SM Energy Reports Results For The Second Quarter Of 2014; Announces Significant Bakken/Three Forks Acquisition

SM Energy Company (NYSE: SM) announces its financial results for the second quarter of 2014 and provides an operations update. In addition, a new presentation concerning the Company's second quarter earnings and operations update will be posted on the Company's website at www.sm-energy.com. This presentation will be referenced during the conference call scheduled for 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time) on July 30, 2014. Information for the call can be found below.

SECOND QUARTER 2014 RESULTS

SM Energy reported net income for the second quarter of 2014 of $59.8 million, or $0.88 per diluted share. This compares to net income of $76.5 million, or $1.13 per diluted share, for the same period of 2013.

Adjusted net income for the second quarter of 2014 was $106.5 million, or $1.56 per diluted share, compared to adjusted net income of $51.8 million, or $0.76 per diluted share, for the same period of 2013. Adjusted net income excludes certain items that the Company believes affect the comparability of operating results and are generally items whose timing and/or amount cannot be reasonably estimated.

Earnings before interest, taxes, depreciation, depletion, amortization, accretion, and exploration expense ("adjusted EBITDAX") set a new quarterly record of $423.4 million in the second quarter of 2014, an increase of 24% from $342.5 million for the same period of 2013.

Adjusted net income and adjusted EBITDAX are non-GAAP financial measures. Please refer to the respective reconciliations in the Financial Highlights section at the end of this release for additional information about these measures.

Total operating revenues for the second quarter of 2014 were $675.0 million compared to $559.4 million for the same period of 2013, a 21% increase from period to period. The table below provides the average realized prices received by product, as well as the adjusted prices received after taking into account cash settlements for derivative transactions:
 
Average Realized Commodity Prices for the Three Months Ended June 30, 2014
 

Before the effect ofderivative cashsettlements
         

After the effectof derivative cashsettlements
 
Oil ($/Bbl) $   91.78 $   86.60
Gas ($/Mcf) $ 4.87 $ 4.51
Natural gas liquids ($/Bbl) $ 35.61 $ 35.59
Equivalent ($/BOE) $ 48.93 $ 46.41
 

The table below presents key performance measures and metrics, as well as previously provided guidance for the second quarter of 2014:
           
Production Reported 2Q14 Guidance
 
Average daily production (MBOE/d) 147.0 136 - 143
Total production (MMBOE) 13.38 12.4 - 13.0
 
Costs
LOE ($/BOE) $4.69 $4.80 - $5.05
Transportation ($/BOE) $6.20

$6.10 - $6.50
Production taxes (% of pre-derivative oil, gas, and NGL revenue) 4.9% 4.5% - 5.0%
 
G&A - Cash ($/BOE) $2.24 $2.25 - $2.45
G&A - Cash NPP ($/BOE) $0.15 $0.25 - $0.40
G&A - Non-cash ($/BOE) $0.46 $0.40 - $0.60
Total G&A ($/BOE) $2.85 $2.90 - $3.45
 
DD&A ($/BOE) $14.03 $14.00 - $14.75
 

Reported average daily production increased by 6% from production of 138.6 MBOE per day in the first quarter of 2014. In the second quarter of 2014, SM Energy's reported production mix was 29% oil/condensate, 24% NGLs, and 47% natural gas.

In the second quarter, the Company reported per unit costs in-line or slightly below its previously announced guidance range.

OPERATIONS UPDATE

Eagle Ford Shale

The Company's operated net production in the Eagle Ford shale averaged 83.2 MBOE per day in the second quarter of 2014, a 9% sequential increase from the prior quarter and a 26% increase over the second quarter of 2013. During the second quarter, SM Energy made 23 flowing completions in its operated Eagle Ford Shale program.

The Company has been shifting its Eagle Ford drilling and completion program toward longer lateral wells and completions with higher sand loading. Although the Company's longer lateral testing is ongoing, sufficient data on the Company's increased sand loading tests is now available from wells in Area 2 of its operated Eagle Ford shale position to conclude that wells completed with higher sand loadings are more productive, have improved initial condensate yields, and have significantly improved economics. Additional details regarding this testing program are included in the Company's presentation and will be discussed on the Company’s earnings call.

