SM Energy Reports Results for Second Quarter of 2010

    --  Quarterly production of 276 MMCFE/d exceeds guidance of 253 -274 MMCFE/d
    --  Company reports net income of $18.1 million, or $0.28 per diluted share
    --  Adjusted net income of $10.2 million, or $0.16 per diluted share

DENVER--(BUSINESS WIRE)-- SM Energy Company (NYSE: SM), formerly named St. Mary Land & Exploration Company, today reports financial results from the second quarter of 2010. In addition, a new presentation for the second quarter earnings and operational update will be posted on the Company's website at sm-energy.com. This presentation will be referenced during the conference call scheduled for 8:00 a.m. Mountain time (10:00 a.m. Eastern time) on August 3, 2010. Information for the earnings call can be found below.

MANAGEMENT COMMENTARY

Tony Best, CEO and President, remarked, "SM Energy has had another strong quarter. We beat production targets and performed very well on most of our cost guidance. Through mid-year, we continue to execute well on our business plan for 2010. We are well positioned with a strong inventory of projects and ample liquidity to fund our programs through the second half of this year."

SECOND QUARTER 2010 RESULTS

SM Energy posted net income for the second quarter of 2010 of $18.1 million, or $0.28 per diluted share. This compares to a net loss of ($8.3 million), or ($0.13) per diluted share, for the same period in 2009. Adjusted net income for the quarter was $10.2 million, or $0.16 per diluted share, versus an adjusted net income of $15.2 million, or $0.24 per diluted share, for the second quarter of 2009. Adjusted net income excludes certain items that the Company believes affect the comparability of operating results. Items excluded generally are one-time items or are items whose timing and/or amount cannot be reasonably estimated. A summary of the adjustments made to arrive at adjusted net income is presented in the table below.


                                 For the Three Months Ended June 30,

                                  2010                      2009

Weighted-average diluted share                64.6                      62.4
count (in millions)

                                  $ in        Per           $ in        Per
                                  millions    Diluted       millions    Diluted
                                              Share                     Share

Reported net income (loss)        $18.1       $0.28         ($8.3 )     ($0.13 )

Adjustments net of tax:

Change in Net Profits Plan        ($3.9 )     ($0.06 )      $1.5        $0.02
liability

Unrealized derivative (gain)      ($1.2 )     ($0.02 )      $7.0        $0.11
loss

Gain on divestiture activity      ($4.2 )     ($0.06 )      ($0.8 )     ($0.01 )

Loss related to hurricanes        -           -             $3.1        $0.05

Adjusted net income (loss),       $8.8        $0.14         $2.5        $0.04
before impairments

Non-cash impairments net of tax:

Impairment of proved properties   -           -             $3.7        $0.06

Abandonment and impairment of     $1.4        $0.02         $7.2        $0.12
unproved properties

Impairment of materials           -           -             $1.7        $0.03
inventory

Adjusted net income               $10.2       $0.16         $15.2       $0.24

NOTE: Totals may not add due to
rounding



Operating cash flow increased to $119.2 million for the second quarter of 2010 from $117.8 million in the same period last year. Net cash provided by operating activities decreased to $116.3 million for the second quarter of 2010 from $116.6 million in the same period in 2009.

Adjusted net income and operating cash flow are non-GAAP financial measures - please refer to the respective reconciliation in the accompanying Financial Highlights section at the end of this release for additional information about these measures.

SM Energy reported quarterly production of 276.4 MMCFE/d, which was above the guidance range of 253 to 274 MMCFE/d. Production came in above guidance primarily due to strong results in the Eagle Ford.

Revenues and other income for the quarter were $211.7 million compared to $205.2 million for the same period in 2009. For the second quarter of 2010, the average equivalent price per MCFE, net of hedging, was $7.36 per MCFE, which is an increase of 10% from the $6.68 per MCFE realized in the comparable period in 2009. Average realized prices, inclusive of hedging activities, were $5.59 per Mcf and $65.17 per barrel in the second quarter of 2010, which is an increase of 8% and 15%, respectively, from the same period a year ago. SM Energy reports its gas volumes on a "wet gas" basis, meaning that revenue dollars associated with natural gas liquids ("NGLs") are reported within the Company's natural gas revenues.

Lease operating expense ("LOE") of $1.15 per MCFE in the second quarter of 2010 was below the Company's guidance of $1.24 to $1.32 per MCFE. Lease operating expense for the quarter represents a 9% decrease from the $1.26 per MCFE in the comparable period last year. The divestiture of higher per unit cost assets was the primary reason for lower per unit LOE costs year over year. Sequentially, LOE declined 2% or $0.02 per MCFE in the second quarter of 2010 from the preceding quarter.

