SM Energy Reports Third Quarter 2018 Results: Great Wells, High Margins And Solid Cash Flow Growth

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

September 30, 2018

Production Data

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2018

2017

Percent Change

2018

2017

Percent Change

Average realized sales price, before the effects of derivative settlements:

Oil (per Bbl)

$

56.96

$

45.20

26

%

$

59.60

$

45.77

30

%

Gas (per Mcf)

$

3.56

$

2.96

20

%

$

3.35

$

2.98

12

%

NGLs (per Bbl)

$

30.77

$

22.40

37

%

$

28.28

$

21.36

32

%

Per Boe

$

38.26

$

27.59

39

%

$

38.15

$

26.76

43

%

Average realized sales price, including the effects of derivative settlements:

Oil (per Bbl)

$

53.64

$

44.47

21

%

$

55.06

$

44.32

24

%

Gas (per Mcf)

$

3.53

$

3.79

(7)

%

$

3.41

$

3.63

(6)

%

NGLs (per Bbl)

$

21.16

$

18.86

12

%

$

20.79

$

18.93

10

%

Equivalent (per Boe)

$

34.86

$

28.82

21

%

$

35.02

$

27.62

27

%

Production:

Oil (MMBbl)

5.0

3.4

48

%

13.7

9.8

39

%

Gas (Bcf)

27.2

29.1

(7)

%

77.7

97.0

(20)

%

NGLs (MMBbl)

2.4

2.4

—

%

6.0

8.1

(26)

%

MMBoe

12.0

10.7

12

%

32.6

34.1

(4)

%

Average daily production:

Oil (MBbl/d)

54.9

37.1

48

%

50.1

36.1

39

%

Gas (MMcf/d)

295.3

316.1

(7)

%

284.7

355.4

(20)

%

NGLs (MBbl/d)

26.2

26.2

—

%

21.9

29.6

(26)

%

MBoe/d

130.2

116.0

12

%

119.4

124.9

(4)

%

Per Boe data:

Realized price, before the effects of derivative settlements

$

38.26

$

27.59

39

%

$

38.15

$

26.76

43

%

Lease operating expense

4.41

4.81

(8)

%

4.66

4.22

10

%

Transportation costs

4.20

5.24

(20)

%

4.42

5.62

(21)

%

Production taxes

1.58

1.15

37

%

1.64

1.11

48

%

Ad valorem tax expense

0.45

0.29

55

%

0.51

0.34

50

%

General and administrative^{(1) (2)}

2.46

2.58

(5)

%

2.64

2.48

6

%

Operating margin, before the effects of derivative settlements⁽²⁾

25.16

13.52

86

%

24.28

12.99

87

%

Derivative settlement gain (loss)

(3.40)

1.23

(376)

%

(3.13)

0.86

(464)

%

Operating margin, including the effects of derivative settlements⁽²⁾

$

21.76

$

14.75

48

%

$

21.15

$

13.85

53

%

Depletion, depreciation, amortization, and

asset retirement obligation liability accretion

$

16.78

$

12.61

33

%

$

14.82

$

12.48

19

%

⁽¹⁾ Includes non-cash stock-based compensation expense per Boe of $0.45 for both the three months ended September 30, 2018, and 2017, and $0.42 and $0.36 for the nine months ended September 30, 2018, and 2017, respectively.

⁽²⁾ Certain prior period amounts have been adjusted to conform to the current period presentation due to an accounting standards update.

