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Press release from Business Wire

SM Energy Reports Results for the Third Quarter of 2012; Provides Operations Update

<ul> <li class='bwlistitemmargb'> <i><b>Record quarterly production of 57.0</b></i> <i><b>BCFE </b></i><b>or <i>9.5 MMBOE, an average of 620 MMCFE/d; above quarterly guidance range of 565 - 603 MMCFE/d</i></b> </li> <li class='bwlistitemmargb'> <i><b>Full-year production guidance increased to 215.5 - 218.5 BCFE</b></i> </li> <li class='bwlistitemmargb'> <i><b>Quarterly GAAP net loss of $38.3 million or $0.58 per diluted share; adjusted net income of $9.7 million or $0.14 per diluted share</b></i> </li> <li class='bwlistitemmargb'> <i><b>Quarterly EBITDAX of $260.9 million; 22% sequential growth over second quarter</b></i> </li> </ul>

Wednesday, October 31, 2012

SM Energy Reports Results for the Third Quarter of 2012; Provides Operations Update17:30 EDT Wednesday, October 31, 2012 DENVER (Business Wire) -- SM Energy Company (NYSE: SM) announces financial results for the third quarter of 2012 and provides an operations update. In addition, a new presentation for the Company's third quarter earnings and operations update will be posted on the Company's website at www.sm-energy.com. This presentation will be referenced during the conference call scheduled for 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time) on November 1, 2012. Information for the earnings call can be found below. THIRD QUARTER 2012 RESULTS SM Energy reported a net loss for the third quarter of 2012 of $38.3 million or $0.58 per diluted share. This compares to net income of $230.1 million, or $3.41 per diluted share, for the same period of 2011. Adjusted net income for the third quarter of 2012 was $9.7 million, or $0.14 per diluted share, compared to adjusted net income of $42.4 million, or $0.63 per diluted share, for the same period of 2011. Adjusted net income excludes certain items that the Company believes affect the comparability of operating results. The Company generally excludes non-recurring items, items whose timing and/or amount cannot be reasonably estimated, and large non-cash items, such as gains or losses on divestiture activity and unrealized gains or losses from derivative activity. The table below presents a summary of the adjustments made to arrive at adjusted net income:   Adjusted Net Income Reconciliation (in thousands, except per share data)   Reconciliation of net income (loss) (GAAP) to adjusted net income (Non-GAAP):         For the Three Months EndedSeptember 30,2012         2011   Reported net income (loss) (GAAP) $ (38,336 ) $ 230,097 Adjustments, net of tax: (1) Change in Net Profits Plan liability 500 (15,631 ) Unrealized derivative (gain) loss 41,869 (82,877 ) (Gain) loss on divestiture activity 5,350 (119,586 ) Impairment of proved properties — 30,425 Abandonment & impairment of unproved properties 280 —     Adjusted net income (Non-GAAP) $ 9,663   $ 42,428     Adjusted net income per diluted common share: $ 0.14   $ 0.63     Diluted weighted-average common shares outstanding: (2) 66,973   67,386   (1) For the three-month periods ended September 30, 2012 and September 30, 2011, adjustments are shown net of tax and are calculated using an effective tax rate of 37.3%, which approximates the Company's statutory tax rate, as adjusted for ordinary permanent differences.   (2) For periods where the Company reports a GAAP net loss, the diluted weighted average share count is calculated using potentially dilutive securities related to unvested Restricted Stock Units, in-the-money outstanding options to purchase the Company's common stock, contingent Performance Share Awards, and contingent Performance Stock Units. On a GAAP basis, these items are not treated as dilutive securities in periods where the Company reports a GAAP loss for the quarter.   