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SM Energy (SM) Incurs Narrower-than-Expected Loss in Q4

Zacks Equity Research

Independent oil and Gas Company SM Energy Company SM posted fourth-quarter 2016 adjusted loss of 31 cents per share, narrower than the Zacks Consensus Estimate of 39 cents. Moreover, the quarterly loss was significantly narrower than the 90 cents per share incurred in the year-ago quarter. This narrower-than-expected loss is mainly attributable to the reduced operating expenses incurred in the fourth quarter.

Total revenue was $379.9 million in the quarter, up 25% from $303.7 million in the prior-year quarter and also up from the Zacks Consensus Estimate of $370 million.

Operational Performance

The company’s fourth-quarter production came in at 145.6 thousand barrels of oil equivalent per day (MBoe/d), down 10% from the year-ago level of 162.1 MMBoe/d. The decline was mainly attributed to reduced activity in the Eagle Ford shale and asset sales.  

SM Energy produced 382.7 million cubic feet per day (MMcf/d) of natural gas in the quarter, down 12% year over year. Oil production decreased 8% year over year to 43.9 thousand barrels per day (MBbls/d). Natural gas liquids contributed 37.9 MBbls/d to the total volume, down 9% from the fourth-quarter 2015.

Due to hedging, the average equivalent price per barrel of oil equivalent (Boe) was $27.59 compared with $28.50 in the year-ago quarter. Including hedging activities, the average realized price of natural gas increased 8% year over year to $3.21 per thousand cubic feet (Mcf) and average realized prices of oil fell 12% to $48.96 per barrel, whereas average realized prices of natural gas liquid was up by 8% and amounted to $16.92 per barrel.

On the cost front, unit lease operating expenses (LOE) decreased 5% year over year to $3.67 per Boe. Transportation expenses, however, increased to $6.39 per Boe from $6.10 per Boe in the year-ago period. General and administrative expenses rose by 10% to $2.49 per Boe from the prior-year level of $2.26, while depletion, depreciation and amortization (DD&A) expenses were down 20% to $12.81 per Boe from the year-ago level of $16.10.

Liquidity

Net cash from operating activities decreased to $137.8 million during the quarter from $193.5 million in the year-ago quarter. As of Dec 31, 2016, SM Energy had a cash balance of $9.37 million and long-term debt of $2,897.6 million, with a debt-to-capitalization ratio of 53.7% compared with the 61 % figure recorded in the preceding quarter.

Operating expenses

Operating expenses amounted to $664.3 million in the fourth quarter as against $809.3 million in the year-ago quarter reflecting a decrease of around 18%. There was a significant drop in the exploration expenses which stood at $23.7 million in the reported quarter as against $37.9 million in the year-ago quarter.

Year-end Reserves

Year end proved reserves of 2016 amounted to 396 MMBoe as against 471 MMBoe in 2015 reflecting a decline rate of 16%.

Fourth-quarter price performance

In the fourth quarter, the Zacks categorized US Oil and Gas Production & Exploration industry has recorded growth of 0.6%. However, shares of SM Energy Company have significantly underperformed the industry by declining around 11.4%.

Guidance

SM Energy estimates production for 2017 in the range of 40–43 MMBoe. Production for the first-quarter 2017 is projected between 11–11.4 MMBoe. The estimated LOE per Boe is $4. The company has its capital expenditure budget for 2017 at $875 million.

Zacks Rank & Key Picks

SM Energy currently has a Zacks Rank #3 (Hold).

Some better-ranked players in the industry include Range Resources Corp. RRC, Ultra Petroleum Corp. UPLMQ and Bonanza Creek Energy, Inc BCEI.

While Range Resources and Ultra Petroleum sport a Zacks Rank #1 (Strong Buy), Bonanza Creek Energy carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks Rank #1 (Strong Buy) stocks here.

Range Resources posted a positive earnings surprise of 14.81% in the last reported quarter.

Ultra Petroleum reported a positive earnings surprise of 100% in the previous quarter.

Bonanza Creek Energy posted a negative earnings surprise of 11.43% in the last quarter.

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