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

September 30, 2018

Condensed Consolidated Balance Sheets

(in thousands, except share data)

September 30,

December 31,

 ASSETS

2018

2017

Current assets:

Cash and cash equivalents

$

176,806

$

313,943

Accounts receivable

179,347

160,154

Derivative assets

81,163

64,266

Prepaid expenses and other

15,826

10,752

Total current assets

453,142

549,115

Property and equipment (successful efforts method):

Proved oil and gas properties

6,686,922

6,139,379

Accumulated depletion, depreciation, and amortization

(3,240,124)

(3,171,575)

Unproved oil and gas properties

1,892,557

2,047,203

Wells in progress

328,808

321,347

Properties held for sale, net

5,040

111,700

Other property and equipment, net of accumulated depreciation of $56,067 and $49,985, respectively

102,984

106,738

Total property and equipment, net

5,776,187

5,554,792

Noncurrent assets:

Derivative assets

8,853

40,362

Other noncurrent assets

35,539

32,507

Total noncurrent assets

44,392

72,869

Total assets

$

6,273,721

$

6,176,776

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

429,698

$

386,630

Derivative liabilities

304,159

172,582

Total current liabilities

733,857

559,212

Noncurrent liabilities:

Revolving credit facility

—

—

Senior Notes, net of unamortized deferred financing costs

2,447,290

2,769,663

Senior Convertible Notes, net of unamortized discount and deferred financing costs

145,662

139,107

Asset retirement obligations

88,149

103,026

Asset retirement obligations associated with oil and gas properties held for sale

—

11,369

Deferred income taxes

140,949

79,989

Derivative liabilities

72,605

71,402

Other noncurrent liabilities

45,810

48,400

Total noncurrent liabilities

2,940,465

3,222,956

Stockholders' equity:

Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 112,137,582 and 111,687,016 shares, respectively

1,121

1,117

Additional paid-in capital

1,758,205

1,741,623

Retained earnings⁽¹⁾

856,111

665,657

Accumulated other comprehensive loss⁽¹⁾

(16,038)

(13,789)

Total stockholders' equity

2,599,399

2,394,608

Total liabilities and stockholders' equity

$

6,273,721

$

6,176,776

⁽¹⁾  The Company reclassified $3.0 million of tax effects stranded in accumulated other comprehensive loss to retained earnings as of January 1, 2018 due to an accounting standards update.

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

September 30, 2018

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

2018

2017

2018

2017

(as adjusted)

(as adjusted)

Operating revenues and other income:

Oil, gas, and NGL production revenue

$

458,382

$

294,459

$

1,243,826

$

912,596

Net gain (loss) on divestiture activity

786

(1,895)

425,656

(131,565)

Other operating revenues

201

2,815

3,398

7,807

Total operating revenues and other income

459,369

295,379

1,672,880

788,838

Operating expenses:

Oil, gas, and NGL production expense

127,638

122,651

365,917

385,073

Depletion, depreciation, amortization, and asset retirement obligation liability accretion

201,105

134,599

483,343

425,643

Exploration⁽¹⁾

13,061

14,119

40,844

38,919

Abandonment and impairment of unproved properties

9,055

—

26,615

157

General and administrative⁽¹⁾

29,464

27,564

86,066

84,618

Net derivative (gain) loss⁽²⁾

178,026

80,599

249,304

(89,364)

Other operating expenses, net

9,664

999

14,219

10,109

Total operating expenses

568,013

380,531

1,266,308

855,155

Income (loss) from operations

(108,644)

(85,152)

406,572

(66,317)

Interest expense

(38,111)

(44,091)

(122,850)

(135,639)

Loss on extinguishment of debt

(26,722)

—

(26,722)

(35)

Other non-operating income, net

806

861

3,017

1,581

Income (loss) before income taxes

(172,671)

(128,382)

260,017

(200,410)

Income tax (expense) benefit

36,748

39,270

(61,342)

65,825

Net income (loss)

$

(135,923)

$

(89,112)

$

198,675

$

(134,585)

Basic weighted-average common shares outstanding

112,107

111,575

111,836

111,366

Diluted weighted-average common shares outstanding

112,107

111,575

113,600

111,366

Basic net income (loss) per common share

$

(1.21)

$

(0.80)

$

1.78

$

(1.21)

Diluted net income (loss) per common share

$

(1.21)

