per MCFE realized in the comparable period in 2009.    Average realized prices, inclusive of hedging activities, were $5.59 per Mcf and $65.17 per barrel in the second quarter of 2010, which is an increase of 8% and 15%, respectively, from the same period a year ago.  SM Energy reports its gas volumes on a “wet gas” basis, meaning that revenue dollars associated with natural gas liquids (“NGLs”) are reported within the Company’s natural gas revenues.

Lease operating expense (“LOE”) of $1.15 per MCFE in the second quarter of 2010 was below the Company’s guidance of $1.24 to $1.32 per MCFE.  Lease operating expense for the quarter represents a 9% decrease from the $1.26 per MCFE in the comparable period last year.  The divestiture of higher per unit cost assets was the primary reason for lower per unit LOE costs year over year.  Sequentially, LOE declined 2% or $0.02 per MCFE in the second quarter of 2010 from the preceding quarter.

Transportation expense of $0.20 per MCFE in the second quarter of 2010 was within guidance of $0.18 to $0.20 per MCFE.  The reported per unit expense increased from $0.16 per MCFE for the comparable period in 2009.    Sequentially, transportation expense was up $0.04 per MCFE from the first quarter of 2010.  Transportation costs, both on a year over year and sequential basis, reflects increased production contributed from areas with higher per unit transportation costs, such as the Eagle Ford shale.

Commodity price increases over the past year for both oil and natural gas resulted in year over year increases in production taxes, both on a per MCFE basis and in absolute dollars.   Between the second quarters of 2009 and 2010, production taxes on a per MCFE basis increased 33% from $0.33 to $0.44.  The Company’s realized production tax rate for the second quarter was 6%, which was slightly below the provided guidance of 7% of pre-hedge oil and natural gas revenue.

Total general and administrative (“G&A”) expense for the second quarter of 2010 was $1.01 per MCFE, which was slightly above the guidance range provided by the Company.  Cash G&A expense was $0.61 per MCFE for the quarter, compared to a guidance range of $0.53 to $0.55 per MCFE.  The Cash G&A expense came in above guidance primarily due to the recognition of certain administrative and legal items in the second quarter.  Non-cash G&A for the second quarter was $0.18 per MCFE versus a guidance range of $0.19 to $0.21 per MCFE.  G&A related to cash payments from the Company’s legacy Net Profits Plan (NPP) program was $0.22 per MCFE in the quarter compared to a guidance range of $0.22 to $0.24 per MCFE.

 
 
 
 
Depletion and depreciation expense (“DD&A”) increased to $3.17 per MCFE in the second quarter of 2010, which was above the Company’s guidance range of $2.90 to $3.10 per MCFE.  DD&A in the comparable period of 2009 was $2.49 per MCFE.  Sequentially, DD&A increased 5% from $3.02 per MCFE in the first quarter of 2010.  The Company’s DD&A rate was impacted by the Company’s divestiture of lower cost basis properties in the first quarter of 2010.  Additionally, infrastructure costs that are incurred at the beginning of the development of emerging plays are also increasing the DD&A rate.

In the second quarter of 2010, SM Energy recognized a pre-tax non-cash benefit of $6.6 million as a result of a decrease in the NPP liability.  The NPP liability is a significant management estimate that is highly sensitive to a number of assumptions including future commodity prices, production rates, and operating costs.  The last pool created under this legacy compensation plan was in 2007.

 
FINANCIAL POSITION AND LIQUIDITY

As of June 30, 2010, SM Energy had total long-term debt of $271.2 million, which was comprised entirely of the Company’s 3.50% Senior Convertible Notes, net of debt discount.  The Company’s debt-to-book capitalization ratio was 19% as of the end of the quarter.

SM Energy currently has no outstanding borrowing under its long-term credit facility.  The Company has a commitment amount of $678 million from the Company’s bank group with a borrowing base of $900 million.  SM Energy is in compliance with all the covenants associated with this facility.


EARNINGS CALL INFORMATION

The Company has scheduled a teleconference to discuss the second quarter results on August 3, 2010 at 8:00 a.m. Mountain time (10:00 a.m. Eastern time).  The call participation number is 866-788-0539 and the participant passcode is 18765995.  An audio replay of the call will be available approximately two hours after the call at 888-286-8010, with the passcode 82316400.  International participants can dial 857-350-1677 to take part in the conference call, using passcode 18765995 and can access a replay of the call at 617-801-6888, using passcode 82316400.  Replays can be accessed through August 17, 2010.

