Rating Update: Stock Rating A-Highest (1/16/24)-SM Energy Co (SM).

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BUSINESS

SM Energy Company, an independent energy company, engages in the acquisition, exploration, development, and production of oil, natural gas, and natural gas liquids in the state of Texas. As of February 24, 2022, it had 492.0 million barrels of oil equivalent of estimated proved reserves. It also has working interests in 825 gross productive oil wells and 483 gross productive gas wells in the Midland Basin and South Texas. The company was formerly known as St. Mary Land & Exploration Company and changed its name to SM Energy Company in May 2010. SM Energy Company was founded in 1908 and is headquartered in Denver, Colorado.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to exceed the cost of capital, SM is expected to continue to be an important Value Builder.

SM Energy has a current Value Trend Rating of A (Highest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. SM Energy has a good Power Rating of 78 and a very high Appreciation Score of 91, and the Highest Value Trend Rating results.

SM Energy’s stock is selling well below targeted value. The current stock price of $39.50 compares to targeted value 12 months forward of $158.
SM Energy’s very high appreciation potential results in an appreciation score of 91 (only 9% of the universe has greater appreciation potential.)
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SM Energy has a Power Rating of 78. (This good Power Rating indicates that SM has a better chance of achieving attractive investment performance over the near to intermediate term than all but 22% of companies in the universe.)
Contributing to this good Power Rating: recent price action has been favorable. Offsetting factors are earnings estimate behavior for SM has been slightly negative recently; and the Crude Petroleum & Natural Gas comparison group is in a slightly weakened position currently.

INVESTMENT PROFILE

SM Energy’s financial strength is average. Financial strength rating is 48.
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Relative to the S&P 500 Composite, SM Energy Co has slightly more Value than Growth characteristics; its appeal is likely to be to Income-oriented investors; the perception is that SM is higher risk. Relative weaknesses include: low historical profitability, low financial strength, high stock price volatility, and high earnings variability. SM Energy’s valuation is low: moderate dividend yield, low P/E ratio, and low price/book ratio. SM has unusually low market capitalization.

CURRENT SIGNALS

SM Energy’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; rising tax keep rate; and rising leverage.

SM Energy’s current technical position is mixed. The stock price is in a 3.3 month down move. The stock has declined 14.6% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average.

ALERTS

SM Energy Co (NYSE: SM). Important negative changes in fundamentals have recently occurred: significant quarterly sales deceleration occurred, and the consensus estimate for December, 2024 decreased significantly.
In light of this new information we are reviewing our current Overall Rating of A. This review will be completed in the next several days.
SM Energy Co (NYSE: SM) has reported E.P.S. of $2.13 for its fourth fiscal quarter (ending December 31) versus $2.11 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $6.89 compared to $9.09 a year ago.
SM Energy Co (NYSE: SM) stock closed at $39.50 on 2/21/24 after an increase of 1.8%. Moreover, above average trading volume at 136% of normal accompanied the advance. The stock has risen 3.8% during the last week and has been exceptionally strong relative to the market over the last nine months.

CASH FLOW

In 2022, SM Energy generated a very significant increase in cash of +$112 million (+34%). Sources of cash were much larger than uses. Cash generated from 2022 EBITDA totaled +$2,565 million. Non-operating uses consumed -$420 million (-16% of EBITDA). Cash taxes consumed -$13 million (-0% of EBITDA). Re-investment in the business amounted to -$1,291 million (-50% of EBITDA). On a net basis, debt investors received -$639 million (-25% of EBITDA) while equity investors removed -$90 million (-3% of EBITDA).
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SM Energy’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Sm Energy Peer Group. (Since 2020 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, SM Energy was in the top quartile and lower quartile. Currently, SM Energy is lower quartile at -16% of EBITDA (-$420 million).

SM Energy’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Sm Energy Peer Group. In most years, SM Energy was in the top quartile and lower quartile. Currently, SM Energy is at median at -0% of EBITDA (-$13 million).

SM Energy’s Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Sm Energy Peer Group. In most years, SM Energy was in the top quartile and lower quartile. Currently, SM Energy is upper quartile at -50% of EBITDA (-$1,291 million).

SM Energy’s Debt Investors, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Sm Energy Peer Group. (Since 2020 Debt Investors, %EBITDA has experienced a very sharp decline.) In most years, SM Energy was in the second quartile and top quartile. Currently, SM Energy is upper quartile at -25% of EBITDA (-$639 million).

SM Energy’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Sm Energy Peer Group. In most years, SM Energy was in the second quartile and lower quartile. Currently, SM Energy is slightly above median at -3% of EBITDA (-$90 million).

SM Energy’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Sm Energy Peer Group. In most years, SM Energy was in the top quartile and lower quartile. Currently, SM Energy is at the upper quartile at +4% of EBITDA (+$112 million).
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SM Energy’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Sm Energy Peer Group. (Since 2019 Cash, %Revenue has experienced very sharp improvement.) In most years, SM Energy was in the top quartile and lower quartile. Currently, SM Energy is upper quartile at +13%.

