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, 2023 , and the three months endedDecember 31, 2022 ("sequential quarterly" or "sequentially"), as well as the year-to-date ("YTD") change between the three months endedMarch 31, 2023 , and the three months endedMarch 31, 2022 ("YTD 2023-over-YTD 2022").
Overview of the Company
General Overview
Our strategy is to be a premier operator of top-tier oil and gas assets. Our team executes this strategy by prioritizing safety, technological innovation, and stewardship of natural resources, all of which are integral to our corporate culture. 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 long-term vision is to sustainably grow value for all of our stakeholders by maintaining and optimizing our high-quality asset portfolio, generating cash flows, and maintaining a strong balance sheet. Our near-term goals include returning value to stockholders through our Stock Repurchase Program and fixed dividend payments, and focusing on continued operational excellence. Our asset portfolio is comprised of high-quality assets in theMidland Basin ofWest Texas and in theMaverick Basin ofSouth Texas that are capable of generating strong returns in the current macroeconomic environment, and present resilience to commodity price risk and volatility. We remain focused on maximizing returns and increasing the value of our top-tier assets through continued development and optimization of ourMidland Basin assets and through continued development and delineation of the Austin Chalk formation inSouth Texas . We believe that our high-quality asset base provides for a sustainable approach to prioritizing operational execution, maintaining a strong balance sheet, generating cash flows, returning capital to stockholders, and maintaining strong financial flexibility. We are committed to exceptional safety, health, and environmental stewardship; supporting the professional development of a diverse and thriving team of employees; building and maintaining partnerships with our stakeholders by investing in and connecting with the communities where we live and work; and transparency in reporting on our progress in these areas.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, environmental, health, and safety measures. Global commodity and financial markets remain subject to heightened levels of uncertainty and volatility as a result of inflation, disruptions resulting from recent bank failures, and the ongoing conflict betweenRussia andUkraine and associated economic and trade sanctions onRussia . These circumstances have driven commodity price volatility and have contributed to increased service provider and other costs, instances of supply chain disruptions, and a rise in interest rates, and could have further industry-specific impacts that 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 2022 Form 10-K . Despite continuing uncertainty, we expect to maximize the value of our high-quality asset base and sustain strong operational performance and financial stability. We remain focused on returning capital to stockholders through increased returns and cash flow generation. Areas of Operations OurMidland Basin assets are comprised of approximately 87,000 net acres located in thePermian Basin inWest Texas ("Midland Basin "). In the first quarter of 2023, drilling and completion activities within our RockStar and Sweetie Peck positions continued to focus primarily on development optimization of ourMidland Basin position. OurMidland Basin position provides substantial future development opportunities within multiple oil-rich intervals, including the Spraberry and Wolfcamp formations. 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 2023, our operations inSouth Texas were focused on production from both the Austin Chalk formation andEagle Ford shale formation, development of the Eagle Ford shale formation, and development and further delineation 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. 18 --------------------------------------------------------------------------------
First Quarter 2023 Overview and Outlook for the Remainder of 2023
