SM Energy Management Discusses Q2 2012 Results - Earnings Call Transcript

SM Energy (SM)

Q2 2012 Earnings Call

August 02, 2012 10:00 am ET


David W. Copeland - Senior Vice President and General Counsel

Anthony J. Best - Chief Executive Officer, President, Director and Member of Executive Committee

A. Wade Pursell - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Javan D. Ottoson - Chief Operating Officer and Executive Vice President


Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Subash Chandra - Jefferies & Company, Inc., Research Division

Welles W. Fitzpatrick - Johnson Rice & Company, L.L.C., Research Division

Scott Hanold - RBC Capital Markets, LLC, Research Division

Michael Scialla - Stifel, Nicolaus & Co., Inc., Research Division

Nicholas P. Pope - Dahlman Rose & Company, LLC, Research Division

David R. Tameron - Wells Fargo Securities, LLC, Research Division

Pearce W. Hammond - Simmons & Company International, Research Division

Michael A. Hall - Robert W. Baird & Co. Incorporated, Research Division



Good morning. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy second quarter earnings conference call. [Operator Instructions] Mr. David Copeland, you may begin your conference.

David W. Copeland

Thank you, Tina. Good morning to all of you joining us by phone and online for SM Energy Company's Second Quarter 2012 Earnings Conference Call and Operations Update. Before we start, I'd like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied on our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday afternoon, the presentation posted on our website for this call and the Risk Factors section in our Form 10-K filed earlier this year and our Form 10-Q that will be filed later today.

We'll also discuss certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are described on our earnings press release from yesterday.

Additionally, we may use the terms probable, possible and 3P reserves and estimated ultimate recovery or EUR on this call. You should read the Cautionary Language slide page in our slide presentation for an important discussion of these terms and the special risks and other considerations associated with these non-proved reserve metrics.

Company officials on the call this morning are Tony Best, President and Chief Executive Officer; Jay Ottoson, Executive Vice President and Chief Operating Officer; Wade Pursell, Executive Vice President and Chief Executive (sic) [Financial] Officer; Brent Collins, Senior Director of Planning and Investor Relations; and myself, the company's Senior Vice President and General Counsel. With that, I'll turn the call over to Tony.

Anthony J. Best

Good morning, everyone, and thank you for joining us this morning for our second quarter 2012 earnings call. I'll make a few introductory remarks, and then Wade and Jay will provide their respective financial and operational reviews. We'll be referring to slides this morning from the presentation that was posted on our website last evening. And my comments will begin with Slide 3.

The second quarter of 2012 continued on pace with our business plans for the year, although we saw adverse financial impacts from lower natural gas pricing and production curtailments in our operating Eagle Ford Shale Program due to equipment delays in our third-party gathering system buildout. As a result of this constraint, we will defer several Eagle Ford well completion in the 2013 and redirect the associated capital into oil-focused projects in the Permian.

Jay will talk more about our Permian progress in a few minutes, but as a preface, let me say that I'm very pleased with our progress in our Mississippian Limestone play as well as our acreage build in this oily province.

In regard to our balance sheet, it was also an important quarter for SM with the redemption of our convertible bonds and the issuance of $400 million in new high-yield bonds at an attractive 6.5% coupon.

I'll now turn the second quarter update over to Wade.

A. Wade Pursell

Thank you, Tony, and good morning. I'll begin with a brief recap of how the company performed compared to our guidance for the quarter starting on Slide 5.

Production came in at 50.6 Bcf equivalent or 556 million per day, which was towards the low end of the range that we provided for the quarter. Jay will discuss production in more detail in his review.

Cost for the quarter were generally in line or better than what we have guided for the quarter. Transportation came in meaningfully below our guidance. This is primarily a function of lower-than-expected Eagle Ford volumes in the quarter. Production taxes also came in below our guidance as a result of tax incentives that we recognized in the quarter related to drilling in the state of Oklahoma. On LOE, absolute dollars came in essentially in line with what we expected for the quarter, however, lower-than-anticipated production volumes pushed LOE per Mcfe slightly above our guidance range. All the other costs that we guide on came in within actually at the low end of our guidance ranges.

We had a couple of unusual items this quarter. First, we recorded $38 million of impairment on proved properties related to our Haynesville shale asset. This impairment was driven by weak natural gas prices. We also recorded a loss on divestiture activity of $24 million in the second quarter.

During the quarter, we ended the marketing process for package of DJ Basin assets, and we didn't receive offers on what we thought was sufficient value for the assets. When these properties were reclassified from assets held for sale to held unused, we were required to recognize a noncash write-down of about $28 million to state the assets at market value for accounting purposes.

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