PROFITABILITY

SM Energy’s return on equity has improved very significantly since 2013. The current level of 24.4% is 2.29X the low for the period and is -16.4% from the high.
This very significant improvement was due to very strong positive trend in pretax operating return and very minor positive trend in non-operating factors.
The productivity of SM Energy’s assets rose over the full period 2013-2023: asset turnover has enjoyed a volatile overall uptrend that accelerated very sharply after the 2022 level.
Reinforcing this trend, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2020 level.
Non-operating factors (income taxes and financial leverage) had a very small positive influence on return on equity.
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SM Energy’s return on equity is above median (24.4%) for the four quarters ended September, 2023.
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Operating performance (pretax return on assets) is substantially above median (15.6%) reflecting asset turnover that is at median (0.40X) and pretax margin at the upper quartile (38.8%).
Tax “keep” rate (income tax management) is at median (87.7%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is lower quartile (1.79X).

GROWTH RATES

There are no significant differences between SM Energy’s longer term growth and growth in recent years.
SM Energy’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been -3.4% per year.

Total asset growth has been -6.3% per year.

Annual E.P.S. growth has been -3.9% per year.

Equity growth has been -2.0% per year.

SM Energy’s consensus growth rate forecast (average of Wall Street analysts) is 10.0% — substantially above the average of the historical growth measures.
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Relative to the Sm Energy Peer Group, SM Energy’s historical growth measures are erratic. Equity growth (-2.0%) has been upper quartile. Total asset growth (-6.3%) has been substantially above median. Revenue growth (-3.4%) has been slightly above median. E.P.S. growth (-3.9%) has been substantially below median.

Consensus growth forecast (10.0%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, SM Energy’s stock price performance has been volatile and significantly below market. Between April, 2013 and February, 2024, SM Energy’s stock price fell -35%; relative to the market, this was a -79% loss. Significant price moves during the period: 1) July, 2021 – May, 2022: +158%; 2) September, 2020 – June, 2021: +1449%; 3) April, 2020 – September, 2020: -61%; 4) March, 2020 – April, 2020: +232%; 5) December, 2019 – March, 2020: -89%; and 6) January, 2019 – October, 2019: -60%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 14.9% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through January, 2024 of 14.9% is above median relative to SM Energy Co Peer Group.

Current 5-year total return performance of 14.6% is substantially above median relative to the S&P 500 Composite.
Through January, 2024, with substantially above median current 5-year total return of 14.6% relative to S&P 500 Composite, SM Energy’s total return performance is slightly above median relative to SM Energy Co Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, SM’s overall valuation is quite low. The highest factor, the ratio of enterprise value/revenue, is below median. Ratio of enterprise value/assets is near the lower quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the price/earnings ratio, is lower quartile.

Relative to SM Energy Peer Group, SM’s overall valuation is normal. The highest factor, the price/equity ratio, is above median. Ratio of enterprise value/assets is above median. Ratio of enterprise value/revenue is above median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the price/earnings ratio, is at the lower quartile.
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SM Energy has a large value gap compared to the median. For SM to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 2.53X to 2.25X. If SM’s ratio of enterprise value/revenue were to fall to 2.25X, its stock price would be lower by $-6 to $34.
For SM to achieve upper quartile valuation relative to the SM Energy Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 2.53X to 3.32X. If SM’s ratio of enterprise value/revenue were to rise to 3.32X, its stock price would increase by $16 from the current level of $40.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to exceed the cost of capital, SM is expected to continue to be an important Value Builder.
SM Energy’s current Price Target of $152 represents a +284% change from the current price of $39.50.
This very high appreciation potential results in an appreciation score of 91 (only 9% of the universe has greater appreciation potential.)
Reinforcing this high Appreciation Score of 91, the high Power Rating of 78 contributes to an Value Trend Rating of A.
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SM Energy’s current Price Target is $152 (+192% from the 2022 Target of $52 and +284% from the 02/21/24 price of $39.50). This dramatic rise in the Target is the result of a +56% increase in the equity base and a +87% increase in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted decline in cost of equity has a slight positive impact as well. Partially offsetting these Drivers, the forecasted decline in return on equity has a very large negative impact.
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PTR’s return on equity forecast is 16.6% — below our recent forecasts. Forecasted return on equity erratic but little changed between 2014 and 2022. The current forecast is significantly above the 2020 low of 4%.

PTR’s growth forecast is 23.0% — substantially above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2014 and 2022. The current forecast is significantly above the 2019 low of 0%.

PTR’s cost of equity forecast is 10.8% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2014 and 2022. The current forecast is well above the 2016 low of 3.2%.
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At SM Energy’s current price of $39.50, investors are placing a negative value of $-30 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 21.9% versus a cost of equity of 11.8%.
PTR’s 2024 Price Target of $152 is based on these forecasts and reflects an estimated value of existing assets of $43 and a value of future investments of $109.

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