What happened

Shares of exploration and production (E&P) company SM Energy (SM 1.80%) dropped around 10% in morning trading on April 30. Although falling oil prices didn't help any, at least a part of the downbeat view here is tied to the energy company's after-the-close earnings release on April 29.  

So what

SM Energy, which operates in Texas, posted revenue of roughly $444 million in the first quarter of 2021, up notably from the nearly $356 million it brought in last year. Materially higher oil and natural gas prices were key drivers on the top line.

That said, production was impacted by the brutal winter storms that effectively shut vast swaths of Texas down early this year. So the company's production was off by 19% year over year and 11% sequentially from the fourth quarter of 2020. That's not particularly good news, but the company is still maintaining its full-year production estimates, so there's a chance it will be able to make up for the shortfall.   

A man holding his head with a candlestick chart heading lower behind him.

Image source: Getty Images.

On a GAAP basis, SM Energy lost $251 million, or $2.19 per share. That was an improvement from the year-ago period, in which the company lost roughly $412 million, or $3.64 per share. The first quarter of 2021 includes nearly $345 million in derivative losses while the first quarter of 2020 includes nearly $990 million in impairment charges and a $545 million derivative gain. The derivatives issue shows the good and bad side of hedges. On an adjusted basis, which takes out one-time items, SM Energy posted a $0.05 per-share loss in the first quarter, in line with the same period a year ago.

At the end of the day, while energy markets have improved greatly over the past year, it looks like SM Energy hasn't been able to capitalize as much as investors would like. And the driller spent more cash than it brought in from its drilling activities during the quarter, which is something that Wall Street would very much like to see change. Although management promises it will be cash flow positive by the end of the year, investors are getting increasingly impatient with small onshore E&P names on this front.     

Now what

With energy giants like ExxonMobil and Chevron reporting a solid return to profitability in the first quarter of 2021, it is a bit disheartening to read that relatively tiny SM Energy is still mired in red ink. However, this is an example of why it makes sense for most investors to focus on the largest, most diversified, and financially strongest names in the energy sector. That's particularly true for those with a more conservative bent.