Transportation expense of $0.20 per MCFE in the second quarter of 2010 was within guidance of $0.18 to $0.20 per MCFE. The reported per unit expense increased from $0.16 per MCFE for the comparable period in 2009. Sequentially, transportation expense was up $0.04 per MCFE from the first quarter of 2010. Transportation costs, both on a year over year and sequential basis, reflects increased production contributed from areas with higher per unit transportation costs, such as the Eagle Ford shale.

Commodity price increases over the past year for both oil and natural gas resulted in year over year increases in production taxes, both on a per MCFE basis and in absolute dollars. Between the second quarters of 2009 and 2010, production taxes on a per MCFE basis increased 33% from $0.33 to $0.44. The Company's realized production tax rate for the second quarter was 6%, which was slightly below the provided guidance of 7% of pre-hedge oil and natural gas revenue.

Total general and administrative ("G&A") expense for the second quarter of 2010 was $1.01 per MCFE, which was slightly above the guidance range provided by the Company. Cash G&A expense was $0.61 per MCFE for the quarter, compared to a guidance range of $0.53 to $0.55 per MCFE. The Cash G&A expense came in above guidance primarily due to the recognition of certain administrative and legal items in the second quarter. Non-cash G&A for the second quarter was $0.18 per MCFE versus a guidance range of $0.19 to $0.21 per MCFE. G&A related to cash payments from the Company's legacy Net Profits Plan (NPP) program was $0.22 per MCFE in the quarter compared to a guidance range of $0.22 to $0.24 per MCFE.

Depletion and depreciation expense ("DD&A") increased to $3.17 per MCFE in the second quarter of 2010, which was above the Company's guidance range of $2.90 to $3.10 per MCFE. DD&A in the comparable period of 2009 was $2.49 per MCFE. Sequentially, DD&A increased 5% from $3.02 per MCFE in the first quarter of 2010. The Company's DD&A rate was impacted by the Company's divestiture of lower cost basis properties in the first quarter of 2010. Additionally, infrastructure costs that are incurred at the beginning of the development of emerging plays are also increasing the DD&A rate.

In the second quarter of 2010, SM Energy recognized a pre-tax non-cash benefit of $6.6 million as a result of a decrease in the NPP liability. The NPP liability is a significant management estimate that is highly sensitive to a number of assumptions including future commodity prices, production rates, and operating costs. The last pool created under this legacy compensation plan was in 2007.

FINANCIAL POSITION AND LIQUIDITY

As of June 30, 2010, SM Energy had total long-term debt of $271.2 million, which was comprised entirely of the Company's 3.50% Senior Convertible Notes, net of debt discount. The Company's debt-to-book capitalization ratio was 19% as of the end of the quarter.

SM Energy currently has no outstanding borrowing under its long-term credit facility. The Company has a commitment amount of $678 million from the Company's bank group with a borrowing base of $900 million. SM Energy is in compliance with all the covenants associated with this facility.

EARNINGS CALL INFORMATION

The Company has scheduled a teleconference to discuss the second quarter results on August 3, 2010 at 8:00 a.m. Mountain time (10:00 a.m. Eastern time). The call participation number is 866-788-0539 and the participant passcode is 18765995. An audio replay of the call will be available approximately two hours after the call at 888-286-8010, with the passcode 82316400. International participants can dial 857-350-1677 to take part in the conference call, using passcode 18765995 and can access a replay of the call at 617-801-6888, using passcode 82316400. Replays can be accessed through August 17, 2010.

In addition, the call will be webcast live and can be accessed at SM Energy Company's website at sm-energy.com. An audio recording of the conference call will be available at that site through August 17, 2010.

INFORMATION ABOUT FORWARD LOOKING STATEMENTS

This release contains forward looking statements within the meaning of securities laws, including forecasts and projections. The words "will," "believe," "budget," "anticipate," "plan," "intend," "estimate," "forecast," and "expect" and similar expressions are intended to identify forward looking statements. These statements involve known and unknown risks, which may cause SM Energy's actual results to differ materially from results expressed or implied by the forward looking statements. These risks include such factors as the volatility and level of oil and natural gas prices, uncertainties inherent in projecting future rates of production from drilling activities and acquisitions, the availability of debt and equity financing, the ability of the banks in the Company's credit facility to fund requested borrowings, the ability of hedge counterparties to settle hedges in favor of the Company, the imprecise nature of estimating oil and gas reserves, the availability of additional economically attractive exploration, development, and property acquisition opportunities for future growth and any necessary financings, unexpected drilling conditions and results, unsuccessful exploration and development drilling, drilling, completion, and operating service availability, the risks associated with the Company's hedging strategy, and other such matters discussed in the "Risk Factors" section of SM Energy's 2009 Annual Report on Form 10-K and subsequent quarterly reports filed on Form 10-Q. Although SM Energy may from time to time voluntarily update its prior forward looking statements, it disclaims any commitment to do so except as required by securities laws.

