SM Energy Reports Year-End 2018 Results and 2019 Operating Plan

Proved reserves at year-end 2017 (MMBoe)

468

Divestitures completed in 2018

(40)

Proved reserves at year-end 2017 pro forma sold properties

428

Production

(44)

Reserve additions from drilling

188

Reserve additions through acquisitions

—

Reserve revisions including price and 5-year rule

(69)

Proved reserves year-end 2018 (MMBoe)

503

For the Three Months Ended
December 31,

For the Twelve Months Ended
December 31,

2018

2017

Percent
Change

2018

2017

Percent
Change

Production (MMBoe)

11.3

10.4

9

%

43.9

44.5

(1)

%

Production (MBoe/d)

122.8

112.6

9

%

120.3

121.8

(1)

%

Production from retained assets (MMBoe)

11.3

9.4

20

%

42.7

38.5

11

%

$/Boe

$/Boe

$/Boe

$/Boe

Average realized price (pre-hedge)

34.74

32.95

5

%

37.27

28.20

32

%

Average realized price (post-hedge)

31.74

32.16

(1)

%

34.18

28.68

19

%

Lease operating expense

4.98

5.10

(2)

%

4.74

4.43

7

%

Transportation costs

4.19

5.01

(16)

%

4.36

5.48

(20)

%

Production and ad valorem taxes

1.58

1.74

(9)

%

2.00

1.52

(32)

%

General and administrative

2.69

3.15

(15)

%

2.65

2.64

—

%

Operating margin (pre-hedge)

21.30

17.95

19

%

23.52

14.13

66

%

FINANCIAL HIGHLIGHTS

December 31, 2018

Production Data

For the Three Months Ended
December 31,

For the Twelve Months Ended
December 31,

2018

2017

Percent
Change

2018

2017

Percent
Change

Average realized sales price, before the effects of derivative settlements:

Oil (per Bbl)

$

49.29

$

53.32

(8)

%

$

56.80

$

47.88

19

%

Gas (per Mcf)

$

3.71

$

3.09

20

%

$

3.43

$

3.00

14

%

NGL (per Bbl)

$

24.01

$

26.01

(8)

%

$

27.22

$

22.35

22

%

Per Boe

$

34.74

$

32.95

5

%

$

37.27

$

28.20

32

%

Average realized sales price, including the effects of derivative settlements:

Oil (per Bbl)

$

47.94

$

48.90

(2)

%

$

53.13

$

45.60

17

%

Gas (per Mcf)

$

3.01

$

4.03

(25)

%

$

3.31

$

3.72

(11)

%

NGL (per Bbl)

$

19.36

$

18.84

3

%

$

20.44

$

18.91

8

%

Equivalent (per Boe)

$

31.74

$

32.16

(1)

%

$

34.18

$

28.68

19

%

Production ⁽¹⁾:

Oil (MMBbls)

5.1

3.8

33

%

18.8

13.7

37

%

Gas (Bcf)

25.5

26.0

(2)

%

103.2

123.0

(16)

%

NGL (MMBbls)

2.0

2.2

(11)

%

7.9

10.3

(23)

%

MMBoe

11.3

10.4

9

%

43.9

44.5

(1)

%

Average daily production ⁽¹⁾:

Oil (MBbls/d)

55.3

41.5

33

%

51.4

37.4

37

%

Gas (MMcf/d)

277.0

282.5

(2)

%

282.7

337.0

(16)

%

NGL (MBbls/d)

21.3

24.0

(11)

%

21.8

28.2

(23)

%

MBoe/d

122.8

112.6

9

%

120.3

121.8

(1)

%

Per Boe Data:

Realized price before the effects of derivative settlements

$

34.74

$

32.95

5

%

$

37.27

$

28.20

32

%

Lease operating expense

4.98

5.10

(2)

%

4.74

4.43

7

%

Transportation costs

4.19

5.01

(16)

%

4.36

5.48

(20)

%

Production taxes

1.19

1.41

(16)

%

1.52

1.18

29

%

Ad valorem tax expense

0.39

0.33

18

%

0.48

0.34

41

%

General and administrative ^{(2) (3)}

2.69

3.15

(15)

