SM Energy Company’s (SM) third-quarter 2010 adjusted earnings of 31 cents per share exceeded the Zacks Consensus Estimate of 17 cents as well as the year-earlier profit of 23 cents on higher production and prices.
Third quarter total revenue of $226.9 million also surpassed the Zacks Consensus Estimate of $204 million and the year-earlier revenue of $185.8 million. Specifically, oil and gas production revenues contributed $197.4 million (up 29.3% year over year) to the total revenue.
Operational Performance
The company’s third-quarter production came in at 298.4 million cubic feet equivalent per day (MMcfe/d), up approximately 4% on an annualized basis, as well as at the top end of the 277–299 MMcfe/d guidance range.
The increase was mainly attributable to the company’s Eagle Ford Shale program, which posted impressive results. SM Energy also raised its production outlook for the full year to a range of 106.5–109 billion cubic feet equivalent (Bcfe) from the 104–108 Bcfe level.
Natural gas produced in the quarter was 17.9 billion cubic feet (Bcf), up 4.1% year over year. Oil production climbed 4% year over year to 1.6 million barrels (MMBbls) in the third quarter.
Including the effect of hedging, average equivalent price per thousand cubic feet (Mcf) was $7.51, compared with $6.86 in the year-ago period. Average realized prices (inclusive of hedging activities) were $5.81 per Mcf of natural gas and $64.28 per barrel of oil, up 17% and 3%, respectively, from the comparable quarter last year.
On the cost front, unit lease operating expense decreased 18% year over year to $1.06 per Mcfe. Transportation expenses were $0.18 per Mcfe (down 10% year over year); general and administrative expenses were $0.96 per Mcfe (up 22%); while depletion, depreciation and amortization expenses were up approximately 20% at $3.05 per Mcfe from the year-earlier level of $2.54 per Mcfe.
Operating cash flow improved to $130.1 million during the quarter from $99.9 million in the year-ago quarter. Net cash from operating activities was $148.2 million, up from the year-earlier level of $111.3 million.
At the end of the quarter, the company had a cash balance of $7.1 million and long-term debt of $275.4 million, representing a debt-to-capitalization ratio of 18.6%.
Outlook
SM Energy had a strong third quarter with production being at the higher end. The company maintained its full-year capital expenditure (capex) guidance at $871 million. We appreciate the company’s effort toward generating higher production volumes without increasing capex associated with lower cost expectations.
The company is increasing its focus on Eagle Ford, Bakken and Granite Wash plays. Development of the Eagle Ford Shale is an important part of SM Energy’s goal to increase stockholder value. We believe that the company’s emerging core portfolio is a positive catalyst for visible organic growth in the next several years.
However, we remain concerned about the company’s higher dependency on the success of the Eagle Ford play and its natural gas-weighted reserves. Hence, we retain our long-term Neutral recommendation for the stock.
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