SM ENERGY COMPANY The following discussion includes forward-looking statements. Please refer to the Cautionary Information about Forward-Looking Statements section of this report for important information about these types of statements. Throughout the following discussion, we explain changes between the three months endedMarch 31, 2022 , compared with the three months endedDecember 31, 2021 ("sequential quarterly" or "sequentially"), as well as the year-to-date ("YTD") change between the three months endedMarch 31, 2022 , compared with the three months endedMarch 31, 2021 ("YTD 2022-over-YTD 2021").
Overview of the Company
General Overview
Our strategic objective is to be a premier operator of top-tier oil and gas assets. Our purpose is to make people's lives better by responsibly producing energy supplies, contributing to domestic energy security and prosperity, and having a positive impact in the communities where we live and work. Our short-term operational and financial goals include generating positive cash flows while strengthening our balance sheet through absolute debt reduction and improved leverage metrics, and increasing the value of our capital project inventory through exploration and development optimization. Our long-term vision is to sustainably grow value for all of our stakeholders. Our strategy for achieving our goals is to focus on high-quality economic drilling, completion, and production opportunities. Our investment portfolio is comprised of oil and gas producing assets in the state ofTexas , specifically in theMidland Basin ofWest Texas and in theMaverick Basin ofSouth Texas . We are committed to exceptional safety, health, and environmental stewardship; supporting the professional development of a diverse and thriving team of employees; making a positive impact in the communities where we live and work; and transparency in reporting on our progress in these areas. We have prioritized ESG initiatives by, among other things, integrating enhanced environmental and social programs throughout the organization and setting near-term and medium-term goals that include reducing flaring and greenhouse gas emissions intensity and maintaining low methane emissions intensity. Additionally, we are putting systems in place to track additional ESG metrics to enable increased reporting in the future and to increase employee awareness.The Environmental, Social and Governance Committee of our Board of Directors oversees, among other things, the development and implementation of the Company's ESG policies, programs and initiatives, and, together with management, reports to our Board of Directors regarding such matters. Further demonstrating our commitment to sustainable operations and environmental stewardship, compensation for our executives and eligible employees under our long-term incentive plan, and compensation for all employees under our short-term incentive plan is calculated based on, in part, certain Company-wide performance-based metrics that include key financial, operational, and environmental, health, and safety measures. Prices for the commodities produced by our industry remained strong during the first quarter of 2022 with benchmark oil prices increasing compared with the fourth quarter of 2021, in part due to the impact of the conflict betweenRussia andUkraine on global commodity and financial markets, and in response to economic and trade sanctions that certain countries have imposed onRussia . Additionally, although the Pandemic remains a global health crisis and continues to evolve, consumer demand has strengthened as cases of the Omicron variant of COVID-19 have decreased from winter levels. Increased demand for oil and gas products has outpaced increased supply, resulting in strong commodity prices which, for 2021, rose to their highest average annual prices since 2014. However, global commodity and financial markets remain subject to heightened levels of uncertainty and volatility related to these events, and future disruptions and industry-specific impacts could result, which may require us to adjust our business plan. For additional detail, please refer to the Risk Factors section in Part I, Item 1A of our 2021 Form 10-K . Despite continuing impacts of geopolitical issues, the Pandemic, and future uncertainty, we expect to maintain our ability to sustain strong operational performance and financial stability while maximizing returns, improving leverage metrics, and increasing the value of our top-tierMidland Basin andSouth Texas assets. Throughout the Pandemic, the safety of our employees, contractors, and the communities where we work has remained our first priority. While our core business operations required certain individuals to be physically present at well site locations, the majority of our office-based employees worked remotely from the onset of the Pandemic through February of 2022. We maintain and continually assess procedures designed to limit the spread of COVID-19, and we continue to communicate to and train all of our employees regarding best practices for maintaining a healthy and safe work environment. We believe that we meet or exceedCenters for Disease Control and Prevention and federal Occupational Safety and Health Act guidelines related to the prevention of the transmission of COVID-19. Throughout the Pandemic, we have operated without significant disruptions to our business, and we believe that our pre-existing control environment and internal controls continue to be effective.
