In a Feb. 28 research note, analyst John Freeman noted that Raymond James' thesis on SM Energy Co. (SM:NYSE) "focuses on the company's high-quality Howard County assets that have yielded some of the best results in the area to date in the highest oil-cut county in the Midland Basin. Through shifting capital out of the Bakken/Williston and Powder River Basin assets and into its Midland Basin program, SM has positioned itself to realize much of the upside to our bullish oil call in 2019/2020."
Freeman also reported that Raymond James updated its estimates on SM Energy, accounting for a weaker-than-anticipated development program and, thus, the expectation of slower growth, in 2019.
"SM Energy targets the Midland Basin again this year, dedicating $1,035 million to its total program at the midpoint of guidance," Freeman relayed, which compares to Raymond James and the Street's projections of $1,060 million and $1,050 million, respectively.
The company, when it delivered its Q4/18 earnings report, guided to lower estimated volume growth in 2019 than consensus' expectation, which resulted in its share price decreasing 14%.
SM Energy's "total/oil guidance of ~127/55 Mboe/d yields ~6%/8% growth y/y, [is] coming in much weaker than Street forecasts expecting ~136/62 Mboe/d (~13%/22% y/y growth)," Freeman noted. "An inconsistent well POP cadence and year-end drilled-but-uncompleted well count attribute to the weak volumes relative to Street models."
Overall in 2019, SM Energy expects to complete 100 net wells in the Permian Basin, which should yield YOY growth of about 20%. However, Raymond James expects a roughly 51% base decline in oil volumes, versus SM's 47%, which "could be a difficult hurdle to overcome this year," Freeman commented. Taking into account the expected "continued outperformance" from the company's Howard County assets, however, the financial services firm models an approximate 12% YOY volume growth in 2019 for SM Energy.
Also of note, Freeman highlighted, the company remains committed to paying down debt regardless of whether or not oil prices continue to rally.
Raymond James has an Outperform rating and a $26 per share price target on SM Energy, whose current share price is around $15.74.
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Disclosures from Raymond James, SM Energy Company, February 28, 2019
ANALYST INFORMATION
Analysts Holdings and Compensation: Equity analysts and their staffs at Raymond James are compensated based on a salary and bonus system. Several factors enter into the bonus determination, including quality and performance of research product, the analyst's success in rating stocks versus an industry index, and support effectiveness to trading and the retail and institutional sales forces. Other factors may include but are not limited to: overall ratings from internal (other than investment banking) or external parties and the general productivity and revenue generated in covered stocks.
The analyst John Freeman, primarily responsible for the preparation of this research report, attests to the following: (1) that the views and opinions rendered in this research report reflect his or her personal views about the subject companies or issuers and (2) that no part of the research analyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations or views in this research report. In addition, said analyst(s) has not received compensation from any subject company in the last 12 months.
RAYMOND JAMES RELATIONSHIP DISCLOSURES
Certain affiliates of the RJ Group expect to receive or intend to seek compensation for investment banking services from all companies under research coverage within the next three months.
Raymond James & Associates, Inc. makes a market in the shares of SM Energy Company.
Raymond James & Associates received non-investment banking securities-related compensation from SM Energy Company within the past 12 months.