In addition, the call will be webcast live and can be accessed at SM Energy Company’s website at sm-energy.com.  An audio recording of the conference call will be available at that site through August 17, 2010.
 

INFORMATION ABOUT FORWARD LOOKING STATEMENTS

This release contains forward looking statements within the meaning of securities laws, including forecasts and projections.  The words “will,” “believe,” “budget,” “anticipate,” “plan,” “intend,” “estimate,” “forecast,” and “expect” and similar expressions are intended to identify forward looking statements.  These statements involve known and unknown risks, which may cause SM Energy’s actual results to differ materially from results expressed or implied by the forward looking statements.  These risks include such factors as the volatility and level of oil and natural gas prices, uncertainties inherent in projecting future rates of production from drilling activities and acquisitions, the availability of debt and equity financing, the ability of the banks in the Company’s credit facility to fund requested borrowings, the ability of hedge counterparties to settle hedges in favor of the Company, the imprecise nature of estimating oil and gas reserves, the availability of additional economically attractive exploration, development, and property acquisition opportunities for future growth and any necessary financings, unexpected drilling conditions and results, unsuccessful exploration and development drilling, drilling, completion, and operating service availability, the risks associated with the Company’s hedging strategy, and other such matters discussed in the “Risk Factors” section of SM Energy’s 2009 Annual Report on Form 10-K and subsequent quarterly reports filed on Form 10-Q.  Although SM Energy may from time to time voluntarily update its prior forward looking statements, it disclaims any commitment to do so except as required by securities laws.


ABOUT THE COMPANY

SM Energy Company, formerly named St. Mary Land & Exploration Company, is an independent energy company engaged in the exploration, exploitation, development, acquisition, and production of natural gas and crude oil. SM Energy routinely posts important information about the Company on its website. For more information about SM Energy, please visit its website at sm-energy.com.


 
 
 
 
 


SM ENERGY COMPANY
  
FINANCIAL HIGHLIGHTS
  
June 30, 2010
  
                                     
                                     
Guidance Comparison
  
For the Three Months
                          
   
Ended June 30, 2010
                          
   
Actual
    
Guidance Range
                          
                                     
Oil and gas production (MMCFE per day)
     276.4       253 - 274                          
                                         
Lease operating expense (per MCFE)
   $ 1.15     $ 1.24 - $1.32                          
Transportation expense (per MCFE)
   $ 0.20     $ 0.18 - $0.20                          
Production taxes, as a percentage of pre-hedge revenue
     6 %     7 %                        
                                         
General and administrative - cash
   $ 0.61     $ 0.53 - $0.55                          
General and administrative - cash related to Net Profits Plan
   $ 0.22     $ 0.22 - $0.24                          
General and administrative - non-cash
   $ 0.18     $ 0.19 - $0.21                          
General and administrative - TOTAL
   $ 1.01     $ 0.94 - $1.00                          
                                         
Depreciation, depletion, and amortization
   $ 3.17     $ 2.90 - $3.10                          
                                         
                                         
                                         
Production Data
  
For the Three Months
        
For the Six Months
      
   
Ended June 30,
      
Ended June 30,
    
      2010       2009    
Percent Change
     2010       2009    
Percent Change
                                             
Average realized sales price, before hedging:
                                            
Oil (per Bbl)
   $ 70.92     $ 53.96       31 %   $ 71.86     $ 44.21       63 %
Gas (per Mcf)
     4.54       3.07       48 %     5.34       3.54       51 %
                                                 
Average realized sales price, net of hedging:
                                                
Oil (per Bbl)
   $ 65.17     $ 56.72       15 %   $ 66.10     $ 50.45       31 %
Gas (per Mcf)
     5.59       5.19       8 %     6.21       5.66       10 %
                                                 
Production:
                                                
Oil (MMBbls)
     1.4       1.6       -14 %     2.9       3.3       -11 %
Gas (Bcf)
     16.7       18.3       -9 %     33.2       36.8       -10 %
BCFE (6:1)
     25.2       28.2       -11 %     50.9       56.6       -10 %
                                                 
Daily production:
                                                
