SM Energy Reports Results for the Second Quarter of 2012; Provides Operations Update

• Quarterly production of 8.4 MMBOE, an average of 92.6 MBOE/d or 555.7 MMCFE/d; in-line with quarterly guidance range of 549 - 593 MMCFE/d
• Operated Eagle Ford shale production for the second quarter increases 16% from first quarter
• 27,700 net acres added to its Permian Basin acreage in first half of 2012; total Permian acreage now approximately 115,500 net acres
• Quarterly GAAP net income of $24.9 million, or $0.37 per diluted share

DENVER--(BUSINESS WIRE)-- SM Energy Company (NYSE: SM) announces financial results for the second quarter of 2012 and provides an operations update. In addition, a new presentation for the Company's second quarter earnings and operations update will be posted on the Company's website at www.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 2, 2012. Information for the earnings call can be found below.

SECOND QUARTER 2012 RESULTS

SM Energy reported net income for the second quarter of 2012 of $24.9 million or $0.37 per diluted share. This compares to net income of $124.5 million, or $1.86 per diluted share, for the same period of 2011. Adjusted net income for the second quarter of 2012 was $5.9 million, or $0.09 per diluted share, compared to adjusted net income of $61.1 million, or $0.91 per diluted share, for the same period of 2011. Adjusted net income excludes certain items that the Company believes affect the comparability of operating results. The Company generally excludes non-recurring items or items whose timing and/or amount cannot be reasonably estimated, and large non-cash items, such as gains or losses on divestiture activity and unrealized gains or losses from derivative activity. A summary of the adjustments made to arrive at adjusted net income is presented in the table below:

(1) For the three-month periods ended June 30, 2012, adjustments are shown net of tax and are calculated using an effective tax rate of 37.3%, which approximates the Company's statutory tax rate, as adjusted for ordinary permanent differences. For the three-month period ended June 30, 2011, adjustments are shown net of tax using the effective income tax rate as calculated by dividing the income tax expense by income before income taxes as shown on the consolidated statement of operations for that period.


Earnings before interest, taxes, depreciation, depletion, amortization, accretion, and exploration expense ("EBITDAX") was $213.7 million for the second quarter of 2012, down from $242.4 million for the same period of 2011.

Adjusted net income and EBITDAX are non-GAAP financial measures — please refer to the respective reconciliations in the accompanying Financial Highlights section at the end of this release for additional information about these measures.

Revenues and other income for the second quarter were $304.4 million compared to $377.9 million for the same period of 2011, a 19% decrease. The table below provides the average realized prices received by product for the Company, as well as the adjusted prices received after taking into account cash settlements for derivative transactions:

The table below presents key performance measures and metrics, as well as previously provided guidance for the second quarter of 2012:

For the second quarter of 2012, SM Energy met or beat guidance on all metrics except LOE. Absolute dollars of LOE were in-line with the Company's expectations, however lower than anticipated production volumes drove per unit LOE above the guidance range for the quarter. Lower than forecasted production from the Eagle Ford shale programs, which are the largest driver of transportation expense for the Company, resulted in lower transportation expense for the quarter. SM Energy recorded lower than expected production taxes as a percentage of pre-derivative oil, gas, and NGL revenue due to tax incentive rebates the Company received during the second quarter of 2012 from the state of Oklahoma. These severance tax incentives relate to activity dating back to 2010 and have all been recorded in the current period resulting in a lower production tax rate for the quarter.

During the second quarter of 2012, the Company withdrew its sales package of DJ Basin assets from the market after receiving inadequate value for the assets. Accounting guidance requires that the assets be recorded at the lower of cost or market when reclassified as "held and used," which resulted in a $28.3 million non-cash loss on divestiture activity for the quarter. During the quarter, the Company recognized an impairment of proved properties of $38.5 million, primarily related to the Company's Haynesville shale assets. The Company also recorded a charge to abandonment and impairment of unproved properties of $10.7 million primarily related to an exploratory program in its Rocky Mountain region.

