- Driving transformation of the portfolio to top tier assets with long-term inventory
- Demonstrating strong operational execution through continued cost management and performance, including reducing LOE guidance by more than 10% at the mid-point
- Exceeding guidance range with production of 14.2 MMBoe; oil production 31% of commodity mix
DENVER–(BUSINESS WIRE)–SM Energy Company (NYSE: SM) today announced financial results for the third quarter of 2016 and provided an operations update. In conjunction with this release, the Company posted an investor presentation on its website at www.sm-energy.com with additional third quarter results and operations detail. This presentation will be referenced during the earnings webcast and conference call scheduled for 8:00 a.m. Mountain Time (10:00 Eastern Time) on November 2, 2016. Further information on the earnings webcast and conference call can be found below.
President and Chief Executive Officer Jay Ottoson comments:
“SM Energy has a straightforward strategy to generate differential shareholder returns by becoming a premier operator of top tier assets. Over the last few months, we have executed a series of transactions that will transform our portfolio and position our Company to operate an expansive inventory of highly economic, high margin drilling projects. Following completion of both our Rock Oil and QStar acquisitions in the Midland Basin, totaling $2.6 billion, and several non-core property divestitures totaling $980 million in gross proceeds, we will be focused on oil production from our pro forma 83,750 net acre position in the Midland Basin and natural gas/NGL production from our operated 161,475 net acre position in the Eagle Ford.
“Our confidence in our ability to realize exceptional value from these newly acquired properties is based on our outstanding operational competence. Our third quarter results again demonstrate excellent execution in operations with production higher and costs lower than expectations. Our operations team is quickly integrating activities on our acreage acquired from Rock Oil, actively incorporating learnings from completion improvement and down-spacing tests, and continuing to trade and bolt-on acreage across our positions to enable the drilling of longer lateral wells. We are executing our due diligence on QStar and closely monitoring field operations where early rates on a recent 9,700’ well look terrific. We are keenly focused on bringing value forward in the Permian Basin, and our continued improvements in well performance and the potential to increase long lateral inventory are key drivers of value creation.”
THIRD QUARTER 2016 RESULTS
Third quarter production of 14.2 MMBoe, or 153,880 Boe per day, was 31% oil, 25% NGLs and 44% natural gas. Production was down 12% compared with the third quarter of 2015, primarily due to decreased activity in the Eagle Ford, and down approximately 1% compared with the second quarter of 2016, as expected declines in Eagle Ford natural gas production as well as an early closing on the New Mexico divestiture were largely offset by increased oil production from the Permian and Williston Basins. For the first nine months of 2016, total production was 41.9 MMBoe and averaged 152,869 Boe per day.
PRODUCTION – SEQUENTIAL COMPARISON
|Natural gas (Bcf)||37.1||39.0|
Realized prices in the third quarter of 2016 averaged $23.25 per Boe (before the effect of commodity derivatives). The average realized price was up 2% compared with the third quarter of 2015, primarily due to a higher oil component in the commodity mix and improved NGL prices, and up 14% compared with the second quarter of 2016, predominantly due to a 44% increase in benchmark natural gas prices. For the first nine months of 2016, the average realized price was $19.87 per Boe. Derivative settlements added $4.06 per Boe in the third quarter of 2016 and added $7.31 per Boe in the first nine months of 2016.
REALIZED PRICES – SEQUENTIAL COMPARISON
|Natural gas ($/Mcf)||2.71/ 2.98||1.79/ 2.60|
Third quarter 2016 lease operating expense (including ad valorem tax) of $3.50 per Boe was down 18% compared with the third quarter of 2015 and flat compared with the second quarter of 2016. Operating expense continues to benefit from lower vendor rates and relentless focus by the operations team on gaining efficiencies in all of the Company’s production operations. Total Company transportation expense for the third quarter of 2016 of $6.24 per Boe was nearly flat with the same prior year period and up 5% sequentially. For the first nine months of 2016, lease operating expense (including ad valorem) was $3.68 per Boe compared with $4.09 per Boe in the first nine months of 2015. For the first nine months of 2016, transportation expense averaged $6.08 per Boe compared with $5.99 in the first nine months of 2015. See below for revisions to guidance as a result of lower operating costs.
