Why SM Energy Is a Stock You Should Avoid

SM Energy stock has lost a quarter of its value this year as the oil pricing environment has turned unfavourable once again. The company’s latest results were not up to the mark, sparking panic among investors who sold the stock in droves to avoid more losses.

But will SM Energy be able to make a comeback, or is it a good idea to stay away from this stock? Let’s find out.

In a Tight Spot

SM Energy’s first-quarter results clearly showed us the negative impact of weak oil prices. The company’s revenue was down 11% year over year to $340.8 million, missing the Wall Street estimate by a whisker.

On the other hand, the company posted a loss of $0.34 per share, which was wider than what was originally expected. The weak quarterly performance can be attributed to lower energy prices.

More specifically, SM Energy’s average price per barrel of oil equivalent came in at $31.39 during the quarter, down from $35.34 a year ago. Meanwhile, the average realized natural gas price also fell by a quarter year over year. Oil prices, specifically, fell 13% annually to $49.19 per barrel.

The lower pricing was enough to offset the production improvements recorded by SM Energy last quarter. Its production had increased 5% year over year to 118,700 barrels of oil equivalent per day during the quarter as compared to 112,700 BOE/day a year ago.

More specifically, the company’s oil production increased 13% to 53,700 barrels per day as compared to the prior-year period. But the company was unable to take advantage of these improvements and its performance took a dip because of the weak pricing scenario.

Increasing costs posed another problem for SM Energy during the quarter. Its lease operating expenses rose 5% year over year, while general and administrative expenses shot up 10%.

So, SM Energy can only recover if oil prices get back on track, but there’s uncertainty surrounding that possibility.

Oil Prices are Moving Lower  

WTI crude is trading at four-month lows after President Donald Trump threatened tariffs against Mexico.

WTI crude oil prices have receded to $53 per barrel, which is a significant decline as compared to the price of $63 per barrel they were trading at just a couple of weeks ago.

This sharp decline in crude oil prices is a result of the U.S.-China trade war, which is expected to affect demand for crude oil. As it stands, WTI crude is trading at four-month lows after President Donald Trump threatened tariffs against Mexico.

The U.S.’ trade war on countries such as China and Mexico could hurt its oil exports, therefore leading to more inventory stockpiles that will weigh on prices. According to the latest U.S. oil inventory data, U.S. crude oil inventories dropped by just 0.28 million barrels in the week that ended on May 24.

The market was originally expecting an inventory draw of 0.86 million barrels. Moreover, gasoline inventories also increase to the tune of 2.20 million barrels, while analysts were looking for a decline of 0.53 million barrels.

These negative indicators will continue weighing on oil prices going forward, and keep SM Energy stock under pressure. As such, it makes sense to stay away from SM Energy.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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