SM Beats Earnings on Record Output (CHK) (EPL) (HNR) (SM)

Independent oil and gas company SM Energy Company’s (SM) first-quarter 2013 adjusted earnings of 82 cents per share comfortably beat the Zacks Consensus Estimate of 51 cents and also increased 70.8% from the year-ago earnings of 48 cents on record production.

Total revenue was $484.2 million in the quarter, showing an improvement of 28.3% from $377.4 million in the prior-year quarter. The revenue also surpassed the Zacks Consensus Estimate of $452.0 million.

Operational Performance

The company’s first-quarter production came in at 115.0 thousand barrels of oil equivalent per day (MBoe/d), which is at the upper end of its forecasted 110–116 MBoe/d. It also showed an improvement of 23.9% from the year-ago level of 92.8 MBoe/d. The outperformance was mainly attributable to the leasehold expansion in New ventures along with acreage additions in its East Texas and the Powder River Basin.

SM Energy produced 358.2 million cubic feet per day (MMcf/d) of natural gas in the quarter, up almost 14% year over year. Oil production also grew 26.1% year over year to 34.8 thousand barrels per day (MBbls/d). Natural gas liquids contributed 20.5 MBbls/d to the total volume, up 60.2% from the first quarter of 2012.

Including the effect of hedging, the average equivalent price per barrel of oil equivalent (Boe) was $46.51 compared with $43.76 in the year-ago period. Average realized prices (inclusive of hedging activities) were $3.90 per thousand cubic feet (Mcf) of natural gas (up 8.3% from the comparable quarter last year), $91.30 per barrel of oil (up 5.7%), and $37.80 per barrel of natural gas liquid (down 12.1%).

On the cost front, unit lease operating expense (LOE) increased 13.3% year over year to $5.28 per Boe in the quarter. Transportation expenses increased to $4.58 per Boe (from $3.38 per Boe in the year-ago period); general and administrative expenses were $3.12 per Boe (down 6.3%); while depletion, depreciation and amortization (DD&A) expenses decreased 4.3% to $19.20 per Boe from the year-earlier level of $20.07 per Boe.

Liquidity

Net cash provided by operating activities decreased to $282.3 million during the quarter from $188.1 million in the year-ago quarter. As of Mar 31, 2013, SM Energy had a cash balance of $0.087 million and long-term debt of $1,530.0 million, with a debt-to-capitalization ratio of 51.6%.

Guidance

For the second quarter of 2013, SM Energy’s production forecast is 10.5 MMBoe/d to 11 MMBoe/d. The estimated LOE per Boe is $5.00 to $5.25 while DD&A is projected in the $19.20–$20.40 range.

SM Energy’s 2013 production forecast is in the band of 42.8-44.5 MMBoe/d. Given the current tepid gas price scenario, the company intends to increase the liquids composition in its portfolio, like its peer Chesapeake Energy Corp. (CHK). As such, liquids are expected to comprise 50% of production by the end of 2013.

The company also remains upbeat on its New Ventures plan. The program has already taken additional acreage in the Permian Basin and in East Texas. These resources have significant potential to boost its oil-weighted inventory.

Zacks Rank

SM Energy currently retains a Zacks Rank #2 (Buy). However, there are other Zacks Ranked #1 (Strong Buy) stocks in the oil and gas industry like Harvest Natural Resources Inc. (HNR) and EPL Oil & Gas, Inc. (EPL) that appear more attractive in the short term.