In the non-operated portion of the Company's Eagle Ford shale program, net production for the second quarter of 2014 averaged 23.8 MBOE per day, a 2% sequential increase over the first quarter of 2014 production of 23.4 MBOE per day and a 37% increase over the second quarter of 2013. The operator made approximately 95 flowing completions during the second quarter. Consistent with previous expectations, the drilling and completion carry provided under the Company's Acquisition and Development Agreement with Mitsui was completed in the second quarter of 2014. With the completion of the carry, the Company is now responsible for funding its proportionate share of drilling and completion costs.

Bakken / Three Forks

In the second quarter of 2014, SM Energy's average daily production for its Bakken/Three Forks program was 16.5 MBOE per day. Average daily production for the quarter increased by 3% over the prior quarter and increased 21% from the second quarter of 2013. During the second quarter, the Company made 12 gross flowing completions in its operated Bakken/Three Forks program.

Earlier today, the Company entered into an agreement to acquire approximately 61,000 net acres in Divide and Williams Counties, North Dakota directly adjacent to its Gooseneck area for $330 million. Highlights of the transaction, which is expected to add significant drilling inventory, include:

  • Associated net production of approximately 3,200 BOE/d (91% oil, 1,500 BTU rich gas)
  • Properties are 90% operated and approximately 70% held by production
  • Interests in 126 drilling spacing units, 81 of which will be operated by SM Energy
  • Working interest for operated spacing units is expected to range between 37.5% – 50.0%

The transaction has an effective date of July 1, 2014, is expected to close by the end of the third quarter of 2014, and is subject to customary closing conditions and adjustments. The Company expects to fund the acquisition with cash on hand and borrowings under its existing credit facility.

Directly adjacent to the acquisition area, SM Energy has seen improvements in its Three Forks program recently due to faster drilling times and improved completions, where results to date indicate that recent wells have higher sustained production rates than older wells. Additional details regarding Gooseneck Three Forks well optimization are included in the Company's presentation and will be discussed on the Company's earnings call.

Powder River Basin

SM Energy completed one well in its Powder River Basin acreage in the second quarter of 2014. The Rush State 4277-36-1FH (SM 100% WI) with a 3,788 foot effective lateral length had a peak 30-day initial production rate of 737 BOE per day (2-stream, 85% oil). During 2014, the Company has acquired or entered into transactions to acquire approximately 33,000 net acres, resulting in a total of approximately 166,000 net acres in the basin. SM Energy added a third rig to its program during the second quarter and has contracted a fourth rig for delivery in the third quarter of 2014.

Permian Basin

During the second quarter of 2014, the Company made 4 flowing completions in its Sweetie Peck property. During the quarter, the Company completed two of its most productive wells to date in this program on a peak initial production per lateral foot basis. The Dorcus 4236H (SM 100% WI) had a peak 30-day initial production rate of 1,093 BOE per day on a two-stream basis and the Dorcus 3036H (SM 100% WI), the Company's first long lateral well in Sweetie Peck with an approximately 7,650 foot effective lateral, had a peak 30-day initial production rate of 1,559 BOE per day on a two-stream basis. In its Buffalo prospect in the northern Midland Basin, the Company spud its first Wolfcamp D test at the end of the second quarter.

FINANCIAL POSITION AND LIQUIDITY

As of the end of the second quarter, the Company had $163.8 million of cash on hand and outstanding borrowings of $1.6 billion, which were comprised entirely of long term notes. As of the end of the second quarter, SM Energy had an undrawn credit facility with $1.3 billion in lender commitments. As of June 30, 2014, the Company's debt to twelve month trailing adjusted EBITDAX remained at 1.0 times and its debt-to-book capitalization ratio was 48%.

CAPITAL, PRODUCTION, AND PERFORMANCE GUIDANCE

SM Energy is reviewing its capital budget for 2014 in light of its recent Bakken/Three Forks acquisition and expects to provide updated capital, production, and performance guidance in mid-August 2014.