%

2.65

2.64

—

%

Operating margin, before the effects of derivative settlements ⁽³⁾

21.30

17.95

19

%

23.52

14.13

66

%

Derivative settlement gain (loss)

(3.00)

(0.79)

280

%

(3.09)

0.48

(744)

%

Operating margin, including the effects of derivative settlements ⁽³⁾

$

18.30

$

17.16

7

%

$

20.43

$

14.61

40

%

Depletion, depreciation, amortization, and asset retirement obligation liability accretion

$

16.10

$

12.69

27

%

$

15.15

$

12.53

21

%

⁽¹⁾ Amounts and percentage changes may not calculate due to rounding.

⁽²⁾ Includes non-cash stock-based compensation expense per Boe of $0.42 and $0.40 for the three months ended December 31, 2018, and 2017, respectively, and $0.42 and $0.37 for the twelve months ended December 31, 2018, and 2017, respectively.

⁽³⁾ Certain prior period amounts have been adjusted to conform to the current period presentation due to an accounting standards update.

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

December 31, 2018

Consolidated Balance Sheets

(in thousands, except share data)

December 31,

2018

2017

ASSETS

Current assets:

Cash and cash equivalents

$

77,965

$

313,943

Accounts receivable

167,536

160,154

Derivative assets

175,130

64,266

Prepaid expenses and other

8,632

10,752

Total current assets

429,263

549,115

Property and equipment (successful efforts method):

Proved oil and gas properties

7,278,362

6,139,379

Accumulated depletion, depreciation, and amortization

(3,417,953)

(3,171,575)

Unproved oil and gas properties

1,581,401

2,047,203

Wells in progress

295,529

321,347

Properties held for sale, net

5,280

111,700

Other property and equipment, net of accumulated depreciation of $57,102 and $49,985, respectively

88,546

106,738

Total property and equipment, net

5,831,165

5,554,792

Noncurrent assets:

Derivative assets

58,499

40,362

Other noncurrent assets

33,935

32,507

Total noncurrent assets

92,434

72,869

Total assets

$

6,352,862

$

6,176,776

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

403,199

$

386,630

Derivative liabilities

62,853

172,582

Total current liabilities

466,052

559,212

Noncurrent liabilities:

Revolving credit facility

—

—

Senior Notes, net of unamortized deferred financing costs

2,448,439

2,769,663

Senior Convertible Notes, net of unamortized discount and deferred financing costs

147,894

139,107

Asset retirement obligations

91,859

103,026

Asset retirement obligations associated with oil and gas properties held for sale

—

11,369

Deferred income taxes

223,278

79,989

Derivative liabilities

12,496

71,402

Other noncurrent liabilities

42,522

48,400

Total noncurrent liabilities

2,966,488

3,222,956

Stockholders' equity:

Common stock, $0.01 par value - authorized: 200,000,000 shares; issued and outstanding: 112,241,966 and 111,687,016 shares, respectively

1,122

1,117

Additional paid-in capital

1,765,738

1,741,623

Retained earnings ⁽¹⁾

1,165,842

665,657

Accumulated other comprehensive loss ⁽¹⁾

(12,380)

(13,789)

Total stockholders' equity

2,920,322

2,394,608

Total liabilities and stockholders' equity

$

6,352,862

$

6,176,776

⁽¹⁾ The Company reclassified $3.0 million of tax effects stranded in accumulated other comprehensive loss to retained earnings as of January 1, 2018 due to an accounting standards update.

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

December 31, 2018

Consolidated Statements of Operations

(in thousands, except per share data)

For the Three Months
Ended December 31,

For the Twelve Months
Ended December 31,

2018

2017

2018

2017

(as adjusted)

(as adjusted)

Operating revenues and other income:

Oil, gas, and NGL production revenue

$

392,531

$

341,187

$

1,636,357

$

1,253,783

Net gain (loss) on divestiture activity

1,261

537

426,917

(131,028)

Other operating revenues, net

400

(1,186)

3,798

6,621

Total operating revenues and other income

394,192

340,538

2,067,072

1,129,376

Operating expenses:

Oil, gas, and NGL production expense

121,450

122,833

487,367

507,906

Depletion, depreciation, amortization, and asset retirement obligation liability accretion

