SM Energy Company’s (SM) fourth-quarter 2010 adjusted earnings of 46 cents per share exceeded the Zacks Consensus Estimate of 30 cents as well as the year-earlier profit of 31 cents on higher production and prices.
Fourth quarter total revenue of $294.1 million surged 21.5% from $242 million in the prior-year quarter. Specifically, oil and gas production revenues contributed $250.2 million (up 33.4% year over year) to the total revenue.
Operational Performance
The company’s fourth-quarter production came in at 344.4 million cubic feet equivalent per day (MMcfe/d), up 21.3% year over year and 15% sequentially, and surpassed its target range of 305–330 MMcfe/d. The increase was mainly attributable to the company’s Eagle Ford Shale program, which posted impressive results.
SM Energy produced 224.9 million cubic feet per day (MMcf/d) natural gas in the quarter, reflecting 21.4% year-over-year growth. Oil production also climbed 21.3% year over year to 19.9 thousand barrels per day (MMBbls/d) in the quarter.
Including the effect of hedging, average equivalent price per thousand cubic feet (Mcf) was $7.98, compared with $7.69 in the year-ago period. Average realized prices (inclusive of hedging activities) were $6.00 per Mcf of natural gas and $70.30 per barrel of oil, down 1% but up 9.1%, respectively, from the comparable quarter last year.
On the cost front, unit lease operating expense (LOE) decreased approximately 19% year over year to $1.06 per Mcfe in the quarter. Transportation expenses were 22 cents per Mcfe (up 10% year over year); general and administrative expenses were $1.00 per Mcfe (up 25%); while depletion, depreciation and amortization (DD&A) expenses increased approximately 4% to $2.99 per Mcfe from the year-earlier level of $2.88 per Mcfe.
Liquidity
Operating cash flow improved to $176.4 million during the quarter from $144.2 million in the year-ago quarter. Net cash from operating activities was $78.7 million, down from the year-earlier level of $83.1 million.
At the end of the quarter, the company had a cash balance of $5.1 million and long-term debt of $323.7 million with debt-to-capitalization ratio of 21% (versus 18.6% in the preceding quarter).
Guidance
SM Energy expects its production to range from 30–33 billion cubic feet equivalent (Bcfe) for first quarter 2011, and 128–132 Bcfe for the full year. LOE expense will likely be in the range of $1.10–1.15 per Mcfe and $1.07–$1.12 per Mcfe for the first quarter and full-year 2011, respectively. The company also expects DD&A to remain in the $2.95–3.15 range for both the first quarter as well as full-year 2011.
Earlier in January 2011, SM Energy set its capital budget of $1.04 billion for 2011, with $830 million (about 80% of the annual capital budget) allotted for drilling. Of the drilling budget, 60% or $500 million will be used toward Eagle Ford Shale and 20% or $170 million in the Bakken and Three Forks intervals in the Williston Basin.
Outlook
SM Energy is increasing its focus on its 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 fourth-quarter 2010 earnings piggy-backing on a record production level.
SM Energy holds a Zacks #3 Rank, which is equivalent to the short-term Hold rating.
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