SM Energy Company’s (SM) first-quarter 2011 adjusted earnings of 42 cents per share exceeded the Zacks Consensus Estimate of 40 cents on higher production. However, the quarterly result was lower than the year-earlier profit of 45 cents.
Total revenue of $315.3 million fell 12% from $360.1 million in the prior-year quarter, but comfortably surpassed the Zacks Consensus Estimate of $255 million. Oil and gas production revenues contributed $276.3 million (up 30% year over year) to the total revenue.
Operational Performance
The company’s first-quarter production came in at 401.4 million cubic feet equivalent per day (MMcfe/d), up 40% year over year, and ahead of management’s target range of 333–366 MMcfe/d. The increase was mainly attributable to the company’s Eagle Ford Shale program, which posted impressive results.
SM Energy produced 241.5 million cubic feet per day (MMcf/d) natural gas in the quarter, reflecting a 31% year-over-year growth. Oil production also climbed 17% year over year to 19.8 thousand barrels per day (MBbls/d). Natural gas liquid contributed 3.8 MBbls/d to the total volume.
Including the effect of hedging, average equivalent price per thousand cubic feet (Mcf) was $7.43, compared with $8.38 in the year-ago period. Average realized prices (inclusive of hedging activities) was $5.04 per Mcf of natural gas and $75.07 per barrel of oil, down 26% but up 12%, respectively, from the comparable quarter last year.
On the cost front, unit lease operating expense (LOE) decreased approximately 21% year over year to 92 cents per Mcfe in the quarter. Transportation expenses increased substantially to 41 cents per Mcfe (from 16 cents in the year-ago period); general and administrative expenses were 72 cents per Mcfe (down 21%); while depletion, depreciation and amortization (DD&A) expenses decreased 3% to $2.92 per Mcfe from the year-earlier level of $3.02 per Mcfe.
Liquidity
Operating cash flow improved to $161.4 million during the quarter from $133.2 million in the year-ago quarter. At the end of the quarter, the company had a cash balance of $191.3 million and long-term debt of $627.9 million with debt-to-capitalization ratio of 34%.
Guidance
SM Energy expects its production to range from 396–429 MMcfe/d for the second quarter of 2011, and 400–416 MMcfe/d for the full year. LOE expense will likely be in the range of 98 cents to $1.03 per Mcfe and 95 cents to $1.00 per Mcfe for the second quarter and full year, respectively. The company also expects DD&A to remain in the $2.90–$3.10 range for both the second quarter as well as full year.
SM Energy raised its capital budget to $1,080 billion from its prior expectation of $1.04 billion for 2011.
Outlook
SM Energy is increasing its focus on Eagle Ford, Bakken and Granite Wash plays. Development of the Eagle Ford Shale is an important part of the company’s goal to increase stockholder value. We believe that the company’s emerging core portfolio is a positive catalyst for visible organic growth over the next several years.
However, our long-term Neutral recommendation stems from the company’s natural gas-weighted reserves. The company derives a significant portion of its operating revenues from natural gas. Consequently, it may face near-term headwinds in this sector on the back of struggling commodity prices.
The company’s competitor, Range Resources Corporation (RRC) also reported better-than-expected first-quarter 2011 earnings piggy-backing on a record production level.
We currently retain our long-term Neutral recommendation on SM Energy. The company holds a Zacks #3 Rank, which is equivalent to the short-term Hold rating.
RANGE RESOURCES (RRC): Free Stock Analysis Report
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