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Here's Why Prudent Investors are Buying SM Energy (SM) Now

SM Energy's (SM) increasing focus on crude, specifically in the Permian Basin and Eagle Ford areas, to enable it to boost oil-weighted activity in the...

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This story originally appeared on Zacks

SM Energy Company SM is well poised to grow on the back of robust Permian Basin oil reserves and encouraging Austin Chalk results.

- Zacks

SM Energy — with a market cap of $1.8 billion — is an upstream energy company. Based in Denver, CO, the company is engaged in the exploration, development, acquisition, and production of natural gas as well as crude oil in North America. As of Dec 31, 2020, it had proved reserves of 405 MMBoe, of which 43% was crude oil, 43% natural gas and 14% NGLs. It added 89 MMBoe of reserves in 2020.

It beat earnings estimates thrice and missed once in the last four quarters, with an average surprise of 47.5%. Courtesy of solid prospects, this Zacks Rank #1 (Strong Buy) stock is worth adding to your portfolio at the moment. You can see the complete list of today’s Zacks #1 Rank stocks here.

SM Energy Company Price and EPS Surprise

SM Energy Company Price and EPS Surprise

SM Energy Company price-eps-surprise | SM Energy Company Quote

What’s Driving the Stock?

Its lucrative hydrocarbon investments, balanced and diverse portfolio of proved reserves as well as development drilling opportunities are expected to create long-term value for shareholders. The company has around 155,000 net acres in South Texas, where it is running two rigs and one completion crew. In the Midland Basin, it has 82,000 net acres and is running three rigs with two completion crews. Around 70% of its 2021 total capital will be utilized in the prolific Midland Basin, while the rest will be allotted to South Texas.

Given the upstream firm’s increasing focus on crude, specifically in the Permian Basin and Eagle Ford areas, it will be able to boost oil-weighted activity in the coming days. Second-quarter production totaled 136.5 MBoe/d, of which 53.8% was crude oil. The company presented encouraging results from the Austin Chalk, wherein breakeven oil price is expected within $12-$28 per barrel NYMEX. The wells in the region are producing around 50-80% liquids, which will boost investor value.

SM Energy's total production guidance has been narrowed to the range of 130.1-135.6 thousand barrels of oil equivalent per day (MBoe/d), signaling a rise from the 2020 level of 126.9 MBoe/d. Of the total output, 52-53% will likely be oil. Coupled with high oil prices, the increased output will boost the company's bottom line. For the third quarter alone, production is expected within 141-143 Mboe/d, of which 53-54% will likely be oil.

SM Energy intends to maximize free cash flow by 2025, which can fund its debt reduction program. Based on J.P. Morgan’s estimates, the company expects 2022 free cash flow yield within 25-30% for 2022. Earlier, it decreased the full-year 2021 capital spending plan by 27% from the February guidance to $650-675 million. Next year, capital expenditure is likely to further decline and remain stable till 2025. Of the total 2021 capital spending plan, 90% will be used for drilling and completion activities.

Risks

There are a few factors that investors should keep in mind. At the end of second-quarter 2021, SM Energy had $2,254.6 million in net debt but no cash and cash equivalents. High leverage of the upstream player is a cause of concern as it can restrict financial flexibility. Also, the company is expected to incur millions of hedging losses due to high commodity prices. This will likely put a dent in its potential cash flow generation. Nevertheless, we believe that systematic and strategic plan of action will drive long-term growth.

Other Key Picks

Other top-ranked stocks from the energy space include Hess Midstream LP HESM, Range Resources Corporation RRC and Cheniere Energy, Inc. LNG, each having a Zacks Rank #2.

Hess Midstream’s bottom line for 2021 is expected to increase 19.1% year over year.

The Zacks Consensus Estimate for Range Resources’ earnings for 2021 is pegged at $1.53 per share, indicating a massive improvement from the year-ago loss of 9 cents.

The consensus estimate for Cheniere’s earnings for 2021 is pegged at $2.53 per share, signaling a major improvement from the year-ago loss of 34 cents.



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Range Resources Corporation (RRC): Free Stock Analysis Report

 

SM Energy Company (SM): Free Stock Analysis Report

 

Cheniere Energy, Inc. (LNG): Free Stock Analysis Report

 

Hess Midstream Partners LP (HESM): Free Stock Analysis Report

 

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