SM Energy's Near-Term Focus Centers On Debt Reduction Over Stock Buybacks: Analyst

Core Viewpoint - J.P. Morgan analyst Zach Parham maintains a Neutral rating on SM Energy Co with a price target of $41.00, highlighting the company's ongoing integration of Uinta assets and minimal impact from previous operational disruptions [1]. Production and Financial Estimates - For the first quarter, oil volumes are expected to reach 103.0 MBo/d, slightly above SM's guidance and in line with consensus expectations of 103.1 MBo/d [2]. - SM plans to deliver 45 net Turn-In-Lines (TILs) in the first quarter, which is 30% of its annual target of 150 net TILs, with a greater impact anticipated in the second quarter [2]. - Second-quarter oil volumes are projected to increase by 6% quarter-over-quarter to 106.9 MBo/d, aligning with the company's full-year production goal of approximately 107 MBo/d [3]. Financial Performance - The estimated cash flow per share (CFPS) for the first quarter is $4.37, slightly above the consensus estimate of $4.28, while EBITDA is projected at $570 million, exceeding the consensus of $559 million [3][4]. - Capital expenditures for the quarter are expected to be $430 million, within the company's guidance, and free cash flow (FCF) is estimated at $72 million [4]. Annual Projections - For the full year, SM projects oil production of 107.7 MBo/d, supported by $1.31 billion in capital spending, resulting in $740 million of free cash flow and a 22% FCF yield [5]. - The company completed a $2.0 billion cash acquisition of XCL Resources in October 2024, expanding its operations in the Uinta Basin [5]. Strategic Focus - Due to the cash-financed acquisition, SM is prioritizing debt reduction over share buybacks, aiming to reduce leverage below 1x by mid-2025, which currently results in a cash return yield lagging behind the peer median [6].