SM Energy Company reports financial results for the fourth quarter of 2013 and provides an update on the Company's operating activities.
In a release on February 18, the Company noted that in addition, a presentation for the fourth quarter earnings and operational update has been posted on the Company's website at www.sm- energy.com. This presentation will be referenced during the conference call scheduled for 8 a.m. Mountain Time (10 a.m. Eastern time) on February 19.
Tony Best, CEO, remarked, "2013 was an extraordinary year for SM Energy. Our proved reserves at year end 2013 were up by 46 percent from 2012 and our drilling finding and development costs were down by 26 percent for the same period. Our development programs were the performance drivers in 2013, resulting in 33 percent annual average daily production growth for the Company and record annual production. As we look to 2014, we believe we have plenty of dry powder to fund our program and many exciting opportunities in optimizing our existing development programs and increasing the inventory in our new venture plays."
FOURTH QUARTER 2013 RESULTS
SM Energy posted GAAP net income for the fourth quarter of 2013 of $7.0 million, or $0.10 per diluted share, compared to a net loss of $67.1 million, or $1.02 per diluted share, for the same period of 2012. Adjusted net income for the fourth quarter was $85.9 million, or $1.26 per diluted share, compared to adjusted net income of $30.4 million, or $0.45 per adjusted diluted share, in the same period of 2012. Adjusted net income excludes certain items that the Company believes affect the comparability of operating results. Items excluded are generally one-time items or are items whose timing and/ or amount cannot be reasonably estimated. Earnings before interest, taxes, depreciation, depletion, amortization, accretion, and exploration expense (EBITDAX) were $395.5 million for the fourth quarter of 2013, an increase of 33 percent from $298.2 million for the same period in 2012.
Adjusted net income and EBITDAX are non-GAAP financial measures - please refer to the respective reconciliation in the accompanying Financial Highlights section at the end of this release for additional information about these measures.
SM Energy's average daily production of 144 MBOE/d for the fourth quarter of 2013 set a new quarterly record for the Company and was above the midpoint of the Company's guidance range of 139 to 146 MBOE/d. Included in this production was approximately 7.7 MBOE/d (81 percent gas) associated with Anadarko Basin properties that the Company divested at the end of 2013. The production mix for the quarter was 28 percent oil, 50 percent gas, and 22 percent NGLs. Production growth was driven by strong results in the Company's operated Eagle Ford shale and Bakken/Three Forks programs. Production grew 4 percent sequentially in the fourth quarter of 2013 over the preceding quarter and 31 percent over the fourth quarter of 2012.
In the fourth quarter of 2013, cash G&A expenses per unit were higher than guided due to performance-based bonus compensation, which was better than projected for the year as a result of Company performance exceeding its 2013 targets. The Company reported a proved property impairment of approximately $110.9 million in the fourth quarter of 2013 for properties in the Company's Mississippian limestone program in the Permian Basin. The Company's effective tax rate for the fourth quarter of 2013 was abnormally high due to the sale of its Anadarko Basin properties in the fourth quarter. The tax gain related to this sale caused a shift in anticipated recognition of state tax benefits causing a one-time rate impact effect. Adjusted for the effects of the aforementioned sale, the Company's adjusted statutory rate would have been approximately 37.2 percent.
PROVED RESERVES AND COSTS INCURRED
SM Energy's estimate of proved reserves as of December 31, 2013, was 428.7 MMBOE, which is an increase of 46 percent from 293.4 MMBOE at the end of 2012. These reserves are comprised of 126.6 MMBbl of oil, 1,189.3 Bcf of natural gas, and 103.9 MMBbl of NGLs.
The Company's proved undeveloped reserves percentage increased to 51 percent of total proved reserves at year-end 2013, compared to 43 percent at the end of 2012. The Company's proved reserves volume of oil and NGLs increased 49 percent to 230.5 MMBOE at year-end 2013 and reflects the Company's focus on liquids-rich plays.
2013 Proved Reserves Roll-Forward
MMBOE Beginning of year 293.43 Price revisions 0.63 Performance revisions 4.36 Discoveries and extensions 140.97 Infill reserves in an existing proved field 54.56 Purchases of minerals in place 1.32 Sales of reserves (18.21 ) Production (48.34 ) End of year 428.72 Percentage liquids 54 percent Percentage proved undeveloped 51 percent
Prices used at year-end to calculate the Company's estimate of proved reserves were $96.94 per barrel of oil, $3.67 per MMBTU of natural gas, and $40.29 per barrel of NGLs, using the trailing 12- month arithmetic average of the first of month price in accordance with SEC requirements. These prices are 2 percent greater for oil, 33 percent greater for natural gas, and 12 percent less for NGLs than the respective prices used at the end of 2012.
The standardized measure of discounted future net cash flows at December 31, 2013, was $4.0 billion. The before income tax PV-10 value of the Company's estimated proved reserves at December 31, 2013, was $5.5 billion, which was 44 percent greater than the prior year PV-10 value of $3.8 billion. More than 80 percent of SM Energy's estimated proved reserves by value were audited by an independent reserve engineering firm. The Company believes its use of an independent reserve auditor is a matter of interest to current and potential shareholders, as well as investment professionals who follow the Company. More information on these items are included in the Company's Form 10-K for the year ended December 31, 2013, which is to be filed with the Securities and Exchange Commission on or around February 19.
