SM Energy Reports Third Quarter 2020 Results, Generating Cash Flow And Reducing Debt

DENVER, Oct. 29, 2020 /PRNewswire/ -- SM Energy Company (the "Company") (NYSE: SM) today announced operating and financial results for the third quarter 2020 and provided updates to its 2020 guidance.

During the third quarter of 2020, the Company continued its focus on the following priorities:

• Capital discipline. Capital expenditures demonstrated continued capital efficiencies as well as timing of certain activity. Capital expenditures of $109.6 million adjusted for increased capital accruals of $11.5 million totaled $121.1 million.
• Generating significant cash flows. Third quarter net cash provided by operating activities of $201.6 million before net change in working capital of $16.8 million totaled $184.8 million. The Company generated free cash flow of $63.7 million (a non-GAAP measure defined and reconciled below). Free cash flow for the first nine months of 2020 was $172.1 million and on a trailing 12-month basis was $233.1 million, or a 128% yield to market capitalization of approximately $182 million as of September 30, 2020.
• Absolute debt reduction. The outstanding principal amount of long-term debt was reduced by $106.5 million, as free cash flow was used to repurchase certain unsecured senior notes due 2022 and 2024 at market rates. Net debt-to-Adjusted EBITDAX was 2.4 times at quarter-end (a non-GAAP measure defined and reconciled below).
• Reducing 2020 capital expenditures. 2020 capital expenditure guidance is further reduced and narrowed to $605-610 million. Compared with original 2020 guidance at the mid-point, capital expenditure guidance is reduced 27% while production remains in-line.

Chief Executive Officer Jay Ottoson comments: "Exceptional third quarter results are due to continued capital discipline, aggressive cost management, better than expected well performance and adherence to strict financial objectives to generate free cash flow and reduce absolute debt. The entire SM Energy team is working diligently toward our common 2020 goals and objectives and we congratulate our employees on our success year-to-date, especially during a particularly challenging time.

"As we look ahead, we intend to stay-the-course and continue to prioritize generating free cash flow and reducing leverage."

THIRD QUARTER 2020 RESULTS
PRODUCTION, REALIZED PRICES AND CERTAIN OPERATING COSTS

• Total production volumes were down 6% compared with the same period in 2019 and up 4% sequentially. Production during the quarter was positively affected by South Texas Austin Chalk well performance exceeding expectations and reduced flaring in the Midland Basin.
• Total production volumes of 35.2 MMBoe for the first nine months of 2020 were relatively flat with the same period in 2019.
• Benchmark pricing for the quarter included NYMEX WTI oil at $40.93/Bbl, NYMEX Henry Hub natural gas at $1.98/MMBtu and Hart Composite OPIS NGLs at $19.13/Bbl.
• The average realized price per Boe of $24.28 was down 23% compared with the same period in 2019 yet up 60% sequentially as commodity prices came off second quarter lows. Including the effect of realized hedges, the average realized price per Boe was $30.33, resulting in approximately $70.3 million of realized net hedge gains for the quarter.
• Lease operating expenses of $3.65 per Boe were down 23% compared with the same period in 2019 and up 11% sequentially. Lower year-over-year costs are the result of aggressive cost management, while the sequential increase reflects additional workover expense. Transportation costs of $3.11 per Boe were down 22% from the same period in 2019 and nearly flat sequentially. Transportation charges year-over-year benefit from a lower proportion of production from South Texas, where transportation costs are higher, as well as a relative increase in production from the Austin Chalk, which has lower transportation costs per Boe.
• Largely as a result of cost management and hedge gains, the operating margin per Boe for the first nine months of 2020 was up 5% compared with the first nine months of 2019, despite significantly lower benchmark commodity prices.

For additional operating metrics and regional detail, please see the Financial Highlights section below and the accompanying 3Q20 slide deck.

NET LOSS, LOSS PER SHARE AND NET CASH PROVIDED BY OPERATING ACTIVITIES

Third quarter 2020 net loss was ($98.3) million, or ($0.86) per diluted common share, which compared with net income of $42.2 million, or $0.37 per diluted common share, in the same period in 2019. The current period included a $63.9 million net derivative loss, while the prior year period included a $100.9 million net derivative gain. For the first nine months of 2020, net loss was ($599.4) million, or ($5.28) per diluted common share, which compares with a loss of ($0.76) per diluted common share in the same period in 2019.

Third quarter 2020 net cash provided by operating activities of $201.6 million before net change in working capital of $16.8 million totaled $184.8 million, which was down ($28.1) million, or 13%, from $212.8 million in the comparable prior year period. The decline in cash flow before the net change in working capital was primarily due to the 9% decline in price per Boe after the effect of realized hedge gains and the 6% decline in production, partially offset by lower costs per unit. For the first nine months of 2020, net cash provided by operating activities of $534.1 million before net change in working capital of $40.4 million totaled $574.5 million, up 1% from the same period in 2019.

