Raymond James lifts SM Energy stock target to $34, retains Outperform

Raymond James raised its price target on SM Energy (SM) to $34 from $30, maintaining an Outperform rating, citing a higher commodity price strip despite a 46% drop in the stock price over the last six months. The adjustment follows SM Energy's Q1 2025 results and reflects an increased lease operating expense forecast due to higher workover and disposal costs; however, the firm highlights SM Energy's strong free cash flow yield, estimated at 9% of enterprise value, and a low EV/EBITDA multiple of 2.7x. SM Energy reported strong Q1 2025 EPS of $1.76 and revenue of $844.54 million, exceeding expectations, and plans to increase oil production by 30% this year while prioritizing debt reduction.

Analysis

Raymond James has upgraded its price target for SM Energy (NYSE: SM) to $34.00 from $30.00, reiterating an Outperform rating, primarily due to a higher commodity price strip. This revision occurs despite SM Energy's stock declining over 46% in the past six months, with its current trading price at $23.83 suggesting undervaluation according to InvestingPro. The update incorporates SM Energy's first-quarter 2025 results, which included an earnings per share (EPS) of $1.76, surpassing forecasts by 14.3%, and revenue of $844.54 million, also exceeding expectations. However, the company revised its 2025 outlook to include a 9% increase in lease operating expenses (LOE) to $5.90 per barrel of oil equivalent (boe), attributed to higher workover activities, rising fuel gas costs, and increased water disposal costs. Despite this, SM Energy maintains strong profitability, evidenced by an 80.2% gross margin over the last twelve months, though it carries a significant debt burden of $2.77 billion. Raymond James projects SM Energy's Q2 production at 200 MBoe/d (55% oil) with capex at $380 million, aligning with company guidance. Full-year 2025 production is estimated at 208 MBoe/d (52% oil) with capex near $1.3 billion. Key financial metrics highlighted include an estimated free cash flow (FCF) yield of approximately 9% of enterprise value (EV), an EV/EBITDA multiple of 2.7x, and a P/E ratio of 3.3x, alongside revenue growth of 24.9% over the last twelve months. SM Energy aims to increase oil production by 30% in the current year, maintain its $1.3 billion capex, and prioritize debt reduction towards a 1x leverage target by year-end, while generating significant FCF even at $55 oil. The stock experienced a 4.92% decline in after-hours trading following the Q1 results announcement.

Key Decisions for Investors

• Investors should consider the disconnect between SM Energy's strong Q1 2025 performance, positive analyst outlook, and its recent significant stock price decline, which may present a value opportunity given the low P/E and EV/EBITDA multiples.
• Monitor the impact of increased lease operating expenses on future margins, alongside the company's progress in achieving its 30% oil production growth target and debt reduction to 1x leverage.
• Given the price target upgrade is linked to higher commodity price strips, investors should closely track energy market dynamics, as these will significantly influence SM Energy's profitability and stock valuation moving forward.