Drilling finding and development costs excluding revisions decreased in 2013 by approximately 26 percent to $7.77 per BOE from $10.44 per BOE in 2012. In 2013, drilling reserve replacement excluding revisions remained above 400 percent for the second consecutive year at 405 percent for 2013. Over a three-year period, SM Energy has decreased its drilling finding and development costs by approximately 55 percent from $17.10 per BOE for 2011, while posting drilling reserve replacement figures in excess of 300 percent annually over the same period.
FINANCIAL POSITION AND LIQUIDITY
As of December 31, 2013, SM Energy had total long-term debt of $1.6 billion and no borrowings under its revolving credit facility. At year-end, SM Energy's debt-to-book capitalization ratio was 50 percent and the ratio of its debt to trailing twelve month EBITDAX was 1.1 times. The Company had $282.2 million in cash and cash equivalents at the end of 2013. Adjusting for this cash, net debt- to-book capitalization ratio was 45 percent and the ratio of its net debt to trailing twelve month EBITDAX was 0.9 times. As of the end of the fourth quarter, SM Energy was in compliance with all of the covenants associated with its long-term debt.
Eagle Ford Shale
The Company made 95 flowing completions in its operated Eagle Ford shale program in 2013, 20 of which were in the fourth quarter. At year-end 2013, SM Energy had 246 net wells producing, 12 proved developed not producing, and 199 proved undeveloped net locations booked for its program. The Company had 239 MMBOE of total proved reserves booked at year-end for this program. During 2013, the Company's operated well costs decreased by approximately 14 percent from 2012 in both the Briscoe and Galvan Ranch portions of its acreage position. In 2014, the Company plans to make approximately 100 flowing completions on its operated acreage, with approximately 60 percent of the activity in Galvan Ranch (area 3) and the balance of activity in Briscoe Ranch (areas 1,2, and 4). In 2014, the Company has planned various completion design tests throughout its acreage position to maximize program economics.
In the non-operated Eagle Ford program, the operator completed 84 gross wells in the fourth quarter of 2013. During the quarter, the operator added one drilling rig to the program, ending the quarter with 10 rigs. In the fourth quarter, the operator commissioned additional compression, which added throughput capacity to its program.
Bakken / Three Forks
SM Energy made 42 gross flowing completions in its operated Bakken/Three Forks program in 2013, 8 of which were completed in the fourth quarter of 2013. At year-end 2013, SM Energy had 103 net wells producing and 79 proved undeveloped net locations booked for its program. The Company had 54 MMBOE of total proved reserves booked at year-end for this program. The Company currently focuses its drilling on its Raven/Bear Den and Gooseneck prospects in North Dakota. Substantially all of the Company's activity is now focused on infill development. SM Energy is currently operating three drilling rigs in North Dakota, two of which are operating in the Raven/Bear Den prospect and the third in the Gooseneck prospect. During 2013, the Company's drill and complete costs for its operated wells decreased by approximately 4 percent in both the Raven/Bear Den and Gooseneck prospects. In 2014, the Company has planned various tests including completion design, spacing, and new intervals to maximize program economics and prove up additional inventory.
Permian Basin Shales
In the Midland Basin, the Company has shifted its drilling focus to horizontal Wolfcamp B targets in both its Sweetie Peck field in Upton County, Texas, and its recently acquired Buffalo prospect in Gaines and Dawson Counties, Texas. In its Sweetie Peck field, the Company made 2 flowing completions in the fourth quarter, both of which targeted the Wolfcamp B formation. Peak 30-day initial production rates for these two completed wells were 981 and 950 BOE/ d and averaged 81 percent and 76 percent oil, respectively. In 2014, the Company plans to drill approximately 14 wells on its Sweetie Peck acreage primarily targeting the Wolfcamp B formation with an additional 2014 test targeting the Wolfcamp D (Cline) formation. The Company has identified 96 drilling locations targeting the Wolfcamp B on its Sweetie Peck acreage.
In its Buffalo prospect, the Company completed its first horizontal Wolfcamp B well, the Tatonka 1-H with an effective lateral length of approximately 5,560 feet. The well had peak 7-day and 30-day initial production rates of approximately 550 BOE/d and 375 BOE/d respectively (89 percent oil). The Company plans to drill additional test wells with longer lateral lengths in 2014 to delineate this prospect.
Powder River Basin
In the Powder River Basin, the Company operated one drilling rig in the fourth quarter focused on the Frontier interval. In 2014, SM Energy plans to drill and complete 8 Frontier wells. At year-end 2013, the Company had identified approximately 355 gross/150 net Frontier locations and 265 gross/145 net Shannon/Sussex locations with a combined resource potential of approximately 215 MMBOE for the three intervals.
On its East Texas acreage, the Company operated one drilling rig and completed one Eagle Ford shale test during the fourth quarter. The Brollier 1H well was the Company's first Eagle Ford shale test well in its Independence Prospect area in Washington County, Texas. The well had a 7-day initial production rate of approximately 1,475 BOE/d and an effective lateral length of approximately 4,450 feet. In 2014, the Company plans to drill and complete eight additional exploration and delineation wells targeting various formations in its four prospect areas in East Texas.
SM Energy Company is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids in onshore North America.
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