181,970

131,393

665,313

557,036

Exploration⁽¹⁾

14,322

15,794

55,166

54,713

Impairment of proved properties

—

—

—

3,806

Abandonment and impairment of unproved properties

23,274

12,115

49,889

12,272

General and administrative⁽¹⁾

30,438

32,665

116,504

117,283

Net derivative (gain) loss⁽²⁾

(411,136)

115,778

(161,832)

26,414

Other operating expenses, net

4,109

7,364

18,328

13,667

Total operating expenses

(35,573)

437,942

1,230,735

1,293,097

Income (loss) from operations

429,765

(97,404)

836,337

(163,721)

Interest expense

(38,056)

(43,618)

(160,906)

(179,257)

Loss on extinguishment of debt

(18)

—

(26,740)

(35)

Other non-operating income (expense), net

69

(2,381)

3,086

(800)

Income (loss) before income taxes

391,760

(143,403)

651,777

(343,813)

Income tax (expense) benefit

(82,028)

117,145

(143,370)

182,970

Net income (loss)

$

309,732

$

(26,258)

$

508,407

$

(160,843)

Basic weighted-average common shares outstanding

112,138

111,611

111,912

111,428

Diluted weighted-average common shares outstanding

113,286

111,611

113,502

111,428

Basic net income (loss) per common share

$

2.76

$

(0.24)

$

4.54

$

(1.44)

Diluted net income (loss) per common share

$

2.73

$

(0.24)

$

4.48

$

(1.44)

⁽¹⁾ Non-cash stock-based compensation component included in:

Exploration expense

$

1,463

$

2,402

$

5,539

$

6,300

General and administrative expense

4,765

4,138

18,369

16,400

Total non-cash stock-based compensation

$

6,228

$

6,540

$

23,908

$

22,700

⁽²⁾ The net derivative (gain) loss line item consists of the following:

Settlement (gain) loss

$

33,892

$

8,168

$

135,803

$

(21,234)

(Gain) loss on fair value changes

(445,028)

107,610

(297,635)

47,648

Net derivative (gain) loss

$

(411,136)

$

115,778

$

(161,832)

$

26,414

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

December 31, 2018

Consolidated Statements of Stockholders' Equity

(in thousands, except share data and dividends per share)

Additional
Paid-in
Capital

Accumulated
Other
Comprehensive
Loss

 Total
Stockholders'
Equity

Common Stock

Retained
Earnings

Shares

Amount

68,075,700

$

681

$

305,607

$

1,559,515

$

(13,402)

$

1,852,401

Net loss

—

—

—

(757,744)

—

(757,744)

Other comprehensive loss

—

—

—

—

(1,154)

(1,154)

Cash dividends, $ 0.10 per share

—

—

—

(7,751)

—

(7,751)

Issuance of common stock under Employee Stock Purchase Plan

218,135

2

4,196

—

—

4,198

Issuance of common stock upon vesting of RSUs and settlement of PSUs, net of shares used for tax withholdings

199,243

2

(2,356)

—

—

(2,354)

Stock-based compensation expense

53,473

1

26,896

—

—

26,897

Issuance of common stock from stock offerings, net of tax

42,710,949

427

1,382,666

—

—

1,383,093

Equity component of 1.50% Senior Convertible Notes due 2021 issuance, net of tax

—

—

33,575

—

—

33,575

Purchase of capped call transactions

—

—

(24,195)

—

—

(24,195)

Other

—

—

(9,833)

—

—

(9,833)

Balances, December 31, 2016

111,257,500

$

1,113

$

1,716,556

$

794,020

$

(14,556)

$

2,497,133

Net loss

—

—

—

(160,843)

—

(160,843)

Other comprehensive income

—

—

—

—

767

767

Cash dividends, $0.10 per share

—

—

—

(11,144)

—

(11,144)

Issuance of common stock under Employee Stock Purchase Plan

186,665

2

2,621

—

—

2,623

Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings

171,278

1

(1,241)

—

—

(1,240)

Stock-based compensation expense

71,573

1

22,699

—

—

22,700

Cumulative effect of accounting change

—

—

1,108

43,624

—

44,732

Other

—

—

(120)

