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. Overview of the Company General Overview Our purpose is to make people's lives better by responsibly producing energy supplies, contributing to 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. We believe that in order to accomplish this vision, we must be a premier operator of top tier assets. Our investment portfolio is currently focused on high quality oil and gas producing assets in the state ofTexas , specifically in theMidland Basin ofWest Texas and inSouth Texas . Areas of Operations OurMidland Basin assets are located in thePermian Basin inWest Texas and are comprised of approximately 80,000 net acres ("Midland Basin "). In the third quarter of 2020, we focused on continuing to delineate, develop, and expand ourMidland Basin position. Our currentMidland 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 159,000 net acres located inDimmit andWebb Counties,Texas ("South Texas"). Our current operations inSouth Texas are focused on developing the Eagle Ford shale formation and delineating the Austin Chalk formation. Our overlapping acreage position in the Eagle Ford shale andAustin Chalk formations includes acreage in oil, gas-condensate, and dry gas windows with gas composition amenable to processing for NGL extraction. Third Quarter 2020 Overview and Outlook for the Remainder of 2020 The impacts of the Pandemic on supply and demand for oil, gas, and NGLs continue to be unpredictable. Given the dynamic nature of the Pandemic, we are unable to reasonably estimate the period of time that these market conditions will exist or the extent to which they will continue to impact our business, results of operations, and financial condition, or the timing of any subsequent recovery. Future case surges or outbreaks could have further negative impacts, and as a result, we may be required to adjust our business plan. For additional detail, please refer to Risk Factors in Part II, Item 1A of this report and those risk factors previously disclosed in our 2019 Form 10-K . During the third quarter of 2020, the Pandemic and associated macroeconomic events continued to affect the realized prices we received for our production, and we expect these impacts to continue for the remainder of the year. Despite continuing negative impacts 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. During the third quarter of 2020, we repurchased$62.5 million and$29.0 million in aggregate principal amount of our 2022 Senior Notes and 2024 Senior Notes, respectively, while also reducing the balance on our revolving credit facility by$15.0 million fromJune 30, 2020 toSeptember 30, 2020 . Please refer to Note 5 - Long-Term Debt in Part I, Item 1 of this report for additional discussion. Our financial risk management program has significantly reduced the impact of substantially lower oil prices in 2020, and as a result of this program we recorded an oil derivative settlement gain of$15.16 per barrel for the nine months endedSeptember 30, 2020 . Our realized oil price before the effects of derivative settlements was$35.92 for the nine months endedSeptember 30, 2020 . As ofSeptember 30, 2020 , a majority of our expected oil production for the remainder of 2020 is covered by derivative contracts at weighted-average NYMEX equivalent prices greater than$56.00 per barrel. Please refer to Oil, Gas, and NGL Prices below for additional detail on our financial risk management program and the pricing effects of our derivative settlements. Additionally, in response to the current economic environment, we have renegotiated certain contracts resulting in realized and future cost savings that directly support our objective of maximizing cash flows. As a result of these cost saving measures and improving operational efficiencies, we expect average well costs for 2020 to be lower than our preliminary expectations for the year. We believe that sustainability is critical to positioning ourselves financially to participate in future energy investment opportunities and executing our strategy of being a premier operator with high standards for corporate responsibility. We remain committed to exceptional safety, health, and environmental stewardship; supporting the professional development of a diverse and thriving team of employees; making a positive difference in 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 environmental, social and governance policies, programs and initiatives, and reports to our Board of Directors regarding such matters. The safety of our employees, contractors, and the communities where we work is our first priority as we continue to operate during the Pandemic. While the execution of our core business operations requires certain individuals to be physically present at well 29 -------------------------------------------------------------------------------- site locations, substantially all of our office-based employees have continued working remotely in order to limit physical interactions and mitigate the spread of COVID-19. For individuals who are unable to perform their jobs remotely, we maintain and continually assess procedures designed to limit the spread of COVID-19, including social distancing and enhanced sanitization measures, and we continue to communicate to and train all of our employees regarding best practices for maintaining a healthy and safe work environment. Since these measures were initially implemented in the first quarter of 2020, we have continued to operate without significant disruptions to our business operations. Our pre-existing control environment and internal controls continue to be effective and we continue to address new risks directly related to the Pandemic as we identify them. The information below summarizes our operating and financial performance and our expectations for the remainder of 2020. We entered 2020 with a total capital program budget between$825 million and$850 million . However, given the Pandemic and related circumstances discussed above, we reduced our 2020 capital program by approximately 25 percent for the full year 2020. Our financial and operational flexibility allows us to continually monitor the economic environment and adjust our activity level as warranted. Our 2020 capital program remains focused on developing and retaining our most economic projects in both ourMidland Basin andSouth Texas assets. Please refer to Overview of Liquidity and Capital Resources below for discussion of how we expect to fund our 2020 capital program. Financial and Operational Results. Average net daily equivalent production for the three months endedSeptember 30, 2020 , was 126.3 MBOE, compared with 134.9 MBOE for the same period in 2019. This decrease was driven by a 22 percent decrease in production volumes from ourSouth Texas assets, partially offset by a seven percent increase in production volumes from ourMidland Basin assets. The overall decrease in