March 31, 2011

Guidance Comparison	For the Three Months
	Ended March 31, 2011
	Actual 3-Stream Sales Method				Estimated 2-Stream Wellhead Sales Method				Guidance Range
Average daily production (MMCFE per day)		401.4				373.1				333 - 366
Total production (BCFE)		36.1				33.6				30 - 33
Lease operating expense (per MCFE)	$	0.92			$	0.98			$	1.10 - $1.15
Transportation expense (per MCFE)	$	0.41			$	0.45			$	0.30 - $0.35
Production taxes, as a percentage of pre-derivative oil, gas, and NGL revenue		6.4	%			6.4	%			7	%
General and administrative - cash (per MCFE)	$	0.46			$	0.49			$	0.54 - $0.57
General and administrative - cash related to Net Profits Plan (per MCFE)	$	0.15			$	0.16			$	0.16 - $0.18
General and administrative - non-cash (per MCFE)	$	0.11			$	0.12			$	0.12 - $0.14
General and administrative - TOTAL (per MCFE)	$	0.72			$	0.77			$	0.82 - $0.89
Depreciation, depletion, and amortization (per MCFE)	$	2.92			$	3.14			$	2.95 - $3.15

Production Data	For the Three Months
	Ended March 31,
	2011				2010				Percent Change
Average realized sales price, before the effects of
derivative cash settlements: (1)
Oil (per Bbl)	$	85.79			$	72.73				18	%
Gas (per Mcf)		4.35				6.15				-29	%
NGL (per Bbl)		46.65				-			NM
Equivalent (MCFE)	$	7.65			$	8.28				-8	%
Average realized sales price, including the effects of
derivative cash settlements: (1)
Oil (per Bbl)	$	75.07			$	66.96				12	%
Gas (per Mcf)		5.04				6.84				-26	%
NGL (per Bbl)		40.89				-			NM
Equivalent (MCFE)	$	7.43			$	8.38				-11	%
Production: (1)
Oil (MMBbls)		1.8				1.5				17	%
Gas (Bcf)		21.7				16.6				31	%
NGL (MMBbls)		0.6				-			NM
BCFE (6:1)		36.1				25.7				40	%
Average daily production: (1)
Oil (MBbls per day)		19.8				17.0				17	%
Gas (MMcf per day)		241.5				184.1				31	%
NGL (MBbls per day)		6.8				-			NM
MMCFE per day (6:1)		401.4				285.8				40	%
Per MCFE Data:
Realized equivalent price	$	7.65			$	8.28				-8	%
Lease operating expense		0.92				1.17				-21	%
Transportation		0.41				0.16				156	%
Production taxes		0.49				0.55				-11	%
General and administrative		0.72				0.91				-21	%
Operating profit, before the effects of derivative cash settlements	$	5.11			$	5.49				-7	%
Derivative cash settlements		(0.22	)			0.10				-320	%
Operating profit, including the effects of derivative cash settlements	$	4.89			$	5.59				-13	%
Depletion, depreciation, amortization, and
asset retirement obligation liability	$	2.92			$	3.02				-3	%
(1) Prior period NGL production volumes, revenues, and prices have not been reclassified to conform to the current presentation given the immateriality of the volumes in prior periods. Please refer to additional discussion in the Company's Form 10-Q for the quarter ended March 31, 2011.

 

 

