In a July 18 research note, John Freeman reported that Raymond James decreased its target price but maintained its Outperform rating on SM Energy Co. (SM:NYSE) in response to a recent operational update.
The new target price, which better reflects "weakness in commodity pricing relative to our prior bullish forecast," Freeman wrote, is $15 per share, down from $20. It compares to SM's current share price of about $10.14.
Freeman indicated that two factors are expected to decrease SM's Q3/19 production numbers. One is SM's intention to reject ethane for most of H2/19 due to its price. The other is shut-ins by offset operators in the Midland Basin, which are estimated to reduce volumes by about 1,500,000 barrels of oil equivalent (boe) in Q3/19. The net result will likely be an approximate 4% decline in SM's sequential production in Q3/19 to 131,500 boe per day (131.5 Mboe/day).
On a positive front, highlighted Freeman, SM met its capital discipline goals so far in 2019. Q2/19 spending came in at $261 million versus the Street's estimate of $314 million and Raymond James' forecast of $302 million.
Also, SM just increased its 2019 volume model by about 1% at the midpoint, 130 Mboe/day. Freeman noted, "Our model remains at the high end of the expected range for the year, given SM's propensity to outperform expected production ranges in its Permian operations."
Looking to 2020, SM Energy's capital program of $960–1,080 million is like this year's, Freeman pointed out. As for production, single high-digit growth is expected.
Investors should expect the company to keep working on improving its balance sheet, Freeman wrote. "SM has hedges in place on about 50% of its anticipated 2020 oil volumes at $55-plus per barrel of West Texas Intermediate, and likely takes any incremental cash flow resulting from commodity price uplift to the balance sheet as it continues to prioritize de-levering in the near term," he added.
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Disclosures from Raymond James, SM Energy Company, July 18, 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.
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