—

—

(120)

Balances, December 31, 2017

111,687,016

$

1,117

$

1,741,623

$

665,657

$

(13,789)

$

2,394,608

Net income

—

—

—

508,407

—

508,407

Other comprehensive income

—

—

—

—

4,378

4,378

Cash dividends, $0.10 per share

—

—

—

(11,191)

—

(11,191)

Issuance of common stock under Employee Stock Purchase Plan

199,464

2

3,185

—

—

3,187

Issuance of common stock upon vesting of RSUs, net of shares used for tax withholdings

291,745

3

(2,978)

—

—

(2,975)

Stock-based compensation expense

63,741

—

23,908

—

—

23,908

Cumulative effect of accounting change

—

—

—

2,969

(2,969)

—

Other

—

—

—

—

—

—

Balances, December 31, 2018

112,241,966

$

1,122

$

1,765,738

$

1,165,842

$

(12,380)

$

2,920,322

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

December 31, 2018

Consolidated Statements of Cash Flows

(in thousands)

 For the Three Months

 For the Twelve Months

Ended December 31,

Ended December 31,

2018

2017

2018

2017

Cash flows from operating activities:

Net income (loss)

$

309,732

$

(26,258)

$

508,407

$

(160,843)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Net (gain) loss on divestiture activity

(1,261)

(537)

(426,917)

131,028

Depletion, depreciation, amortization, and asset retirement obligation liability accretion

181,970

131,393

665,313

557,036

Impairment of proved properties

—

—

—

3,806

Abandonment and impairment of unproved properties

23,274

12,115

49,889

12,272

Stock-based compensation expense

6,228

6,540

23,908

22,700

Net derivative (gain) loss

(411,136)

115,778

(161,832)

26,414

Derivative settlement gain (loss)

(33,892)

(8,168)

(135,803)

21,234

Amortization of debt discount and deferred financing costs

3,716

3,798

15,258

16,276

Loss on extinguishment of debt

18

—

26,740

35

Deferred income taxes

81,036

(124,608)

141,708

(192,066)

Other, net

2,371

5,267

287

7,885

Changes in current assets and liabilities:

Accounts receivable

(2,526)

(7,505)

(30,152)

13,997

Prepaid expenses and other

7,234

7,002

(729)

(1,953)

Accounts payable and accrued expenses

(2,055)

23,425

23,819

44,985

Accrued derivative settlements

14,743

6,538

20,733

12,584

Net cash provided by operating activities

179,452

144,780

720,629

515,390

Cash flows from investing activities:

Net proceeds from the sale of oil and gas properties

5,310

(1,646)

748,509

776,719

Capital expenditures

(270,600)

(263,384)

(1,303,188)

(888,353)

Acquisition of proved and unproved oil and gas properties

(8,684)

(2,507)

(33,255)

(89,896)

Net cash used in investing activities

(273,974)

(267,537)

(587,934)

(201,530)

Cash flows from financing activities:

Proceeds from credit facility

—

—

—

406,000

Repayment of credit facility

—

—

—

(406,000)

Net proceeds from senior notes

—

—

492,079

—

Cash paid to repurchase Senior Notes, including premium

(18)

—

(845,002)

(2,357)

Net proceeds from sale of common stock

1,306

885

3,187

2,623

Dividends paid

(5,607)

(5,581)

(11,191)

(11,144)

Other, net

—

(19)

(7,746)

(1,411)

Net cash used in financing activities

(4,319)

(4,715)

(368,673)

(12,289)

Net change in cash, cash equivalents, and restricted cash

(98,841)

(127,472)

(235,978)

301,571

Cash, cash equivalents, and restricted cash at beginning of period

176,806

441,415

313,943

12,372

Cash, cash equivalents, and restricted cash at end of period

$

77,965

$

313,943

$

77,965

$

313,943

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

December 31, 2018

Adjusted EBITDAX ⁽¹⁾

(in thousands)

Reconciliation of net income (loss) (GAAP) to adjusted EBITDAX (non-GAAP) to net cash provided by operating activities (GAAP):

For the Three Months

For the Twelve Months

Ended December 31,

Ended December 31,

2018

2017

2018

2017

Net income (loss) (GAAP)

