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Weather, Completions Gave SM Energy 3Q Production Pains

Implementation of its enhanced completion program in the Eagle Ford Shale and weather-related delays in the Williston Basin caused SM Energy Co. to turn in disappointing third quarter production results.

SM Energy shares lost nearly 11% to end the day Friday at $60.98 after setting a new 52-week low intraday of $60.48.

The company said Thursday afternoon that third quarter production would be 13.1 million boe, or 142,500 boe/d, which is at the low end of previous guidance.

"SM Energy has moved to an enhanced completion program in its Eagle Ford producing area using higher sand loading and longer laterals," the company said. "These enhanced completions, while improving well economics, resulted in longer than anticipated downtime due to required well shut-ins for offset completions during the quarter. Weather-related delays in the Williston Basin also negatively impacted production for the quarter."

The third quarter difficulties were not unexpected. In August the company said that new guidance, while higher, had incorporated downtime expected in the operated Eagle Ford asset during the third quarter (see Shale Daily, Aug. 19).

The third quarter results were a 180-degree reversal from the second quarter, when SM Energy beat guidance (see Shale Daily, July 31), said analysts at Tudor, Pickering, Holt & Co. (TPH) in a note Friday. TPH said SM shares are likely to remain range-bound "...until outperformance of individual wells appears in quarterly production data."

Production in both the Eagle Ford and Bakken/Three Forks has been increasing over the past few weeks and production guidance for the fourth quarter is 13.9-14.7 million boe, which at the midpoint represents 9% growth over the third quarter of 2014, the company said. "The outlook for production growth in 2015 and 2016 remains unchanged at 20% and 15%, respectively."

Wells Fargo Securities analyst David Tameron in a note Friday called the third quarter miss "meaningful" and noted that the company's fourth quarter guidance is weaker than implied guidance from August by 0.4 million boe. Tameron said Wells Fargo and the Street had been expecting fourth quarter production of about 14.9 million boe.

"Given this market's turbulent tape, [it] probably makes sense for management to get the news out of the way," Tameron wrote. "Nonetheless, we still expect plenty of questions in the Q3 conference call as investors/Street grapple with the impact of [Eagle Ford frack] offset shut-ins and Bakken weather delays on SM's recently introduced 2015 guidance."

Topeka Capital Markets Gabriele Sorbara reaffirmed a "buy" rating on SM Energy shares but cut the price target to $95 from $100 due to contraction in the sector.

"While the update was disappointing, at the current valuation, we believe SM shares are trading at the value of 3Q14E production," Sorbara wrote. "We believe SM's resource upside potential is free, with further upside from the enhanced completion methods in the Eagle Ford and Bakken."

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