What happened

Shares of U.S. exploration and production company SM Energy (SM -1.88%) fell as much as 12% in morning trading on Thursday. Although some of that was likely related to lower natural gas prices, at least a portion of the downbeat mood was driven by the energy company's earnings, which were released after the market closed on Wednesday.  

So what

SM Energy's top line came in at $320 million in the fourth quarter of 2020, down from $452 million in the same quarter of 2019. Despite that decline, cost reductions helped it turn in adjusted earnings of $0.02 per share, up from a loss of $0.04 per share in the prior year. But Wall Street had been projecting a profit of $0.07 per share, which means there was a pretty sizable miss. Revenue was a little light of expectations as well. Investors, not surprisingly, were displeased.  

An oil Well and two men writing in notebooks in the foreground.

Image source: Getty Images.

SM Energy is expecting to see increased production in 2021 over 2020. And if energy prices remain at recent levels, that would likely mean a better year.

But the driller didn't provide much guidance in its earnings release about the hit it will take from the cold front now shutting down vast swaths of Texas, a state in which SM Energy has material operations. It is, basically, assessing the impact, which suggests that first-quarter earnings may not be great reading. And, extrapolating just a little, it indicates that the full-year projections it is currently making may already be facing notable headwinds. Investors showing a little caution here seems pretty logical.  

Now what

The energy sector is historically a highly volatile area of the market. The stock of relatively small SM Energy (with a roughly $1.4 billion market cap) has been particularly volatile since the pandemic sent energy demand into a tailspin. Although energy prices have been solidifying of late, as have the shares of SM Energy, the driller now has to deal with the disruption caused by adverse weather.

Most investors looking at the energy patch would probably be better off sticking to larger, more diversified companies like Chevron, a name that Warren Buffett recently revealed to be in Berkshire Hathaway's portfolio.