Oil (MBbls per day)
     15.5       18.1       -14 %     16.2       18.2       -11 %
Gas (MMcf per day)
     183.3       201.4       -9 %     183.7       203.6       -10 %
MMCFE per day (6:1)
     276.4       310.1       -11 %     281.1       312.6       -10 %
                                                 
Margin analysis per MCFE:
                                                
Average realized sales price, before hedging
   $ 6.99     $ 5.15       36 %   $ 7.64     $ 4.87       57 %
                                                 
Average realized sales price, net of hedging
     7.36       6.68       10 %     7.88       6.62       19 %
Lease operating expense
     1.15       1.26       -9 %     1.16       1.36       -15 %
Transportation
     0.20       0.16       25 %     0.18       0.18       0 %
Production taxes
     0.44       0.33       33 %     0.50       0.33       52 %
General and administrative
     1.01       0.64       58 %     0.96       0.61       57 %
Operating margin
   $ 4.56     $ 4.29       6 %   $ 5.08     $ 4.14       23 %
Depletion, depreciation, amortization, and
                                                
asset retirement obligation liability accretion
   $ 3.17     $ 2.49       27 %   $ 3.10     $ 2.87       8 %

 
 
 
 

Consolidated Statements of Operations
                        
(In thousands, except per share amounts)
  
For the Three Months
  
For the Six Months
 
  
Ended June 30,
  
Ended June, 30,
   
2010
    
2009
    
2010
    
2009
  
                         
Operating revenues and other income:
                        
Oil and gas production revenue
   $ 175,887     $ 145,279     $ 388,774     $ 275,696  
Realized oil and gas hedge gain
     9,329       43,279       11,924       98,899  
Gain on divestiture activity
     7,021       1,244       127,999       645  
Marketed gas system and other operating revenue
     19,460       15,396       43,135       29,178  
Total operating revenues and other income
     211,697       205,198       571,832       404,418  
                                 
Operating expenses:
                                
Oil and gas production expense
     45,168       49,465       93,508       105,294  
Depletion, depreciation, amortization,
                                
and asset retirement obligation liability accretion
     79,770       70,391       157,535       162,103  
Exploration
     14,498       19,490       28,396       33,088  
Impairment of proved properties
     -       6,043       -       153,092  
Abandonment and impairment of unproved properties
     2,375       11,631       3,279       15,533  
Impairment of materials inventory
     -       2,719       -       11,335  
General and administrative
     25,398       18,160       48,884       34,559  
Change in Net Profits Plan liability
     (6,599 )     2,449       (33,871 )     (20,842 )
Marketed gas system expense
     15,807       13,609       37,853       26,992  
Unrealized derivative (gain) loss
     (2,087 )     11,288       (9,822 )     13,134  
Other expense
     578       5,814       1,530       11,456  
Total operating expenses
     174,908       211,059       327,292       545,744  
                                 
Income (loss) from operations
     36,789       (5,861 )     244,540       (141,326 )
 
                                
Nonoperating income (expense):
                                
Interest income
     54       105       183       127  
Interest expense
     (6,343 )     (7,663 )     (13,130 )     (13,759 )
                                 
Income (loss) before income taxes
     30,500       (13,419 )     231,593       (154,958 )
Income tax benefit (expense)
     (12,432 )     5,097       (87,347 )     59,013  
                                 
Net income (loss)
   $ 18,068     $ (8,322 )   $ 144,246     $ (95,945 )
                                 
Basic weighted-average common shares outstanding
     62,917       62,418       62,855       62,377  
                                 
Diluted weighted-average common shares outstanding
     64,566       62,418       64,493       62,377  
                                 
Basic net income (loss) per common share
   $ 0.29     $ (0.13 )   $ 2.29     $ (1.54 )
                                 
Diluted net income (loss) per common share
   $ 0.28     $ (0.13 )   $ 2.24     $ (1.54 )

 
 
 
 


Consolidated Balance Sheets
            
(In thousands, except share amounts)
  
June 30,
    
December 31,
  
ASSETS
  
2010
    
2009
  
             
Current assets:
            
Cash and cash equivalents
   $ 10,249     $ 10,649  
Accounts receivable
     108,427       116,136  
Refundable income taxes
     23,215       32,773  
Prepaid expenses and other
     14,284       14,259  
Derivative asset
     45,481       30,295  
Deferred income taxes
     -       4,934  
Total current assets
     201,656       209,046  
                 
