SM - SM Energy: Solid Production And Cost Performance For Q1 2023

2023-05-30 14:47:55 ET

Summary

• SM Energy Company is now projected to generate $374 million in free cash flow in 2023 at current strip.
• It performed well in Q1 2023 both from a production standpoint and a cost standpoint.
• I have slightly increased my expectations around its 2023 production to 148,000 BOEPD.
• SM Energy Company is building up its cash on hand and should be easily able to deal with its upcoming debt maturities.

SM Energy Company (SM) reported fairly strong results in Q1 2023. SM production (both total and oil) ended up slightly above the high end of its Q1 2023 guidance, while its costs ended up a bit lower than expected as well.

I now expect SM Energy to generate approximately $374 million in free cash flow at the current 2023 strip. I've increased my modeled production for SM slightly, although I am still keeping that within its original guidance range.

I've bumped up SM's estimated value to around $43 per share to account for the increase in its production levels as well as a change in my expectations for long-term commodity prices to $75 WTI oil and $3.75 NYMEX gas.

Q1 2023 Results

SM Energy expected to average 143,000 to 146,000 BOEPD (42% to 43% oil) in production during Q1 2023. It ended up at 146,400 BOEPD (43% oil) for the quarter, which was relatively strong production. SM primarily attributed production coming in above guidance to outperformance from its 16 new South Texas wells, as well as getting a seven-well South Texas pad online a week earlier than planned.

In addition to the strong production, SM also managed to keep its capex under expectations for the quarter. It expected $320 million to $330 million in Q1 2023 capex, and ended up at $307.6 million. That $307.6 million also included $9.9 million in unbudgeted Midland Basin leasehold acquisitions. SM's operating cost performance was also good for Q1 2023.

SM has not disclosed details about its 6,300 net acre Midland Basin acquisition yet, except to indicate that the acreage is not in its Rockstar or Sweetie Peck areas. The approximately $1,600 per net acre cost is relatively low and thus it may be in a generally unexplored area.

Updated Outlook For 2023

SM has maintained its full-year guidance so far, but I am bumping up its modeled 2023 production to 148,000 BOEPD (43% oil). This is a 1,000 BOEPD increase from before, but is still within its original guidance range of 144,000 to 150,000 BOEPD.

At that production level and the current strip for 2023 (including $73 to $74 WTI oil), I project SM to generate $2.193 billion in revenues before hedges. SM's hedges may have around $52 million in positive value during 2023.

I am not changing SM's cost projections at this moment, although it was tracking a bit better than expected during Q1 2023. Lowered diesel prices are helping there, with SM mentioning in late April that diesel prices were down around -25% compared to Q4 2022.

I now project SM to generate $374 million in free cash flow at current strip in 2023.

It may put $72 million towards dividends with its quarterly dividend of $0.15 per share, leaving it $302 million to put towards share repurchases and debt reduction.

SM repurchased 1.414 million shares in Q1 2023 at an average price of $28.32, for a total cost of $40 million.

Estimated Valuation

I've changed my expectations for long-term commodity prices to $75 WTI oil and $3.75 NYMEX gas. At those commodity prices, I now estimate SM's value at approximately $43 per share at the end of 2023. This is up from my previous estimated value of $41 due to my expectations for higher oil prices along with a slight increase to SM's projected production in 2023.

SM does have $1.585 billion in notes maturing between 2025 and 2028, but it should be able to effectively deal with those notes. SM also has $478 million in cash on hand, so its leverage is also reasonable and will probably end 2023 around 0.6x to 0.7x.

SM mentioned that the interest rates on its 2025 notes (at 5.625%) is not much higher than the interest rate it is receiving on its cash balance, so it isn't a huge hurry to redeem those notes.

Conclusion

SM Energy Company Q1 2023 results were positive, with production coming in a bit better than expected and costs coming in a bit lower than expected. SM has not changed its guidance for 2023, but I've bumped up its modeled production slightly to 148,000 BOEPD, which is still within its guidance range for the full year.

At current strip, SM is now projected to generate $374 million in free cash flow for 2023. It is expected to continue repurchasing shares while also building up its cash on hand to help redeem its upcoming debt maturities.

I estimate SM Energy Company stock value at approximately $43 per share in a long-term $75 WTI oil environment (along with $3.75 NYMEX gas), giving it a decent amount of potential upside.

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