ADJUSTED EBITDAX, ADJUSTED NET INCOME AND NET DEBT-TO-ADJUSTED EBITDAX

The following paragraphs discuss non-GAAP measures including Adjusted EBITDAX, adjusted net loss, adjusted net loss per diluted share and net debt-to-Adjusted EBITDAX. Please reference the definitions and reconciliations of these measures to the most directly comparable GAAP financial measures at the end of this release.

Third quarter 2020 Adjusted EBITDAX was $232.5 million, down $25.3 million, or 10%, from $257.8 million in the same period in 2019. The decrease in Adjusted EBITDAX was due to lower realized prices and production, partially offset by lower costs per unit. For the first nine months of 2020, Adjusted EBITDAX was $720.0 million, up 2% from $707.2 million for the first nine months of 2019.

Third quarter 2020 adjusted net loss was ($5.5) million, or ($0.05) per diluted common share, which compares with adjusted net loss of ($12.1) million, or ($0.11) per diluted common share, for the same period in 2019.  For the first nine months of 2020, adjusted net loss was ($28.5) million, or ($0.25) per diluted common share, compared with an adjusted net loss of ($48.5) million, or ($0.43) per diluted common share, in the first nine months of 2019.

At September 30, 2020, net debt-to-Adjusted EBITDAX was 2.4 times.

FINANCIAL POSITION, LIQUIDITY AND CAPITAL EXPENDITURES

On September 30, 2020, the outstanding principal amount of the Company's long-term debt was $2.42 billion, down from $2.77 billion at year-end 2019. Long-term debt was comprised of $1.73 billion in unsecured senior notes, $446.7 million in secured senior notes, $65.5 million in secured senior convertible notes, plus $178.0 million drawn on the Company's senior secured revolving credit facility.

On September 30, 2020, the Company's borrowing base and commitments under its senior secured revolving credit facility were $1.1 billion. The Company's available liquidity was $880 million, which includes $178.0 million drawn and a $42 million letter of credit. The cash balance was approximately zero. The Company expects to complete its fall redetermination process in November 2020.

Capital expenditures before capital accruals for the third quarter of 2020 were $121.1 million. During the third quarter 2020, the Company drilled 19 net wells and added 24 net flowing completions. For the nine months of 2020 the Company drilled 72 net wells and added 54 net flowing completions.

COMMODITY DERIVATIVES

Commodity hedge positions as of September 30, 2020:

• Approximately 90%+ of expected 4Q20 oil production is hedged to WTI. The average floor price on collars is $55/Bbl and the average price on swaps is $57/Bbl. Approximately 18 MMBbls of 2021 oil production is hedged to WTI. The average floor price on collars is approximately $49/Bbl and the average price on swaps is approximately $40/Bbl.
• Approximately 85-90% of expected 4Q20 Midland Basin oil production basis is hedged to the local price point at $(0.38)/Bbl.
• Approximately 40% of expected 4Q20 natural gas production is hedged at an average price of $2.39/MMBtu to HSC, and approximately 65% of expected 4Q20 Midland natural gas production is hedged at an average price of $1.21/MMBtu to WAHA.
• NGL hedges are by individual product and include only propane.

A detailed schedule of these and other hedge positions are provided in the 3Q20 accompanying slide deck.

GUIDANCE FULL YEAR 2020:

• Capital expenditures: $605-610 million, further reduced to reflect continued capital efficiency and timing. Fourth quarter 2020 is expected to range between $203-208 million, which will include the addition of a second completions crew in the Midland Basin and a partial quarter crew in South Texas.  Capital will include costs associated with wells that will be turned-in-line in January 2021.
• Production: 45.2-46.2 MMBoe, or 123.5-126.2 MBoe/d, at 49% oil. Fourth quarter 2020 is expected to range between 10.0-11.0 MMBoe, or 109-120 MBoe/d, at 48% oil.
• G&A: ~$110 million including approximately $20 million non-cash compensation.
• Exploration/Capitalized overhead: ~$40 million.
• LOE: ~$4.00 significantly reduced due to cost reductions, specifically faster connections to the electric grid, and fewer workovers.
• Transportation: $3.10-$3.30, unchanged.
• Production and ad valorem taxes: ~4.5% of pre-hedge revenue + ~ $0.40. Approximately $1.40 combined.
• DD&A: $17-$18/Boe.

SCHEDULE FOR THIRD QUARTER REPORTING
October 29, 2020 - In conjunction with this release, the Company posts to its website a pre-recorded webcast discussion, a written transcript of the webcast, and an associated IR presentation. Please visit ir.sm-energy.com.

October 30, 2020 – Please join SM Energy management at 8:00 a.m. Mountain time/10:00 a.m. Eastern time for the third quarter 2020 financial and operating results Q&A session. This discussion will be accessible via webcast (available live and for replay) on the Company's website at ir.sm-energy.com or by telephone. In order to join the live conference call, please register at the link below for dial-in information.

• Live Conference Call Registration: http://www.directeventreg.com/registration/event/7275226
• Replay (conference ID 7275226) - Domestic toll free/International: 800-585-8367/416-621-4642

The call replay will be available approximately one hour after the call and until November 6, 2020.