FINANCIAL POSITION AND LIQUIDITY

At the end of the second quarter of 2012, SM Energy had total long-term debt of $1.2 billion. A summary of the Company's long-term debt is shown in the table below:

On June 29, 2012, the Company issued $400 million of 6.50% Senior Notes due in 2023. As a result of this issuance, the Company's borrowing base under its credit facility was automatically decreased from $1.5 billion to $1.4 billion. SM Energy has elected to keep its current commitments under its credit facility unchanged at $1.0 billion. As of June 30, 2012, SM Energy's debt-to-book capitalization ratio was 43%, and the ratio of the Company's debt to twelve month trailing EBITDAX was 1.2 times. As of the end of the second quarter, SM Energy was in compliance with all of the covenants associated with its long-term debt. As of June 30, 2012, and July 27, 2012, the Company's outstanding balance on its long-term credit facility was $61.0 million and $85.5 million, respectively.

OPERATIONS UPDATE

Production

SM Energy reported quarterly production of 50.6 BCFE, or an average of 555.7 MMCFE per day, for the second quarter of 2012, which is within the previously provided production guidance range of 549 to 593 MMCFE per day. Reported production declined slightly from the quarterly production of 50.7 BCFE in the first quarter of 2012 due to production declines in dry gas producing areas and divestitures that were not fully offset by production growth in other areas during the quarter.

Divestitures

During the first half of 2012, the Company has closed or entered into contracts to sell approximately $50 million of various legacy assets packages, including a non-operated Green River Basin package and non-operated Bakken/Three Forks assets in the Williston Basin.

Eagle Ford Shale

The Company's operated net production in the Eagle Ford shale averaged 207.1 MMCFE/d in the second quarter of 2012, a 16% increase from the first quarter production of 178.3 MMCFE/d. During the second quarter of 2012, SM Energy operated six drilling rigs on its operated Eagle Ford shale acreage. Starting in 2012, most drilling activity has been focused on drilling multi-well pads, and as a result, the well completion schedule for the year is weighted toward the second half. During the first half of 2012, the Company completed 26 wells in the operated program. Production in the second quarter was impacted by downstream pipeline curtailments in April and further constrained by continuing delays in the installation and start-up of new field production batteries on the third-party operated gathering system. These delays are being caused by later than expected deliveries of equipment resulting from increased industry demand. Based on the current schedule for delivery of midstream equipment, the Company now expects to complete 67 wells in 2012.

In the non-operated portion of the Company's Eagle Ford program, net production for the second quarter of 2012 averaged 9.5 MBOE/d. The operator ran approximately nine drilling rigs and one spudder rig during the second quarter of 2012 and is expected to continue at the same activity level for the remainder of the year. The operator has recently accelerated the expansion of the midstream assets, which is a non-carried expense under the carry agreement with Mitsui, causing an increase in the amount of capital invested in this system by SM Energy in 2012.

Bakken / Three Forks

SM Energy added a fourth drilling rig in the North Dakota portion of the Williston Basin at the end of the second quarter and plans to run those four rigs for the remainder of 2012. The Company currently has three of its rigs focused on Bakken and Three Forks drilling in the Company's Raven and Bear Den prospects in McKenzie and Williams Counties, North Dakota. The fourth operated rig is focused on the Three Forks formation in the Company's Gooseneck prospect in Divide County, North Dakota. During the first half of 2012, the Company transitioned most of its drilling and completion activity in the Williston Basin to multi-well pad infill drilling. The Company is also participating in a number of non-operated wells throughout the Williston Basin.

Permian Basin

During the first half of 2012, the Company increased its acreage position in the Permian Basin by 27,700 net acres and increased its development rig count in the basin to three rigs. During the second quarter, one of the rigs was focused on Mississippian Limestone development in the northern Midland Basin where the Company has seen encouraging results with recent wells. The Company operated a rig in a recently acquired acreage block near Midland, Texas, and completed a horizontal well in the Leonard Shale. The well is currently flowing back and a second well is currently being drilled. The Company also completed a Bone Springs development well on acreage it holds in New Mexico and is drilling the second well of a multi-well program in that play. At the beginning of the third quarter, the Company added a second rig to its Mississippian Limestone development program, increasing its total operated rig count in the Permian Basin to four.

Other Activity

In its Granite Wash program, the Company operated three rigs throughout the second quarter of 2012 and completed five wells. The Company also operated one rig in its Niobrara/Frontier program in the Powder River Basin.

UPDATED CAPITAL, PRODUCTION, AND PERFORMANCE GUIDANCE

SM Energy is updating its previously provided capital expenditure and operational guidance for the third quarter and for the full year 2012.