Earnings before interest, taxes, depreciation, depletion, amortization, accretion, and exploration expense ("EBITDAX") was $260.9 million for the third quarter of 2012, an increase of 21% from $215.5 million for the same period of 2011. Adjusted net income and EBITDAX are non-GAAP financial measures — please refer to the respective reconciliations in the accompanying Financial Highlights section at the end of this release for additional information about these measures. Revenues and other income for the third quarter were $379.0 million compared to $530.6 million for the same period of 2011. The decrease in operating revenue in the third quarter of 2012 was primarily due to a decrease in divestiture activity in the current period compared to the same period in 2011, when the Company recognized approximately $191 million in gains from divestiture activity. The table below provides the average realized prices received by product for the Company, as well as the adjusted prices received after taking into account cash settlements for derivative transactions:   Average Realized Commodity Prices for Quarter Ended September 30, 2012         Before the effect ofderivative cashsettlements         After the effect ofderivative cashsettlements   Oil ($/Bbl) $ 83.98 $ 82.15 Gas ($/Mcf) $ 3.05 $ 3.44 Natural gas liquids ($/Bbl) $ 34.82 $ 37.39 Equivalent ($/MCFE) $ 6.56 $ 6.76   The table below presents key performance measures and metrics, as well as previously provided guidance for the third quarter of 2012:               ProductionReported3Q12 Guidance   Average daily production (MMCFE/d) 620 565 - 603 Total production (BCFE) 57.0 52.0 - 55.5   Costs LOE ($/MCFE) $0.82 $0.88 - $0.94 Transportation ($/MCFE) $0.65 $0.69 - $0.73 Production taxes (% of pre-derivative oil, gas, and NGL revenue) 5.1% 6.1%   G&A - Cash ($/MCFE) $0.37 $0.44 - $0.47 G&A - Cash NPP ($/MCFE) $0.07 $0.07 - $0.09 G&A - Non-cash ($/MCFE) $0.12$0.13 - $0.15 Total G&A ($/MCFE) $0.56 $0.64 - $0.71   DD&A ($/MCFE) $3.38 $3.20 - $3.40 Non-cash interest expense ($MM) $1.1 $1.1   For the third quarter of 2012, SM Energy met or beat guidance on all metrics. Production was approximately 6% above the midpoint of third quarter guidance, primarily driven by growth in the Company's operated Eagle Ford shale program as the Company's third party midstream provider alleviated infrastructure constraints on its midstream gathering system. LOE was lower than guidance primarily due to the operated Eagle Ford shale program, where cost saving initiatives and the installation of a water recycling facility have driven costs below the Company's earlier forecast. For transportation costs, the Company was below guidance due to anticipated third party field compression and oil gathering facilities not coming online during the third quarter as planned. The Company's production tax rate as a percentage of oil, gas, and NGL revenue was lower than guidance due to severance tax incentives granted to deep gas wells associated with the Texas portion of the Company's Haynesville shale program. G&A per MCFE was lower than guidance as a result of a combination of higher than forecasted production and lower than forecasted compensation related expenses. FINANCIAL POSITION AND LIQUIDITY At the end of the third quarter of 2012, SM Energy had total long-term debt of approximately $1.3 billion. A summary of the Company's long-term debt is shown in the table below:   Schedule of long-term debt ($ in millions)         Debt IssueAmount outstanding atSeptember 30, 2012 Revolving credit facility $ 228 Senior Notes due 2019 350 Senior Notes due 2021 350 Senior Notes due 2023 400 Total $ 1,328   On August 31, 2012, the Company's bank group redetermined its borrowing base, increasing it to $1.55 billion from $1.4 billion at June 30, 2012. SM Energy has elected to keep its current commitments under its credit facility unchanged at $1.0 billion. As of September 30, 2012, SM Energy's debt-to-book capitalization ratio was 47% and the ratio of the Company's debt to twelve month trailing EBITDAX was 1.3 times. As of the end of the third quarter, SM Energy was in compliance with all of the covenants associated with its long-term debt. OPERATIONS UPDATEProduction SM Energy reported quarterly production of 57.0 BCFE or 9.5 MMBOE, resulting in average daily production of 620 MMCFE per day for the third quarter of 2012. Reported production was 6% above the midpoint of the previously provided production guidance range of 565 to 603 MMCFE per day. Reported production increased by 13% from