Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of SM Energy (NYSE:SM) climbed Wednesday following the announcement that the company had realized a large gain on its hedging and derivative contracts to earn a quarterly profit of $4.91 per share. Excluding one time gains and losses such as the hedging contracts and asset impairments, net income was $1.05 per share, a slight miss from consensus analyst estimates.
So What: While much of the attention today will be on the one time gains from the hedging contracts, one of the more promising things for SM Energy in the future is the company's operational performance and strategy. Total proved reserves increased to 547.7 million barrels, giving the company 10 years of drilling inventory. Also, its most attractive wells in the Eagle Ford shale are capable of an internal rate of return greater than 30% at today's prices. While this is only one part of the larger portfolio, it is encouraging to know that it has something to work on and generate profits while prices are as weak as they are today.
SM intends to reduce capital spending in 2015 by almost half from last year and focus on limited drilling in the Eagle Ford and the Bakken shale formations. What is also intriguing about its strategy is that the company will drill many of its wells but leave them incomplete until some of the well completion service costs come down. This is discouraging because the company may be spending money now while not getting much in the door, but having a strong inventory of wells ready to go online quickly will make it easier for the company to react when oil prices do recover.
Now What: When it comes to almost any pure oil and gas producer that operates in the U.S., there are going to be questions about how profitable they will be with oil prices as weak as they are. SM was able to offer investors slightly encouraging answers to some of those questions, but it wasn't exactly a slam dunk quarter, either. There are some positive signs that SM Energy will do OK through this rough patch and emerge as a pretty strong company, but cautious investors who are looking for a more certain outlook should probably shy away from this stock for a while longer.