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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number 001-31539
sm-20200630_g1.jpg
SM ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware41-0518430
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
1775 Sherman Street, Suite 1200, Denver, Colorado
80203
(Address of principal executive offices)(Zip Code)
(303) 861-8140
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)Name of each exchange on which registered
Common stock, $0.01 par valueSMNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of July 23, 2020, the registrant had 114,458,893 shares of common stock outstanding.
1


TABLE OF CONTENTS
Item
Page
2


Cautionary Information about Forward-Looking Statements
This Report on Form 10-Q (“Form 10-Q” or “this report”) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements included in this report, other than statements of historical facts, that address activities, conditions, events, or developments with respect to our financial condition, results of operations, business prospects or economic performance that we expect, believe, or anticipate will or may occur in the future, or that address plans and objectives of management for future operations, are forward-looking statements. The words “anticipate,” “assume,” “believe,” “budget,” “could,” “estimate,” “expect,” “forecast,” “intend,” “pending,” “plan,” “potential,” “project,” “target,” “will,” and similar expressions are intended to identify forward-looking statements. Forward-looking statements appear throughout this report, and include statements about such matters as:
the impacts of macroeconomic events and the global COVID-19 pandemic (“Pandemic”) on us, our industry, our financial condition, results of operations, future operations, business prospects, capital and financial resources, ability to service our debt, ability to access the capital markets, and our plans to address the foregoing;
the amount and nature of future capital expenditures and the availability of liquidity and capital resources to fund capital expenditures;
our expected total production volumes for the fiscal year 2020;
any changes to the borrowing base or aggregate lender commitments under our Sixth Amended and Restated Credit Agreement, as amended (“Credit Agreement”);
our outlook on future crude oil, natural gas, and natural gas liquids (also respectively referred to as “oil,” “gas,” and “NGLs” throughout this report) prices, well costs, service costs, lease operating costs, and general and administrative costs;
our drilling of wells and other exploration and development activities, our ability to obtain permits and governmental approvals, and plans by us, our joint development partners, and/or other third-party operators;
possible or expected acquisitions and divestitures, including the possible divestiture or farm-down of, or joint development of, certain properties;
oil, gas, and NGL reserve estimates and estimates of both future net revenues and the present value of future net revenues associated with those reserve estimates;
future oil, gas, and NGL production estimates, identified drilling locations, as well as drilling prospects, inventories, projects and programs;
cash flows, liquidity, interest and related debt service expenses, changes in our effective tax rate, and our ability to repay debt in the future;
business strategies and other plans and objectives for future operations, including plans for expansion and growth of operations or to defer capital investment, plans with respect to future dividend payments, and our outlook on our future financial condition or results of operations; and
other similar matters, such as those discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part I, Item 2 of this report.
Our forward-looking statements are based on assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions, expected future developments, and other factors that we believe are appropriate under the circumstances. These statements are subject to known and unknown risks and uncertainties, which may cause our actual results and performance to be materially different from any future results or performance expressed or implied by the forward-looking statements. Factors that may cause our financial condition, results of operations, business prospects or economic performance to differ from expectations include the factors discussed in the Risk Factors section in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 (“2019 Form 10-K”), in Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, our 2020 Proxy Statement, and the Risk Factors section in Part II, Item 1A of this report.
We caution you that forward-looking statements are not guarantees of future performance and actual results or performance may be materially different from those expressed or implied in forward-looking statements. The forward-looking statements in this report speak only as of the filing of this report. Although we may from time to time voluntarily update our prior forward-looking statements, we disclaim any commitment to do so except as required by applicable securities laws.
3


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(in thousands, except share data)
June 30,
2020
December 31,
2019
ASSETS
Current assets:
Cash and cash equivalents$10  $10  
Accounts receivable127,173  184,732  
Derivative assets211,582  55,184  
Prepaid expenses and other16,704  12,708  
Total current assets355,469  252,634  
Property and equipment (successful efforts method):
Proved oil and gas properties8,134,461  8,934,020  
Accumulated depletion, depreciation, and amortization(4,536,537) (4,177,876) 
Unproved oil and gas properties923,666  1,005,887  
Wells in progress266,957  118,769  
Other property and equipment, net of accumulated depreciation of $65,447 and $64,032, respectively
37,278  72,848  
Total property and equipment, net4,825,825  5,953,648  
Noncurrent assets:
Derivative assets34,390  20,624  
Other noncurrent assets51,944  65,326  
Total noncurrent assets86,334  85,950  
Total assets$5,267,628  $6,292,232  
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses$257,053  $402,008  
Derivative liabilities38,250  50,846  
Other current liabilities12,597  19,189  
Total current liabilities307,900  472,043  
Noncurrent liabilities:
Revolving credit facility193,000  122,500  
Senior Notes, net2,263,119  2,610,298  
Asset retirement obligations86,628  84,134  
Deferred income taxes57,049  189,386  
Derivative liabilities24,028  3,444  
Other noncurrent liabilities55,072  61,433  
Total noncurrent liabilities2,678,896  3,071,195  
Commitments and contingencies (note 6)
Stockholders’ equity:
Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 113,553,271 and 112,987,952 shares, respectively
1,136  1,130  
Additional paid-in capital1,825,327  1,791,596  
Retained earnings465,310  967,587  
Accumulated other comprehensive loss(10,941) (11,319) 
Total stockholders’ equity2,280,832  2,748,994  
Total liabilities and stockholders’ equity$5,267,628  $6,292,232  
The accompanying notes are an integral part of these condensed consolidated financial statements.
4