the quarterly production of 50.6 BCFE in the second quarter of 2012. The Company's Eagle Ford program is primarily responsible for this production growth. Eagle Ford Shale The Company's operated net production in the Eagle Ford shale averaged 243 MMCFE/d in the third quarter of 2012, an 18% increase from second quarter production of 207 MMCFE/d. Average daily production from the Company's operated Eagle Ford shale program increased 90% from the third quarter of 2011 to the third quarter of 2012. During the third quarter of 2012, SM Energy operated six drilling rigs on its operated Eagle Ford shale acreage. At the end of the third quarter, one rig was released and the Company expects to exit the year with five operated rigs. During the quarter, the Company's midstream provider began installing additional planned tank batteries in its infield gathering system. At the end of the quarter, the system had five of the six planned tank batteries installed, and the Company expects the sixth remaining battery to be operational by year end. During the third quarter, the Company completed 24 wells on its operated acreage. Based on the current drilling schedule, the Company now expects to complete 74 wells in 2012, with another 21 drilled wells waiting on completion at year end. In the non-operated portion of the Company's Eagle Ford shale program, net production for the third quarter of 2012 averaged 14.0 MBOE/d. The operator ran approximately nine drilling rigs and one spudder rig during the third quarter of 2012, and is expected to continue at the same activity level for the remainder of the year. Bakken / Three Forks SM Energy operated four drilling rigs during the third quarter, and plans to operate those four rigs for the remainder of 2012. The Company continues to focus three of its rigs on Bakken and Three Forks drilling in its Raven and Bear Den prospects in McKenzie and Williams Counties, North Dakota, while the fourth operated rig focuses on the Three Forks formation in the Company's Gooseneck prospect in Divide County, North Dakota. Third quarter average daily production for the Company's Bakken / Three Forks program was 11.0 MBOE/d, a 6% increase from the second quarter of 2012 and a 96% increase from the third quarter of 2011. During the first half of 2012, the Company transitioned most of its drilling and completion activity in the Williston Basin to multi-well pad infill drilling. During the quarter, the Company completed nine operated wells in its Bakken / Three Forks program. While the Company has divested a number of its non-operated Williston Basin assets, the Company is still participating in a number of non-operated wells throughout the Williston Basin. Permian Basin In the third quarter of 2012, the Company increased its acreage position in the Permian Basin by approximately 10,300 net acres to a total of approximately 125,600 net acres in the basin. During the third quarter, the Company operated four drilling rigs. Two of these rigs were focused on the Company's Mississippian limestone project in the northern Midland Basin, where it continues to delineate its approximately 68,000 net acre position. One operated rig is focused on the Leonard shale, with four wells in various stages of drilling and completion. The Company expects to evaluate the performance of these initial wells prior to providing any additional commentary on this program. Other Activity In its Granite Wash program, the Company operated three rigs and completed four wells in the third quarter of 2012. The Company plans to drop one of the rigs during the fourth quarter of 2012, exiting the year with two operated rigs. The Company also operated one rig in its Powder River Basin program in Wyoming, where it is testing long lateral Frontier wells as well as the prospectivity of other intervals. UPDATED PRODUCTION, AND PERFORMANCE GUIDANCE The Company is providing updated production and cost guidance for fourth quarter and full year 2012 in the table below: Guidance for 2012               4Q12FY2012 Production (BCFE) 57.5 - 60.5 215.5 - 218.5 Average daily production (MMCFE/d) 625 - 658 589 - 597 Oil production (as % of total) ~28% Natural gas production (as % of total) ~55% NGL