Third quarter 2016 general and administrative expense of $32.7 million was down 14% compared with the third quarter of 2015 and was up 16% sequentially. In the third quarter of 2016, general and administrative expense included $2.9 million related to closure of the Company’s Billings, Montana office, as well as $5.0 million of non-cash stock-based compensation charges. In the prior year period, general and administrative expense included $1.0 million related to office closure and other reorganization charges, as well as $5.4 million in non-cash stock-based compensation. General and administrative expense is lower year-over-year primarily because the Company has consolidated regional offices and reduced headcount. For the first nine months of 2016, general and administrative expense was $93.1 million (including $15.4 million of non-cash stock-based compensation) and included $2.9 million of office closure and reorganization charges compared with the first nine months of 2015 at $124.0 million (including $15.2 million of non-cash stock-based compensation), which included $9.5 million of office closure and reorganization expenses. The Company expects to incur an additional $3.0 million of office closure and reorganization charges in the fourth quarter of 2016.
The Company’s GAAP net loss for the third quarter of 2016 was $40.9 million, or $0.52 per diluted common share, compared with net income of $3.1 million, or $0.05 per diluted common share, in the third quarter of 2015. The year-over-year decline in net income was primarily due to significantly higher cash and non-cash derivative gains in the 2015 period, partially offset by lower impairment expense, higher gain on divestiture activity and lower depletion, depreciation and amortization expenses, each in the 2016 period. In addition, interest expense in the third quarter of 2016 includes a one-time cash charge of $10 million for a committed second lien facility, in conjunction with the announcement of the acquisition of assets from Rock Oil Holdings LLC, that the Company did not utilize and ultimately terminated during the quarter. Net loss for the first nine months of 2016 was $556.8 million, or $7.78 per diluted common share (including $427.3 million in non-cash derivative losses and $285.4 million in impairment charges), compared with a net loss of $107.5 million (including $102.2 million in non-cash derivative losses and $148.5 million in impairment charges), or $1.59 per diluted common share, for the first nine months of 2015.
Adjusted EBITDAX, adjusted net income and adjusted net income per diluted share are non-GAAP measures. Please reference the reconciliations to the most directly comparable GAAP financial measures at the end of this release.
The Company’s adjusted EBITDAX for the third quarter of 2016 was $205.1 million, compared with $259.4 million in the prior year period. The year-over-year decline in adjusted EBITDAX was predominantly due to higher cash derivative settlement gains in the 2015 period. Compared sequentially with the second quarter of 2016, adjusted EBITDAX was down $12.0 million, with the second quarter benefiting from a slightly higher margin per Boe, which included the benefit from hedge gains. Adjusted EBITDAX for the first nine months of 2016 was $604.6 million, compared with $908.5 million in the prior year period.
The Company’s adjusted net loss for the third quarter of 2016 was $29.0 million, or $0.37 per diluted common share, compared with adjusted net loss of $23.3 million, or $0.34 per diluted common share, in the third quarter of 2015. For the first nine months of 2016, the Company’s adjusted net loss was $115.8 million, or $1.62 per diluted common share, compared with adjusted net income of $24.5 million, or $0.36 per diluted common share, for the first nine months of 2015. The calculation of adjusted net loss excludes non-recurring items and items difficult to estimate in order to present results that can be more consistently compared with prior periods and peer results.
FINANCIAL POSITION AND LIQUIDITY
At September 30, 2016, the outstanding principal balance on the Company’s long-term debt included $2.8 billion in senior notes plus $172.5 million in senior convertible notes. The Company’s senior secured credit facility was undrawn. Also at quarter-end, the Company had a cash balance of $980.7 million, which the Company applied to closing the Rock Oil acquisition on October 4, 2016.
As previously announced, during the quarter, the Company:
- issued $500 million 6.750% senior unsecured notes due 2026;
- issued $172.5 million 1.500% senior unsecured convertible notes due 2021;
- issued 18.4 million shares of common stock for gross proceeds of $552 million; and
- closed $195 million in asset divestitures, subject to pre- and post-closing adjustments.
Also as previously announced, subsequent to quarter-end, the Company:
- closed on the acquisition of Midland Basin assets from Rock Oil Holdings LLC for $991 million, subject to post-closing adjustments;
- announced a definitive agreement to acquire Midland Basin assets from QStar LLC and a related entity for $1.6 billion; under these agreements the sellers will be issued approximately 13.4 million shares of SM Energy common stock to fund $500 million of the purchase price;
- announced a definitive agreement to sell the Company’s properties in the Williston Basin located outside of Divide County, North Dakota to Oasis Petroleum for $785 million, subject to pre- and post-closing adjustments; and
- continued the marketing process for its interests in third party-operated Eagle Ford assets, including its ownership in associated midstream assets.