Areas of Operations
OurMidland Basin assets are comprised of approximately 80,000 net acres located in thePermian Basin inWest Texas ("Midland Basin "). In the first quarter of 2022, drilling and completion activities within our RockStar and Sweetie Peck positions continued to focus primarily on development optimization and further delineating ourMidland Basin position. Our currentMidland Basin position provides substantial future development opportunities within multiple oil-rich intervals, including the Spraberry and Wolfcamp formations. 21 -------------------------------------------------------------------------------- OurSouth Texas assets are comprised of approximately 155,000 net acres located in theMaverick Basin inDimmit andWebb Counties,Texas ("South Texas"). In the first quarter of 2022, our operations inSouth Texas were focused on production from both the Austin Chalk formation andEagle Ford shale formation, and further development of the Austin Chalk formation. Our overlapping acreage position in theMaverick Basin covers a significant portion of the westernEagle Ford shale andAustin Chalk formations, and includes acreage across the oil, gas-condensate, and dry gas windows with gas composition amenable to processing for NGL extraction.
First Quarter 2022 Overview and Outlook for the Remainder of 2022
During the first quarter of 2022, we remained committed to our goal of reducing the principal balance of our outstanding debt through cash flow generation. For the three months endedMarch 31, 2022 , net cash provided by operating activities exceeded net cash used in investing activities by$192.0 million , and we reduced the principal balance of our total outstanding long-term debt by$104.8 million . Further, cash and cash equivalents increased from$332.7 million atDecember 31, 2021 , to$419.9 million atMarch 31, 2022 . We executed on this goal through strong operational performance and a diligent focus on cost management, and we benefited from increased commodity pricing which has improved from historic lows experienced during the height of the Pandemic. Our 2022 capital program is expected to be approximately$750.0 million . Our financial and operational flexibility allows us to continually monitor the economic environment and adjust our activity level as warranted. Our 2022 capital program remains focused on highly economic oil development projects in both ourMidland Basin andSouth Texas assets. We believe that our high-quality asset portfolio is capable of generating strong returns in the current macroeconomic environment, which we expect will enable us to grow cash flows, improve leverage metrics, and maintain strong financial flexibility. Please refer to Overview of Liquidity and Capital Resources below for discussion of how we expect to fund the remainder of our 2022 capital program. Financial and Operational Results. Average net daily equivalent production for the three months endedMarch 31, 2022 , decreased three percent sequentially to 153.3 MBOE, primarily driven by a decrease in oil volumes of 15 percent, or 12.7 MBbl per day, which was the result of timing of well completions. The decrease in oil volumes was partially offset by an increase of 37 percent, or 6.3 MBbl per day, in NGL volumes. Increases in benchmark oil prices during the first quarter of 2022 resulted in an increased realized oil price, before the effect of derivative settlements, of 24 percent sequentially. Gas and NGL realized prices, before the effect of derivative settlements, decreased sequentially by 15 percent, and three percent, respectively. Total realized price before the effect of derivative settlements ("realized price" or "realized prices") per BOE increased six percent sequentially. The increase in total realized price per BOE was partially offset by the decrease in total net equivalent production volumes, resulting in a one percent increase in oil, gas, and NGL production revenue, which was$858.7 million for the three months endedMarch 31, 2022 , compared with$852.4 million for the three months endedDecember 31, 2021 . Oil, gas, and NGL production expense per BOE of$10.49 for the three months endedMarch 31, 2022 , increased seven percent sequentially, primarily as a result of increased ad valorem tax expense, production tax expense, and transportation costs per BOE. We recorded a net derivative loss of$418.5 million for the three months endedMarch 31, 2022 , compared to a net derivative gain of$22.5 million for the three months endedDecember 31, 2021 . Included within these amounts are derivative settlement losses of$168.2 million and$268.7 million for the three months endedMarch 31, 2022 , andDecember 31, 2021 , respectively, resulting from increased benchmark commodity prices.
Please refer to Overview of Selected Production and Financial Information,
Including Trends and Comparison of Financial Results and Trends Between the
Three Months Ended
Operational and financial activities during the three months ended
•Net cash provided by operating activities of$342.1 million for the three months endedMarch 31, 2022 , compared with$429.6 million for the three months endedDecember 31, 2021 .