production (as % of total) ~17%   LOE ($/MCFE) $0.82 - $0.87 $0.81 - $0.86 Transportation ($/MCFE) $0.69 - $0.73 $0.62 - $0.65 Production taxes (% of pre-derivative oil, gas, and NGL revenue) 6.1 % 5.3%   G&A - Cash ($/MCFE) $0.40 - $0.44 $0.41 - $0.45 G&A - Cash NPP ($/MCFE) $0.07 - $0.09 $0.08 - $0.10 G&A - Non-cash ($/MCFE) $0.11 - $0.13 $0.10 - $0.12 Total G&A ($/MCFE) $0.58 - $0.66 $0.59 - $0.67   DD&A ($/MCFE) $3.20 - $3.40 $3.20 - $3.40 Non-cash interest expense ($MM) $ 1.1 $ 6.8   Effective income tax rate range 37.3% - 37.8% % of income tax that is current <5%   EARNINGS CALL INFORMATION The Company has scheduled a teleconference to discuss these results and other operational matters for November 1, 2012, at 8:00 a.m. Mountain Time (10:00 a.m. Eastern Time). The call participation number is 877-445-0811 and the conference ID number is 42308521. An audio replay of the call will be available approximately two hours after the call at 855-859-2056, with the conference ID number 42308521. International participants can dial 617-401-8115 to take part in the conference call, using the conference ID number 42308521, and can access a replay of the call at 404-537-3406, using conference ID number 42308521. Replays can be accessed through November 15, 2012. This call is being webcast live and can be accessed at SM Energy Company's website at www.sm-energy.com. An audio recording of the conference call will be available at that site through November 15, 2012. INFORMATION ABOUT FORWARD LOOKING STATEMENTS This release may contain or incorporate by reference forward looking statements within the meaning of securities laws, including estimates, forecasts, plans and projections. The words “will,” “believe,” “budget,” “anticipate,” “plan,” “intend,” “estimate,” “forecast,” and “expect” and similar expressions are intended to identify forward looking statements. The forward looking statements contained in this release speak as of the date of this release. These statements involve known and unknown risks, which may cause SM Energy's actual results to differ materially from results expressed or implied by the forward looking statements. These risks include such factors as the volatility and level of oil, natural gas, and natural gas liquids prices, the uncertain nature of the expected benefits from the acquisition, divestiture, or joint venture of oil and gas properties, the uncertain nature of announced divestiture, joint venture, farm down or similar efforts and the ability to complete such transactions, uncertainties inherent in projecting future rates of production from drilling activities and acquisitions, the ability of midstream service providers to purchase or market the Company's production, the ability of purchasers of production to pay for those sales, the availability of debt and equity financing for purchasers of oil and gas properties, the ability of the banks in the Company's credit facility to fund requested borrowings, the ability of derivative counterparties to settle derivative contracts in favor of the Company, the imprecise nature of estimating oil and gas reserves, the availability of additional economically attractive exploration, development, and property acquisition opportunities for future growth and any necessary financings, unexpected drilling conditions and results, unsuccessful exploration and development drilling, the availability of drilling, completion, and operating equipment and services, the risks associated with the Company's commodity price risk management strategy, uncertainty regarding the ultimate impact of potentially dilutive securities, and other such matters discussed in the “Risk Factors” section of SM Energy's 2011 Annual Report on Form 10-K and subsequent quarterly reports filed on Form 10-Q. Although SM Energy may from time to time voluntarily update its prior forward looking statements, it disclaims any commitment to do so except as required by securities laws. ABOUT THE COMPANY SM Energy Company is an independent energy company engaged in the acquisition, exploration, development, and production of crude oil, natural gas, and natural gas liquids in onshore North America. SM Energy routinely posts important