Closings of the QStar acquisition in the Midland Basin and closing of the Williston Basin divestiture are both anticipated in December 2016. The closings of these transactions are subject to the satisfaction of customary closing conditions, and there can be no assurance that either of these transactions will close on-time or at all.
Currently, the Company’s senior secured revolving credit facility has a borrowing base of $1.35 billion and lender commitments of $1.25 billion.
CAPITAL ACTIVITY AND OPERATIONS
Costs incurred in oil and gas activities for the third quarter of 2016 were $156.4 million and for the first nine months of 2016 were $561.2 million. Total capital spend (before acquisitions) for the third quarter of 2016 was $145.4 million and for the first nine months of 2016 was $518.3 million. Please refer to the Total Capital Spend Reconciliation at the end of this release for a reconciliation of the Company’s Costs incurred in oil and gas activities (GAAP) to Total capital spend (Non-GAAP).Total capital spend (before acquisitions) guidance for 2016 is approximately $700 million, which includes the expected addition of two rigs in the Midland Basin during the fourth quarter. The Company is unable to present a quantitative reconciliation of this forward-looking non-GAAP financial measure without unreasonable effort because acquisition costs are inherently unpredictable. Acquisition costs could be significant in future periods and would depend on a wide variety of factors outside the Company’s control. Accordingly, investors are cautioned not to place undue reliance on this information.
During the third quarter, the Company drilled 16 gross/16 net operated wells and completed 63 gross/61 net operated wells. The Company’s drilled and uncompleted (DUC) inventory at September 30, 2016 was 82 gross/79 net operated wells plus 27 net non-operated wells.
Third quarter of 2016 Permian Basin net production was 986,000 Boe (10,700 Boe/d) and was 74% oil. Production increased 16% sequentially with activity that included drilling seven net wells and completing nine net wells.
Subsequent to quarter-end, the Company completed the acquisition of more than 26,000 net acres (adjusted for acres acquired after the transaction was announced) in Howard County, Texas, for $991 million (subject to post- closing adjustments) and announced the signing of definitive agreements to acquire an additional 35,700 net acres in Howard and Martin Counties for $1.6 billion. The second set of transactions is expected to close in December and is expected to result in expanding the Company’s total Midland Basin position from 21,975 net acres at the end of the second quarter to approximately 83,750 net acres by year-end. The Company added a third rig to its Permian program with the close of the first acquisition and anticipates running four rigs by year-end.
Company-wide, the Company is gearing up for increased activity in the Permian Basin. The integration of the Rock Oil assets is going smoothly and the Company is actively relocating employees to develop and operate these assets. The Company also has its employees monitoring operations on the QStar assets where drilling recently commenced on a 3-well pad. Further, QStar recently completed a 9,700’ lateral well with an average 14-day production rate of approximately 1,830 Boe/d. At Sweetie Peck, the Company is conducting down-spacing tests to approximately 400’ in the Wolfcamp B and Lower Spraberry. Across the basin, the Company continues to bolt-on adjacent acreage positions, including approximately 1,300 net acres adjacent to the original Rock Oil position since the announcement of the acquisition, as well as negotiate trades with neighboring operators to maximize the potential for drilling 10,000’ laterals.
Going forward, the Company plans to primarily focus its capital program on Permian Basin activity where high oil content, high operating margins and continued top tier operational performance have the potential to drive substantial growth in cash flows.
Third quarter of 2016 Eagle Ford net production was 10.4 MMBoe (113,400 Boe/d), of which 8.0 MMBoe was operated and 2.5 MMBoe was third party operated. Consistent with the Company’s forecast, production declined approximately 4.9% sequentially related to declining natural gas volumes. During the quarter, the Company drilled three wells and completed 25 wells in the area. New completions were located in higher oil/lower natural gas areas. The Company expects to restart drilling activity in its operated Eagle Ford program in the first quarter of 2017 and expects to continue completing DUCs during the fourth quarter of 2016. The Company continues to employ co-development of the Lower and Upper Eagle Ford formations along with drilling longer laterals and enhanced completion designs.