During the first quarter of 2023, we remained focused on returning value to our stockholders through our Stock Repurchase Program and fixed quarterly dividend payments. During the three months endedMarch 31, 2023 , we repurchased and subsequently retired 1,413,758 shares of our outstanding common stock at a cost of$40.0 million , excluding taxes, commissions, and fees. During the first quarter of 2023, we declared quarterly dividends of$0.15 per share totaling$18.1 million . Please refer to Note 3 - Equity in Part I, Item 1 of this report for additional discussion regarding our Stock Repurchase Program. Our total 2023 capital program is expected to be approximately$1.1 billion , exclusive of acquisitions, and will remain focused on our highly economic oil development projects in both ourMidland Basin andSouth Texas assets. During 2023, we expect to repeat our track record of inventory replacement and growth and to continue applying our strength in geosciences and development optimization. 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 maintain cash flows and financial flexibility. Please refer to Overview of Liquidity and Capital Resources below for discussion of how we expect to fund the remainder of our 2023 capital program. Financial and Operational Results. Average net daily equivalent production for the three months endedMarch 31, 2023 , increased two percent sequentially to 146.4 MBOE, consisting of a 10 percent increase from ourSouth Texas assets partially offset by a four percent decrease from ourMidland Basin assets. These changes are a result of the timing of well completions. Oil and gas realized prices, before the effect of derivative settlements ("realized price" or "realized prices"), decreased sequentially by 10 percent and 36 percent, respectively, as a result of decreases in benchmark commodity prices during the first quarter of 2023. Realized price for NGLs remained flat sequentially. Total realized price per BOE decreased 15 percent sequentially, resulting in a 15 percent decrease in oil, gas, and NGL production revenue, which was$570.8 million for the three months endedMarch 31, 2023 , compared with$669.3 million for the three months endedDecember 31, 2022 . Oil, gas, and NGL production expense of$10.80 per BOE for the three months endedMarch 31, 2023 , decreased six percent sequentially, primarily as a result of decreases in production tax expense per BOE and ad valorem tax expense per BOE. We recorded a net derivative gain of$51.3 million for the three months endedMarch 31, 2023 , compared with a net derivative gain of$11.2 million for the three months endedDecember 31, 2022 . Included within these amounts are a derivative settlement gain of$5.1 million for the three months endedMarch 31, 2023 , and a derivative settlement loss of$115.6 million for the three months endedDecember 31, 2022 .
Operational and financial activities during the three months ended
•Net cash provided by operating activities of$331.6 million for the three months endedMarch 31, 2023 , compared with$288.4 million for the three months endedDecember 31, 2022 . •Net income of$198.6 million , or$1.62 per diluted share, for the three months endedMarch 31, 2023 , compared with net income of$258.5 million , or$2.09 per diluted share, for the three months endedDecember 31, 2022 . •Adjusted EBITDAX, a non-GAAP financial measure, for the three months endedMarch 31, 2023 , of$401.4 million , compared with$373.9 million for the three months endedDecember 31, 2022 . Please refer to the caption Non-GAAP Financial Measures below for additional discussion and our definition of adjusted EBITDAX and reconciliations to net income and net cash provided by operating activities.
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 Activities. In ourMidland Basin program, we operated three drilling rigs and averaged two completion crews, drilled eight gross (seven net) wells, and completed 12 gross (10 net) wells during the first quarter of 2023. Average net daily equivalent production volumes decreased sequentially by four percent to 74.0 MBOE. Costs incurred in ourMidland Basin program during the three months endedMarch 31, 2023 , totaled$174.0 million , or 56 percent of our total costs incurred for the period. During the remainder of 2023, we anticipate operating three drilling rigs and averaging one completion crew. We expect our activity to focus primarily on developing the Spraberry and Wolfcamp formations within our RockStar and Sweetie Peck positions. In ourSouth Texas program, we operated two drilling rigs and one completion crew, drilled seven gross (seven net) wells, and completed 17 gross (16 net) wells during the first quarter of 2023. Average net daily equivalent production volumes increased sequentially by 10 percent to 72.5 MBOE. Costs incurred in ourSouth Texas program during the three months endedMarch 31, 2023 , totaled$125.6 million , or 41 percent of our total costs incurred for the period. During the remainder of 2023, we anticipate operating two drilling rigs and one completion crew, focused primarily on developing the Austin Chalk formation. 19 -------------------------------------------------------------------------------- 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, 2023 : Midland Basin South Texas (1) Total Gross Net Gross Net Gross Net Wells drilled but not completed at December 31, 2022 (2) 49 40 29 28 78 69 Wells drilled 8 7 7 7 15 14 Wells completed (12) (10) (17) (16) (29) (26) Wells drilled but not completed at March 31, 2023 (2) 45 37 19 19 64 56