$

309,732

$

(26,258)

$

508,407

$

(160,843)

Interest expense

38,056

43,618

160,906

179,257

Interest income ⁽²⁾

(596)

(1,067)

(5,191)

(3,968)

Income tax expense (benefit)

82,028

(117,145)

143,370

(182,970)

Depletion, depreciation, amortization, and asset retirement obligation liability accretion

181,970

131,393

665,313

557,036

Exploration ⁽³⁾⁽⁴⁾

12,859

13,392

49,627

48,413

Impairment of proved properties

—

—

—

3,806

Abandonment and impairment of unproved properties

23,274

12,115

49,889

12,272

Stock-based compensation expense

6,228

6,540

23,908

22,700

Net derivative (gain) loss

(411,136)

115,778

(161,832)

26,414

Derivative settlement gain (loss)

(33,892)

(8,168)

(135,803)

21,234

Net (gain) loss on divestiture activity

(1,261)

(537)

(426,917)

131,028

Loss on extinguishment of debt

18

—

26,740

35

Other, net

1,901

3,200

1,977

8,820

Adjusted EBITDAX ⁽⁴⁾ (non-GAAP)

$

209,181

$

172,861

$

900,394

$

663,234

Interest expense

(38,056)

(43,618)

(160,906)

(179,257)

Interest income ⁽²⁾

596

1,067

5,191

3,968

Income tax (expense) benefit

(82,028)

117,145

(143,370)

182,970

Exploration ⁽³⁾⁽⁴⁾

(12,859)

(13,392)

(49,627)

(48,413)

Amortization of debt discount and deferred financing costs

3,716

3,798

15,258

16,276

Deferred income taxes

81,036

(124,608)

141,708

(192,066)

Other, net ⁽⁴⁾

470

2,067

(1,690)

(935)

Changes in current assets and liabilities

17,396

29,460

13,671

69,613

Net cash provided by operating activities (GAAP)

$

179,452

$

144,780

$

720,629

$

515,390

⁽¹⁾ Adjusted EBITDAX represents net income (loss) before interest expense, interest income, income taxes, depletion, depreciation, amortization and asset retirement obligation liability accretion expense, exploration expense, property abandonment and impairment expense, non-cash stock-based compensation expense, derivative gains and losses net of settlements, gains and losses on divestitures, gains and losses on extinguishment of debt, and certain other items.  Adjusted EBITDAX excludes certain items that we believe affect the comparability of operating results and can exclude items that are generally non-recurring in nature or whose timing and/or amount cannot be reasonably estimated.  Adjusted EBITDAX is a non-GAAP measure that we present because we believe it provides useful additional information to investors and analysts, as a performance measure, for analysis of our ability to internally generate funds for exploration, development, acquisitions, and to service debt.  We are also subject to financial covenants under our Credit Agreement based on adjusted EBITDAX ratios.  In addition, adjusted 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.  Adjusted EBITDAX should not be considered in isolation or as a substitute for net income (loss), income (loss) from operations, net cash provided by operating activities, or other profitability or liquidity measures prepared under GAAP.  Because adjusted EBITDAX excludes some, but not all items that affect net income (loss) and may vary among companies, the adjusted EBITDAX amounts presented may not be comparable to similar metrics of other companies.  Our credit facility provides a material source of liquidity for us.  Under the terms of our Credit Agreement, if we failed to comply with the covenants that establish a maximum permitted ratio of total funded debt, as defined in the Credit Agreement, to adjusted EBITDAX, we would be in default, an event that would prevent us from borrowing under our credit facility and would therefore materially limit our sources of liquidity.  In addition, if we are in default under our credit facility and are unable to obtain a waiver of that default from our lenders, lenders under that facility and under the indentures governing our outstanding Senior Notes and Senior Convertible Notes would be entitled to exercise all of their remedies for default.

⁽²⁾ Interest income is included within the other non-operating income, net line item on the Company's consolidated statements of operations.

⁽³⁾ Stock-based compensation expense is a component of exploration expense and general and administrative expense on the accompanying consolidated statements of operations.  Therefore, the exploration line items shown in the reconciliation above will vary from the amount shown on the Company's accompanying consolidated statements of operations for the component of stock-based compensation expense recorded to exploration expense.

