Here's Why You Should Hold on to SM Energy (SM) Stock Now

SM Energy Company SM continues to benefit from high-quality Howard County assetsand robust Permian portfolio. However, high leverage and operating costs remain concerns.

Denver, CO-based SM Energy — with a market capitalization of $1.3 billion — is an independent oil and gas company engaged in exploration, exploitation, development, acquisition, and production of natural gas and crude oil in North America. The company delivered a four-quarter positive earnings surprise of 10.4%, on average. Notably, shares of SM Energy have gained 9.8% against the industry’s 8.2% decline in the past year.

Let’s delve deeper into the factors that substantiate why it's perfectly alright to hang onto this Zacks Rank #3 (Hold) stock.

Factors to Boost the Stock

We expect the company’s attractive oil and gas investments, balanced and diverse portfolio of proved reserves, and development drilling opportunities to create long-term value for its shareholders. We view SM Energy as one of the most attractive players in the exploration and production space.

Given the company’s increasing focus on oil, specifically in the Permian and Eagle Ford regions, we believe that SM Energy will be able to boost oil-weighted activity. Additionally, the firm holds meaningful leasehold positions in leading U.S. shale plays like South Texas Eagle Ford Shale, which will provide the company with many years of profitable drilling inventory. Its high-quality Howard County assets are a huge positive.

In 2019, the company is expected to have completed more than 100 net wells in the Permian basin. In the South Texas, its net well completions are expected to have reached 19. Well drilling activities are likely to have backed the company to reach production growth targets. Production for fourth-quarter 2019 is projected within 130.4-134.8 thousand barrels of oil equivalent per day (MBoe/d). For full-year 2019, SM Energy marginally lifted its production view from 129-131 MBoe/d to 130-131 MBoe/d, of which 44% is expected to be oil.

What’s Deterring the Stock?

There are a few factors that are holding back the stock from reaching its true potential.

At the end of the third quarter, SM Energy’s debt and cash balance was $2,735.8 million and $10,000, respectively. High leverage of the upstream player is a cause of concern. The company’s long-term debt-to-capitalization ratio of 49% is much higher than the industry average of 40.5%.

For most part of the last three years, SM Energy’s dividend yield had been much lower than the industry it belongs to, reflecting unimpressive returns for investors.

For 2019, the company is expected to incur lease operating expenses per Boe of $4.70-$4.80, the upper limit of which is higher than $4.74 per Boe in 2018.  General and administrative costs are expected within $125-$130 million, indicating an increase from $116.5 million in 2018. The company’s forecast for higher costs is likely to have hurt the bottom line.

Which Way are Estimates Headed?

For fourth-quarter 2019, the Zacks Consensus Estimate for revenues is pegged at $409.2 million, indicating an improvement of 3.8% from the year-ago reported figure. For adjusted earnings, the consensus mark stands at a loss of 12 cents per share, suggesting growth of 33.3% from the year-ago reported figure.

Stocks to Consider

Some better-ranked stocks in the energy sector include Chevron Corporation CVX, Repsol SA REPYY and Centennial Resource Development, Inc. CDEV, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Chevron’s bottom line for 2020 is expected to rise 5.5% year over year.

Repsol’s bottom line for 2020 is expected to rise 51% year over year.

Centennial’s revenues for fourth-quarter 2019 is expected to rise 8% year over year.

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