EARNINGS CALL INFORMATION

The Company has scheduled a teleconference to discuss these results and other operational matters for July 30, 2014, at 8:00 a.m. Mountain time (10:00 a.m. Eastern time). Conference dial-in information is included below. A telephonic replay of the call will be available approximately two hours after the call through August 13, 2014.
                 
Call Type       Phone Number       Conference ID
Domestic Participant       877-303-1292       72768736
Domestic Replay       855-859-2056       72768736
International Participant       315-625-3086       72768736
International Replay       404-537-3406       72768736
           

This call is being webcast live and can be accessed at SM Energy Company's website at www.sm-energy.com. An audio recording of the conference call will be available at that site through August 13, 2014.

INFORMATION ABOUT FORWARD-LOOKING STATEMENTS

This release contains forward-looking statements within the meaning of securities laws, including forecasts and projections. The words “anticipate,” “assume,” “believe,” “budget,” “estimate,” “expect,” “forecast,” “intend,” “plan,” “project,” “will” and similar expressions are intended to identify forward-looking statements. These statements involve known and unknown risks, which may cause SM Energy's actual results to differ materially from results expressed or implied by the forward-looking statements. These risks include factors such as the availability, proximity and capacity of gathering, processing and transportation facilities; the uncertainty of negotiations to result in an agreement or a completed transaction; the uncertain nature of announced acquisition, divestiture, joint venture, farm down or similar efforts and the ability to complete any such transactions; the uncertain nature of expected benefits from the actual or expected acquisition, divestiture, joint venture, farm down or similar efforts; the volatility and level of oil, natural gas, and natural gas liquids prices; uncertainties inherent in projecting future rates of production from drilling activities and acquisitions; the imprecise nature of estimating oil and gas reserves; the availability of additional economically attractive exploration, development, and acquisition opportunities for future growth and any necessary financings; unexpected drilling conditions and results; unsuccessful exploration and development drilling results; the availability of drilling, completion, and operating equipment and services; the risks associated with the Company's commodity price risk management strategy; uncertainty regarding the ultimate impact of potentially dilutive securities; and other such matters discussed in the “Risk Factors” section of SM Energy's 2013 Annual Report on Form 10-K. The forward-looking statements contained herein speak as of the date of this announcement. Although SM Energy may from time to time voluntarily update its prior forward-looking statements, it disclaims any commitment to do so except as required by securities laws.

ABOUT THE COMPANY

SM Energy Company is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids in onshore North America. SM Energy routinely posts important information about the Company on its website. For more information about SM Energy, please visit its website at www.sm-energy.com.
                 
SM ENERGY COMPANY
FINANCIAL HIGHLIGHTS (unaudited)
June 30, 2014
                 

Production Data

For the Three Months Ended June 30,

For the Six Months Ended June 30,
2014 2013

Percent Change
2014 2013

Percent Change
 
Average realized sales price, before the effects of
derivative cash settlements:
Oil (per Bbl) $ 91.78 $ 90.00 2 % $ 90.41 $ 90.82 %
Gas (per Mcf) 4.87 4.28 14 % 5.04 3.96 27 %
NGL (per Bbl) 35.61   34.09   4 % 37.13   35.24   5 %
Equivalent (per BOE) $ 48.93 $ 44.57 10 % $ 49.43 $ 44.95 10 %
 
Average realized sales price, including the effects of
derivative cash settlements:
Oil (per Bbl) $ 86.60 $ 89.64 (3 )% $ 86.85 $ 90.45 (4 )%
Gas (per Mcf) 4.51 4.23 7 % 4.67 4.08 14 %
NGL (per Bbl) 35.59   36.00   (1 )% 35.67   36.81   (3 )%
Equivalent (per BOE) $ 46.41 $ 44.66 4 % $ 47.00 $ 45.52 3 %
 
Production:
Oil (MMBbls) 3.89 3.23 21 % 7.55 6.36 19 %
Gas (Bcf) 37.96 39.15 (3 )% 73.50 71.39 3 %
NGL (MMBbls) 3.16   2.24   41 % 6.05   4.08   48 %
MMBOE 13.38 11.99 12 % 25.85 22.34 16 %
 
