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Can SM Energy (SM) Soar Further After Gaining 67.7% in 6 Months?

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Zacks Equity Research
·4 min read
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SM Energy Company SM shares have jumped 67.7% in the past six months compared with the industry’s 29.1% rise. While the upstream energy industry was grappling with coronavirus woes, SM Energy managed to navigate through the challenges. This Denver, CO-based company, with a market c­­­­­­ap of $689.7 million, is one of the fastest-growing shale producers.

The company beat the Zacks Consensus Estimate for earnings in all the trailing four quarters, delivering an earnings surprise of 70.6%, on average. It continues to benefit from its prolific Permian Basin resources.

Can It Retain Momentum?

The answer is yes and here’s why we think so:

SM Energy’s attractive hydrocarbon investments, balanced and diverse portfolio of proved reserves, and development drilling opportunities are expected to create long-term value for its shareholders. As such, we view SM Energy as one of the most attractive players in the exploration and production space.

Given this Zacks Rank #3 (Hold) company’s increasing focus on oil, specifically in the Permian Basin and Eagle Ford areas, we believe that it will be able to boost oil-weighted activity in the coming days. Additionally, the company holds meaningful leasehold positions in leading U.S. shale plays like South Texas & Gulf Coast, which will provide the company with many years of profitable drilling inventory. Importantly, its high-quality Howard County assets are a huge positive.

To navigate through the current market volatility, the company has decreased capital spending plan for full-year 2020 within $605-610 million. Notably, this expectation is 27% lower than the February guidance. Moreover, the company has a strong hedging position, which will enable it to cruise through the weak oil price environment. Also, despite continuing headwinds from the coronavirus pandemic, the company generated free cash flow of $63.7 million in the third quarter of 2020. This reflects massive strength in the company’s operations.

Notably, it provided its production guidance in the range of 123.5-126.2 barrels of oil equivalent per day (Boe/d) for 2020, of which 49% will likely be crude oil. In the Midland Basin, the company has plans for 70 net completions in 2020, of which it has achieved 50 in the year-to-date period. With top-tier well performance and efficiency, SM Energy is operating three rigs and two completion crews at the basin, wherein it has 82,000 net acres. In the South Texas region, it has 159,000 net acres, with one running rig and completion crew each. It intends to drill 12 net wells and complete four net wells at the site in 2020.

However, there are a few factors that are holding back the stock from reaching its complete potential. For example, at the third-quarter end, SM Energy’s debt and cash balance were $2,353 million and $10,000, respectively. High leverage of the upstream player is a cause of concern as it can restrict its financial flexibility. Its long-term debt-to-capitalization of 51.9% is much higher than the industry average of 36.8%.

Key Picks

Some better-ranked players in the energy space include Covanta Holding Corporation CVA, Ameresco, Inc. AMRC and Ring Energy, Inc. REI, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Covanta Holding’s bottom line for 2021 is expected to rise 93% year over year.

Ameresco’s bottom line for 2020 is expected to rise 21.7% year over year.

Ring Energy’s sales for 2021 are expected to rise 2.5% year over year.

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