•A cash and cash equivalents balance of
•Net income of$48.8 million , or$0.39 per diluted share, for the three months endedMarch 31, 2022 , compared with net income of$424.9 million , or$3.43 per diluted share, for the three months endedDecember 31, 2021 . Net income for the three months endedMarch 31, 2022 , was primarily a result of strong oil pricing partially offset by a net derivative loss of$418.5 million . Please refer to Comparison of Financial Results and Trends Between the Three Months EndedMarch 31, 2022 , andDecember 31, 2021 , and Between the Three Months EndedMarch 31, 2022 , and 2021 below for additional discussion regarding the components of net income (loss) for the periods presented. •Adjusted EBITDAX, a non-GAAP financial measure, for the three months endedMarch 31, 2022 , was$524.6 million , compared with$406.9 million for the three months endedDecember 31, 2021 . Please refer to the caption Non-GAAP 22 --------------------------------------------------------------------------------
Financial Measures below for additional discussion and our definition of adjusted EBITDAX and reconciliations to net income (loss) and net cash provided by operating activities.
Operational Activities. In ourMidland Basin program, we operated three drilling rigs and one completion crew, and drilled 16 gross (14 net) wells and completed six gross (five net) wells during the first quarter of 2022. Net equivalent production volumes decreased sequentially by 17 percent to 7.9 MMBOE. Costs incurred in ourMidland Basin program during the three months endedMarch 31, 2022 , totaled$84.4 million , or 48 percent of our total costs incurred for the period. During the remainder of 2022, we anticipate operating three drilling rigs and one completion crew, which will continue to utilize both zipper or simul-frac techniques, where two or more horizontal wells are stimulated at the same time using a single fleet. Activity will focus primarily on developing the Spraberry and Wolfcamp formations within our RockStar and Sweetie Peck positions in theMidland Basin . In ourSouth Texas program, we operated two drilling rigs and one completion crew, and drilled nine gross (nine net) wells and completed 13 gross (13 net) wells during the first quarter of 2022. Net equivalent production volumes increased sequentially by 16 percent to 5.9 MMBOE. Costs incurred in ourSouth Texas program during the three months endedMarch 31, 2022 , totaled$76.1 million , or 43 percent of our total costs incurred for the period. During the remainder of 2022, we anticipate operating two drilling rigs and one completion crew, focused primarily on developing the Austin Chalk formation. The table below provides a quarterly summary of changes in our drilled but not completed well count and current year drilling and completion activity in our operated programs for the three months endedMarch 31, 2022 : Midland Basin South Texas (1) Total Gross Net Gross Net Gross Net Wells drilled but not completed at December 31, 2021 30 27 32 32 62 59 Wells drilled 16 14 9 9 25 23 Wells completed (6) (5) (13) (13) (19) (18) Wells drilled but not completed at March 31, 2022 40 36 28 28 68 64
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(1) The
Costs Incurred. Costs incurred in oil and gas property acquisition, exploration, and development activities, whether capitalized or expensed, totaled$175.1 million for the three months endedMarch 31, 2022 , and were primarily incurred in ourMidland Basin andSouth Texas programs as further detailed in Operational Activities above. 23 -------------------------------------------------------------------------------- Production Results. The table below presents our production by product type for each of our assets for the three months endedMarch 31, 2022 ,December 31, 2021 , andMarch 31, 2021 : For the Three Months Ended March 31, 2022 December 31, 2021 March 31, 2021 Midland Basin Production: Oil (MMBbl) 5.3 6.7 5.1 Gas (Bcf) 15.5 16.5 10.6 NGLs (MMBbl) - - - Equivalent (MMBOE) 7.9 9.4 6.9 Average net daily equivalent (MBOE per day) 87.4 102.6 76.1 Relative percentage 57 % 65 % 68 % South Texas Production: Oil (MMBbl) 1.2 1.1 0.3 Gas (Bcf) 15.9 14.7 11.0 NGLs (MMBbl) 2.1 1.6 1.0 Equivalent (MMBOE) 5.9 5.1 3.2 Average net daily equivalent (MBOE per day) 65.8 55.7 35.5 Relative percentage 43 % 35 % 32 % Total Production: Oil (MMBbl) 6.5 7.8 5.4 Gas (Bcf) 31.4 31.3 21.5 NGLs (MMBbl) 2.1 1.6 1.0 Equivalent (MMBOE) 13.8 14.6 10.0 Average net daily equivalent (MBOE per day) 153.3 158.3 111.6
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Note: Amounts may not calculate due to rounding.