Average daily production:
Oil (MBbls per day) 42.8 35.5 21 % 41.7 35.1 19 %
Gas (MMcf per day) 417.2 430.2 (3 )% 406.1 394.4 3 %
NGL (MBbls per day) 34.7   24.6   41 % 33.4   22.5   48 %
MBOE 147.0 131.8 12 % 142.8 123.4 16 %
 
Per BOE Data:
Realized price before the effects of derivative cash settlements $ 48.93 $ 44.57 10 % $ 49.43 $ 44.95 10 %
Lease operating expense 4.69 4.69 % 4.64 4.96 (6 )%
Transportation costs 6.20 5.59 11 % 6.27 5.12 22 %
Production taxes 2.38 2.21 8 % 2.29 2.24 2 %
General and administrative 2.85   2.95   (3 )% 2.83   3.03   (7 )%
Operating profit, before the effects of derivative cash settlements $ 32.81 $ 29.13 13 % $ 33.40 $ 29.60 13 %
Derivative cash settlements (2.52 ) 0.09   (2,900 )% (2.43 ) 0.57   (526 )%
Operating profit, including the effects of derivative cash settlements $ 30.29   $ 29.22   4 % $ 30.97   $ 30.17   3 %
Depletion, depreciation, amortization, and
asset retirement obligation liability accretion $ 14.03 $ 18.82 (25 )% $ 14.12 $ 19.00 (26 )%
 
SM ENERGY COMPANY
FINANCIAL HIGHLIGHTS (unaudited)
June 30, 2014
                       

Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)

For the Three Months Ended June 30,

For the Six Months Ended June 30,
2014 2013 2014 2013
Operating revenues:
Oil, gas, and NGL production revenue $ 654,661 $ 534,520 $ 1,277,770 $ 1,004,095
Other operating revenues 20,319   24,840   29,930   39,445  
Total operating revenues 674,980   559,360   1,307,700   1,043,540  
 
Operating expenses:
Oil, gas, and NGL production expense 177,598 149,737 341,307 275,370

Depletion, depreciation, amortization, and asset retirementobligation liability accretion
187,781 225,731 364,996 424,440
Exploration 24,270 20,657 45,605 36,055
Impairment of proved properties 34,552 55,771
Abandonment and impairment of unproved properties 164 4,339 2,965 4,641
General and administrative 38,115 35,374 73,166 67,654
Change in Net Profits Plan liability (7,105 ) (5,438 ) (8,881 ) (7,363 )
Derivative loss (gain) 126,469 (85,190 ) 224,131 (54,618 )
Other operating expenses 5,972   35,314   14,061   51,108  
Total operating expenses 553,264   415,076   1,057,350   853,058  
 
Income from operations 121,716 144,284 250,350 190,482
 
Non-operating income (expense):
Interest expense (24,040 ) (21,581 ) (48,230 ) (40,682 )
Other, net (1,847 ) 24   (1,821 ) 36  
 
Income before income taxes 95,829 122,727 200,299 149,836
Income tax expense (36,049 ) (46,205 ) (74,912 ) (56,587 )
 
Net income $ 59,780   $ 76,522   $ 125,387   $ 93,249  
 
Basic weighted-average common shares outstanding 67,069   66,295   67,063   66,254  
 
Diluted weighted-average common shares outstanding 68,239   67,893   68,180   67,711  
 
Basic net income per common share $ 0.89   $ 1.15   $ 1.87   $ 1.41  
 
Diluted net income per common share $ 0.88   $ 1.13   $ 1.84   $ 1.38  
 
 
SM ENERGY COMPANY
FINANCIAL HIGHLIGHTS (unaudited)
June 30, 2014
           

Condensed Consolidated Balance Sheets
(in thousands, except share amounts) June 30, December 31,
ASSETS 2014 2013
Current assets:
Cash and cash equivalents $ 163,794 $ 282,248
Accounts receivable 312,415 318,371
Derivative asset 3,613 21,559
Deferred income taxes 12,086 10,749
Prepaid expenses and other 15,007   14,574  
Total current assets 506,915   647,501  
 
Property and equipment (successful efforts method):
Proved oil and gas properties 6,151,765 5,637,462
Less - accumulated depletion, depreciation, and amortization (2,883,506 ) (2,583,698 )
Unproved oil and gas properties 388,336 271,100
Wells in progress 495,052 279,654

