Denver-based SM Energy Co., whose Texas-centered operations plow the Eagle Ford Shale and Midland formation of the Permian Basin, said Wednesday it has reduced spending and activity to the rest of the year, with guidance uncertain because of the Covid-19 pandemic.

The management team provided a webcast of its quarterly performance but did not hold a conference call or take questions from analysts.

Capital expenditures for 2020 have been cut by 20% year/year to an implied $660-680 million from prior guidance of $825-850 million. Salaries have been reduced for executives, effective in May, with all employee compensation increases postponed across the board.

“As our industry faces unprecedented circumstances, our priorities are first, the safety of our employees and contractors under the conditions of the pandemic, and second, maintaining a sustainable business plan under the contracted macro-economic environment,” CEO Jay Ottoson said.

“We have implemented a wide range of changes, from modifying our capital activity to adopting new daily safety protocols for field teams. Our pace of capital spending has been reduced, and we have a strong hedge position in 2020 to bolster our cash flows during a time of considerable uncertainty.”

Production between January and March averaged 135,900 boe/d, 51% weighted to oil, driven by the Midland sub-basin, with 65,200 b/d. SM fetched an average realized price for its oil and gas of $28.64/boe, down 19% sequentially. However, including the effect of realized hedges, the average price was $34.58, off 5%, resulting in around $73.4 million of realized net hedge gains for the quarter.

The company drilled 25 net wells and completed 20 in the first three months of the year. However, because of the uncertainty going forward, SM has reduced its well completion and drilling pace.

Five rigs now are working in the Midland, along with one completions crew. However, in July, one of the Midland rigs is to be dropped. One rig continues to work in South Texas with no completions crews.

[Want to see more earnings? See the full list of NGI’s 1Q2020 earnings season coverage.]

“Worldwide production of oil remains higher than demand, and oil storage capacity is nearly full, increasing the potential for forced shut-in of production,” management said. “Government entities are actively considering prorationing of production, and economic conditions may also result in well shut-ins to reduce economic loss.”
On Tuesday (May 5), the Railroad Commission of Texas is scheduled to make a final decision about whether to mandate producers reduced oil production across the state by 20%.

“Given the difficulty of accurately forecasting production volumes in this environment,” SM has withdrawn its production guidance for the year.

Net losses in 1Q2020 totaled $411.9 million (minus $3.64/share), which included one-time impairments of nearly $990 million after writing down the value of proved assets in South Texas because of lower commodity prices. In 1Q2019, net losses totaled $177.6 million (minus $1.58).

Operating net cash climbed 71% year/year to $97.9 million because of the 32% increase to net output from the Permian Midland, which provided high operating margins and the benefit from realized hedging gains.

SM managed to reduce its debt in the tumultuous period by $91.2 million, using a combination of open market purchases and by paying down a senior secured credit facility. The borrowing base redetermination was completed with an 8.3% reduction to a $1.1 billion commitment level from $1.2 billion. As of the filing, total debt was $2.7 billion with liquidity of $1.0 billion.