SM Energy Reports Second Quarter 2018 Results

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

June 30, 2018

Production Data

For the Three Months Ended
June 30,

For the Six Months Ended
June 30,

2018

2017

Percent
Change

2018

2017

Percent
Change

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

Oil (per Bbl)

$

61.02

$

44.30

38

%

$

61.14

$

46.08

33

%

Gas (per Mcf)

$

3.32

$

2.99

11

%

$

3.23

$

2.99

8

%

NGLs (per Bbl)

$

27.55

$

19.71

40

%

$

26.60

$

20.92

27

%

Per Boe

$

38.40

$

25.13

53

%

$

38.09

$

26.38

44

%

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

Oil (per Bbl)

$

55.42

$

43.36

28

%

$

55.90

$

44.24

26

%

Gas (per Mcf)

$

3.29

$

3.63

(9)

%

$

3.34

$

3.56

(6)

%

NGLs (per Bbl)

$

21.51

$

18.73

15

%

$

20.54

$

18.96

8

%

Equivalent (per Boe)

$

34.91

$

26.57

31

%

$

35.12

$

27.08

30

%

Production:

Oil (MMBbl)

4.4

2.9

50

%

8.6

6.4

34

%

Gas (Bcf)

25.3

34.0

(26)

%

50.5

67.9

(26)

%

NGLs (MMBbl)

1.9

2.8

(31)

%

3.6

5.7

(37)

%

MMBoe

10.5

11.3

(8)

%

20.6

23.4

(12)

%

Average daily production:

Oil (MBbl/d)

47.9

32.0

50

%

47.6

35.5

34

%

Gas (MMcf/d)

278.3

374.1

(26)

%

279.3

375.3

(26)

%

NGLs (MBbl/d)

20.9

30.3

(31)

%

19.7

31.4

(37)

%

MBoe/d

115.2

124.6

(8)

%

113.9

129.5

(12)

%

Per Boe data:

Realized price, before the effects of derivative settlements

$

38.40

$

25.13

53

%

$

38.09

$

26.38

44

%

Lease operating expense

4.66

4.11

13

%

4.80

3.96

21

%

Transportation costs

4.47

5.71

(22)

%

4.55

5.79

(21)

%

Production taxes

1.66

1.00

66

%

1.67

1.09

53

%

Ad valorem tax expense

0.41

0.16

156

%

0.54

0.36

50

%

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

2.76

2.49

11

%

2.74

2.43

13

%

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

24.44

11.66

110

%

23.79

12.75

87

%

Derivative settlement loss

(3.49)

1.44

(342)

%

(2.97)

0.70

(524)

%

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

$

20.95

$

13.10

60

%

$

20.82

$

13.45

55

%

Depletion, depreciation, amortization, and

asset retirement obligation liability accretion

$

14.48

$

13.52

7

%

$

13.69

$

12.42

10

%

⁽¹⁾ Includes non-cash stock-based compensation expense per Boe of $0.39 and $0.30 for the three months ended June 30, 2018 and 2017, respectively, and $0.40 and $0.32 for the six months ended June 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)

June 30, 2018

Condensed Consolidated Balance Sheets

(in thousands, except share data)

June 30,

December 31,

 ASSETS

2018

2017

Current assets:

Cash and cash equivalents

$

615,906

$

313,943

Accounts receivable

178,682

160,154

Derivative assets

146,329

64,266

Prepaid expenses and other

14,293

10,752

Total current assets

955,210

549,115

Property and equipment (successful efforts method):

Proved oil and gas properties

6,372,956

6,139,379

Accumulated depletion, depreciation, and amortization

(3,041,653)

(3,171,575)

Unproved oil and gas properties

1,917,883

2,047,203

Wells in progress

361,238

321,347

Oil and gas properties held for sale, net

5,040

111,700

Other property and equipment, net of accumulated depreciation of $53,483 and $49,985, respectively

102,986

106,738

Total property and equipment, net

5,718,450

5,554,792

Noncurrent assets:

Derivative assets

31,151

40,362

Other noncurrent assets

31,674

32,507

Total noncurrent assets

62,825

72,869

Total assets

$

6,736,485

$

6,176,776

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

446,318

$

386,630

Current portion of Senior Notes, net of unamortized deferred financing costs

342,301

—

Derivative liabilities

259,338

172,582

Total current liabilities

1,047,957

559,212

Noncurrent liabilities:

Revolving credit facility

—

—

Noncurrent portion of Senior Notes, net of unamortized deferred financing costs

2,429,994

2,769,663

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

143,430

139,107

Asset retirement obligations

87,279

103,026

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

—

11,369

Deferred income taxes

177,709

79,989

Derivative liabilities

67,583

71,402

Other noncurrent liabilities

45,906

48,400

Total noncurrent liabilities

2,951,901

3,222,956

Stockholders' equity:

Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 111,846,998 and 111,687,016 shares, respectively

1,118

1,117

Additional paid-in capital

1,754,169

1,741,623

Retained earnings⁽¹⁾

997,641

665,657

Accumulated other comprehensive loss⁽¹⁾

(16,301)

(13,789)

Total stockholders' equity

2,736,627

2,394,608

Total liabilities and stockholders' equity

$

6,736,485

$

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)

June 30, 2018

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

2018

2017

2018

2017

(as adjusted)

(as adjusted)

Operating revenues and other income:

Oil, gas, and NGL production revenue

$

402,558

$

284,939

$

785,444

$

618,137

Net gain (loss) on divestiture activity

39,501

(167,133)

424,870

(129,670)

Other operating revenues

1,857

2,915

3,197

4,992

Total operating revenues and other income

443,916

120,721

1,213,511

493,459

Operating expenses:

Oil, gas, and NGL production expense

117,400

124,376

238,279

262,422

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

151,765

153,232

282,238

291,044

Exploration⁽¹⁾

14,056

12,983

27,783

24,800

Abandonment and impairment of unproved properties

11,935

157

17,560

157

General and administrative⁽¹⁾

28,920

28,237

56,602

57,054

Net derivative (gain) loss⁽²⁾

63,749

(55,189)

71,278

(169,963)

Other operating expenses, net

(57)

4,251

4,555

9,110

Total operating expenses

387,768

268,047

698,295

474,624

Income (loss) from operations

56,148

(147,326)

515,216

18,835

Interest expense

(41,654)

(44,595)

(84,739)

(91,548)

Loss on extinguishment of debt

—

—

—

(35)

Other non-operating income, net

1,802

953

2,211

720

Income (loss) before income taxes

16,296

(190,968)

432,688

(72,028)

Income tax (expense) benefit

901

71,061

(98,090)

26,555

Net income (loss)

$

17,197

$

(119,907)

$

334,598

$

(45,473)

Basic weighted-average common shares outstanding

111,701

111,277

111,698

111,274

Diluted weighted-average common shares outstanding

113,630

111,277

113,267

111,274

Basic net income (loss) per common share

$

0.15

$

(1.08)

$

3.00

$

(0.41)

Diluted net income (loss) per common share

$

0.15

$

(1.08)

$

2.95

$

(0.41)

Dividends per common share

$

—

$

—

$

0.05

$

0.05

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

Exploration expense

$

1,189

$

995

$

2,505

$

2,403

General and administrative expense

4,075

3,363

8,171

7,410

Total non-cash stock-based compensation

$

5,264

$

4,358

$

10,676

$

9,813

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

Settlement (gain) loss

$

36,665

$

(16,303)

$

61,193

$

(16,310)

(Gain) loss on fair value changes

27,084

(38,886)

10,085

(153,653)

Total net derivative (gain) loss

$

63,749

$

(55,189)

$

71,278

$

(169,963)

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

June 30, 2018

Condensed Consolidated Statements of Cash Flows

(in thousands)

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

2018

2017

2018

2017

(as adjusted)

