SM Energy Company (SM) reported second-quarter 2010 earnings of 16 cents per share, beating the Zacks Consensus Estimate of 15 cents primarily on better-than-expected production volume. However, the second-quarter result was well below the year-earlier earnings of 24 cents due to higher depreciation, depletion and amortization (DD&A) and general and administrative (G&A) expenses.
Total revenue increased by approximately 3% year over year to $211.7 million in the quarter, surpassing the Zacks Consensus Estimate of $194 million.
Operational Performance
Second-quarter’s production of 276 million cubic feet equivalent per day (MMcfe/d) fell 11% on an annualized basis, but was at the top end of the 253–274 MMcfe/d range guided by the company attributable to better-than-expected oil volumes. The company also increased its full-year production guidance to 284–296 MMcfe/d from 267–284 MMcfe/d.
Of the total production, gas was approximately 66% and the rest was oil. Natural gas produced in the quarter was 16.7 billion cubic feet (Bcf), down 9% year over year. Oil production was 1.4 million barrels (MMBbls), down 14% from the year-earlier quarter.
Including the effect of hedging, average equivalent price per thousand cubic feet (Mcf) was $7.36, up 10% from the year-ago realization. Average realized prices (inclusive of hedging activities) were $5.59 per Mcf of natural gas and $65.17 per barrel of oil, up 8% and 15%, respectively, from the comparable quarter last year.
On the costs front, unit lease operating expense decreased 9% year over year to $1.15 per Mcfe, which was below the company’s guidance of $1.24 to $1.32 per Mcfe, due to the divestiture of higher per unit cost assets. Transportation expenses were $0.20 per Mcfe, up 25% year over year. G&A expenses were $1.01 per Mcfe, slightly above the guidance range. DD&A expenses were up approximately 27% at $3.17 per Mcfe from the year-earlier level of $2.49 per Mcfe, which was well above the guidance range $2.90 to $3.10 per Mcfe.
Discretionary cash flow was $119.2 million during the quarter, up approximately 1.2% year over year. Net cash from operating activities was $116.3 million, down from the year-earlier level of $116.6 million.
At the end of the quarter, the company had cash balance of $10.2 million and long-term debt of $271.2 million, representing a debt-to-capitalization ratio of 19%.
Outlook
SM Energy had a strong second-quarter with production being above expectations. The company increased its full-year capital expenditure (capex) guidance to $871 million from $725 million previously. SM Energy is focusing its increased expenditure on the company’s Eagle Ford, Bakken and Granite Wash plays. For the non-operated Eagle Ford, Anadarko is currently operating 6 rigs on the joint venture acreage, only 2 of which were in SM Energy’s original budget.
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, a 20% increase in 2010 capex guidance, with only 5% rise in volumes is a concern. Hence, we retain our Zacks #3 Rank (Hold) for the stock.
Total revenue increased by approximately 3% year over year to $211.7 million in the quarter, surpassing the Zacks Consensus Estimate of $194 million.
Operational Performance
Second-quarter’s production of 276 million cubic feet equivalent per day (MMcfe/d) fell 11% on an annualized basis, but was at the top end of the 253–274 MMcfe/d range guided by the company attributable to better-than-expected oil volumes. The company also increased its full-year production guidance to 284–296 MMcfe/d from 267–284 MMcfe/d.
Of the total production, gas was approximately 66% and the rest was oil. Natural gas produced in the quarter was 16.7 billion cubic feet (Bcf), down 9% year over year. Oil production was 1.4 million barrels (MMBbls), down 14% from the year-earlier quarter.
Including the effect of hedging, average equivalent price per thousand cubic feet (Mcf) was $7.36, up 10% from the year-ago realization. Average realized prices (inclusive of hedging activities) were $5.59 per Mcf of natural gas and $65.17 per barrel of oil, up 8% and 15%, respectively, from the comparable quarter last year.
On the costs front, unit lease operating expense decreased 9% year over year to $1.15 per Mcfe, which was below the company’s guidance of $1.24 to $1.32 per Mcfe, due to the divestiture of higher per unit cost assets. Transportation expenses were $0.20 per Mcfe, up 25% year over year. G&A expenses were $1.01 per Mcfe, slightly above the guidance range. DD&A expenses were up approximately 27% at $3.17 per Mcfe from the year-earlier level of $2.49 per Mcfe, which was well above the guidance range $2.90 to $3.10 per Mcfe.
Discretionary cash flow was $119.2 million during the quarter, up approximately 1.2% year over year. Net cash from operating activities was $116.3 million, down from the year-earlier level of $116.6 million.
At the end of the quarter, the company had cash balance of $10.2 million and long-term debt of $271.2 million, representing a debt-to-capitalization ratio of 19%.
Outlook
SM Energy had a strong second-quarter with production being above expectations. The company increased its full-year capital expenditure (capex) guidance to $871 million from $725 million previously. SM Energy is focusing its increased expenditure on the company’s Eagle Ford, Bakken and Granite Wash plays. For the non-operated Eagle Ford, Anadarko is currently operating 6 rigs on the joint venture acreage, only 2 of which were in SM Energy’s original budget.
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, a 20% increase in 2010 capex guidance, with only 5% rise in volumes is a concern. Hence, we retain our Zacks #3 Rank (Hold) for the stock.
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