⁽⁴⁾ Certain prior period amounts have been adjusted to conform to the current period presentation on the consolidated financial statements due to accounting standards updates.

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

December 31, 2018

Adjusted Net Income (Loss)

For the Three Months

For the Twelve Months

(in thousands, except per share data)

Ended December 31,

Ended December 31,

2018

2017

2018

2017

Net income (loss) (GAAP)

$

309,732

$

(26,258)

$

508,407

$

(160,843)

Net derivative (gain) loss

(411,136)

115,778

(161,832)

26,414

Derivative settlement gain (loss)

(33,892)

(8,168)

(135,803)

21,234

Net (gain) loss on divestiture activity

(1,261)

(537)

(426,917)

131,028

Impairment of proved properties

—

—

—

3,806

Abandonment and impairment of unproved properties

23,274

12,115

49,889

12,272

Loss on extinguishment of debt

18

—

26,740

35

Other, net⁽¹⁾

1,901

8,200

2,777

13,820

Tax effect of adjustments⁽²⁾

91,378

(45,987)

139,997

(75,308)

US tax reform⁽³⁾

—

(63,675)

—

(63,675)

Adjusted net income (loss) (non-GAAP)⁽⁴⁾

$

(19,986)

$

(8,532)

$

3,258

$

(91,217)

Net income (loss) per diluted common share (GAAP)

$

2.73

$

(0.24)

$

4.48

$

(1.44)

Net derivative (gain) loss

(3.63)

1.04

(1.43)

0.24

Derivative settlement gain (loss)

(0.30)

(0.07)

(1.20)

0.19

Net gain (loss) on divestiture activity

(0.01)

—

(3.76)

1.18

Impairment of proved properties

—

—

—

0.03

Abandonment and impairment of unproved properties

0.21

0.11

0.44

0.11

Loss on extinguishment of debt

—

—

0.24

—

Other, net⁽¹⁾

0.02

0.07

0.02

0.12

Tax effect of adjustments⁽²⁾

0.80

(0.42)

1.24

(0.68)

US tax reform⁽³⁾

—

(0.57)

—

(0.57)

Adjusted net income (loss) per diluted common share            (non-GAAP)

$

(0.18)

$

(0.08)

$

0.03

$

(0.82)

Basic weighted-average shares outstanding (GAAP)

112,138

111,611

111,912

111,428

Diluted weighted-average shares outstanding (GAAP)

113,286

111,611

113,502

111,428

Note: Amounts and percentage changes may not calculate due to rounding.

⁽¹⁾ For the three months ended December 31, 2018, the adjustment is related to impairment on materials inventory, the change in Net Profits Plan liability, and bad debt expense. For the twelve months ended December 31, 2018, the adjustment is related to impairment on materials inventory, the change in Net Profits Plan liability, bad debt expense and an accrual for a non-recurring matter.  For the three-month and twelve-month periods ended December 31, 2017, the adjustment is related to impairment on materials inventory, pension settlement expense, the change in Net Profits Plan liability, bad debt expense, and an accrual for a non-recurring matter.

⁽²⁾ For the three and twelve-month periods ended December 31, 2018, adjustments are shown before tax effect which is calculated using a tax rate of 21.7%, which approximates the Company's statutory tax rate adjusted for ordinary permanent differences.  For the three and twelve-month periods ended December 31, 2017, adjustments are shown before tax effect which is calculated using a tax rate of 36.1%, which approximates the Company's statutory tax rate adjusted for ordinary permanent differences.

⁽³⁾ US tax reform adjustment primarily relates to the enactment of the 2017 Tax Act on December 22, 2017, which reduced the Company's federal tax rate for 2018 and future years from 35 percent to 21 percent.

⁽⁴⁾ Adjusted net income (loss) 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 and other adjustments, such as derivative gains and losses net of settlements, impairments, net (gain) loss on divestiture activity, materials inventory loss, and gains or losses on extinguishment of debt. The non-GAAP measure of adjusted net income (loss) 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 (loss) is widely used by professional research analysts and others as a performance measure 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 (loss) should not be considered in isolation or as a substitute for net income (loss), income (loss) from operations, cash provided by operating activities, or other income, profitability, cash flow, or liquidity measures prepared under GAAP. Since adjusted net income (loss) excludes some, but not all, items that affect net income (loss) and may vary among companies, the adjusted net income (loss) amounts presented may not be comparable to similarly titled measures of other companies.