Oil and gas properties held for sale net of accumulated depletion, depreciation and amortization of $23,697 and $7,390, respectively
23,935 19,072
Other property and equipment, net of accumulated depreciation of $33,529 and $28,775, respectively 258,619   236,202  
Total property and equipment, net 4,434,201   3,859,792  
 
Noncurrent assets:
Derivative asset 1,300 30,951
Restricted cash 5,499 96,713
Other noncurrent assets 56,120   70,208  
Total other noncurrent assets 62,919   197,872  
Total Assets $ 5,004,035   $ 4,705,165  
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 592,493 $ 606,751
Derivative liability 92,088 26,380
Other current liabilities   6,000  
Total current liabilities 684,581   639,131  
 
Noncurrent liabilities:
Revolving credit facility
Senior Notes 1,600,000 1,600,000
Asset retirement obligation 117,916 115,659
Asset retirement obligation associated with oil and gas properties held for sale 2,760 3,033
Net Profits Plan liability 48,104 56,985
Deferred income taxes 725,408 650,125
Derivative liability 52,847 4,640
Other noncurrent liabilities 26,467   28,771  
Total noncurrent liabilities 2,573,502   2,459,213  
 
Stockholders’ equity:

Common stock, $0.01 par value - authorized: 200,000,000 shares; issued: 67,116,732 and 67,078,853shares outstanding, respectively; net of treasury shares: 67,116,732 and 67,056,441, respectively
671 671
Additional paid-in capital 273,664 257,720
Treasury stock, at cost: zero and 22,412 shares, respectively (823 )
Retained earnings 1,476,703 1,354,669
Accumulated other comprehensive loss (5,086 ) (5,416 )
Total stockholders’ equity 1,745,952   1,606,821  
Total Liabilities and Stockholders’ Equity $ 5,004,035   $ 4,705,165  
 
SM ENERGY COMPANY
FINANCIAL HIGHLIGHTS (unaudited)
June 30, 2014
                       

Condensed Consolidated Statements of Cash Flows
(in thousands)

For the Three Months Ended June 30,

For the Six Months Ended June 30,
2014 2013 2014 2013
Cash flows from operating activities:
Net income $ 59,780 $ 76,522 $ 125,387 $ 93,249
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on divestiture activity (2,526 ) (6,280 ) (5,484 ) (5,706 )
Depletion, depreciation, amortization, and asset retirement obligation liability accretion 187,781 225,731 364,996 424,440
Exploratory dry hole expense 6,459 5,727 6,459 5,886
Impairment of proved properties 34,552 55,771
Abandonment and impairment of unproved properties 164 4,339 2,965 4,641
Stock-based compensation expense 7,997 9,955 14,341 18,068
Change in Net Profits Plan liability (7,105 ) (5,438 ) (8,881 ) (7,363 )
Derivative loss (gain) 126,469 (85,190 ) 224,131 (54,618 )
Derivative cash settlement (loss) gain (33,680 ) 2,211 (62,620 ) 14,003
Amortization of deferred financing costs 1,477 1,363 2,954 2,440
Deferred income taxes 35,537 45,959 73,911 56,239
Plugging and abandonment (1,894 ) (2,368 ) (3,219 ) (3,746 )
Other, net (1,724 ) 3,933 (4,827 ) 5,769
Changes in current assets and liabilities:
Accounts receivable (11,905 ) (37,120 ) (2,558 ) (59,284 )
Prepaid expenses and other 417 (637 ) 1,302 (32 )
Accounts payable and accrued expenses 48,178   40,804   (13,704 ) 46,598  
Net cash provided by operating activities 415,425   314,063   715,153   596,355  
 
Cash flows from investing activities:
Net proceeds from sale of oil and gas properties 44,842 16,036 46,821 20,343
Capital expenditures (426,841 ) (352,852 ) (778,580 ) (733,992 )
Acquisition of proved and unproved oil and gas properties (98,619 ) (59,156 ) (98,619 ) (59,201 )
Other, net (6,484 ) (2,915 ) (2,257 ) (4,940 )
Net cash used in investing activities (487,102 ) (398,887 ) (832,635 ) (777,790 )
 