Property and equipment (successful efforts method), at cost:
                
Land
     1,483       1,371  
Proved oil and gas properties
     3,066,300       2,797,341  
Less - accumulated depletion, depreciation, and amortization
     (1,203,841 )     (1,053,518 )
Unproved oil and gas properties, net of impairment allowance
                
of $62,507 in 2010 and $66,570 in 2009
     138,531       132,370  
Wells in progress
     97,312       65,771  
Materials inventory, at lower of cost or market
     31,305       24,467  
Oil and gas properties held for sale less accumulated depletion,
                
depreciation, and amortization
     7,115       145,392  
Other property and equipment, net of accumulated depreciation
                
of $16,478 in 2010 and $14,550 in 2009
     15,472       14,404  
      2,153,677       2,127,598  
                 
Other noncurrent assets:
                
Derivative asset
     30,169       8,251  
Restricted cash subject to Section 1031 Exchange
     19,595       -  
Other noncurrent assets
     12,288       16,041  
Total other noncurrent assets
     62,052       24,292  
                 
Total Assets
   $ 2,417,385     $ 2,360,936  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
          
                 
Current liabilities:
                
Accounts payable and accrued expenses
   $ 270,030     $ 236,242  
Derivative liability
     37,903       53,929  
Deposit associated with oil and gas properties held for sale
     -       6,500  
Deferred income taxes
     4,970       -  
Total current liabilities
     312,903       296,671  
                 
Noncurrent liabilities:
                
Long-term credit facility
     -       188,000  
Senior convertible notes, net of unamortized
                
discount of $16,288 in 2010, and $20,598 in 2009
     271,212       266,902  
Asset retirement obligation
     64,284       60,289  
Asset retirement obligation associated with oil and gas properties held for sale
     1,526       18,126  
Net Profits Plan liability
     136,420       170,291  
Deferred income taxes
     408,997       308,189  
Derivative liability
     24,046       65,499  
Other noncurrent liabilities
     15,164       13,399  
Total noncurrent liabilities
     921,649       1,090,695  
                 
Commitments and contingencies
                
                 
Stockholders' equity:
                
Common stock, $0.01 par value: authorized  - 200,000,000 shares;
                
issued:  63,110,068 shares in 2010 and 62,899,122 shares in 2009;
                
outstanding, net of treasury shares: 63,007,433 shares in 2010
                
and 62,772,229 shares in 2009
     631       629  
Additional paid-in capital
     174,973       160,516  
Treasury stock, at cost:  102,635 shares in 2010 and 126,893 shares in 2009
     (489 )     (1,204 )
Retained earnings
     992,685       851,583  
Accumulated other comprehensive income (loss)
     15,033       (37,954 )
Total stockholders' equity
     1,182,833       973,570  
Total Liabilities and Stockholders' Equity
   $ 2,417,385     $ 2,360,936  

 
 
 
 

Consolidated Statements of Cash Flows
                        
(In thousands)
  
For the Three Months
  
For the Six Months
   
Ended June 30,
  
Ended June 30,
   
2010
    
2009
    
2010
    
2009
  
Cash flows from operating activities:
                        
                         
Net income (loss)
   $ 18,068     $ (8,322 )   $ 144,246     $ (95,945 )
Adjustments to reconcile net income (loss) to net cash
                                
provided by operating activities:
                                
Gain on divestiture activity
     (7,021 )     (1,244 )     (127,999 )     (645 )
Depletion, depreciation, amortization,
                                
and asset retirement obligation liability accretion
     79,770       70,391       157,535       162,103  
Exploratory dry hole expense
     164       4,573       327       4,667  
Impairment of proved properties
     -       6,043       -       153,092  
Abandonment and impairment of unproved properties
     2,375       11,631       3,279       15,533  
Impairment of materials inventory
     -       2,719       -       11,335  
Stock-based compensation expense*
     6,261       3,733       11,864       7,509  
Change in Net Profits Plan liability
     (6,599 )     2,449       (33,871 )     (20,842 )
Unrealized derivative (gain) loss
     (2,087 )     11,288       (9,822 )     13,134  
Loss related to hurricanes
     -       5,027       -       7,120  
Amortization of debt discount and deferred financing costs
     3,366       3,611       6,657       5,703  
Deferred income taxes
     14,212       (7,758 )     78,820       (63,148 )
Plugging and abandonment
     (3,988 )     (337 )     (6,222 )     (2,355 )
Other
     1,988       430       2,937       1,619  
Changes in current assets and liabilities:
                                
