SM Energy (SM)

Q4 2012 Earnings Call

February 21, 2013 10:00 am ET

Executives

David W. Copeland - General Counsel ,Senior Vice President and Corporate Secretary

Anthony J. Best - Chief Executive Officer, Director and Member of Executive Committee

A. Wade Pursell - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Javan D. Ottoson - President and Chief Operating Officer

Analysts

Brian Lively - Tudor, Pickering, Holt & Co. Securities, Inc., Research Division

Welles W. Fitzpatrick - Johnson Rice & Company, L.L.C., Research Division

Michael S. Scialla - Stifel, Nicolaus & Co., Inc., Research Division

Stephen P. Shepherd - Simmons & Company International, Research Division

Subash Chandra - Jefferies & Company, Inc., Research Division

Michael Kelly - Global Hunter Securities, LLC, Research Division

Joseph Patrick Magner - Macquarie Research

Brian T. Velie - Capital One Southcoast, Inc., Research Division

Rudolf A. Hokanson - Barrington Research Associates, Inc., Research Division

Joseph Bachmann - Howard Weil Incorporated, Research Division

Presentation

Operator

Good morning. My name is Bonnie, and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy Fourth Quarter and Full Year 2012 Earnings Conference Call. [Operator Instructions] Thank you. Now I'll turn the conference over to Mr. David Copeland, Senior Vice President and General Counsel. Please go ahead, sir.

David W. Copeland

Thank you, Bonnie. Good morning to all of you joining us by phone and online for SM Energy's Fourth Quarter and Year-End 2012 Earnings Conference Call and Operations Update.

Before we start, I'd like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday afternoon, the presentation posted on our website for this call and the Risk Factors section in our Form 10-K filed earlier today.

We'll also discuss certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are described in our earnings press release from yesterday.

Additionally, we may use the terms probable, possible and 3P reserves and estimated ultimate recovery or EUR on this call. You should read the Cautionary Language page in our slide presentation for an important discussion of these terms and the special risks and other considerations associated with these non-proved reserve metrics.

Company officials on the call this morning are Tony Best, Chief Executive Officer; Jay Ottoson, President and Chief Operating Officer; Wade Pursell, Executive Vice President and Chief Financial Officer; Brent Collins, Senior Director of Planning and Investor Relations; and myself, the company's Senior Vice President and General Counsel and Corporate Secretary.

I'll turn the call over to Tony now.

Anthony J. Best

Thank you, David. Good morning, everyone, and thank you for joining us for our fourth quarter and year-end 2012 earnings call. I will make a few introductory remarks, and then Wade and Jay will provide their respective financial and operational reviews. We'll be referring to slides this morning that were posted on our website last evening.

Beginning on Slide 3, I'll cover some key messages that I think are important to take away from today's call. Let me begin by saying that 2012 was a record year for SM Energy. On the reserve front, we increased proved reserves 40% to nearly 1.8 TCF equivalent or 300 million barrels of oil equivalent. Our reserves at the end of 2012 are now 53% liquids. Our drilling reserve replacement and F&D metrics were some of the best the company has ever posted. Drilling reserve replacement was 411%. Our drilling F&D was $1.74 per Mcfe, and we've also increased our R-to-P ratio.

It was also a record year for production, which was capped off with a quarterly production record as well. Annual production grew 29% in 2012 to a new annual record of 219 billion cubic feet equivalent or 36.5 million barrels of oil equivalent, and we hit a new quarterly production number of 60.7 BCF equivalent in the fourth quarter of 2012. We executed well on our core development programs in the Eagle Ford and the Bakken/Three Forks in 2012. Jay will discuss this in more detail shortly.

During 2012, our teams did a good job of advancing new venture programs that we hope will be the next legs of growth for the company. In the Permian, the Mississippian Lime continues to be encouraging to us, and we're evaluating a number of shale intervals that are on our 120,000 net acres that we believe are prospective for new and significant shale development.

Last night, we announced that we have almost 100,000 net acres in East Texas counties north of Houston that could be prospective in multiple formations. Bottom line, 2012 was another year of strong performance with several key records notched for the company. And we remain focused on growing long-term value for our shareholders.

I'll now turn the call over to Wade for his financial update.

A. Wade Pursell

Thanks, Tony. Good morning. I'll begin on Slide 5 and recap our quarterly performance. Our adjusted net income for the quarter was $30.4 million or $0.45 per diluted share, and our quarterly EBITDAX was nearly $300 million, both of which were significantly above consensus for the quarter.

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