(as adjusted)

Cash flows from operating activities:

Net income (loss)

$

17,197

$

(119,907)

$

334,598

$

(45,473)

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

Net (gain) loss on divestiture activity

(39,501)

167,133

(424,870)

129,670

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

151,765

153,232

282,238

291,044

Abandonment and impairment of unproved properties

11,935

157

17,560

157

Stock-based compensation expense

5,264

4,358

10,676

9,813

Net derivative (gain) loss

63,749

(55,189)

71,278

(169,963)

Derivative settlement gain (loss)

(36,665)

16,303

(61,193)

16,310

Amortization of debt discount and deferred financing costs

3,884

3,733

7,750

8,679

Loss on extinguishment of debt

—

—

—

35

Deferred income taxes

(861)

(64,015)

97,505

(30,790)

Other, net

225

1,088

(2,302)

4,464

Net change in working capital

(5,609)

256

(21,722)

28,182

Net cash provided by operating activities

171,383

107,149

311,518

242,128

Cash flows from investing activities:

Net proceeds from the sale of oil and gas properties

251,435

21,914

742,215

766,247

Capital expenditures

(421,798)

(212,342)

(723,319)

(366,743)

Acquisition of proved and unproved oil and gas properties

(24,615)

(13,035)

(24,615)

(88,140)

Net cash provided by (used in) investing activities

(194,978)

(203,463)

(5,719)

311,364

Cash flows from financing activities:

Proceeds from credit facility

—

8,500

—

406,000

Repayment of credit facility

—

(8,500)

—

(406,000)

Cash paid to repurchase Senior Notes

—

—

—

(2,344)

Cash paid for extinguishment of debt

—

—

—

(13)

Net proceeds from sale of common stock

1,881

1,738

1,881

1,738

Dividends paid

(5,584)

(5,563)

(5,584)

(5,563)

Other, net

(133)

(1)

(133)

(161)

Net cash used in financing activities

(3,836)

(3,826)

(3,836)

(6,343)

Net change in cash, cash equivalents, and restricted cash

(27,431)

(100,140)

301,963

547,149

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

643,337

659,661

313,943

12,372

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

$

615,906

$

559,521

$

615,906

$

559,521

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

June 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 June 30,

For the Six Months Ended
June 30,

2018

2017

2018

2017

Net income (loss) (GAAP)

$

17,197

$

(119,907)

$

334,598

$

(45,473)

Interest expense

41,654

44,595

84,739

91,548

Interest income⁽²⁾

(2,414)

(1,265)

(3,263)

(1,600)

Income tax expense (benefit)

(901)

(71,061)

98,090

(26,555)

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

151,765

153,232

282,238

291,044

Exploration⁽³⁾⁽⁴⁾

12,867

11,988

25,278

22,397

Abandonment and impairment of unproved properties

11,935

157

17,560

157

Stock-based compensation expense

5,264

4,358

10,676

9,813

Net derivative (gain) loss

63,749

(55,189)

71,278

(169,963)

Derivative settlement gain (loss)

(36,665)

16,303

(61,193)

16,310

Net (gain) loss on divestiture activity

(39,501)

167,133

(424,870)

129,670

Loss on extinguishment of debt

—

—

—

35

Other, net

2

3,655

9

8,641

Adjusted EBITDAX (Non-GAAP)⁽⁴⁾

224,952

153,999

435,140

326,024

Interest expense

(41,654)

(44,595)

(84,739)

(91,548)

Interest income⁽²⁾

2,414

1,265

3,263

1,600

Income tax (expense) benefit

901

71,061

(98,090)

26,555

Exploration⁽³⁾⁽⁴⁾

(12,867)

(11,988)

(25,278)

(22,397)

Amortization of debt discount and deferred financing costs

3,884

3,733

7,750

8,679

Deferred income taxes

(861)

(64,015)

97,505

(30,790)

Other, net ⁽⁴⁾

223

(2,567)

(2,311)

(4,177)

Net change in working capital

(5,609)

256

(21,722)

28,182

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

$

171,383

$

107,149

$

311,518

$

242,128

⁽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 senior secured debt to adjusted EBITDAX and a minimum permitted ratio of adjusted EBITDAX to interest, 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.