UPCOMING CONFERENCE PARTICIPATION

• November 18, 2020 - Stephens Annual Investment Conference 2020. President and Chief Operating Officer Herb Vogel will be present at 11:00 a.m. Eastern time. This event will be webcast, accessible from the Company's website, and available for replay for a limited period. An investor presentation for this event will be posted to the Company's website before market open on November 18, 2020.
• November 30, 2020. Bank of America Securities 2020 Leveraged Finance Virtual Conference. EVP and Chief Financial Officer Wade Pursell will present at 12:00 p.m. Eastern time. This event will be webcast, accessible from the Company's website, and available for replay for a limited period. An investor presentation for this event will be posted to the Company's website before market open on November 30, 2020.

FORWARD LOOKING STATEMENTS
This release contains forward-looking statements within the meaning of securities laws. The words "assumes," "anticipate," "estimate," "expect," "forecast," "generate," "guidance," "implied," "maintain," "plan," "project,"  "objectives," "outlook," "sustainable," "target," "will" and similar expressions are intended to identify forward-looking statements.  Forward-looking statements in this release include, among other things, certain guidance for the full year and fourth quarter 2020, including capital expenditures, production, operating costs and DD&A; and, the Company's 2020 goals, which include generating free cash flow and reducing leverage. These statements involve known and unknown risks, which may cause SM Energy's actual results to differ materially from results expressed or implied by the forward-looking statements. Future results may be impacted by the risks discussed in the Risk Factors section of SM Energy's most recent Annual Report on Form 10-K, as such risk factors may be updated from time to time in the Company's other periodic reports filed with the Securities and Exchange Commission, specifically the third quarter 2020 Form 10-Q.  The forward-looking statements contained herein speak as of the date of this release.  Although SM Energy may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so, except as required by securities laws.

ABOUT THE COMPANY
SM Energy Company is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and NGLs in the state of Texas.  SM Energy routinely posts important information about the Company on its website. For more information about SM Energy, please visit its website at www.sm-energy.com.

SM ENERGY INVESTOR CONTACT
Jennifer Martin Samuels, [email protected], 303-864-2507

DEFINITIONS OF NON-GAAP MEASURES AS CALCULATED BY THE COMPANY
The following non-GAAP measures are presented in addition to financial statements as the Company believes these metrics and performance measures are widely used by the investment community, including investors, research analysts and others, to evaluate and compare investments among upstream oil and gas companies in making investment decisions or recommendations.  These measures, as presented, may have differing calculations among companies and investment professionals and may not be directly comparable to the same measures provided by others.  A non-GAAP measure should not be considered in isolation or as a substitute for the related GAAP measure or any other measure of a company's financial or operating performance presented in accordance with GAAP.  A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP measure or measures is presented below.  These measures may not be comparable to similarly titled measures of other companies.

Adjusted EBITDAX:  Adjusted EBITDAX is calculated as net income (loss) before interest expense, interest income, income taxes, depletion, depreciation, amortization and asset retirement obligation liability accretion expense, exploration expense, property abandonment and impairment expense, non-cash stock-based compensation expense, derivative gains and losses net of settlements, gains and losses on divestitures, gains and losses on extinguishment of debt, and certain other items.  Adjusted EBITDAX excludes certain items that the Company believes affect the comparability of operating results, including items that are generally non-recurring in nature or whose timing and/or amount cannot be reasonably estimated. Adjusted EBITDAX is also important as it is considered among financial covenants under the Company's Credit Agreement, a material source of liquidity for the Company.  Please reference the Company's 2019 Form 10-K and third quarter 2020 Form 10-Q for discussion of the Credit Agreement and its covenants.

Adjusted net loss:  Adjusted net loss excludes certain items that the Company believes affect the comparability of operating results, including items that are generally non-recurring in nature or whose timing and/or amount cannot be reasonably estimated.  These items include non-cash and other adjustments, such as derivative gains and losses net of settlements, impairments, net (gain) loss on divestiture activity, gains and losses on extinguishment of debt, and accruals for non-recurring matters.

Free cash flow: Free cash flow is calculated as net cash provided by operating activities before net change in working capital less capital expenditures before increase (decrease) in capital expenditure accruals and other.

Free cash flow yield to market capitalization: Free cash flow yield to market capitalization is calculated as Free cash flow (defined above) divided by market capitalization.

Net Debt: The total principal amount of outstanding senior secured notes and senior unsecured notes plus amounts drawn on the revolving credit facility (also referred to as total funded debt) less cash and cash equivalents.

Net debt-to-Adjusted EBITDAX:  Net debt-to-Adjusted EBITDAX is calculated as Net Debt (defined above) divided by Adjusted EBITDAX (defined above).  A variation of this calculation is a financial covenant under the Company's Credit Agreement for its revolving credit facility beginning in the fourth quarter of 2018.

SOURCE SM Energy Company

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