Cash flows from financing activities:
Proceeds from credit facility 293,000 516,500
Repayment of credit facility (695,000 ) (828,500 )
Deferred financing costs related to credit facility (3,444 ) (3,444 )
Net proceeds from 2024 Notes 490,820 490,820
Proceeds from sale of common stock 2,490 2,880 2,490 3,652
Dividends paid (3,353 ) (3,314 ) (3,353 ) (3,314 )
Other, net (101 ) (29 ) (109 ) (29 )
Net cash provided by (used in) financing activities (964 ) 84,913   (972 ) 175,685  
 
Net change in cash and cash equivalents (72,641 ) 89 (118,454 ) (5,750 )
Cash and cash equivalents at beginning of period 236,435     87   282,248   5,926  
Cash and cash equivalents at end of period $ 163,794   $ 176   $ 163,794   $ 176  
 
SM ENERGY COMPANY
FINANCIAL HIGHLIGHTS (unaudited)
June 30, 2014
                       

Adjusted Net Income
(in thousands, except per share data)
 
Reconciliation of net income (GAAP)
to adjusted net income (Non-GAAP):

For the Three Months Ended June 30,

For the Six Months Ended June 30,
2014 2013 2014 2013
 
Reported net income (GAAP) $ 59,780 $ 76,522 $ 125,387 $ 93,249
 
Adjustments net of tax: (1)
Change in Net Profits Plan liability (4,462 ) (3,393 ) (5,577 ) (4,580 )
Derivative loss (gain) 79,423 (53,159 ) 140,754 (33,973 )
Derivative cash settlement (loss) gain (21,151 ) 1,380 (39,325 ) 8,710
Gain on divestiture activity (1,586 ) (3,919 ) (3,444 ) (3,549 )
Impairment of proved properties 21,561 34,690
Abandonment and impairment of unproved properties 103 2,708 1,862 2,887
Other (2) (5,558 ) 10,107 (5,558 ) 10,075
               
Adjusted net income (Non-GAAP) (3) $ 106,549   $ 51,807   $ 214,099   $ 107,509  
 
Diluted weighted-average common shares outstanding: 68,239   67,893   68,180   67,711  
 
Adjusted net income per diluted common share: $ 1.56   $ 0.76   $ 3.14   $ 1.59  
 

(1) For the three and six-month period ended June 30, 2014, adjustments are shown net of tax and are calculated using a tax rate of 37.2%, which approximates the Company's statutory tax rate for that period, as adjusted for ordinary permanent differences. For the three and six-month period ended June 30, 2013, adjustments are shown net of tax using the Company's effective rate as calculated by dividing income tax expense by income before income taxes on the condensed consolidated statement of operations.

(2) For the three and six-month period ended June 30, 2014, adjustments include items related to settlements from the previously disclosed litigation against Endeavour Operating Corporation. These items are included as a portion of other operating revenues and non-operating expense, other, net, on the Company's condensed consolidated statement of operations. For the three and six-month period ended June 30, 2013, adjustments include items related to an agreed clarification concerning royalty payment provisions of various leases on certain South Texas & Gulf Coast acreage. These items are included as a portion of other operating expense on the Company's condensed consolidated statement of operations.

(3) Adjusted net income excludes certain items that the Company believes affect the comparability of operating results and generally are items whose timing and/or amount cannot be reasonably estimated. These items include non-cash adjustments and impairments such as the change in the Net Profits Plan liability, derivative loss, derivative cash settlement (loss) gain, impairment of properties, and (gain) loss on divestiture activity. The non-GAAP measure of adjusted net income is presented because management believes it provides useful additional information to investors for analysis of SM Energy's fundamental business on a recurring basis. In addition, management believes that adjusted net income is widely used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research of industry research analysts in making investment decisions. Adjusted net income should not be considered in isolation or as a substitute for net income, income from operations, cash provided by operating activities or other income, profitability, cash flow, or liquidity measures prepared under GAAP. Since adjusted net income excludes some, but not all, items that affect net income and may vary among companies, the adjusted net income amounts presented may not be comparable to similarly titled measures of other companies.
 