Accounts receivable
     20,872       5,446       7,628       49,149  
Refundable income taxes
     (3,445 )     -       9,558       13,161  
Prepaid expenses and other
     (1,637 )     (1,677 )     (148 )     (7,091 )
Accounts payable and accrued expenses
     (5,103 )     8,583       26,299       (12,338 )
Excess income tax benefit from the exercise of stock options
     (938 )     -       (938 )     -  
Net cash provided by operating activities
     116,258       116,586       270,150       241,761  
                                 
Cash flows from investing activities:
                                
Net proceeds from sale of oil and gas properties
     8,751       18       247,998       1,081  
Capital expenditures
     (172,182 )     (82,201 )     (304,627 )     (215,826 )
Acquisition of oil and gas properties
     -       9       -       (44 )
Deposits to restricted cash
     -       -       (19,595 )     -  
Receipts from restricted cash
     16,565       10,050       -       14,398  
Receipts from short-term investments
     -       1,002       -       1,002  
Other
     8       -       (6,492 )     -  
Net cash used in investing activities
     (146,858 )     (71,122 )     (82,716 )     (199,389 )
                                 
Cash flows from financing activities:
                                
Proceeds from credit facility
     26,500       576,000       204,059       1,766,000  
Repayment of credit facility
     (26,500 )     (600,000 )     (392,059 )     (1,791,000 )
Debt issuance costs related to credit facility
     -       (11,060 )     -       (11,060 )
Proceeds from sale of common stock
     2,648       894       2,916       1,066  
Dividends paid
     (3,144 )     (3,120 )     (3,144 )     (3,120 )
Excess income tax benefit from the exercise of stock options
     938       -       938       -  
Other
     (17 )     -       (544 )     -  
Net cash provided by (used in) financing activities
     425       (37,286 )     (187,834 )     (38,114 )
                                 
Net change in cash and cash equivalents
     (30,175 )     8,178       (400 )     4,258  
Cash and cash equivalents at beginning of period
     40,424       2,211       10,649       6,131  
Cash and cash equivalents at end of period
   $ 10,249     $ 10,389     $ 10,249     $ 10,389  
                                 
* Stock-based compensation expense is a component of exploration expense and general and administrative expense on the consolidated statements of
operations. For the six months ended June 30, 2010, and 2009, approximately $3.4 million and $2.9 million, respectively of stock-based compensation
expense was included in exploration expense. For the six months ended June 30, 2010, and 2009, approximately $8.5 million and $4.6 million, respectively
of stock-based compensation expense was included in general and administrative expense. For the three months ended June, 30, 2010, and 2009,
approximately $1.7 million and $1.3 million, respectively of stock-based compensation expense was included in exploration expense. For the three months
ended June, 30, 2010 and 2009, approximately $4.6 million and $2.4 million, respectively of stock-based compensation expense was included in
general and administrative expense.
 

 
 
 
 
 
Adjusted Net Income
                        
(In thousands, except per share data)
                        
                     
Reconciliation of net income (loss) (GAAP)
  
For the Three Months
  
For the Six Months
to Adjusted net income (Non-GAAP):
  
Ended June 30,
  
Ended June 30,
   
2010
    
2009
    
2010
    
2009
  
                         
Reported net income (loss) (GAAP)
   $ 18,068     $ (8,322 )   $ 144,246     $ (95,945 )
                                 
Adjustments net of tax: (1)
                                
Change in Net Profits Plan liability
     (3,907 )     1,519       (21,102 )     (12,901 )
Unrealized derivative (gain) loss
     (1,236 )     7,000       (6,119 )     8,130  
Gain on divestiture activity
     (4,156 )     (771 )     (79,743 )     (399 )
Loss related to hurricanes (2)
     -       3,117       -       4,407  
                                 
Adjusted net income (loss), before impairment adjustments
     8,769       2,543       37,282       (96,708 )
                                 
Non-cash impairments net of tax: (1)
                                
Impairment of proved properties
     -       3,748       -       94,790  
Abandonment and impairment of unproved properties
     1,406       7,213       2,043       9,618  
Impairment of materials inventory
     -       1,686       -       7,017  
Adjusted net income, non-recurring items
                                
