SM EnergyPopped: What You Need to Know


Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: It's a "red" day for the stock market today, but not all investors are crying. In fact, over at SM Energy (NYS: SM) , they're lighting up the stock and sending SM shares up 11%.

So what: This independent producer of oil and gas "beat" earnings last night, reporting $1.86 per share in profits versus $0.28 earned in last year's Q2. Most of the gains came from "divestiture activity," true, but even adjusted for those one-time gains, SM says it would have earned $0.91 in Q2.

Now what: Color me unimpressed. Oh, I know investors are loving the news today. But I've never been a big fan of companies that report "GAAP profits" but lack the free cash flow to back them up -- and at SM, I simply don't see the cash. According to management, "earning" $106 million in the first half of this year required that the company burn through more than $292 million in negative free cash flow.

Nor is this an unusual event at SM Energy. Fact is, the company's only generated positive free cash flow in one year out of the last five (2009). Its cash bonfire this year may be larger than in most, but the company's still more than $700 million in the hole over the course of the past five years. You pays your money and you takes your chances, of course, but if it were me, I'd be taking today's profits and running ... and not looking back at SM Energy.

Disagree? Think the company's got potential?Add SM Energy to your Watchlist.

At the time thisarticle was published Fool contributorRich Smithdoes not own (or short) shares of SM Energy. The Motley Fool has adisclosure policy.Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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