information about the Company on its website. For more information about SM Energy, please visit its website at www.sm-energy.com   SM ENERGY COMPANYFINANCIAL HIGHLIGHTSSeptember 30, 2012               Guidance ComparisonFor the Three Months EndedSeptember 30, 2012ActualGuidanceRange   Average daily production (MMCFE per day) 620 565 - 603 Total production (BCFE) 57.0 52.0 - 55.5   Lease operating expense (per MCFE) $0.82 $0.88 - $0.94 Transportation expense (per MCFE) $0.65 $0.69 - $0.73 Production taxes, as a percentage of pre-derivative oil, gas, and NGL revenue 5.1 % 6.1%   General and administrative - Cash (per MCFE) $0.37 $0.44 - $0.47 General and administrative - Cash related to Net Profits Plan (per MCFE) $0.07 $0.07 - $0.09 General and administrative - Non-cash (per MCFE) $0.12   $0.13 - $0.15 Total General and administrative (per MCFE) $0.56   $0.64- $0.71   Depreciation, depletion, and amortization (per MCFE) $3.38 $3.20 - $3.40   Non-cash interest expense ($MM) $1.1 $1.1     SM ENERGY COMPANYFINANCIAL HIGHLIGHTSSeptember 30, 2012                           Production DataFor the Three Months EndedSeptember 30,For the Nine Months EndedSeptember 30,20122011PercentChange20122011PercentChange   Average realized sales price, before the effects ofderivative cash settlements: Oil (per Bbl) $ 83.98 $ 82.63 2 % $ 85.76 $ 88.54 (3 )% Gas (per Mcf) 3.05 4.52 (33 )% 2.78 4.51 (38 )% NGL (per Bbl) 34.82   56.10   (38 )% 38.53   52.71   (27 )% Equivalent (per MCFE) $ 6.56 $ 7.65 (14 )% $ 6.63 $ 7.90 (16 )%   Average realized sales price, including the effects ofderivative cash settlements: Oil (per Bbl) $ 82.15 $ 75.02 10 % $ 83.04 $ 78.13 6 % Gas (per Mcf) 3.44 4.89 (30 )% 3.35 4.97 (33 )% NGL (per Bbl) 37.39   49.71   (25 )% 39.61   46.45   (15 )% Equivalent (per MCFE) $ 6.76 $ 7.40 (9 )% $ 6.85 $ 7.57 (10 )%   Production: Oil (MMBbls) 2.6 2.0 33 % 7.5 5.6 33 % Gas (Bcf) 31.3 25.9 21 % 88.1 71.5 23 % NGL (MMBbls) 1.7   0.8   109 % 4.2   2.2   91 % BCFE (6:1) 57.0 42.5 34 % 158.3 118.4 34 %   Average daily production: Oil (MBbls per day) 28.6 21.5 33 % 27.4 20.6 33 % Gas (MMcf per day) 340.3 281.2 21 % 321.5 262.0 23 % NGL (MBbls per day) 18.0   8.6   109 % 15.3   8.0   91 % MMCFE per day (6:1) 619.6 462.1 34 % 577.6 433.7 33 %   Per MCFE Data: Realized price before the effects of derivative cash settlements $ 6.56 $ 7.65 (14 )% $ 6.63 $ 7.90 (16 )% Lease operating expense 0.82 0.94 (13 )% 0.83 0.90 (8 )% Transportation costs 0.65 0.56 16 % 0.61 0.47 30 % Production taxes 0.33 0.33 — % 0.33 0.29 14 % General and administrative 0.56   0.70   (20 )% 0.58   0.70   (17 )% Operating profit, before the effects of derivative cash settlements $ 4.20 $ 5.12 (18 )% $ 4.28 $ 5.54 (23 )% Derivative cash settlements 0.20   (0.25 ) (180 )% 0.22   (0.33 ) (167 )% Operating profit, including the effects of derivative cash settlements $ 4.40   $ 4.87   (10 )% $ 4.50   $ 5.21   (14 )% Depletion, depreciation, amortization, and asset retirement obligation liability accretion $ 3.38 $ 2.89 17 % $ 3.31 $ 2.90 14 %     SM ENERGY COMPANYFINANCIAL HIGHLIGHTSSeptember 30, 2012                         Consolidated Statements of Operations (in thousands, except per share amounts) For the Three MonthsEnded September 30,For the Nine MonthsEnded September 30,2012201120122011 Operating revenues and other income: Oil, gas, and NGL production revenue $ 373,928 $ 325,231 $ 1,049,131 $ 935,478 Realized hedge gain (loss) 501 (6,843 ) 2,338 (14,548 ) Gain (loss) on divestiture activity (8,532 ) 190,728 (31,246 ) 245,662 Marketed gas system and other operating revenue 13,054   21,458   40,571   57,184   Total operating revenues and other income 378,951   530,574   1,060,794   1,223,776     Operating expenses: Oil, gas, and NGL production expense 102,447 77,753 280,713 196,907 Depletion, depreciation, amortization, and asset retirement obligation liability accretion 192,432 123,067 523,610 343,805 Exploration 25,417 11,272 66,031 33,587 Impairment of proved properties — 48,525 38,523 48,525 Abandonment and impairment of unproved properties 447 — 11,296 4,316 General and administrative 32,171 29,787 91,443 82,958 Change in Net Profits Plan liability 798 (24,930 ) (17,342 ) (24,719 ) Unrealized and