$

(0.80)

$

1.75

$

(1.21)

Dividends per common share

$

0.05

$

0.05

$

0.10

$

0.10

⁽¹⁾  Non-cash stock-based compensation included in:

Exploration expense

$

1,571

$

1,495

$

4,076

$

3,898

General and administrative expense

5,433

4,852

13,604

12,262

Total non-cash stock-based compensation

$

7,004

$

6,347

$

17,680

$

16,160

⁽²⁾  The net derivative (gain) loss line item consists of the following:

Settlement (gain) loss

$

40,718

$

(13,092)

$

101,911

$

(29,402)

(Gain) loss on fair value changes

137,308

93,691

147,393

(59,962)

Total net derivative (gain) loss

$

178,026

$

80,599

$

249,304

$

(89,364)

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

September 30, 2018

Condensed Consolidated Statements of Cash Flows

(in thousands)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2018

2017

2018

2017

(as adjusted)

(as adjusted)

Cash flows from operating activities:

Net income (loss)

$

(135,923)

$

(89,112)

$

198,675

$

(134,585)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Net (gain) loss on divestiture activity

(786)

1,895

(425,656)

131,565

Depletion, depreciation, amortization, and asset retirement obligation liability accretion

201,105

134,599

483,343

425,643

Abandonment and impairment of unproved properties

9,055

—

26,615

157

Stock-based compensation expense

7,004

6,347

17,680

16,160

Net derivative (gain) loss

178,026

80,599

249,304

(89,364)

Derivative settlement gain (loss)

(40,718)

13,092

(101,911)

29,402

Amortization of debt discount and deferred financing costs

3,792

3,799

11,542

12,478

Loss on extinguishment of debt

26,722

—

26,722

35

Deferred income taxes

(36,833)

(36,668)

60,672

(67,458)

Other, net

218

1,960

(2,084)

6,424

Net change in working capital

17,997

11,971

(3,725)

40,153

Net cash provided by operating activities

229,659

128,482

541,177

370,610

Cash flows from investing activities:

Net proceeds from the sale of oil and gas properties

984

12,118

743,199

778,365

Capital expenditures

(309,269)

(258,226)

(1,032,588)

(624,969)

Acquisition of proved and unproved oil and gas properties

44

751

(24,571)

(87,389)

Net cash provided by (used in) investing activities

(308,241)

(245,357)

(313,960)

66,007

Cash flows from financing activities:

Proceeds from credit facility

—

—

—

406,000

Repayment of credit facility

—

—

—

(406,000)

Debt issuance costs related to credit facility

(4,647)

—

(4,771)

—

Net proceeds from Senior Notes

492,079

—

492,079

—

Cash paid to repurchase Senior Notes, including premium

(844,984)

—

(844,984)

(2,357)

Net proceeds from sale of common stock

—

—

1,881

1,738

Dividends paid

—

—

(5,584)

(5,563)

Other, net

(2,966)

(1,231)

(2,975)

(1,392)

Net cash used in financing activities

(360,518)

(1,231)

(364,354)

(7,574)

Net change in cash, cash equivalents, and restricted cash

(439,100)

(118,106)

(137,137)

429,043

Cash, cash equivalents, and restricted cash at beginning of period

615,906

559,521

313,943

12,372

Cash, cash equivalents, and restricted cash at end of period

$

176,806

$

441,415

$

176,806

$

441,415

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

September 30, 2018

Adjusted EBITDAX (non-GAAP)⁽¹⁾

(in thousands)

Reconciliation of net income (loss) (GAAP) and net cash provided by operating activities (GAAP) to adjusted EBITDAX (non-GAAP)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2018

2017

2018

2017

Net income (loss) (GAAP)

$

(135,923)

$

(89,112)

$

198,675

$

(134,585)

Interest expense

38,111

44,091

122,850

135,639

Interest income⁽²⁾

(1,332)