SM ENERGY COMPANY
FINANCIAL HIGHLIGHTS (unaudited)
June 30, 2014
Adjusted EBITDAX (3)                        
(in thousands)
 

Reconciliation of net income (GAAP) to adjusted EBITDAX (Non- GAAP) to net cash provided by operating activities (GAAP)

For the Three Months Ended June 30,
 
2014 2013   2014 2013
Net income (GAAP) $ 59,780 $ 76,522 $ 125,387 $ 93,249
Interest expense 24,040 21,581 48,230 40,682
Other non-operating (income) expense, net 1,847 (24 ) 1,821 (36 )
Income tax expense 36,049 46,205 74,912 56,587

Depreciation, depletion, amortization, and asset retirementobligation liability accretion
187,781 225,731 364,996 424,440
Exploration (1) 22,603 18,383 42,541 31,607
Impairment of proved properties 34,552 55,771
Abandonment and impairment of unproved properties 164 4,339 2,965 4,641
Stock-based compensation expense 7,997 9,955 14,341 18,068
Derivative loss (gain) 126,469 (85,190 ) 224,131 (54,618 )
Derivative cash settlement gain (loss) (33,680 ) 2,211 (62,620 ) 14,003
Change in Net Profits Plan liability (7,105 ) (5,438 ) (8,881 ) (7,363 )
Gain on divestiture activity (2) (2,526 ) (6,280 ) (5,484 ) (5,706 )
Adjusted EBITDAX (Non-GAAP) 423,419   342,547   822,339   671,325  
Interest expense (24,040 ) (21,581 ) (48,230 ) (40,682 )
Other non-operating income (expense), net (1,847 ) 24 (1,821 ) 36
Income tax expense (36,049 ) (46,205 ) (74,912 ) (56,587 )
Exploration (1) (22,603 ) (18,383 ) (42,541 ) (31,607 )
Exploratory dry hole expense 6,459 5,727 6,459 5,886
Amortization of deferred financing costs 1,477 1,363 2,954 2,440
Deferred income taxes 35,537 45,959 73,911 56,239
Plugging and abandonment (1,894 ) (2,368 ) (3,219 ) (3,746 )
Other, net (1,724 ) 3,933 (4,827 ) 5,769
Changes in current assets and liabilities 36,690   3,047   (14,960 ) (12,718 )
Net cash provided by operating activities (GAAP) $ 415,425   $ 314,063   $ 715,153   $ 596,355  
 

(1) Stock-based compensation expense is a component of exploration expense and general and administrative expense on the accompanying condensed consolidated statements of operations. Therefore, the exploration line items shown in the reconciliation above will vary from the amount shown on the accompanying condensed consolidated statements of operations because of the component of stock-based compensation expense recorded to exploration.

(2) Gain on divestiture activity is included within the other operating revenues line item of the accompanying condensed consolidated statements of operations.

(3) Adjusted EBITDAX represents income before interest expense, other non-operating (income) expense, income taxes, depreciation, depletion, amortization, and accretion, exploration expense, property impairments, non-cash stock compensation expense, derivative gains and losses net of cash settlements, change in the Net Profits Plan liability, and gains and losses on divestitures. Adjusted EBITDAX excludes certain items that the Company believes affect the comparability of operating results and can exclude items that are generally one-time in nature or whose timing and/or amount cannot be reasonably estimated. Adjusted EBITDAX is a non-GAAP measure that is presented because the Company believes that it provides useful additional information to investors and analysts, as a performance measure, for analysis of the Company's ability to internally generate funds for exploration, development, acquisitions, and to service debt. The Company is also subject to a financial covenant under its credit facility based on its debt to adjusted EBITDAX ratio. In addition, adjusted EBITDAX is widely used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research of industry research analysts in making investment decisions. Adjusted EBITDAX should not be considered in isolation or as a substitute for net income, income from operations, net cash provided by operating activities, or profitability or liquidity measures prepared under GAAP. Because adjusted EBITDAX excludes some, but not all items that affect net income and may vary among companies, the adjusted EBITDAX amounts presented may not be comparable to similar metrics of other companies.

Copyright Business Wire 2010

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