realized derivative (gain) loss 55,856 (128,425 ) (40,040 ) (83,872 ) Marketed gas system and other operating expense 12,219   20,737   40,780   57,746   Total operating expenses 421,787   157,786   995,014   659,253     Income (loss) from operations (42,836 ) 372,788 65,780 564,523   Nonoperating income (expense): Interest income 126 27 201 382 Interest expense (18,362 ) (9,372 ) (45,352 ) (33,636 )   Income (loss) before income taxes (61,072 ) 363,443 20,629 531,269 Income tax benefit (expense) 22,736   (133,346 ) (7,740 ) (195,142 )   Net income (loss) $ (38,336 ) $ 230,097   $ 12,889   $ 336,127     Basic weighted-average common shares outstanding 65,745   63,904   64,815   63,665     Diluted weighted-average common shares outstanding 65,745   67,386   67,343   67,390     Basic net income (loss) per common share $ (0.58 ) $ 3.60   $ 0.20   $ 5.28     Diluted net income (loss) per common share $ (0.58 ) $ 3.41   $ 0.19   $ 4.99       SM ENERGY COMPANYFINANCIAL HIGHLIGHTSSeptember 30, 2012           Consolidated Balance Sheets (in thousands, except per share amounts) September 30,December 31,ASSETS20122011 Current assets: Cash and cash equivalents $ 184 $ 119,194 Accounts receivable 235,887 210,368 Refundable income taxes 3,242 5,581 Prepaid expenses and other 39,014 68,026 Derivative asset 41,865 55,813 Deferred income taxes 5,746   4,222   Total current assets 325,938   463,204     Property and equipment (successful efforts method), at cost: Land 1,845 1,548 Proved oil and gas properties 5,197,761 4,378,987 Less - accumulated depletion, depreciation, and amortization (2,190,507 ) (1,766,445 ) Unproved oil and gas properties 160,468 120,966 Wells in progress 264,634 273,428 Materials inventory, at lower of cost or market 12,718 16,537 Oil and gas properties held for sale net of accumulated depletion, depreciation and amortization of$15,446 in 2012 and $10,714 in 2011 19,503 246 Other property and equipment, net of accumulated depreciation of $22,075 in 2012 and $23,985 in 2011 135,376   71,369   Total property and equipment, net 3,601,798   3,096,636     Other noncurrent assets: Derivative asset 22,383 31,062 Restricted cash 93,771 124,703 Other noncurrent assets 80,062   83,375   Total other noncurrent assets 196,216   239,140     Total Assets$4,123,952   $3,798,980     LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 474,573 $ 456,999 Derivative liability 19,352 42,806 Other current liabilities 6,000   6,000   Total current liabilities 499,925   505,805     Noncurrent liabilities: Long-term credit facility 228,000 — 3.50% Senior Convertible Notes, net of unamortized discount of $2,431 in 2011 — 285,069 6.625% Senior Notes Due 2019 350,000 350,000 6.50% Senior Notes Due 2021 350,000 350,000 6.50% Senior Notes Due 2023 400,000 — Asset retirement obligation 90,788 87,167 Asset retirement obligation associated with oil and gas properties held for sale 749 1,277 Net Profits Plan liability 90,389 107,731 Deferred income taxes 573,577 568,263 Derivative liability 8,802 12,875 Other noncurrent liabilities 57,680   67,853   Total noncurrent liabilities 2,149,985   1,830,235     Stockholders' equity: Common stock, $0.01 par value - authorized: 200,000,000 shares; issued: 66,121,809 shares in 2012 and64,145,482 shares in 2011; outstanding, net of treasury shares: 66,071,228 shares in 2012 and 64,064,415shares in 2011 661 641 Additional paid-in capital 222,812 216,966 Treasury stock, at cost: 50,581 shares in 2012 and 81,067 shares in 2011 (1,221 ) (1,544 ) Retained earnings 1,257,534 1,251,157 Accumulated other comprehensive loss (5,744 ) (4,280 ) Total stockholders' equity 1,474,042   1,462,940     Total Liabilities and Stockholders' Equity$4,123,952   $3,798,980       SM ENERGY COMPANYFINANCIAL HIGHLIGHTSSeptember 30, 2012                         Consolidated Statements of Cash Flows (in thousands) For the Three MonthsEnded September 30,For the Nine MonthsEnded September 30,2012201120122011 Cash flows from operating activities: Net income (loss) $ (38,336 ) $ 230,097 $ 12,889 $ 336,127 Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on divestiture activity 8,532 (190,728 ) 31,246 (245,662 ) Depletion, depreciation, amortization, and asset