(1,301)

(4,595)

(2,901)

Income tax expense (benefit)

(36,748)

(39,270)

61,342

(65,825)

Depletion, depreciation, amortization, and asset retirement obligation liability accretion

201,105

134,599

483,343

425,643

Exploration⁽³⁾⁽⁴⁾

11,490

12,624

36,768

35,021

Abandonment and impairment of unproved properties

9,055

—

26,615

157

Stock-based compensation expense

7,004

6,347

17,680

16,160

Net derivative (gain) loss

178,026

80,599

249,304

(89,364)

Derivative settlement gain (loss)

(40,718)

13,092

(101,911)

29,402

Net (gain) loss on divestiture activity

(786)

1,895

(425,656)

131,565

Loss on extinguishment of debt

26,722

—

26,722

35

Other, net

67

785

76

9,426

Adjusted EBITDAX (non-GAAP)⁽⁴⁾

256,073

164,349

691,213

490,373

Interest expense

(38,111)

(44,091)

(122,850)

(135,639)

Interest income⁽²⁾

1,332

1,301

4,595

2,901

Income tax (expense) benefit

36,748

39,270

(61,342)

65,825

Exploration⁽³⁾⁽⁴⁾

(11,490)

(12,624)

(36,768)

(35,021)

Amortization of debt discount and deferred financing costs

3,792

3,799

11,542

12,478

Deferred income taxes

(36,833)

(36,668)

60,672

(67,458)

Other, net ⁽⁴⁾

151

1,175

(2,160)

(3,002)

Net change in working capital

17,997

11,971

(3,725)

40,153

Net cash provided by operating activities (GAAP)⁽⁴⁾

$

229,659

$

128,482

$

541,177

$

370,610

⁽¹⁾ Adjusted EBITDAX represents net income (loss) before interest expense, interest income, income taxes, depletion, depreciation, amortization and asset retirement obligation liability accretion expense, exploration expense, property abandonment and impairment expense, non-cash stock-based compensation expense, derivative gains and losses net of settlements, gains and losses on divestitures, gains and losses on extinguishment of debt, and certain other items.  Adjusted EBITDAX excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally one-time in nature or whose timing and/or amount cannot be reasonably estimated.  Adjusted EBITDAX is a non-GAAP measure that we present because we believe it provides useful additional information to investors and analysts, 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 Agreement based on adjusted EBITDAX ratios.  In addition, adjusted 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.  Adjusted EBITDAX 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 profitability or liquidity measures prepared under GAAP.  Because adjusted EBITDAX excludes some, but not all, items that affect net income (loss) and may vary among companies, the adjusted EBITDAX amounts presented may not be comparable to similar metrics of other companies.  Our credit facility provides a material source of liquidity for us.  Under the terms of our Credit Agreement, if we failed to comply with the covenants that establish a maximum permitted ratio of total funded debt, as defined in the Credit Agreement, to adjusted EBITDAX, we would be in default, an event that would prevent us from borrowing under our credit facility and would therefore materially limit our sources of liquidity.  In addition, if we are in default under our credit facility and are unable to obtain a waiver of that default from our lenders, lenders under that facility and under the indentures governing our outstanding Senior Notes and Senior Convertible Notes would be entitled to exercise all of their remedies for default.

⁽²⁾ Interest income is included within the other non-operating income, net line item on the Company's condensed consolidated statements of operations.

⁽³⁾ Stock-based compensation expense is a component of exploration expense and general and administrative expense on the accompanying condensed consolidated statements of operations.  Therefore, the exploration line items shown in the reconciliation above will vary from the amount shown on the Company's accompanying condensed consolidated statements of operations for the component of stock-based compensation expense recorded to exploration expense.

⁽⁴⁾ Certain prior period amounts have been adjusted to conform to the current period presentation on the condensed consolidated financial statements due to accounting standards updates.

