SM Energy: Works On Integrating Its Uinta Basin Assets

seekingalpha11-23

SM Energy's Q3 2024 production exceeded expectations and showed good capital efficiency.SM's Uinta Basin acquisition pushes its production above 200,000 BOEPD and its oil cut above 50%.SM is projected...

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Torsten Asmus  SM Energy (NYSE:SM) delivered relatively strong Q3 2024 results, with production 3% above the midpoint of its guidance and capex below guidance. It is still in the process of integrating its Uinta Basin acquisitions, so its Q4 2024 guidance range is relatively wide. Generally, it expects higher quarter-over-quarter Texas production, albeit with an oil cut that is a couple percent lower. SM's Uinta Basin production for Q4 2024 will likely be lower than the 44,000 BOEPD it had previously mentioned as some completions have been deferred to the end of 2024 or early 2025. SM has provided more information around its cost structure post-Uinta Basin acquisitions. SM's transportation costs per BOE may double due to the high cost of transporting the Uinta Basin waxy crude. I am maintaining my estimate of SM's value at $50 per share, with the production outperformance offset by some higher costs than what I had modeled. Q3 2024 Results SM's Q3 2024 production increased to around 170,000 BOEPD, including 77,400 barrels per day in oil production (46% oil cut). This did not include contributions from SM's Uinta Basin acquisitions, which closed just after the end of the quarter. SM's Q3 2024 production exceeded expectations, with both total production and oil production around 3% higher than the midpoint of its guidance. This was achieved with lower than budgeted capex. SM reported $290.4 million in Q3 2024 capex (net of changes in capital accruals) compared to its guidance for $300 million to $310 million. SM attributed this outperformance to strong well-level performance as well as the favorable timing of some completions. The combination of higher than expected production and lower than budgeted capex helped SM deliver $129.8 million in adjusted free cash flow in Q3 2024, which was 32% higher than Q2 2024. SM's performance in Q3 2024 resulted in it's the midpoint of its full-year production guidance being increased slightly (by around 1,000 BOEPD) independent of its Uinta Basin acquisitions. SM's full-year capex guidance has also come down by around $20 million, independent of those acquisitions. Q4 2024 Guidance SM now expects around 205,000 to 220,000 BOEPD in Q4 2024 production, with a 51% oil cut. Capex is expected to be around $320 million to $340 million. There seems to be a much larger range of production expectations than usual, probably due to the integration of its Uinta Basin assets, creating some uncertainty. SM mentioned that while the acquisitions closed at the start of Q4 2024, there is a transition services agreement and SM expects to assume all Uinta Basin operational activity by the end of 2024. SM previously mentioned expectations for 44,000 BOEPD (87% oil) in Q4 2024 production from its Uinta Basin assets. However, it now noted that the seller of the Uinta Basin assets completed fewer wells than previously projected in 2H 2024. Three wells were revised to extend the laterals from around 2 miles to 3 miles, resulting in improved capital efficiency. These wells are now expected to be turned-in-line at the end of 2024 to early 2025, deferring related volumes into 2025 instead of 2H 2024. Thus, Uinta Basin production may be closer to 39,000 or 40,000 BOEPD in Q4 2024, reduced by the delayed wells and offset well shut-ins. SM's Texas assets are expected to have slightly increased production (by a couple percent) compared to Q3 2024, along with an oil cut that may be a couple percent lower. The Uinta Basin acquisitions are expected to roughly double SM's transportation expense to a range of $4.30 to $4.60 per BOE for Q4 2024. This is due to the high cost of transporting the waxy Uinta Basin crude oil, estimated at around $16 per barrel of oil.   SM's Debt Maturities (sm-energy.com (Q3 2024 Presentation)) SM may be able to generate close to $200 million in free cash flow in Q4 2024. Before the effect of any share repurchases, SM would then end 2024 with around $2.73 billion in net debt, with its Q4 2024 free cash flow essentially paying off its credit facility debt. This does not include any impact from working capital changes. Notes On 2025 I've decided to model SM's 2025 results at 200,000 BOEPD (52% oil). This is around 5,000 BOEPD higher than what SM mentioned in its June presentation, but SM's production has generally exceeded expectations, and it is also deferring some 2024 Uinta Basin volumes into 2025. At current strip of $69 to $70 WTI oil along with $3.25 NYMEX gas, I'd project SM to generate $3.244 billion in revenues after hedges.        Type Barrels/Mcf $ Per Barrel/Mcf $ Million   Oil 37,960,000 $67.75 $2,572   NGLs 10,950,000 $21.00 $230   Gas 144,540,000 $2.90 $419   Hedge Value     $23   Total     $3,244   Click to enlarge This results in a projection of $612 million in free cash flow before any cash income taxes. I've assumed that SM's transportation expense is $4.60 per BOE for 2025, slightly higher than Q4 2024 due to a larger amount of Uinta Basin oil in the production mix.      $ Million   Lease Operating $365   Transportation $336   Production and Ad Valorem Taxes $216   Cash G&A $120   Net Cash Interest $195   Capex (Excluding Capitalized Interest) $1,400   Total $2,632   Click to enlarge Notes On Valuation I am keeping my estimate of SM's value at $50 per share for now, based on a longer-term (after 2025) $75 WTI oil and $3.75 NYMEX gas scenario. SM's well-level performance has been above expectations, leading me to model its 2025 production 2% to 3% higher than before. However, SM's costs are also a bit higher than I expected, and it still needs to integrate its Uinta Basin assets. A transportation cost of $16 per barrel of Uinta Basin oil works out to approximately $14 per BOE for Uinta Basin production. At roughly $70 WTI oil, SM would be realizing around $52 for its Uinta Basin oil net of transportation costs and differentials. Conclusion SM reported relatively strong Q3 2024 results, with production that exceeded expectations. SM's capex was also below guidance, indicating positive strides with capital efficiency. For Q4 2024, SM is in the process of taking over operations at its Uinta Basin assets. It is expected to end up with over 50% oil and 205,000 to 220,000 BOEPD in total production.  SM had previously discussed 195,000 BOEPD in 2025, although that is probably conservative, and I am now modeling 200,000 BOEPD in 2025 production. This would allow SM to generate over $600 million in free cash flow (excluding cash income taxes) despite sub-$70 oil prices and high transportation costs with its Uinta Basin acquisitions.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"Company Corporation,analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2485254225"}