The Company is in the process of marketing its third party operated Eagle Ford assets, including its ownership interest in related mid-stream assets, and anticipates completing the sale in the first quarter of 2017.
Third quarter of 2016 Rocky Mountain net production was 2.7 MMBoe (29,800 Boe/d) and was 81% oil. The Rocky Mountain region includes the Company’s Williston Basin and Powder River Basin assets. Regional production from only Divide County, North Dakota was approximately 0.9 MMBoe (9,350 Boe/d). During the quarter, the Company drilled five net wells and completed 26 net wells in Divide County, North Dakota. The majority of newly completed wells experienced delayed initial production resulting from downtime while the Company installed pumping units. The Company is currently operating one rig in the Williston Basin.
During the quarter, the Company completed the sale of certain non-core assets in the Rocky Mountain region and, subsequent to quarter-end, announced a definitive agreement for the sale of its Raven/Bear Den and other Williston Basin assets outside of Divide County, North Dakota. This sale is expected to close in early December 2016.
Full year 2016 guidance is revised as follows:
|Total capital spend (before acquisitions) ($MM)||$700|
|Total production (MMBoe)||55.3-56.0|
|LOE including ad valorem ($/Boe)||$3.60-3.65|
|Production taxes||~$1.00 or 5%|
|G&A (including approximately $21-23MM non-cash,|
|stock-based compensation expense) ($MM)||$128-130|
|Exploration before dry hole expenses ($MM)||$60-64|
|(this amount is a component of capital guidance)|
Fourth quarter of 2016 production is expected to range between 13.3 and 14.0 MMBoe. Fourth quarter production volumes and commodity mix will be affected by timing of the close date on the sale of Williston assets, which include Raven/Bear Den and associated production.
Total capital spend (before acquisitions) is a non-GAAP measure. The Company is unable to present a quantitative reconciliation of this forward-looking non-GAAP financial measure without unreasonable effort because acquisition costs are inherently unpredictable. Acquisition costs could be significant in future periods and would depend on a wide variety of factors outside the Company’s control. Accordingly, investors are cautioned not to place undue reliance on this information.
As of October 26, 2016
For the fourth quarter of 2016, the Company has commodity derivatives in place for approximately 70% of expected oil production, 75% of expected natural gas production and 55% of expected NGL production.
|OIL SWAPS||OIL COLLARS||NATURAL GAS SWAPS||NGL SWAPS|
|Volume/Average Price||Volume/Avg. Ceiling – Floor||Volume/Average Price||Volume/Average Price|
|4Q16||2,249/$59.03||881/$51.52 – $40.00||26,700/$3.34||1,888/$15.94|
|1Q17||1,574/$46.41||704/$54.17 – $45.00||28,222/$3.78||1,911/$19.12|
|2Q17||1,445/$46.44||636/$54.10 – $45.00||25,669/$4.00||1,762/$19.18|
|3Q17||1,340/$46.66||583/$54.05 – $45.00||23,657/$4.01||1,640/$19.26|
|4Q17||1,253/$46.35||540/$54.01 – $45.00||22,001/$3.98||1,539/$19.22|
Notes: The volumes above represent fixed swap and collar contracts the Company has in place through 4Q17. Volumes for 4Q16 include all commodity contracts for settlement any time during the fourth quarter of 2016; prices are weighted averages; natural gas contracts reflect regional contract positions and are no longer adjusted to a NYMEX equivalent; NGL prices are at Mt. Belvieu and reflect specific NGL components, 4Q16 includes ethane, propane, and butanes, and 2017 quarters include ethane, propane, butanes and gasoline.
THIRD QUARTER 2016 WEBCAST AND CONFERENCE CALL
Please join SM Energy management at 8:00 a.m. Mountain time/10:00 a.m. Eastern time Wednesday, November 2, 2016, for a discussion of third quarter financial and operating results via webcast (available live and for replay) on the Company’s website at www.sm-energy.com. Please reference the Third Quarter Earnings IR presentation available on the Company’s website.
Alternatively, you may join by telephone with the passcode 5999858 (applicable for live and replay calls) at:
Live – Domestic toll free/International: 877-303-1292/315-625-3086
Replay – Domestic toll free/International: 855-859-2056/404-537-3406
The call replay will be available approximately two hours after the call until November 16, 2016.