Why SM Energy Stock Is Sinking Today

What happened

Shares of SM Energy (NYSE: SM) slumped on Thursday, falling 13% by 2:30 p.m. EST. Driving the decline was the oil and gas company's fourth-quarter results and its outlook for 2019.

So what

SM Energy reported solid results for the fourth quarter overall. Production increased 9% year over year during the quarter due to strong growth in the Permian Basin. However, despite that growth, the company reported an adjusted net loss of $20 million, or $0.18 per share, though that was $0.01 per share better than the consensus estimate. Driving the loss was weaker oil and NGL (natural gas liquids) prices during the quarter.

Pump Jack with the sun setting in the background.
Pump Jack with the sun setting in the background.

Image source: Getty Images.

SM Energy also unveiled its outlook for 2019. The oil and gas producer plans to spend between $1 billion to $1.07 billion this year on drilling more wells, which is 22% less at the midpoint than last year. That's enough money to grow its production in the Permian by 20% while keeping its output in the Eagle Ford roughly flat with 2018's level.

Despite the big spending reduction, SM Energy expects to outspend the cash flow it can produce at current oil prices through the first half of the year while targeting to generate free cash in the second half. That plan to outspend is a concern, given that most peers are aiming to live well below their means in 2019.

Now what

SM Energy is going against the grain this year by aiming to outspend cash flow so that it can continue ramping up in the Permian despite lower oil prices and that region's pipeline constraints. While the company hopes that it will reach an inflection point by midyear and start generating free cash, its current strategy is aggressive, given the less-than-ideal market conditions. As such, that plan could backfire if oil prices take another tumble.

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Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.