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per share data)
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2020201920202019
Operating revenues and other income:
Oil, gas, and NGL production revenue$169,790  $406,854  $524,023  $747,330  
Net gain on divestiture activity91  262  91  323  
Other operating revenues(249) 56  1,252  449  
Total operating revenues and other income169,632  407,172  525,366  748,102  
Operating expenses:
Oil, gas, and NGL production expense80,445  123,050  199,997  244,355  
Depletion, depreciation, amortization, and asset retirement obligation liability accretion180,856  206,330  414,345  384,076  
Exploration9,787  10,877  21,136  22,225  
Impairment8,750  12,417  998,513  18,755  
General and administrative27,227  30,920  54,674  63,006  
Net derivative (gain) loss167,200  (79,655) (378,140) 97,426  
Other operating (income) expense, net8,046  (934) 8,612  (599) 
Total operating expenses482,311  303,005  1,319,137  829,244  
Income (loss) from operations(312,679) 104,167  (793,771) (81,142) 
Interest expense(40,354) (39,627) (81,866) (77,607) 
Gain on extinguishment of debt227,281    239,476    
Other non-operating expense, net(185) (562) (679) (879) 
Income (loss) before income taxes(125,937) 63,978  (636,840) (159,628) 
Income tax (expense) benefit36,685  (13,590) 135,693  32,448  
Net income (loss)$(89,252) $50,388  $(501,147) $(127,180) 
Basic weighted-average common shares outstanding113,008  112,262  113,015  112,257  
Diluted weighted-average common shares outstanding113,008  112,932  113,015  112,257  
Basic net income (loss) per common share$(0.79) $0.45  $(4.43) $(1.13) 
Diluted net income (loss) per common share$(0.79) $0.45  $(4.43) $(1.13) 
Dividends per common share$  $  $0.01  $0.05  

The accompanying notes are an integral part of these condensed consolidated financial statements.
5


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
(in thousands)
For the Three Months Ended
June 30,
For the Six Months Ended
June 30,
2020201920202019
Net income (loss)$(89,252) $50,388  $(501,147) $(127,180) 
Other comprehensive income, net of tax:
Pension liability adjustment188  119  378  382  
Total other comprehensive income, net of tax188  119  378  382  
Total comprehensive income (loss)$(89,064) $50,507  $(500,769) $(126,798) 

The accompanying notes are an integral part of these condensed consolidated financial statements.
6


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in thousands, except share data and dividends per share)
Additional Paid-in CapitalAccumulated Other Comprehensive LossTotal Stockholders’ Equity
Common StockRetained Earnings
SharesAmount
Balances, December 31, 2019112,987,952  $1,130  $1,791,596  $967,587  $(11,319) $2,748,994  
Net loss—  —  —  (411,895) —  (411,895) 
Other comprehensive income—  —  —  —  190  190  
Cash dividends declared, $0.01 per share
—  —  —  (1,130) —  (1,130) 
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings730    (3) —  —  (3) 
Stock-based compensation expense—  —  5,561  —  —  5,561  
Balances, March 31, 2020112,988,682  $1,130  $1,797,154  $554,562  $(11,129) $2,341,717  
Net loss—  —  —  (89,252) —  (89,252) 
Other comprehensive income—  —  —  —  188  188  
Issuance of common stock under Employee Stock Purchase Plan297,013  3  944  —  —  947  
Stock-based compensation expense267,576  3  5,709  —  —  5,712  
Issuance of warrants—  —  21,520  —  —  21,520  
Balances, June 30, 2020113,553,271  $1,136  $1,825,327  $465,310  $(10,941) $2,280,832  
Additional Paid-in CapitalAccumulated Other Comprehensive LossTotal Stockholders’ Equity
Common StockRetained Earnings
SharesAmount
Balances, December 31, 2018112,241,966  $1,122  $1,765,738  $1,165,842  $(12,380) $2,920,322  
Net loss—  —  —  (177,568) —  (177,568) 
Other comprehensive income—  —  —  —  263  263  
Cash dividends declared, $0.05 per share
—  —  —  (5,612) —  (5,612) 
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings2,579    (18) —  —  (18) 
Stock-based compensation expense—  —  5,838  —  —  5,838  
Balances, March 31, 2019112,244,545  $1,122  $1,771,558  $982,662  $(12,117) $2,743,225  
Net income—  —  —  50,388  —  50,388  
Other comprehensive income—  —  —  —  119  119  
Issuance of common stock under Employee Stock Purchase Plan184,079  2  1,957  —  —  1,959  
Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings290    (2) —  —  (2) 
Stock-based compensation expense96,719  1  6,153  —  —  6,154  
Other—  —  (1) 1  —    
Balances, June 30, 2019112,525,633  $1,125  $1,779,665  $1,033,051  $(11,998) $2,801,843  

