What happened

Shares of small independent oil and gas producer SM Energy Company (NYSE:SM) are down 12.1% at 12:45 p.m. EST on Thursday, following the release of the company's fourth-quarter results yesterday after market close, and conference call with investors before market open today. 

SM Energy reported a fourth-quarter loss of $26.3 million or $0.24 per share. Management said its adjusted non-GAAP loss was $8.5 million, or $0.08 per share, while analysts were expecting a loss of $0.14 per share in the quarter. The company reported a substantial gain related to the new federal tax legislation passed in late 2017. This one-time gain was worth $63.7 million in gains to the bottom line, but the company excluded it from its adjusted non-GAAP results. 

Oil pumpjack in motion.

Image source: Getty Images.

So what

While SM Energy surpassed analyst estimates in the fourth quarter, it looks like investors are concerned about its 2018 operating plan and guidance. The company says it plans to spend $1.27 billion in capital projects in 2018, a 36% increase from the $936 million it spent in 2017. This is expected to lead to 130 net wells drilled, up from 123 in 2017, but the company will only complete 100 of those wells, down from 111 completed in 2017. 

Furthermore, guidance for total production doesn't factor in much growth, and the low end of the range would in fact be a reduction in output. SM Energy produced 44.5 million barrels of oil equivalent (MMBoe) in 2017, and is guiding for 42 MMBoe to 46 MMBoe in 2018. 

Now what

Management said on the earnings call and in the release that its focus in 2018 -- and over the long term -- is cash flows, not oil and gas volumes, and intends to use 2018 and 2019 to "target substantial growth in cash flow along with a reduction in net debt:EBITDAX [earnings before interest, taxes, depreciation, amortization, and exploration] to approximately 2.5 times." 

While a cash-returns focus certainly sounds like the right approach in an industry that's often too focused on oil and gas output growth, today's stock-price drop suggests investors aren't necessarily eager to go along for the ride. If management can make progress over the next year or two and improve returns even without substantial growth in production, the market will likely respond favorably.

With operating cash flow down by more than half over the past few years, management has a lot of work to do if its focus is truly generating higher returns. 

Jason Hall has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.