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SM Energy (SM) Presents Encouraging Drilling Results, Up 5.2%

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·4 min read
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SM Energy Company SM jumped 5.2% yesterday, after it provided multiple positive operating and fundamental points in the J.P. Morgan 2021 energy conference.

The company intends to maximize free cash flow by 2025. Earlier, it decreased the full-year 2021 capital spending plan by 27% from the February guidance to $650-675 million. Next year, capital expenditure is expected to further decline and remain stable till 2025. Of the total 2021 capital spending plan, 90% will be used for drilling and completion activities.

Around 70% of the total capital will likely be utilized in the prolific Midland Basin, while the rest will go to South Texas. In the Midland Basin, the company has 82,000 net acres and is running three rigs with three completion crews. SM Energy’s well performance in the region is expected to be better than most of its peers. Its breakeven oil pricing in the area is estimated within $12-$31 per barrel NYMEX.

The company has around 155,000 net acres in the South Texas, where it is running two rigs. Its transportation costs in the region are expected to drop 25 cents per thousand cubic feet from mid-2021. Furthermore, it will likely witness an additional reduction of 35 cents per thousand cubic feet by mid-2023. This will likely give SM Energy’s bottom line an upward thrust. Moreover, it has presented encouraging results from the Austin Chalk, wherein breakeven oil price is expected within $12-$28 per barrel NYMEX. Markedly, the wells in the region are producing around 50-80% liquids, which will boost investor value.

SM Energy has a strong hedging position, which will provide it with cash flow stability. For the second half of the year, the company hedged 75-80% expected oil volumes at $40.66 per barrel to the West Texas Intermediate. Also, it hedged 85% of its second half-2021 estimated natural gas volumes. Although the hedges provide lower risk from volatile commodity prices, the company is expected to incur millions of hedging losses due to high current commodity prices. This can put a small dent in its potential cash flow generation.

Moving on from the hedging losses in second half-2021, the company is likely to generate massive cash flow over a five-year period, which can fund its debt reduction program. The company is retiring or repurchasing almost $400 million principal amount from 2022 and 2024 outstanding senior notes. At first quarter-end, it had liquidity of $965 million and $2,321.7 million in net debt.

Price Performance

SM Energy’s stock has increased 21.7% in the month-to-date period compared with 8.4% growth of the industry.

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Zacks Investment Research

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Zacks Rank & Stocks to Consider

The company currently has a Zacks Rank #3 (Hold). Some better-ranked players in the energy space include PDC Energy, Inc. PDCE, Pembina Pipeline Corporation PBA and PHX Minerals Inc. PHX, each having a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PDC Energy’s bottom line for 2021 is expected to jump 129.1% year over year.

Pembina Pipeline’s bottom line for 2021 is expected to rise 42.2% year over year.

PHX Minerals’ bottom line for 2021 is expected to surge 180% year over year.

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SM Energy Company (SM) : Free Stock Analysis Report

PDC Energy, Inc. (PDCE) : Free Stock Analysis Report

Pembina Pipeline Corp. (PBA) : Free Stock Analysis Report

PHX Minerals Inc. (PHX) : Free Stock Analysis Report

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