The accompanying notes are an integral part of these condensed consolidated financial statements.
7


SM ENERGY COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
For the Six Months Ended June 30,
20202019
Cash flows from operating activities:
Net loss$(501,147) $(127,180) 
Adjustments to reconcile net loss to net cash provided by operating activities
Net gain on divestiture activity(91) (323) 
Depletion, depreciation, amortization, and asset retirement obligation liability accretion414,345  384,076  
Impairment998,513  18,755  
Stock-based compensation expense11,273  11,992  
Net derivative (gain) loss(378,140) 97,426  
Derivative settlement gain (loss)215,965  (879) 
Amortization of debt discount and deferred financing costs8,578  7,633  
Gain on extinguishment of debt(239,476)   
Deferred income taxes(136,268) (33,237) 
Other, net(3,827) (1,287) 
Net change in working capital(57,254) 21,454  
Net cash provided by operating activities332,471  378,430  
Cash flows from investing activities:
Net proceeds from the sale of oil and gas properties (1)
92  12,520  
Capital expenditures(310,209) (576,127) 
Other, net  319  
Net cash used in investing activities(310,117) (563,288) 
Cash flows from financing activities:
Proceeds from revolving credit facility841,000  696,500  
Repayment of revolving credit facility(770,500) (578,500) 
Debt issuance costs related to 10.0% Senior Secured Notes due 2025(10,491)   
Cash paid to repurchase 6.125% Senior Notes due 2022(28,318)   
Repayment of 1.50% Senior Convertible Notes due 2021(53,508)   
Net proceeds from sale of common stock947  1,959  
Dividends paid(1,130) (5,612) 
Other, net(354) (1,044) 
Net cash provided by (used in) financing activities(22,354) 113,303  
Net change in cash, cash equivalents, and restricted cash  (71,555) 
Cash, cash equivalents, and restricted cash at beginning of period10  77,965  
Cash, cash equivalents, and restricted cash at end of period$10  $6,410  
Supplemental schedule of additional cash flow information and non-cash activities:
Operating activities:
Cash paid for interest, net of capitalized interest$(82,313) $(67,646) 
Investing activities:
Decrease in capital expenditure accruals and other$(28,896) $(10,097) 
Supplemental non-cash investing activities:
Carrying value of properties exchanged$  $66,588  
Supplemental non-cash financing activities:
Non-cash gain on extinguishment of debt, net$292,984  $  
Reconciliation of cash, cash equivalents, and restricted cash:
Cash and cash equivalents$10  $12  
Restricted cash (1)
  6,398  
Cash, cash equivalents, and restricted cash at end of period$10  $6,410  
____________________________________________
(1) As of June 30, 2019, a portion of net proceeds from the sale of oil and gas properties was restricted for future property acquisitions. Restricted cash is included in the other noncurrent assets line item on the accompanying unaudited condensed consolidated balance sheets (“accompanying balance sheets”).
The accompanying notes are an integral part of these condensed consolidated financial statements.
8


