During the second quarter Denver-based SM Energy Co. saw its production grow by 7% over the previous quarter, thanks to improvements in both the Permian Basin and the Eagle Ford Shale, while costs came down.

“Production volumes reflected continued improvement in performance in both Eagle Ford and Permian wells while operating efficiencies contributed to both lower operating and capital costs,” said CEO Jay Ottoson.

Second quarter production of 14.3 million boe, or 157,247 boe/d, was 29% oil, 26% natural gas liquids (NGL) and 45% natural gas. Production from new wells in both the operated Eagle Ford and Permian outperformed plan, the company said. Eagle Ford wells completed during the quarter were primarily located in the natural gas/NGL-rich portion of Eagle Ford. Oil production met the midpoint of guidance despite weather-related delays in well completions in North Dakota. Total production was up 7% sequentially from the first quarter of 2016 and down 9% from the second quarter of 2015, pro forma for assets sold.

Realized prices in the second quarter averaged $20.35/boe (before the effect of commodity derivatives). Benchmark oil and NGL prices increased from first quarter lows, driving a 29% sequential increase in the average realized price. Year-over-year the average realized price was down 24%.

SM Energy is running four rigs: two in the Permian, one in the Bakken/Three Forks and one in the Eagle Ford, with plans to drop the Eagle Ford rig this month. During the second quarter, the company drilled 19 gross/18 net operated wells, completed 34 gross/31 net operated wells and participated in drilling one net and completing six net non-operated wells. The drilled but uncompleted inventory at June 30 was 129 gross/124 net operated wells plus 27 net non-operated wells. During the second half of 2016, the Company plans to drill about 30 net wells and complete about 65 net wells.

Focus on Sweetie Peck Area

Second quarter Permian Basin net production was 849,000 boe (9,330 boe/d) and was 73% oil. Production increased 53% sequentially with activity that included drilling eight net wells and completing eight net wells. Further improvements in drill times from the first quarter were realized. Wells in the Sweetie Peck area are top-tier among Midland Basin operators, SM Energy said. For the second half of 2016, the Company expects to focus its drilling activity in the Sweetie Peck area, which offers the highest returns in its portfolio as well as “substantial upside” for reserve and inventory growth.

“We continue to see opportunity to drive better well performance by looking at tests we started implementing over two years ago,” Herb Vogel, executive vice president of operations, said during a conference call on Wednesday. “…[W]e’ve begun to see significant benefits after about a half-year of production from tightening stage spacing of fracture stimulation from 200 feet to 167 feet. In the tests shown, after almost two years, we saw that the tighter stage spacing improved our cumulative production by 17%.

“While the data we can show is limited to one test for now, we just implemented this improvement in three new Lower Spraberry wells and expect that the increased cost of the additional completion stages will result in stronger production from these wells and yield even higher returns.

Higher Than Expected Eagle Ford Volumes

Second quarter Eagle Ford net production was 10.9 million boe (119,300 boe/d) of which 8.4 million boe was operated and 2.5 million boe was third-party operated. Operated production increased 10% sequentially with nine wells completed in the quarter and “significant benefit” from well optimization. New wells completed early in the quarter had strong initial rates, driving natural gas and NGL production volumes higher than expectations, the company said. “Activity in the Eagle Ford continues to employ stack-staggered drilling configurations with co-development of the Lower and Upper Eagle Ford formations along with testing diverter technologies and tighter spacing.”

Second quarter of Rocky Mountain net production was 2.6 million boe (28,610 boe/d) and was 80% oil. Regional production included 2.0 million boe from the Bakken/Three Forks area, with the remainder from the Powder River Basin and other areas. During the quarter, SM Energy drilled four net wells and completed 14 net wells in the area, with the majority of completions occurring late in the quarter following weather-related road closures and mechanical delays. The company said it continues to see improving well performance from variations in completion techniques, including employing diverters, slick water and optimization of stages.

Total capital spending guidance for 2016 was reduced to about $670 million from about $705 million as lower drilling and completion costs and realized efficiencies contribute to overall capital cost savings. Production guidance for the year is 53-57 million boe. Third quarter production is expected to range between 13.5 and 14.0 million boe and is expected to have a commodity mix that is about 31% oil.

The company reported a net loss for the second quarter of $168.7 million (minus $2.48/share) compared with a net loss of $57.5 million (minus 85 cents/share) in the second quarter of 2015. The year-over-year decline was primarily due to lower operating revenues as a result of lower production and lower realized commodity prices, and an increased non-cash derivative loss in the 2016 period, partially offset by higher general and administrative expense, impairment charges and loss on extinguishment of debt recorded in the 2015 period.

The adjusted net loss for the second quarter was $30.2 million (minus 44 cents/share) compared with adjusted net income of $33.2 million (49 cents/share) in the year-ago quarter.