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(1) TheSouth Texas drilled but not completed well count as ofDecember 31, 2022 , included nine gross (nine net) wells that were not included in our five-year development plan as ofDecember 31, 2022 , eight of which were in the Eagle Ford shale formation. (2) Amounts may not calculate due to rounding. Costs Incurred. Costs incurred in oil and gas property acquisition, exploration, and development activities, whether capitalized or expensed, totaled$308.7 million for the three months endedMarch 31, 2023 , and were primarily incurred in ourMidland Basin andSouth Texas programs as further detailed in Operational Activities above. Production Results. The table below presents our production by product type for each of our assets for the three months endedMarch 31, 2023 ,December 31, 2022 , andMarch 31, 2022 : For the Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 Midland Basin Production: Oil (MMBbl) 4.2 4.4 5.3 Gas (Bcf) 14.5 15.9 15.5 NGLs (MMBbl) - - - Equivalent (MMBOE) 6.7 7.1 7.9 Average net daily equivalent (MBOE per day) 74.0 77.0 87.4 Relative percentage 51 % 54 % 57 % South Texas Production: Oil (MMBbl) 1.4 1.3 1.2 Gas (Bcf) 17.8 16.2 15.9 NGLs (MMBbl) 2.1 2.1 2.1 Equivalent (MMBOE) 6.5 6.1 5.9 Average net daily equivalent (MBOE per day) 72.5 65.9 65.8 Relative percentage 49 % 46 % 43 % Total Production: Oil (MMBbl) 5.7 5.7 6.5 Gas (Bcf) 32.2 32.1 31.4 NGLs (MMBbl) 2.1 2.1 2.1 Equivalent (MMBOE) 13.2 13.1 13.8 Average net daily equivalent (MBOE per day) 146.4 142.9 153.3
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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
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--------------------------------------------------------------------------------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. The following table summarizes commodity price data, as well as the effect of derivative settlements, for the three months endedMarch 31, 2023 ,December 31, 2022 , andMarch 31, 2022 : For the Three Months Ended March 31, 2023 December 31, 2022 March 31, 2022 Oil (per Bbl): Average NYMEX contract monthly$ 76.13 $ 82.64$ 94.29 price Realized price$ 74.31 $ 82.35$ 94.03 Effect of oil derivative settlements$ (1.10) $ (15.04)$ (20.00) Gas: Average NYMEX monthly settle price$ 3.42 $ 6.26 $ 4.95 (per MMBtu) Realized price (per Mcf)$ 2.91 $ 4.52 $ 5.42 Effect of gas derivative settlements (per Mcf)$ 0.35 $ (0.91)$ (0.86) NGLs (per Bbl): Average OPIS price (1)$ 30.95 $ 33.03$ 48.36 Realized price$ 26.24 $ 26.10$ 38.56 Effect of NGL derivative $ - $ (0.27)$ (5.67) settlements
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(1) EffectiveJanuary 1, 2023 , average OPIS price per barrel of NGL, historical or strip, assumes a composite barrel product mix of 42% Ethane, 28% Propane, 6% Isobutane, 11% Normal Butane, and 13% Natural Gasoline. For periods prior to 2023, average OPIS price per barrel of NGL, historical or strip, assumed a composite barrel product mix of 37% Ethane, 32% Propane, 6% Isobutane, 11% Normal Butane, and 14% Natural Gasoline. These product mixes represent the industry standard composite barrel for the respective periods presented and do not necessarily represent our product mix for NGL production. Realized prices reflect our actual product mix. Given the uncertainty surrounding global financial markets, the ongoing conflict betweenRussia andUkraine , the economic and trade sanctions that certain countries have imposed onRussia , production output from theOrganization of the Petroleum Exporting Countries ("OPEC") plus other non-OPEC oil producing countries (collectively referred to as "OPEC+"), and the potential impacts of these issues on global commodity markets, we expect 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, which could include further inflation, supply chain disruptions, a continued rise in interest rates, and industry-specific impacts. In addition to supply and demand fundamentals, as global commodities, the prices for oil, gas, and NGLs are 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 areas of our operations and beyond.
The following table summarizes 12-month strip prices for NYMEX WTI oil, NYMEX
Henry Hub gas, and OPIS NGLs as of
As of April 21, 2023 As of March 31, 2023
NYMEX WTI oil (per Bbl) $ 75.93 $ 74.45
NYMEX Henry Hub gas (per MMBtu) $ 3.03 $ 3.00
OPIS NGLs (per Bbl) $ 28.97 $ 28.73
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
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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 7 - 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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