ABOUT THE COMPANY

SM Energy Company, formerly named St. Mary Land & Exploration Company, is an independent energy company engaged in the exploration, exploitation, development, acquisition, and production of natural gas and crude oil. SM Energy routinely posts important information about the Company on its website. For more information about SM Energy, please visit its website at sm-energy.com.



SM ENERGY COMPANY

FINANCIAL HIGHLIGHTS

June 30, 2010

Guidance         For the Three Months
Comparison

                 Ended June 30, 2010

                 Actual        Guidance
                               Range

Oil and gas
production       276.4         253 - 274
(MMCFE per day)

Lease operating                $1.24 -
expense (per     $ 1.15        $1.32
MCFE)

Transportation                 $0.18 -
expense (per     $ 0.20        $0.20
MCFE)

Production
taxes, as a
percentage of    6          %  7          %
pre-hedge
revenue

General and                    $0.53 -
administrative - $ 0.61        $0.55
cash

General and
administrative - $ 0.22        $0.22 -
cash related to                $0.24
Net Profits Plan

General and                    $0.19 -
administrative - $ 0.18        $0.21
non-cash

General and                    $0.94 -
administrative - $ 1.01        $1.00
TOTAL

Depreciation,                  $2.90 -
depletion, and   $ 3.17        $3.10
amortization

Production Data  For the Three Months                 For the Six Months

                 Ended June 30,                       Ended June 30,

                 2010          2009          Percent  2010         2009          Percent
                                             Change                              Change

Average realized
sales price,
before hedging:

Oil (per Bbl)    $ 70.92       $ 53.96       31  %    $ 71.86      $ 44.21       63  %

Gas (per Mcf)    4.54          3.07          48  %    5.34         3.54          51  %

Average realized
sales price, net
of hedging:

Oil (per Bbl)    $ 65.17       $ 56.72       15  %    $ 66.10      $ 50.45       31  %

Gas (per Mcf)    5.59          5.19          8   %    6.21         5.66          10  %

Production:

Oil (MMBbls)     1.4           1.6           -14 %    2.9          3.3           -11 %

Gas (Bcf)        16.7          18.3          -9  %    33.2         36.8          -10 %

BCFE (6:1)       25.2          28.2          -11 %    50.9         56.6          -10 %

Daily
production:

Oil (MBbls per   15.5          18.1          -14 %    16.2         18.2          -11 %
day)

Gas (MMcf per    183.3         201.4         -9  %    183.7        203.6         -10 %
day)

MMCFE per day    276.4         310.1         -11 %    281.1        312.6         -10 %
(6:1)

Margin analysis
per MCFE:

Average realized
sales price,     $ 6.99        $ 5.15        36  %    $ 7.64       $ 4.87        57  %
before hedging

Average realized
sales price, net 7.36          6.68          10  %    7.88         6.62          19  %
of hedging

Lease operating  1.15          1.26          -9  %    1.16         1.36          -15 %
expense

Transportation   0.20          0.16          25  %    0.18         0.18          0   %

Production taxes 0.44          0.33          33  %    0.50         0.33          52  %

General and      1.01          0.64          58  %    0.96         0.61          57  %
administrative

Operating margin $ 4.56        $ 4.29        6   %    $ 5.08       $ 4.14        23  %

Depletion,
depreciation,
amortization,
and

asset retirement
obligation       $ 3.17        $ 2.49        27  %    $ 3.10       $ 2.87        8   %
liability
accretion

Consolidated
Statements of
Operations

(In thousands,
except per share For the Three Months                 For the Six Months
amounts)

                 Ended June 30,                       Ended June, 30,

                 2010          2009                   2010         2009

Operating
revenues and
other income:

Oil and gas                                           $
production       $ 175,887     $ 145,279              388,774      $ 275,696
revenue

Realized oil and 9,329         43,279                 11,924       98,899
gas hedge gain

Gain on
divestiture      7,021         1,244                  127,999      645
activity

Marketed gas
system and other 19,460        15,396                 43,135       29,178
operating
revenue

Total operating
revenues and     211,697       205,198                571,832      404,418
other income