Reconciliation of Net Debt

(in thousands)

September 30,

2018

Senior Notes (principal value from Note 5 of Form 10-Q)

$

2,476,796

Senior Convertible Notes (principal value from Note 5 of Form 10-Q)

172,500

Revolving credit facility

—

Total funded debt

$

2,649,296

Less: Cash and cash equivalents

(176,806)

Net Debt

$

2,472,490

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

September 30, 2018

Adjusted EBITDAX (non-GAAP)⁽¹⁾

(in thousands)

Reconciliation of net income (GAAP) and net cash provided by operating activities (GAAP) to Adjusted EBITDAX (non-GAAP)

For the Trailing Twelve Month
Period Ended September 30,

2018

Net income (GAAP)

$

172,417

Interest expense

166,468

Interest income⁽²⁾

(5,662)

Income tax benefit

(55,803)

Depletion, depreciation, amortization, and asset retirement obligation liability accretion

614,736

Exploration⁽³⁾⁽⁴⁾

50,160

Abandonment and impairment of unproved properties

38,730

Stock-based compensation expense

24,220

Net derivative loss

365,082

Derivative settlement loss

(110,079)

Net gain on divestiture activity

(426,193)

Loss on extinguishment of debt

26,722

Other, net

3,276

Adjusted EBITDAX (non-GAAP)⁽⁴⁾

864,074

Interest expense

(166,468)

Interest income⁽²⁾

5,662

Income tax benefit

55,803

Exploration⁽³⁾⁽⁴⁾

(50,160)

Amortization of debt discount and deferred financing costs

15,340

Deferred income taxes

(63,936)

Other, net⁽⁴⁾

(93)

Net change in working capital

25,735

Net cash provided by operating activities (GAAP)⁽⁴⁾

$

685,957

⁽¹⁾ Adjusted EBITDAX represents net income (loss) before interest expense, interest income, income taxes, depletion, depreciation, amortization and asset retirement obligation liability accretion expense, exploration expense, property abandonment and impairment expense, non-cash stock-based compensation expense, derivative gains and losses net of settlements, gains and losses on divestitures, gains and losses on extinguishment of debt, and certain other items.  Adjusted EBITDAX excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally one-time in nature or whose timing and/or amount cannot be reasonably estimated.  Adjusted EBITDAX is a non-GAAP measure that we present because we believe it provides useful additional information to investors and analysts, 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 Agreement based on adjusted EBITDAX ratios.  In addition, adjusted 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.  Adjusted EBITDAX 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 profitability or liquidity measures prepared under GAAP.  Because adjusted EBITDAX excludes some, but not all, items that affect net income (loss) and may vary among companies, the adjusted EBITDAX amounts presented may not be comparable to similar metrics of other companies.  Our credit facility provides a material source of liquidity for us.  Under the terms of our Credit Agreement, if we failed to comply with the covenants that establish a maximum permitted ratio of total funded debt, as defined in the Credit Agreement, to adjusted EBITDAX, we would be in default, an event that would prevent us from borrowing under our credit facility and would therefore materially limit our sources of liquidity.  In addition, if we are in default under our credit facility and are unable to obtain a waiver of that default from our lenders, lenders under that facility and under the indentures governing our outstanding Senior Notes and Senior Convertible Notes would be entitled to exercise all of their remedies for default.

⁽²⁾ Interest income is included within the other non-operating income, net line item on the Company's condensed consolidated statements of operations.

⁽³⁾ Stock-based compensation expense is a component of exploration expense and general and administrative expense on the accompanying condensed consolidated statements of operations.  Therefore, the exploration line items shown in the reconciliation above will vary from the amount shown on the Company's accompanying condensed consolidated statements of operations for the component of stock-based compensation expense recorded to exploration expense.

⁽⁴⁾ Certain prior period amounts have been adjusted to conform to the current period presentation on the condensed consolidated financial statements due to accounting standards updates.