Oil & Gas Stocks

SM Energy Co Valuation – Initial Coverage $SM

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – January 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how SM Energy Co (SM) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): SM Energy Company is an independent energy company. The Company is engaged in the acquisition, exploration, development and production of crude oil and condensate, natural gas and natural gas liquids (NGLs) in onshore North America. The Company operates in the exploration and production segment of the oil and gas industry within the United States. Its operations are concentrated in onshore operating areas in the United States: South Texas & Gulf Coast Region, Rocky Mountain Region and Permian Region. It has working interests in approximately 1,460 gross (approximately 870 net) productive oil wells and approximately 1,770 gross (approximately 650 net) productive gas wells. Within South Texas & Gulf Coast Region, the Company has both operated and non-operated Eagle Ford shale programs on approximately 200,000 net acres. It has approximately 162,000 net acres being developed in the Bakken and Three Forks formations. It has approximately 23,000 net acres in its Permian Region.

SM Chart

SM data by YCharts

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Premium members can view a full ModernGraham valuation of the company and have access to download a PDF version of the valuation for easy reference. Recent valuations of the components of the Dow Jones Industrial Average are available for free members, including this one of Microsoft Corporation.  In addition, here is a post detailing what can be found within each individual company’s valuation.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of SM – January 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $3,409,616,320 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 3.79 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -304.40% Fail
6. Moderate PEmg Ratio PEmg < 20 -13.92 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.45 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 3.79 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 3.15 Fail
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

EPSmg -$2.45
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade D
MG Value based on 3% Growth -$35.46
MG Value based on 0% Growth -$20.79
Market Implied Growth Rate -11.21%
Current Price $34.05
% of Intrinsic Value N/A

SM Energy Co does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the insufficient earnings stability or growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the net current assets, and the lack of earnings stability or growth over the last five years. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $1.06 in 2012 to an estimated $-2.45 for 2016. This level of negative earnings does not support a positive valuation.As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into SM Energy Co revealed the company was trading above its Graham Number of $0. The company pays a dividend of $0.1 per share, for a yield of 0.3% Its PEmg (price over earnings per share – ModernGraham) was -13.93, which was below the industry average of 69.19, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-34.29.

SM Energy Co scores quite poorly in the ModernGraham grading system, with an overall grade of D.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$34.29
Graham Number $0.00
PEmg -13.93
Current Ratio 3.79
PB Ratio 1.45
Current Dividend $0.10
Dividend Yield 0.29%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $1,246,609,000
Total Current Liabilities $328,630,000
Long-Term Debt $2,894,323,000
Total Assets $5,785,433,000
Intangible Assets $0
Total Liabilities $3,937,518,000
Shares Outstanding (Diluted Average) 78,468,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate -$8.76
Dec2015 -$6.61
Dec2014 $9.79
Dec2013 $2.51
Dec2012 -$0.83
Dec2011 $3.19
Dec2010 $3.04
Dec2009 -$1.59
Dec2008 $1.38
Dec2007 $2.94
Dec2006 $2.94
Dec2005 $2.33
Dec2004 $1.44
Dec2003 $1.40
Dec2002 $0.49
Dec2001 $0.71
Dec2000 $0.99
Dec1999 $0.00
Dec1998 -$0.20
Dec1997 $0.54
Dec1996 $0.30

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate -$2.45
Dec2015 $1.01
Dec2014 $4.39
Dec2013 $1.55
Dec2012 $1.06
Dec2011 $1.94
Dec2010 $1.45
Dec2009 $0.97
Dec2008 $2.24
Dec2007 $2.52
Dec2006 $2.11
Dec2005 $1.55
Dec2004 $1.11
Dec2003 $0.87
Dec2002 $0.53
Dec2001 $0.51
Dec2000 $0.38

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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