Consolidated Statements of Operations
(In thousands, except per share amounts)	For the Three Months
	Ended March 31,
	2011					2010
Operating revenues and other income:
Oil, gas, and NGL production revenue		$	276,313			$	212,887
Realized hedge gain (loss)*			(1,375	)			2,595
Gain on divestiture activity			24,915				120,978
Marketed gas system and other operating revenue			15,476				23,675
Total operating revenues and other income			315,329				360,135
Operating expenses:
Oil, gas, and NGL production expense			65,812				48,340
Depletion, depreciation, amortization,
and asset retirement obligation liability accretion			105,356				77,765
Exploration			12,712				13,898
Abandonment and impairment of unproved properties			3,079				904
General and administrative			25,861				23,486
Change in Net Profits Plan liability			14,195				(27,272	)
Unrealized and realized derivative (gain) loss*			88,429				(7,735	)
Marketed gas system and other expense			19,857				22,998
Total operating expenses			335,301				152,384
Income (loss) from operations			(19,972	)			207,751
Nonoperating income (expense):
Interest income			128				129
Interest expense			(9,714	)			(6,787	)
Income (loss) before income taxes			(29,558	)			201,093
Income tax benefit (expense)			11,055				(74,915	)
Net income (loss)		$	(18,503	)		$	126,178
Basic weighted-average common shares outstanding			63,447				62,792
Diluted weighted-average common shares outstanding			63,447				64,377
Basic net income (loss) per common share		$	(0.29	)		$	2.01
Diluted net income (loss) per common share		$	(0.29	)		$	1.96
* As of January 1, 2011, the Company elected to de-designate all commodity derivative contracts that had previously been designated as cash flow hedges as of December 31, 2010, and to discontinue hedge accounting prospectively.  Accordingly, beginning January 1, 2011, gains and losses from commodity price management activities, both realized and unrealized, will be included in the income statement on the line titled “Unrealized and realized derivative (gain) loss”. Hedging balances accounted for in the balance sheet line titled “accumulated other comprehensive loss” as of December 31, 2010 will now be recognized in the income statement line titled “Realized hedge gain (loss)” as they are realized.  For the three months ended March 31, 2011, our adjusted oil price was negatively impacted by $19.1 million of realized oil derivative cash settlements, our adjusted natural gas price was positively impacted by $14.9 million of realized natural gas derivative cash settlements, and our adjusted NGL price was negatively impacted by $3.5 million of realized NGL derivative cash settlements.

 

Consolidated Balance Sheets
(In thousands, except share amounts)		March 31,				December 31,
ASSETS		2011				2010
Current assets:
Cash and cash equivalents		$	191,294			$	5,077
Accounts receivable			146,805				163,190
Refundable income taxes			4,752				8,482
Prepaid expenses and other			18,565				45,522
Derivative asset			33,571				43,491
Deferred income taxes			8,503				8,883
Total current assets			403,490				274,645
Property and equipment (successful efforts method), at cost:
Land			1,526				1,491
Proved oil and gas properties			3,553,287				3,389,158
Less - accumulated depletion, depreciation, and amortization			(1,427,181	)			(1,326,932	)
Unproved oil and gas properties			92,375				94,290
Wells in progress			183,737				145,327
Materials inventory, at lower of cost or market			18,215				22,542
Oil and gas properties held for sale			122,838				86,811
Other property and equipment, net of accumulated depreciation
of $16,447 in 2011 and $15,480 in 2010			45,859				21,365
			2,590,656				2,434,052
Other noncurrent assets:
Derivative asset			12,325				18,841
Other noncurrent assets			47,053				16,783
Total other noncurrent assets			59,378				35,624
Total Assets		$	3,053,524			$	2,744,321
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses		$	375,721			$	417,654
Derivative liability			114,228				82,044
Deposit associated with oil and gas properties held for sale			-				2,355
Total current liabilities			489,949				502,053
Noncurrent liabilities:
Long-term credit facility			-				48,000
3.50% senior convertible notes, net of unamortized
discount of $9,558 in 2011 and $11,827 in 2010			277,942				275,673
6.625% senior notes			350,000				-
Asset retirement obligation			70,979				69,052
Asset retirement obligation associated with oil and gas properties held for sale			122				2,119
Net Profits Plan liability			147,403				135,850
Deferred income taxes			425,029				443,135
Derivative liability			64,574				32,557
Other noncurrent liabilities			15,078				17,356
Total noncurrent liabilities			1,351,127				1,023,742
Commitments and contingencies
Stockholders' equity:
Common stock, $0.01 par value - authorized:  200,000,000 shares;
issued:  63,720,176 shares in 2011 and 63,412,800 shares in 2010;
outstanding, net of treasury shares: 63,617,930 shares in 2011
and 63,310,165 shares in 2010			637				634
Additional paid-in capital			206,304				191,674
Treasury stock, at cost:  102,246 shares in 2011 and 102,635 shares in 2010			(386	)			(423	)
Retained earnings			1,020,448				1,042,123
Accumulated other comprehensive loss			(14,555	)			(15,482	)
Total stockholders' equity			1,212,448				1,218,526
Total Liabilities and Stockholders' Equity		$	3,053,524			$	2,744,321

 

 