retirement obligation liability accretion 192,432 123,067 523,610 343,805 Exploratory dry hole expense 10,353 — 18,551 49 Impairment of proved properties — 48,525 38,523 48,525 Abandonment and impairment of unproved properties 447 — 11,296 4,316 Stock-based compensation expense 9,359 7,713 21,731 19,550 Change in Net Profits Plan liability 798 (24,930 ) (17,342 ) (24,719 ) Unrealized derivative (gain) loss 66,777 (132,180 ) (7,237 ) (108,020 ) Amortization of debt discount and deferred financing costs 1,076 3,404 5,692 14,698 Deferred income taxes (22,910 ) 112,010 7,305 164,251 Plugging and abandonment (288 ) (1,505 ) (1,804 ) (2,935 ) Other 1,773 (64 ) 906 (5,952 ) Changes in current assets and liabilities: Accounts receivable (19,417 ) (10,417 ) (18,682 ) (20,787 ) Refundable income taxes (639 ) 3,134 2,339 8,482 Prepaid expenses and other (1,444 ) (960 ) (6,203 ) 14,732 Accounts payable and accrued expenses 34,785 (39,028 ) 30,766 (41,558 ) Excess income tax benefit from the exercise of stock awards —   (8,364 ) —   (15,155 ) Net cash provided by operating activities243,298   119,774   653,586   489,747     Cash flows from investing activities: Net proceeds from sale of oil and gas properties 33,253 227,101 48,663 325,053 Capital expenditures (421,389 ) (419,245 ) (1,126,755 ) (1,081,617 ) Acquisition of oil and gas properties (292 ) — (5,604 ) — Other (111 ) 2,015   —   (340 ) Net cash used in investing activities(388,539)(190,129)(1,083,696)(756,904)   Cash flows from financing activities: Proceeds from credit facility 432,000 13,500 1,234,500 115,500 Repayment of credit facility (265,000 ) (13,500 ) (1,006,500 ) (163,500 ) Debt issuance costs related to credit facility — (194 ) — (8,719 ) Net proceeds from Senior Notes due 2019 — (313 ) — 341,122 Net proceeds from Senior Notes due 2023 (113 ) — 392,223 — Repayment of Convertible Notes — — (287,500 ) — Proceeds from sale of common stock 533 664 3,421 5,593 Dividends paid — — (3,208 ) (3,181 ) Net share settlement from issuance of stock awards (21,605 ) (9,967 ) (21,605 ) (9,967 ) Excess income tax benefit from the exercise of stock awards — 8,364 — 15,155 Other (574 ) 644   (231 ) —   Net cash provided by (used in) financing activities   145,241     (802)   311,100     292,003     Net change in cash and cash equivalents — (71,157 ) (119,010 ) 24,846 Cash and cash equivalents at beginning of period 184   101,080   119,194   5,077   Cash and cash equivalents at end of period$184$29,923$184$29,923     SM ENERGY COMPANYFINANCIAL HIGHLIGHTSSeptember 30, 2012                         Adjusted Net Income (in thousands, except per share data)   Reconciliation of net income (loss) (GAAP)to adjusted net income (Non-GAAP):For the Three MonthsEnded September 30,For the Nine MonthsEnded September 30,2012201120122011   Reported net income (loss) (GAAP) $ (38,336 ) $ 230,097 $ 12,889 $ 336,127   Adjustments net of tax: (1) Change in Net Profits Plan liability 500 (15,631 ) (10,873 ) (15,499 ) Unrealized derivative (gain) loss 41,869 (82,877 ) (4,538 ) (67,729 ) (Gain) loss on divestiture activity 5,350 (119,586 ) 19,591 (154,030 ) Impairment of proved properties — 30,425 24,154 30,425 Abandonment and impairment of unproved properties 280 — 7,082 2,706         Adjusted net income (Non-GAAP) (2) $ 9,663   $ 42,428   $ 48,305   $ 132,000       Adjusted net income per diluted common share: $ 0.14   $ 0.63   $ 0.72   $ 1.96     Diluted weighted-average common shares outstanding: (3) 66,973   67,386   67,343   67,390     (1) For the three and nine-month periods ended September 30, 2012 and September 30, 2011, adjustments are shown net of tax and are calculated using an effective tax rate of 37.3%, which approximates the Company's statutory tax rate, as adjusted for ordinary permanent differences.   (2) Adjusted net income excludes certain items that the Company believes affect the comparability of operating results. Items excluded generally are non-recurring items or are items whose timing and/or amount cannot be reasonably estimated. These items include non-cash adjustments and impairments such as the change in the Net Profits Plan liability, unrealized derivative (gain) loss, impairment of proved properties, abandonment and impairment of unproved properties, and loss (gain) on divestiture activity. The non-GAAP measure of adjusted net income is presented because management believes it provides useful additional information to investors for analysis of SM Energy's fundamental business on a recurring basis. In addition, management believes that adjusted net income is widely used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research of industry research analysts in making investment decisions. Adjusted net income should not be considered in isolation or as a substitute for net income, income from operations, cash provided by operating activities or other income, profitability, cash flow, or liquidity measures prepared under GAAP. Since adjusted net income excludes some, but not all, items that affect net income and may vary among companies, the adjusted net income amounts presented may not be comparable to similarly titled measures of other companies.   (3) For periods where the Company reports a GAAP net loss, the diluted weighted average share count is calculated using potentially dilutive securities related to unvested Restricted Stock Units, in-the-money outstanding options to purchase the Company's common stock, contingent Performance Share Awards, and contingent Performance Stock Units. On a GAAP basis, these items are not treated as dilutive securities in periods where the Company reports a GAAP loss for the quarter.                           EBITDAX (in thousands)   Reconciliation of net income (loss) (GAAP) to EBITDAX (Non-GAAP)For the Three MonthsEnded September 30,For the Nine MonthsEnded September 30,2012201120122011   Reported net income (loss) (GAAP) $ (38,336 ) $ 230,097 $ 12,889 $ 336,127   Adjustments: Interest income (126 ) (27 ) (201 ) (382 ) Interest expense 18,362 9,372 45,352 33,636 Income tax (benefit) expense (22,736 ) 133,346 7,740 195,142 Depletion, depreciation, amortization, and asset retirement obligation liability accretion 192,432 123,067 523,610 343,805 Exploration 25,417 11,272 66,031 33,587 Impairment of proved properties — 48,525 38,523 48,525 Abandonment and impairment of unproved properties 447 — 11,296 4,316 Stock-based compensation expense 9,359 7,713 21,731 19,550 Unrealized derivative (gain) loss 66,777 (132,180 ) (7,237 ) (108,020 ) Change in Net Profits Plan liability 798 (24,930 ) (17,342 ) (24,719 ) (Gain) loss on divestiture activity 8,532   (190,728 ) 31,246   (245,662 ) EBITDAX (Non-GAAP) (4) $ 260,926 $ 215,527 $ 733,638 $ 635,905 (4) EBITDAX represents income or loss before interest expense, interest income, income taxes, depreciation, depletion, amortization and accretion, exploration expense, property impairments, non-cash stock compensation expense, unrealized derivative gains and losses, change in the Net Profit Plan liability, and gains and losses on divestitures. EBITDAX excludes certain items that the Company believes affect the comparability of operating results and can exclude items that are generally one-time or whose timing and/or amount cannot be reasonably estimated. EBITDAX is a non-GAAP measure that is presented because the Company believes that it provides useful additional information to investors, as a performance measure, for analysis of its ability to internally generate funds for exploration, development, acquisitions, and to service debt. The Company is also subject to financial covenants under its credit facility based on its debt to EBITDAX ratio. In addition, EBITDAX is widely used by professional research analysts and others in the valuation, comparison, and investment recommendations of companies in the oil and gas exploration and production industry, and many investors use the published research of industry research analysts in making investment decisions. EBITDAX should not be considered in isolation or as a substitute for net income, income from operations, net cash provided by operating activities, profitability, or liquidity measures prepared under GAAP. Since EBITDAX excludes some, but not all items that affect net income and may vary among companies, the EBITDAX amounts presented may not be comparable to similar metrics of other companies. SM EnergyJames R. Edwards, 303-837-2444