production volumes for the three months endedSeptember 30, 2020 , was primarily due to fewer net well completions during the nine months endedSeptember 30, 2020 , compared with the same period in 2019, as we reduced capital expenditures in response to lower commodity prices in 2020. Realized prices before the effects of derivative settlements for oil, gas, and NGLs decreased 30 percent, 12 percent, and 11 percent, respectively, for the three months endedSeptember 30, 2020 , compared with the same period in 2019. As a result of decreased production and pricing, oil, gas, and NGL production revenue decreased 28 percent to$282.0 million for the three months endedSeptember 30, 2020 , from$389.4 million for the same period in 2019. We recorded a net derivative loss of$63.9 million and a net derivative gain of$100.9 million for the three months endedSeptember 30, 2020 , and 2019, respectively. Included within these derivative amounts is a gain of$70.3 million on derivative contracts that settled during the three months endedSeptember 30, 2020 , and a gain of$24.7 million for the same period in 2019. Total production costs on a per BOE basis decreased 21 percent to$8.20 per BOE for the three months endedSeptember 30, 2020 , from$10.41 per BOE for the same period in 2019. Financial and operational activities during the three months endedSeptember 30, 2020 , resulted in the following: •a$103.1 million decrease in our total outstanding long-term debt balance fromJune 30, 2020 , toSeptember 30, 2020 , primarily driven by net cash provided by operating activities of$201.6 million for the three months endedSeptember 30, 2020 , which was in excess of net cash used in investing activities of$116.6 million for the three months endedSeptember 30, 2020 ; •net loss of$98.3 million , or$0.86 per diluted share, for the three months endedSeptember 30, 2020 , compared with net income of$42.2 million , or$0.37 per diluted share, for the same period in 2019. The net loss for the three months endedSeptember 30, 2020 , was primarily due to a$134.2 million downward mark-to-market adjustment on our commodity derivative contracts. Please refer to Comparison of Financial Results and Trends Between the Three and Nine Months EndedSeptember 30, 2020 , and 2019 below for additional discussion regarding the components of net income (loss) for the periods presented; and •adjusted EBITDAX, a non-GAAP financial measure, for the three months endedSeptember 30, 2020 , was$232.5 million , compared with$257.8 million for the same period in 2019. Please refer to the caption Non-GAAP Financial Measures below for additional discussion and our definition of adjusted EBITDAX and reconciliations of net income (loss) and net cash provided by operating activities. Operational Activities. The financial results and operational activity discussed throughout this report reflect the impacts of the Pandemic and the misalignment of supply and demand caused by competition among oil producing nations for crude oil market share. We will continue to monitor the economic environment through the remainder of the year and maintain flexibility to make related financial and operational adjustments as warranted. In ourMidland Basin program, we operated four drilling rigs and one completion crew during the third quarter of 2020. We drilled 23 gross (19 net) wells and completed 22 gross (22 net) wells during the third quarter of 2020, and increased production volumes year-over-year by seven percent to 7.1 MMBOE. Costs incurred for oil and gas producing activities in ourMidland Basin program during the three months endedSeptember 30, 2020 , totaled$120.4 million , or 89 percent of our total costs incurred for the period. We plan to operate between three and four drilling rigs and between one and two completion crews for the remainder of the year. Drilling and completion activities within our RockStar and Sweetie Peck positions in theMidland Basin continue to focus primarily on delineating and developing the Lower Spraberry and Wolfcamp shale intervals. 30 -------------------------------------------------------------------------------- In ourSouth Texas program, we entered the third quarter of 2020 with no drilling rigs and we began operating one drilling rig in September. We completed two gross (two net) wells during the third quarter of 2020. Production volumes for the third quarter of 2020 decreased 22 percent year-over-year. While natural decline and our deferral of activity led to a decrease in total production volumes, oil production volumes increased 40 percent year-over-year as a result of the higher liquids content from ourAustin Chalk completions. Costs incurred for oil and gas producing activities in ourSouth Texas program during the three months endedSeptember 30, 2020 , totaled$7.2 million , or five percent of our total costs incurred for the period. We anticipate operating one drilling rig and one completion crew at times during the remainder of 2020 inSouth Texas . Drilling and completion activities inSouth Texas during the remainder of 2020 will be focused on delineating 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 and nine months endedSeptember 30, 2020 : Midland Basin South Texas Total Gross Net Gross Net Gross Net Wells drilled but not completed at December 31, 2019 51 48 21 21 72 69 Wells drilled 25 22 3 3 28 25 Wells completed (19) (19) (1) (1) (20) (20) Other (1) - 1 - - - 1 Wells drilled but not completed at March 31, 2020 57 52 23 23 80 75 Wells drilled 25 23 4 4 29 27 Wells completed (13) (10) (1) (1) (14) (11) Wells drilled but not completed at June 30, 2020 69 65 26 26 95 91 Wells drilled 23 19 - - 23 19 Wells completed (22) (22) (2) (2) (24) (24) Other (1) - 1 - - - 1 Wells drilled but not completed at September 30, 2020 70 63 24 24 94 87
____________________________________________
(1) Includes adjustments related to normal business activities, including working interest changes for existing drilled but not completed wells. Costs Incurred in Oil and Gas Producing Activities. Costs incurred in oil and gas property acquisition, exploration, and development activities, whether capitalized or expensed, totaled$135.7 million and$437.1 million for the three and nine months endedSeptember 30, 2020 , respectively, and were 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 areas of operation for the three months endedSeptember 30, 2020 , and 2019: Midland Basin South Texas Total Three Months Ended Three Months Ended September Three Months Ended September September 30, 30, 30, 2020 2019 2020 2019 2020 2019 Production: Oil (MMBbl) 5.0 5.1 0.5 0.3 5.5 5.4 Gas (Bcf) 12.3 9.1 13.8 20.4 26.1 29.5 NGLs (MMBbl) - - 1.8 2.1 1.8 2.1 Equivalent (MMBOE) 7.1 6.6 4.5 5.8 11.6 12.4 Average net daily equivalent (MBOE/d) 76.9 71.7 49.3 63.2 126.3 134.9 Relative percentage 61 % 53 % 39 % 47 % 100 % 100 %
____________________________________________
Note: Amounts may not calculate due to rounding.