& non-cash impairments (Non-GAAP) (3)
   $ 10,175     $ 15,190     $ 39,325     $ 14,717  
                                 
Adjusted net income per share (Non-GAAP)
                                
Basic
   $ 0.16     $ 0.24     $ 0.63     $ 0.24  
Diluted
   $ 0.16     $ 0.24     $ 0.61     $ 0.24  
                                 
Average number of shares outstanding
                                
Basic
     62,917       62,418       62,855       62,377  
Diluted
     64,566       62,418       64,493       62,377  
                                 
(1) Adjustments are shown net of tax using the effective income tax rate; calculated by dividing the income tax benefit (expense) by income (loss) before income
taxes as stated on the consolidated statement of operations. Effective income tax rates for the three months ended June 30, 2010 and 2009, were 40.8% and
38.0% respectively. Effective income tax rates for the six months ended June 30, 2010 and 2009, were 37.7% and 38.1% respectively.
                               
(2) The loss related to hurricanes is included within line item other expense on the consolidated statements of operations.
                                 
(3) Adjusted net income excludes certain items that the Company believes affect the comparability of operating results. Items excluded generally are one-time items or are items whose timing and/or amount cannot be reasonably estimated. These items include non-cash adjustments and impairments such as the change in the Net Profits Plan liability, unrealized derivative (gain) loss, impairment of proved properties, abandonment and impairment of unproved properties, impairment of materials inventory, gain on divestiture activity, and loss related to hurricanes. The non-GAAP measure of adjusted net income is presented because management believes it provides useful additional information to investors for analysis of SM Energy's fundamental business on a recurring basis. In addition, management believes that adjusted net income is widely used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research of industry research analysts in making investment decisions. Adjusted net income should not be considered in isolation or as a substitute for net income, income from operations, cash provided by operating activities or other income, profitability, cash flow, or liquidity measures prepared under GAAP. Since adjusted net income excludes some, but not all, items that affect net income and may vary among companies, the adjusted net income amounts presented may not be comparable to similarly titled measures of other companies.

 
 
 
 

Operating Cash Flow
                        
(In thousands)
                        
                         
Reconciliation of net cash provided by operating activities
  
For the Three Months
  
For the Six Months
(GAAP) to Operating cash flow (Non-GAAP):
  
Ended June 30,
  
Ended June 30,
   
2010
    
2009
    
2010
    
2009
  
                         
Net cash provided by operating activities (GAAP)
   $ 116,258     $ 116,586     $ 270,150     $ 241,761  
                                 
Changes in current assets and liabilities
   $ (9,749 )   $ (12,352 )   $ (42,399 )   $ (42,881 )
                                 
Exploration
   $ 14,498     $ 19,490       28,396       33,088  
      Less:  Exploratory dry hole expense
   $ (164 )   $ (4,573 )     (327 )     (4,667 )
      Less:  Stock-based compensation expense included in exploration
   $ (1,684 )   $ (1,309 )     (3,438 )     (2,864 )
                                 
Operating cash flow (Non-GAAP) (4)
   $ 119,159     $ 117,842     $ 252,382     $ 224,437  
                                 
                                 
                                 
(4) Beginning in the third quarter of 2009 the Company changed its definition of operating cash flow. Prior periods have been conformed to the current
definition and the change in the definition did not result in a material variance to results under the prior definiton. Operating cash flow is computed as net cash
provided by operating activities adjusted for changes in current assets and liabilities and exploration, less exploratory dry hole expense, and
stock-based compensation expense included in exploration. The non-GAAP measure of operating cash flow is presented because management believes that it
provides useful additional information to investors for analysis of SM Energy's ability to internally generate funds for exploration, development, acquisitions, and to
service debt. In addition, operating cash flow is widely used by professional research analysts and others in the valuation, comparison, and investment
recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research of industry research analysts
in making investment decisions. Operating cash flow should not be considered in isolation or as a substitute for net income, income from operations, net cash provided
by operating activities or other income, profitability, cash flow, or liquidity measures prepared under GAAP. Since operating cash flow excludes some, but not all
items that affect net income and net cash provided by operating activities and may vary among companies, the operating cash flow amounts presented may not
be comparable to similarly titled measures of other companies. See the consolidated statements of cash flows herein for more detailed cash flow information.