The Company's current forecast for 2012 capital investment will be approximately $1.5 billion. The following table summarizes the updated capital allocations for 2012:

As indicated earlier, non-drilling capital is now forecast to be higher than in the original plan due to non-operated infrastructure investment in the Eagle Ford shale. Capital in the operated Eagle Ford program is expected to be lower than originally planned due to infrastructure related deferrals of a number of completions. This development capital has been shifted to oily activities in the Permian Basin and the non-operated portion of the Bakken/Three Forks program.

The Company is providing updated production and cost guidance for third quarter and full year 2012 in the table below:

EARNINGS CALL INFORMATION

The Company has scheduled a teleconference to discuss these results and other operational matters for August 2, 2012, at 8:00 a.m. Mountain time (10:00 a.m. Eastern time). The call participation number is 877-445-0811 and the conference ID number is 10490818. An audio replay of the call will be available approximately two hours after the call at 855-859-2056, with the conference ID number 10490818. International participants can dial 617-401-8115 to take part in the conference call, using the conference ID number 10490818, and can access a replay of the call at 404-537-3406, using conference ID number 10490818. Replays can be accessed through August 16, 2012.

This call is being webcast live and can be accessed at SM Energy Company's website at www.sm-energy.com. An audio recording of the conference call will be available at that site through August 16, 2012.

INFORMATION ABOUT FORWARD LOOKING STATEMENTS

This release may contain or incorporate by reference forward looking statements within the meaning of securities laws, including estimates, forecasts, plans and projections. The words “will,” “believe,” “budget,” “anticipate,” “plan,” “intend,” “estimate,” “forecast,” and “expect” and similar expressions are intended to identify forward looking statements. The forward looking statements contained in this release speak as of the date of this release. 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, natural gas, and natural gas liquids prices, the uncertain nature of the expected benefits from the acquisition, divestiture, or joint venture of oil and gas properties, the uncertain nature of announced divestiture, joint venture, farm down or similar efforts and the ability to complete such transactions, uncertainties inherent in projecting future rates of production from drilling activities and acquisitions, the ability of midstream service providers to purchase or market the Company's production, the ability of purchasers of production to pay for those sales, the availability of debt and equity financing for purchasers of oil and gas properties, the ability of the banks in the Company's credit facility to fund requested borrowings, the ability of derivative counterparties to settle derivative contracts 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, the availability of drilling, completion, and operating equipment and services, the risks associated with the Company's commodity price risk management strategy, uncertainty regarding the ultimate impact of potentially dilutive securities, and other such matters discussed in the “Risk Factors” section of SM Energy's 2011 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 is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids in onshore North America. SM Energy routinely posts important information about the Company on its website. For more information about SM Energy, please visit its website at www.sm-energy.com

(1) For the three and six-month periods ended June 30, 2012, adjustments are shown net of tax and are calculated using an effective tax rate of 37.3%, which approximates the Company's statutory tax rate, as adjusted for ordinary permanent differences. For the three and six-month periods ended June 30, 2011, adjustments are shown net of tax using the effective income tax rate as calculated by dividing the income tax expense by income before income taxes as shown on the consolidated statement of operations for that respective period.

(2) Adjusted net income excludes certain items that the Company believes affect the comparability of operating results. Items excluded generally are non-recurring 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, 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, 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.

(3) EBITDAX represents income or loss before interest expense, interest income, income taxes, depreciation, depletion, amortization and accretion, exploration expense, property impairments, non-cash stock compensation expense, unrealized derivative gains and losses, change in the Net Profit Plan liability, and gains and losses on divestitures. EBITDAX excludes certain items that we believe affect the comparability of operating results and can exclude items which are generally one-time or whose timing and/or amount cannot be reasonably estimated. EBITDAX is a non-GAAP measure that is presented because we believe that it provides useful additional information to investors, as a performance measure, for analysis of our ability to internally generate funds for exploration, development, acquisitions, and to service debt. We are also subject to financial covenants under our credit facility based on our debt to EBITDAX ratio. In addition, EBITDAX 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. EBITDAX should not be considered in isolation or as a substitute for net income, income from operations, net cash provided by operating activities, profitability, or liquidity measures prepared under GAAP. Since EBITDAX excludes some, but not all items that affect net income and may vary among companies, the EBITDAX amounts presented may not be comparable to similar metrics of other companies.

SM Energy
James R. Edwards, 303-837-2444

Source: SM Energy

Released August 1, 2012