Consolidated Statements of Cash Flows
(In thousands)	For the Three Months
	Ended March 31,
	2011					2010
Cash flows from operating activities:
Net income (loss)		$	(18,503	)		$	126,178
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Gain on divestiture activity			(24,915	)			(120,978	)
Depletion, depreciation, amortization,
and asset retirement obligation liability accretion			105,356				77,765
Exploratory dry hole expense			40				163
Abandonment and impairment of unproved properties			3,079				904
Stock-based compensation expense*			5,551				5,603
Change in Net Profits Plan liability			14,195				(27,272	)
Unrealized derivative (gain) loss			82,012				(7,735	)
Amortization of debt discount and deferred financing costs			3,620				3,291
Deferred income taxes			(18,174	)			64,608
Other			(2,006	)			(1,285	)
Changes in current assets and liabilities:
Accounts receivable			16,385				(13,244	)
Refundable income taxes			3,730				13,003
Prepaid expenses and other			20,959				1,489
Accounts payable and accrued expenses			(28,341	)			31,402
Excess income tax benefit from the exercise of stock awards			(6,303	)			-
Net cash provided by operating activities			156,685				153,892
Cash flows from investing activities:
Net proceeds from sale of oil and gas properties			39,023				239,247
Capital expenditures			(309,691	)			(132,445	)
Deposits to restricted cash			-				(36,160	)
Other			(2,355	)			(6,500	)
Net cash provided by (used in) investing activities			(273,023	)			64,142
Cash flows from financing activities:
Proceeds from credit facility			102,000				177,559
Repayment of credit facility			(150,000	)			(365,559	)
Net proceeds from 6.625% senior notes			341,435				-
Proceeds from sale of common stock			3,460				268
Excess income tax benefit from the exercise of stock awards			6,303				-
Other			(643	)			(527	)
Net cash provided by (used in) financing activities			302,555				(188,259	)
Net change in cash and cash equivalents			186,217				29,775
Cash and cash equivalents at beginning of period			5,077				10,649
Cash and cash equivalents at end of period		$	191,294			$	40,424
* Stock-based compensation expense is a component of exploration expense and general and administrative expense on the consolidated statements of operations. For the three months ended March 31, 2011, and 2010, respectively, approximately $1.5 million and $1.8 million of stock-based compensation expense was included in exploration expense.  For the three months ended March 31, 2011, and 2010, respectively, approximately $4.0 million and $3.8 million 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
to Adjusted net income (Non-GAAP):	Ended March 31,
	2011					2010
Reported net income (loss) (GAAP)		$	(18,503	)		$	126,178
Adjustments net of tax: (1)
Change in Net Profits Plan liability			8,886				(17,112	)
Unrealized derivative (gain) loss			51,339				(4,853	)
Gain on divestiture activity			(15,597	)			(75,909	)
Abandonment and impairment of unproved properties			1,927				567
Adjusted net income (Non-GAAP) (2)		$	28,052			$	28,871
Diluted net income (loss) per common share
As reported (GAAP)		$	(0.29	)		$	1.96
Adjusted (Non-GAAP) (3)		$	0.42			$	0.45
Diluted weighted-average common shares outstanding:
As reported (GAAP)			63,447				64,377
Adjusted (Non-GAAP) (3)			66,490				64,377
(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.
(2) 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, abandonment and impairment of unproved properties, and gain on divestiture activity. 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 (loss), income (loss) 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.
(3) Adjusted net income per diluted share is calculated using potentially dilutive securities related to unvested restricted stock units, in-the-money outstanding options to purchase the Company’s common stock, contingent Performance Share Awards, and shares into which the 3.50% Senior Convertible Notes may be converted, as calculated for accounting purposes using the treasury stock method as applied to the Company's net share settlement option for the notes. On a GAAP basis, these items were not treated as dilutive securities in the first quarter of 2011 as the Company reported a GAAP loss for the quarter.

 

 

 

Operating Cash Flow
(In thousands)
Reconciliation of net cash provided by operating activities	For the Three Months
(GAAP) to Operating cash flow (Non-GAAP):	Ended March 31,
	2011					2010
Net cash provided by operating activities (GAAP)		$	156,685			$	153,892
Changes in current assets and liabilities			(6,430	)			(32,650	)
Exploration			12,712				13,898
Less:  Exploratory dry hole expense			(40	)			(163	)
Less:  Stock-based compensation expense included in exploration			(1,522	)			(1,754	)
Operating cash flow (Non-GAAP) (4)		$	161,405			$	133,223
(4) 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 (loss), income (loss) 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 (loss) 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.