Please refer to Overview of Selected Production and Financial Information,
Including Trends and Comparison of Financial Results and Trends Between the
Three Months Ended
Oil, Gas, and NGL Prices
Our financial condition and the results of our operations are significantly
affected by the prices we receive for our oil, gas, and NGL production, which
can fluctuate dramatically. When we refer to realized oil, gas, and NGL prices
below, the disclosed price represents the average price for the respective
period, before the effect of derivative settlements. While quoted NYMEX oil and
gas and OPIS NGL prices are generally used as a basis for comparison within our
industry, the prices we receive are affected by quality, energy content,
location and transportation differentials, and contracted pricing benchmarks for
these products.
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The following table summarizes commodity price data, as well as the effect of
derivative settlements, for the three months ended March 31, 2022 , December 31,
2021 , and March 31, 2021 :
For the Three Months Ended
March 31, 2022 December 31, 2021 March 31, 2021
Oil (per Bbl):
Average NYMEX contract monthly $ 94.29 $ 77.19 $ 57.84
price
Realized price $ 94.03 $ 76.08 $ 56.33
Effect of oil derivative
settlements $ (20.00) $ (22.97) $ (10.38)
Gas:
Average NYMEX monthly settle price $ 4.95 $ 5.83 $ 2.69
(per MMBtu)
Realized price (per Mcf) $ 5.42 $ 6.35 $ 4.16
Effect of gas derivative
settlements (per Mcf) $ (0.86) $ (2.05) $ (1.88)
NGLs (per Bbl):
Average OPIS price (1) $ 48.36 $ 44.21 $ 30.47
Realized price $ 38.56 $ 39.63 $ 26.93
Effect of NGL derivative $ (5.67) $ (16.64) $ (10.79)
settlements
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(1) Average OPIS price per barrel of NGL, historical or strip, assumes a composite barrel product mix of 37% Ethane, 32% Propane, 6% Isobutane, 11% Normal Butane, and 14% Natural Gasoline for all periods presented. This product mix represents the industry standard composite barrel and does not necessarily represent our product mix for NGL production. Realized prices reflect our actual product mix. Oil prices continued to increase during the first quarter of 2022, compared with 2021. However, given the uncertainty surrounding the ongoing conflict betweenRussia andUkraine , the economic and trade sanctions that certain countries have imposed onRussia , the dynamic nature of the Pandemic, and the potential impacts to global commodity and financial markets, we expect future benchmark prices for oil, gas, and NGLs to remain volatile for the foreseeable future, and we cannot reasonably predict the timing or likelihood of any future impacts that may result. In addition to supply and demand fundamentals, as a global commodity, the price of oil is affected by real or perceived geopolitical risks in various regions of the world as well as the relative strength ofthe United States dollar compared to other currencies. Our realized prices at local sales points may also be affected by infrastructure capacity in the area of our operations and beyond. Please refer to First Quarter 2022 Overview and Outlook for the Remainder of 2022 above for additional discussion of factors impacting pricing.
The following table summarizes 12-month strip prices for NYMEX WTI oil, NYMEX
Henry Hub gas, and OPIS NGLs as of
As of April 20, 2022 As of March 31, 2022
NYMEX WTI oil (per Bbl) $ 96.54 $ 93.25
NYMEX Henry Hub gas (per MMBtu) $ 6.89 $ 5.72
OPIS NGLs (per Bbl) $ 47.89 $ 47.30
We use financial derivative instruments as part of our financial risk management
program. We have a financial risk management policy governing our use of
derivatives, and decisions regarding entering into commodity derivative
contracts are overseen by a financial risk management committee consisting of
certain of our senior executive officers and finance personnel. We make
decisions about the amount of our expected production that we cover by
derivatives based on the amount of debt on our balance sheet, the level of
capital commitments and long-term obligations we have in place, and the terms
and futures prices that are made available by our approved counterparties. With
our current commodity derivative contracts, we believe we have partially reduced
our exposure to volatility in commodity prices and basis differentials in the
near term. Our use of costless collars for a portion of our derivatives allows
us to participate in some of the upward movements in oil and gas prices while
also setting a price floor below which we are insulated from further price
decreases. Please refer to Note 10 - Derivative Financial Instruments in Part I,
Item 1 of this report and to Commodity Price Risk in Overview of Liquidity and
Capital Resources below for additional information regarding our oil, gas, and
NGL derivatives.
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