SM Energy Anticipates $207 Million Derivative Loss
The oil-and-gas producer said third-quarter realized oil averaged $85.76 a barrel before hedges, with gas at $2.48 a Mcf and NGLs at $29.40 a barrel.
SM Energy Company (SM), the oil-and-gas producer, said it anticipates a net derivative settlement loss of $207 million for the third quarter of 2026, a figure that reflects settlements of commodity derivatives during the period and excludes changes in the fair value of unsettled positions, which could be material and will be reported with third-quarter results.
The preliminary, unaudited estimates covered average realized prices before the effect of net derivative settlements: oil at $85.76 a barrel, gas at $2.48 a Mcf, and natural gas liquids at $29.40 a barrel. The information is subject to completion of the company’s financial reporting for the quarter and may change.
That hedge book sits on a combined company that has spent 2026 integrating the Civitas Resources merger, which closed on January 30, 2026, and recasting itself as a scaled, multi-basin operator with an oil-heavy portfolio. After the first quarter, SM had already raised its full-year production outlook and lifted its annualized synergy target to $375 million from an initial $200 million to $300 million range, with about $300 million of those savings actioned at the time.
The second quarter marked the first full period as a combined company. Average net daily production rose to approximately 440 MBoe/d, including about 230 MBbl/d of oil, from 371.2 MBoe/d, including 190.3 MBbl/d of oil, in the first quarter. Adjusted EBITDAX increased to $1.4 billion from $970 million. Operating cash flow rose to $1.1 billion, or $1.2 billion before net change in working capital, including certain long-term items, from $640 million, or $692 million before that working-capital adjustment. Adjusted free cash flow increased to $467 million, after $42 million of one-time integration, transaction, and capital costs, from $20 million after similar one-time items. Capital expenditures totaled $754 million, or $717 million before changes in accruals.
Net income was $4.46 a share, and adjusted net income was $2.19 a share, versus a net loss of $1.68 a share and adjusted net income of $1.55 a share in the prior quarter. The first-quarter loss was tied primarily to a non-cash mark-to-market loss on commodity derivatives after a sharp rise in forward oil prices. The second-quarter average realized price before hedges was $53.86 a Boe.
Integration continued to accelerate. Merger-related synergies reached 95% of the target, or $355 million, actioned to date, up from about $300 million after the first quarter, with full run-rate synergies expected to be actioned by year-end 2026. The company lowered full-year 2026 recurring G&A guidance by $50 million at the midpoint, reflecting accelerated integration and full capture of merger-related G&A synergies. It maintained full-year 2026 capital guidance of $2.65 billion to $2.85 billion.
Production guidance for the second half of 2026 was raised to 435 MBoe/d to 440 MBoe/d, including about 238 MBbl/d of oil, from the approximately 430 MBoe/d run rate set after the first quarter.
The balance sheet moved in the same direction as cash generation. SM closed the $950 million sale of certain South Texas assets on April 30, 2026, substantially achieving a $1.0 billion-plus asset-sales target. Net proceeds of about $900 million were used to redeem all $819 million aggregate principal of 6.75% and 5.0% senior notes due 2026, contributing to a $1.1 billion sequential reduction in net debt. Subsequent to quarter-end, the company issued a notice of full redemption of all remaining $417 million of 6.625% senior notes due 2027 at par using cash on hand, retiring all senior notes due through mid-2028.
Capital returned to stockholders in the second quarter totaled $137 million, or about 30% of adjusted free cash flow, through $84 million of share repurchases covering 2.6 million shares and a $0.22-a-share quarterly dividend. President and CEO Beth McDonald said the team generated significant free cash flow on the strength of the scaled portfolio and moved with urgency on synergies in the first full quarter as a combined company.
The third-quarter derivative settlement estimate is the near-term earnings consideration the company flagged. Unsettled fair-value changes remain to be reported with the quarter’s full results.