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Flooding in Texas Impacting SM Energy, but 3Q Permian, Eagle Ford Volumes Higher

Better-than-expected performance in the Eagle Ford Shale and Permian Basin helped SM Energy Co. exceed the high end of its production guidance in the third quarter, but management warned that the recent rains in Texas this month have impacted operations.

The Denver-based independent in its preliminary 3Q2018 results said Thursday total production hit 12 million boe, or 130,200 boe/d, on strong well performance in West Texas within the Permian’s Midland sub-basin. SM also had higher-than-forecast processed natural gas liquids (NGL) from the Eagle Ford in South Texas.

Permian volumes jumped 26% sequentially and 108% year/year from retained assets, while Eagle Ford volumes rose 12% from the second quarter.

"The combination of great rock quality and excellent operational execution continue to support a solid production growth trajectory that, in turn, supports our long-term objective for competitive growth in cash flow per debt adjusted share,” CEO Jay Ottoson said.

NGL volumes increased 27% sequentially as the company elected to process ethane in the Eagle Ford, per contractual elections, because of increased pricing.

Benchmark pricing in 3Q2018 for West Texas Intermediate (WTI) averaged $69.50/bbl, with Henry Hub natural gas at around $2.90/MMBtu. NGL pricing averaged $37.97/bbl. Before the effect of hedges, averaged realized oil prices were $38.26/boe; including realized hedges, the average price was $34.86, resulting in a loss of around $40.7 million net.

Permian realizations exceeded the 2018 plan by 9% during 3Q2018, despite an increased Midland-WTI differential that averaged minus $12.82/bbl, before the effects of basis hedges.
Eagle Ford realizations exceeded expectations by 16%, primarily from increased NGL prices.

Month-to-date in October, SM said some of its Permian production in western Howard and eastern Martin counties has been curtailed because of a force majeure incident at a third-party gas processing facility. Processing for all of SM’s production volumes is expected to be restored by month’s end.

In addition to the incident at the gas processing facility, heavy rainfall in Texas has caused “temporary flooding and loss of electrical power at certain locations in the company's RockStar area. This led to temporary shut-in of some wells and delays installing some pipeline connections for new wells.”

How much production may be impacted by the flooding is to be outlined in the 4Q2018 guidance update when SM issues its third quarter earnings results on Nov. 1, management said.

“At this time, we expect the impact of deferred production to be approximately 0.3 million boe for the fourth quarter.”

SM incurred $276 million in costs for the third quarter. It drilled 34 net wells and completed 28 in the Permian. It also drilled and completed five net wells in South Texas. Regional weather “has affected the timing of certain completions,” management said.

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