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS (UNAUDITED)

June 30, 2018

Adjusted Net Income (Loss) (Non-GAAP)

(in thousands, except per share data)

For the Three Months

For the Six Months

Ended June 30,

Ended June 30,

2018

2017

2018

2017

Net income (loss) (GAAP)

$

17,197

$

(119,907)

$

334,598

$

(45,473)

Net derivative (gain) loss

63,749

(55,189)

71,278

(169,963)

Derivative settlement gain (loss)

(36,665)

16,303

(61,193)

16,310

Net (gain) loss on divestiture activity

(39,501)

167,133

(424,870)

129,670

Abandonment and impairment of unproved properties

11,935

157

17,560

157

Loss on extinguishment of debt

—

—

—

35

Other, net⁽¹⁾

2

3,655

809

8,641

Tax effect of adjustments⁽²⁾

104

(47,673)

86,022

5,469

Adjusted net income (loss) (Non-GAAP)⁽³⁾

$

16,821

$

(35,521)

$

24,204

$

(55,154)

Diluted net income (loss) per common share (GAAP)

$

0.15

$

(1.08)

$

2.95

$

(0.41)

Net derivative (gain) loss

0.56

(0.50)

0.63

(1.53)

Derivative settlement gain (loss)

(0.32)

0.15

(0.54)

0.15

Net (gain) loss on divestiture activity

(0.35)

1.50

(3.75)

1.17

Abandonment and impairment of unproved properties

0.11

—

0.16

—

Loss on extinguishment of debt

—

—

—

—

Other, net⁽¹⁾

—

0.03

0.01

0.07

Tax effect of adjustments⁽²⁾

—

(0.42)

0.75

0.05

Adjusted net income (loss) per diluted common share (Non-GAAP)⁽⁴⁾

$

0.15

$

(0.32)

$

0.21

$

(0.50)

Basic weighted-average common shares outstanding (GAAP)

111,701

111,277

111,698

111,274

Diluted weighted-average common shares outstanding (GAAP)

113,630

111,277

113,267

111,274

Note: Amounts may not calculate due to rounding.

⁽¹⁾ For the three-month and six-month periods ended June 30, 2018, the adjustment is related to bad debt expense. Additionally, for the six-month period ended June 30, 2018, an accrual for a non-recurring matter is included.  For the three-month and six-month periods ended June 30, 2017, the adjustment is related to the change in Net Profits Plan liability and impairment of proved properties. Additionally, for the six-month period ended June 30, 2017, an adjustment related to materials inventory loss is included.  These items are included in other operating expenses on the Company's condensed consolidated statements of operations.

⁽²⁾ The tax effect of adjustments is calculated using a tax rate of 21.7% for the three-month and six-month periods ended June 30, 2018, and a tax rate of 36.1% for the three-month and six-month periods ended June 30, 2017.  Note that the rate used for the three-month period ended March 31, 2018 was 21.9%. These rates approximate the Company's statutory tax rate for the respective periods, as adjusted for ordinary permanent differences.

⁽³⁾ Adjusted net income (loss) 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 and other adjustments, such as derivative gains and losses net of settlements, impairments, net (gain) loss on divestiture activity, materials inventory loss, and gains or losses on extinguishment of debt.  The non-GAAP measure of adjusted net income (loss) 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 (loss) 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 (loss) 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 (loss) excludes some, but not all, items that affect net income (loss) and may vary among companies, the adjusted net income (loss) amounts presented may not be comparable to similarly titled measures of other companies.

⁽⁴⁾ For periods where the Company reports adjusted net loss, basic weighted-average common shares outstanding are used in the calculation of adjusted net loss per diluted common share.