31
--------------------------------------------------------------------------------
The table below presents our production by product type for each of our areas of
operation for the nine months ended
Midland Basin South Texas Total
Nine Months Ended Nine Months Ended September Nine Months Ended September
September 30, 30, 30,
2020 2019 2020 2019 2020 2019
Production:
Oil (MMBbl) 16.0 14.8 1.3 0.9 17.2 15.7
Gas (Bcf) 34.0 24.4 44.6 57.3 78.6 81.7
NGLs (MMBbl) - - 4.8 6.2 4.8 6.2
Equivalent
(MMBOE) 21.6 18.8 13.5 16.7 35.2 35.5
Average net daily
equivalent
(MBOE/d) 79.0 69.0 49.4 61.1 128.3 130.1
Relative
percentage 62 % 53 % 38 % 47 % 100 % 100 %
____________________________________________
Note: Amounts may not calculate due to rounding. Please refer to A Three Month and Nine Month Overview of Selected Production and Financial Information, Including Trends and Comparison of Financial Results and Trends Between the Three and Nine Months EndedSeptember 30, 2020 , and 2019 below for discussion on production. 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 effects of derivative settlements, unless otherwise indicated. 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 effects of derivative settlements, for the third and second quarters of 2020 as well as the third quarter of 2019: For the Three Months Ended September 30, 2020 June 30, 2020 September 30, 2019 Oil (per Bbl): Average NYMEX contract monthly$ 40.93 $ 27.85 $ 56.45 price Realized price, before the effect$ 37.69 $ 22.25 $ 53.99 of derivative settlements Effect of oil derivative settlements$ 12.51 $ 25.81 $ (0.41) Gas: Average NYMEX monthly settle price$ 1.98 $ 1.72 $ 2.23 (per MMBtu) Realized price, before the effect$ 1.90 $ 1.34 $ 2.17 of derivative settlements (per Mcf) Effect of gas derivative settlements (per Mcf)$ 0.03 $ 0.04 $ 0.41 NGLs (per Bbl): Average OPIS price (1)$ 19.13 $ 14.02 $ 18.89 Realized price, before the effect$ 14.07 $ 10.43 $ 15.73 of derivative settlements Effect of NGL derivative$ 0.29 $ 1.94 $ 7.14 settlements
____________________________________________
(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. During the first nine months of 2020, benchmark prices for oil were impacted by the misalignment of supply and demand caused by the Pandemic and other macroeconomic events. 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. We expect future benchmark prices for oil, gas, and NGLs to remain depressed for 32 -------------------------------------------------------------------------------- the foreseeable future due to the Pandemic and the misalignment of supply and demand. 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 Third Quarter 2020 Overview and Outlook for the Remainder of 2020 above for additional discussion of factors impacting pricing. The following table summarizes 12-month strip prices for NYMEX WTI oil, NYMEXHenry Hub gas, and OPIS NGLs as ofOctober 21, 2020 , andSeptember 30, 2020 : As of October 21, 2020 As of September 30, 2020 NYMEX WTI oil (per Bbl) $ 41.13 $ 41.53 NYMEX Henry Hub gas (per MMBtu) $ 3.13 $ 2.84 OPIS NGLs (per Bbl) $ 20.22 $ 19.46 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 senior executive officers and finance personnel. The amount of our production covered by derivatives is driven by the amount of debt on our balance sheet, the level of capital commitments and long-term obligations we have in place, and our ability to enter into favorable commodity derivative contracts. 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 for a portion of our oil and gas production. 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. Financial Results of Operations and Additional Comparative Data The tables below provide information regarding selected production and financial information for the three months endedSeptember 30, 2020 , and the preceding three quarters.
© Edgar Online, source
