SM Energy Company’s (SM) second-quarter 2012 adjusted earnings of 9 cents per share decreased 90.1% from the year-ago earnings of 91 cents, due to lower price realizations. The results also came in below the Zacks Consensus Estimate of 23 cents.
Total revenue of $304.4 million was down 19.4% from $377.8 million in the prior-year quarter and missed the Zacks Consensus Estimate of $370 million. Oil, gas and natural gas liquid (NGL) production revenues contributed $312.6 million (down 6.4% year over year) to the total revenue.
The company’s second-quarter production came in at 555.7 million cubic feet equivalent per day (MMcfe/d), which is within the company’s guidance range of 549–593 MMcfe/d and up 27.2% from the year-ago level of 436.9 MMcfe/d.
SM Energy produced 309.2 million cubic feet per day (MMcf/d) of natural gas in the quarter, reflecting a 17.7% year-over-year improvement. Oil production also grew 27% year over year to 25.9 thousand barrels per day (MBbls/d). Natural gas liquids contributed 15.2 MBbls/d to the total volume, up 74.7% from the second quarter of 2011.
Including the effect of hedging, the average equivalent price per thousand cubic feet equivalent (Mcfe) was $6.51 compared with $7.89 in the year-ago period. Average realized prices (inclusive of hedging activities) were $3.02 per Mcf of natural gas, $80.52 per barrel of oil, and $39.44 per barrel of natural gas liquid, down nearly 39.7%, 4.6%, and 17.0% respectively, from the comparable quarter last year.
On the cost front, unit lease operating expense (:LOE) increased 8.3% year over year to 91 cents per Mcfe in the quarter. Transportation expenses increased substantially to 60 cents per Mcfe (from 42 cents in the year-ago period); general and administrative expenses were 62 cents per Mcfe (down 10.1%); while depletion, depreciation and amortization (DD&A) expenses increased 10.3% to $3.20 per Mcfe from the year-earlier level of $2.90 per Mcfe.
Net cash provided by operating activities improved to $222.2 million during the quarter from $213.3 million in the year-ago quarter. As of June 30, 2012, SM Energy had a cash balance of $0.2 million and long-term debt of $1,161.0 million, with a debt-to-capitalization ratio of 43.2%.
For the third quarter of 2012, SM Energy’s production forecast is in the range of 52 Bcfe to 55.5 Bcfe. The estimated LOE per Mcfe is 88 cents to 94 cents while DD&A is projected in the $3.20–$3.40 range.
For 2012, SM Energy has maintained its production forecast in the range of 210–217 Bcfe and capital spending at approximately $1,500 million.
Denver, Colorado-based SM Energy Company, previously known as St. Mary Land & Exploration Company, is an independent oil and gas company engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America.
We remain bearish on account of the depressed natural gas price environment. The company derives a significant portion of its operating revenues from natural gas, and may face near-term headwinds in this market from struggling commodity prices. Oil and gas companies like Stone Energy Corp’s (SGY) second-quarter results were also hurt by lower commodity prices.
Again, in terms of geographic diversification, SM Energy’s lack of exposure to the other refining region overseas weakens its competitive positioning, in our view. With the majority of its capacity located in North America, the company’s results are heavily tied to refining margins in a single market.
Apart from successful exploration activities, SM Energy also depends on property acquisitions to expand its resource base. The company may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.
Overall volatility in commodity prices, as well as possible delays in development plans due to permitting and environmental concerns, may also affect SM Energy’s results.
The company holds a Zacks #5 Rank, which is equivalent to a short-term Strong Sell rating.
Considering the fundamentals, we maintain an Underperform recommendation on the stock.
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