zhengzaishuru
SM Energy (NYSE:SM) looks capable of generating approximately $1.15 billion in free cash flow during 2H 2023 and 2024 combined at current strip prices. This also assumes a slightly above maintenance capex budget that results in mid-single-digits production growth in 2024.
I am keeping my expectations around long-term (after 2024) commodity prices at $75 oil and $3.75 NYMEX gas. At those long-term commodity prices, I value SM at $48 per share, assuming that commodity prices follow the current strip (including low-$80s WTI oil) in 2024. This is a couple of dollars per share higher than my previous estimate of SM’s value, reflecting increased near-term free cash flow expectations.
Realized Prices For NGLs
One area to keep an eye on is SM’s realized price for NGLs, which represent approximately 17% of SM’s total production. NGLs account for approximately 35% of SM’s production in South Texas though, due to it devoting a fair amount of its focus to the liquids-rich area of the Austin Chalk.
The higher BOE volumes coming out of the liquids-rich Austin Chalk have contributed to South Texas accounting for 53% of SM’s total production in Q2 2023, compared to 43% in Q2 2022. SM’s Midland Basin production declined -12% in Q2 2023 compared to Q2 2022, while its South Texas production increased by +28% over that same period.
| Volumes By Area | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 | Q2 2023 |
| Midland Basin | 57% | 57% | 57% | 54% | 51% | 47% |
| South Texas | 43% | 43% | 43% | 46% | 49% | 53% |
SM mentioned that its NGL composition is around 49% ethane, 24% propane, 12% natural gasoline, 8% butane and 7% isobutane. It realized $42.08 per BOE for its NGLs in Q2 2022 but is realizing in the low-to-mid $20s per BOE for its NGLs now.
SM’s NGL Realizations (sm-energy.com)
Based on SM’s NGL composition, I estimate it would realize approximately $22 per BOE for its NGLs in 2024 at current strip.
Updated Outlook For 2H 2023
Since I last looked at SM Energy in August, projected oil prices for the second half of 2023 have become a fair bit stronger, while natural gas prices (for the same period) have decreased slightly.
The current strip of around $85 WTI oil and $2.80 NYMEX gas for the second half of 2023 results in a projection that SM can generate $1.3 billion in revenues after hedges during this time period.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Oil | 12,300,000 | $83.50 | $1,027 |
| NGLs | 4,800,000 | $22.00 | $106 |
| Gas | 63,600,000 | $2.80 | $178 |
| Hedge Value | -$11 | ||
| Total | $1,300 |
Thus SM may be able to generate $424 million in free cash flow during the second half of 2023.
| $ Million | |
| Lease Operating | $159 |
| Transportation | $60 |
| Production and Ad Valorem Taxes | $87 |
| Cash G&A | $50 |
| Net Cash Interest | $45 |
| Capex | $475 |
| Total | $876 |
Potential 2024 Outlook
I am modeling SM’s 2024 results at 157,000 BOEPD (43% oil production). This is mid-single digits growth compared to its expected 2023 production.
At the current 2024 strip of low-$80s WTI oil and $3.50 NYMEX gas, I project that SM will end up with $2.631 billion in revenues after hedges.
| Type | Barrels/Mcf | $ Per Barrel/Mcf | $ Million |
| Oil | 24,641,150 | $80.00 | $1,971 |
| NGLs | 10,452,432 | $22.00 | $230 |
| Gas | 133,268,508 | $3.25 | $433 |
| Hedge Value | -$3 | ||
| Total | $2,631 |
If SM ends up with a $1.1 billion capital expenditure budget to grow production by mid-single digits, then it would end up with $728 million in free cash flow during 2024, before any impact from cash income taxes. This assumes that SM will run an average of 5.5 rigs during 2024.
| $ Million | |
| Lease Operating | $308 |
| Transportation | $125 |
| Production and Ad Valorem Taxes | $180 |
| Cash G&A | $100 |
| Net Cash Interest | $90 |
| Capex | $1,100 |
| Total | $1,903 |
Notes On Valuation
I am continuing to maintain my expectations around long-term (after 2024) commodity prices at $75 WTI oil and $3.75 NYMEX gas. At those commodity prices, I now estimate SM’s value at approximately $48 per share. This assumes that commodity prices match current strip until at least the end of 2024.
SM may be able to generate over $6.50 per share in free cash flow in 2024 at current strip prices, assuming that it continues to repurchase shares. This amount of free cash flow also involves a capex budget that is above maintenance capex, as it should be able to maintain production levels with $1 billion (or slightly less) in capital expenditures.
Conclusion
SM Energy looks capable of generating around $1.15 billion in free cash flow in 2H 2023 and 2024 combined at current strip, while also growing production modestly. This will allow it to continue to share repurchases while also putting aside money to pay back its upcoming note maturities via cash on hand.
Strong near-term commodity prices boost SM’s value to around $48 per share in a long-term $75 oil and $3.75 gas scenario, assuming that oil prices remain higher than those long-term prices during 2024.
