Why SM Energy Co's Stock Is Stumbling Today

By Matthew DiLallo Markets Fool.com

Image source: Getty Images.

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What happened

Shares of SM Energy (NYSE: SM) slumped on Tuesday and were down by as much as 10.1% before moderating the decline to 7.5% as of 3:15 p.m. EST. Driving the sell-off was an update on the company's operations.

So what

SM Energy reported results for eight recently completed wells in the Midland Basin on its newly acquired acreage. One of the wells achieved the highest 30-day rate per lateral foot in the Basin to date. Meanwhile, the other seven exceeded the company's estimates for productivity.

In addition to that, the company announced that full-year 2016 production averaged 108,400 barrels of oil equivalent per day, which was in line with expectations. Driving that result was the fact the Midland Basin production increased nearly four times from its 2015 exit rate to its 2016 exit rate.

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Overall, these are solid numbers and likely were not the cause of today's downdraft. Instead, what seemed to drive today's sell-off was the company's comments on 2017. While management did not offer any official guidance, CEO Jay Ottoson said, "During 2017, we expect that our capital program will focus on drilling and completing wells like those we are announcing today, resulting in accelerated high margin production growth on our retained assets. In addition, we will be working to improve completion techniques and further delineate our Midland Basin position to ensure that our future development plans are optimized."

Investors see those comments possibly hinting that growth in 2017 might not be as robust as hoped because the company will spend time and money testing its position to optimize future development plans.

Now what

SM Energy recently spent billions of dollars to buy its way into the high-growth Midland Basin. Given the capital it has already invested, the company wants to make sure it gets the most out of this position, which is why it plans to focus on testing this acreage to see what it really has. While that could result in slower growth this year than investors had hoped, it should enable the company to deliver better results in future years because it can then optimize development in the region.

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