⁽¹⁾ Includes nominal amounts outside of the Eagle Ford.

Total Capital Spend Reconciliation:

(in millions)

Reconciliation of costs incurred in oil & gas activities (GAAP) to total capital spend (non-GAAP)⁽¹⁾⁽³⁾

For the Year Ended

December 31, 2018

Costs incurred in oil and gas activities (GAAP):

$

1,389.5

Asset retirement obligations

(6.8)

Capitalized interest

(20.6)

Proved property acquisitions⁽²⁾

(1.3)

Unproved property acquisitions

(32.3)

Other

0.6

Total capital spend (non-GAAP):

$

1,329.1

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

December 31, 2018

Discretionary Cash Flow Reconciliation:

(in millions)

Reconciliation of net cash provided by operating activities (GAAP) to discretionary cash flow (Non-GAAP)⁽¹⁾

For the Three Months Ended
December 31, 2018

For the Twelve Months Ended
December 31, 2018

Net cash provided by operating activities (GAAP):

$

179.5

$

720.6

Net change in working capital

(17.4)

(13.7)

Exploration ⁽²⁾⁽³⁾

12.9

49.6

Discretionary cash flow (non-GAAP):

$

174.9

$

756.6

Note: Amounts may not calculate due to rounding.

⁽¹⁾ Discretionary cash flow is defined as net cash provided by operating activities excluding changes in assets and liabilities, and exploration (included in our capital spend guidance). Discretionary cash flow is widely accepted as a financial indicator of an oil and gas company's ability to generate cash which is used to internally fund exploration and development activities, pay dividends, and service debt. Discretionary cash flow is presented because management believes it provides useful information to investors when comparing our cash flows with the cash flows of other companies that use the full cost method of accounting for oil and gas producing activities, or have different financing and capital structures or tax rates. Discretionary cash flow is not a measure of financial performance under GAAP and should not be considered as an alternative to cash flows from operating activities, as defined by GAAP, or as a measure of liquidity, or an alternative to net income.

⁽²⁾ Exploration expense is added back in the calculation of discretionary cash flow because, for peer comparison purposes, this number is included in our reported total capital spend.

⁽³⁾ Stock-based compensation expense is a component of exploration expense and general and administrative expense on the statements of operations. Therefore, the exploration line items shown in the reconciliation above will vary from the amount shown on the statements of operations for the component of stock-based compensation expense recorded to exploration expense.

PV-10 Reconciliation:

(in millions)

Reconciliation of standardized measure (GAAP) to PV-10 (non-GAAP)⁽¹⁾

As of December 31,

2018

2017

Standardized measure of discounted future net cash flows (GAAP):

$

4,654.4

$

3,024.1

Add: 10 percent annual discount, net of income taxes

3,847.1

2,573.2

Add: future undiscounted income taxes

1,012.2

205.7

Undiscounted future net cash flows

9,513.7

5,803.0

Less: 10 percent annual discount without tax effect

(4,409.4)

(2,746.5)

PV-10 (non-GAAP):

$

5,104.3

$

3,056.5

PV-10 value of assets sold in 2018:

n/a

(207.3)

PV-10 pro-forma assets sold:

$

5,104.3

$

2,849.2

⁽¹⁾ The non-GAAP measure of PV-10 is presented because management believes it provides useful information to investors for analysis of SM Energy's fundamental business on a recurring basis. In addition, management believes that PV-10 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. PV-10 should not be considered in isolation or as a substitute for other measures prepared under GAAP.

SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

December 31, 2018

Reconciliation of Net Debt

(in thousands)

As of
December 31, 2018

Senior Notes (principal value from Note 5 of Form 10-K)

$

2,476,796

Senior Convertible Notes (principal value from Note 5 of Form 10-K)

172,500

Revolving credit facility

—

Total funded debt

2,649,296

Less: Cash and cash equivalents

(77,965)

Net Debt

$

2,571,331