SM ENERGY COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Summary of Significant Accounting Policies
Description of Operations
SM Energy Company, together with its consolidated subsidiaries (“SM Energy” or the “Company”), is an independent energy company engaged in the acquisition, exploration, development, and production of oil, gas, and NGLs in the State of Texas.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information, the instructions to Quarterly Report on Form 10-Q, and Regulation S-X. These financial statements do not include all information and notes required by GAAP for annual financial statements. However, except as disclosed herein, there has been no material change in the information disclosed in the notes to the consolidated financial statements included in the 2019 Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation of interim financial information, have been included. Operating results for the periods presented are not necessarily indicative of expected results for the full year. In connection with the preparation of the Company’s unaudited condensed consolidated financial statements, the Company evaluated events subsequent to the balance sheet date of June 30, 2020, and through the filing of this report. Additionally, certain prior period amounts have been reclassified to conform to current period presentation in the accompanying unaudited condensed consolidated financial statements.
Significant Accounting Policies
The significant accounting policies followed by the Company are set forth in Note 1 - Summary of Significant Accounting Policies in the 2019 Form 10-K and are supplemented by the notes to the unaudited condensed consolidated financial statements included in this report. These unaudited condensed consolidated financial statements should be read in conjunction with the 2019 Form 10-K.
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued to reduce the complexity of accounting for income taxes for those entities that fall within the scope of the accounting standard. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 on January 1, 2020, and there was no material impact on the Company’s unaudited condensed consolidated financial statements or disclosures upon adoption.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 was issued to provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. Generally, the guidance is to be applied as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to the date that the financial statements are available to be issued. ASU 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the options provided by ASU 2020-04. Please refer to Note 5 - Long-Term Debt for discussion of the use of the London Interbank Offered Rate (“LIBOR”) in connection with borrowings under the Credit Agreement.
As disclosed in the 2019 Form 10-K, on January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. As expected, there was no material impact on the Company’s unaudited condensed consolidated financial statements or disclosures upon adoption of these ASUs.
There are no ASUs that would have a material effect on the Company’s unaudited condensed consolidated financial statements and related disclosures that have been issued but not yet adopted by the Company as of June 30, 2020, or through the filing of this report.
9


Note 2 - Revenue from Contracts with Customers
The Company recognizes its share of revenue from the sale of produced oil, gas, and NGLs from its Midland Basin and South Texas assets. Oil, gas, and NGL production revenue presented within the accompanying unaudited condensed consolidated statements of operations (“accompanying statements of operations”) is reflective of the revenue generated from contracts with customers.
The tables below present oil, gas, and NGL production revenue by product type for each of the Company’s operating regions for the three and six months ended June 30, 2020, and 2019:
Midland BasinSouth TexasTotal
Three Months Ended
June 30,
Three Months Ended
June 30,
Three Months Ended
June 30,
202020192020201920202019
(in thousands)
Oil production revenue$114,358  $288,447  $5,158  $15,697  $119,516  $304,144  
Gas production revenue11,921  16,449  22,942  48,775  34,863  65,224  
NGL production revenue45  (43) 15,366  37,529  15,411  37,486  
Total$126,324  $304,853  $43,466  $102,001  $169,790  $406,854  
Relative percentage74 %75 %26 %25 %100 %100 %
____________________________________________
Note: Amounts may not calculate due to rounding.
Midland BasinSouth TexasTotal
Six Months Ended
June 30,
Six Months Ended
June 30,
Six Months Ended
June 30,
202020192020201920202019
(in thousands)
Oil production revenue$390,494  $513,694  $20,715  $29,511  $411,209  $543,205  
Gas production revenue23,255  32,041  52,318  98,296  75,573  130,337  
NGL production revenue103  (22) 37,138  73,810  37,241  73,788  
Total$413,852  $545,713  $110,171  $201,617  $524,023  $747,330  
Relative percentage79 %73 %21 %27 %100 %100 %
____________________________________________
Note: Amounts may not calculate due to rounding.
The Company recognizes oil, gas, and NGL production revenue at the point in time when custody and title (“control”) of the product transfers to the purchaser, which differs depending on the applicable contractual terms. Transfer of control drives the presentation of transportation, gathering, processing, and other post-production expenses (“fees and other deductions”) within the accompanying statements of operations. Fees and other deductions incurred by the Company prior to control transfer are recorded within the oil, gas, and NGL production expense line item on the accompanying statements of operations. When control is transferred at or near the wellhead, sales are based on a wellhead market price that is impacted by fees and other deductions incurred by the purchaser subsequent to the transfer of control. Please refer to Note 2 - Revenue from Contracts with Customers in the 2019 Form 10-K for more information regarding the types of contracts under which oil, gas, and NGL production revenue is generated.
Significant judgments made in applying the guidance in Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, relate to the point in time when control transfers to purchasers in gas processing arrangements with midstream processors. The Company does not believe that significant judgments are required with respect to the determination of the transaction price, including amounts that represent variable consideration, as volume and price carry a low level of estimation uncertainty given the precision of volumetric measurements and the use of index pricing with generally predictable differentials. Accordingly, the Company does not consider estimates of variable consideration to be constrained.
The Company’s performance obligations arise upon the production of hydrocarbons from wells in which the Company has an ownership interest. The performance obligations are considered satisfied upon control transferring to a purchaser at the wellhead, inlet, or tailgate of the midstream processor’s processing facility, or other contractually specified delivery point. The time period between production and satisfaction of performance obligations is generally less than one day; thus, there are no material unsatisfied or partially unsatisfied performance obligations at the end of the reporting period.