Operating
expenses:

Oil and gas
production       45,168        49,465                 93,508       105,294
expense

Depletion,
depreciation,
amortization,

and asset
retirement
obligation       79,770        70,391                 157,535      162,103
liability
accretion

Exploration      14,498        19,490                 28,396       33,088

Impairment of
proved           -             6,043                  -            153,092
properties

Abandonment and
impairment of    2,375         11,631                 3,279        15,533
unproved
properties

Impairment of
materials        -             2,719                  -            11,335
inventory

General and      25,398        18,160                 48,884       34,559
administrative

Change in Net
Profits Plan     (6,599     )  2,449                  (33,871  )   (20,842    )
liability

Marketed gas     15,807        13,609                 37,853       26,992
system expense

Unrealized
derivative       (2,087     )  11,288                 (9,822   )   13,134
(gain) loss

Other expense    578           5,814                  1,530        11,456

Total operating  174,908       211,059                327,292      545,744
expenses

Income (loss)    36,789        (5,861     )           244,540      (141,326   )
from operations

Nonoperating
income
(expense):

Interest income  54            105                    183          127

Interest expense (6,343     )  (7,663     )           (13,130  )   (13,759    )

Income (loss)
before income    30,500        (13,419    )           231,593      (154,958   )
taxes

Income tax
benefit          (12,432    )  5,097                  (87,347  )   59,013
(expense)

Net income       $ 18,068      $ (8,322   )           $            $ (95,945  )
(loss)                                                144,246

Basic
weighted-average 62,917        62,418                 62,855       62,377
common shares
outstanding

Diluted
weighted-average 64,566        62,418                 64,493       62,377
common shares
outstanding

Basic net income
(loss) per       $ 0.29        $ (0.13    )           $ 2.29       $ (1.54    )
common share

Diluted net
income (loss)    $ 0.28        $ (0.13    )           $ 2.24       $ (1.54    )
per common share

Consolidated
Balance Sheets

(In thousands,
except share     June 30,      December 31,
amounts)

ASSETS           2010          2009

Current assets:

Cash and cash    $ 10,249      $ 10,649
equivalents

Accounts         108,427       116,136
receivable

Refundable       23,215        32,773
income taxes

Prepaid expenses 14,284        14,259
and other

Derivative asset 45,481        30,295

Deferred income  -             4,934
taxes

Total current    201,656       209,046
assets

Property and
equipment
(successful
efforts method),
at cost:

Land             1,483         1,371

Proved oil and   3,066,300     2,797,341
gas properties

Less -
accumulated
depletion,       (1,203,841 )  (1,053,518 )
depreciation,
and amortization

Unproved oil and
gas properties,
net of
impairment
allowance

of $62,507 in
2010 and $66,570 138,531       132,370
in 2009

Wells in         97,312        65,771
progress

Materials
inventory, at    31,305        24,467
lower of cost or
market

Oil and gas
properties held
for sale less
accumulated
depletion,

depreciation,    7,115         145,392
and amortization

Other property
and equipment,
net of
accumulated
depreciation

of $16,478 in
2010 and $14,550 15,472        14,404
in 2009

                 2,153,677     2,127,598

Other noncurrent
assets:

Derivative asset 30,169        8,251

Restricted cash
subject to       19,595        -
Section 1031
Exchange

Other noncurrent 12,288        16,041
assets

Total other
noncurrent       62,052        24,292
assets

Total Assets     $             $
                 2,417,385     2,360,936

LIABILITIES AND
STOCKHOLDERS'
EQUITY

Current
liabilities:

Accounts payable
and accrued      $ 270,030     $ 236,242
expenses

Derivative       37,903        53,929
liability

Deposit
associated with
oil and gas      -             6,500
properties held
for sale

Deferred income  4,970         -
taxes

Total current    312,903       296,671
liabilities

Noncurrent
liabilities:

Long-term credit -             188,000
facility

Senior
convertible
notes, net of
unamortized

discount of
$16,288 in 2010, 271,212       266,902
and $20,598 in
2009

Asset retirement 64,284        60,289
obligation

Asset retirement
obligation
associated with  1,526         18,126
oil and gas
properties held
for sale

Net Profits Plan 136,420       170,291
liability

Deferred income  408,997       308,189
taxes

Derivative       24,046        65,499
liability

Other noncurrent 15,164        13,399
liabilities

Total noncurrent 921,649       1,090,695
liabilities

Commitments and
contingencies

Stockholders'
equity:

Common stock,
$0.01 par value:
authorized -
200,000,000
shares;

issued:
63,110,068
shares in 2010
and 62,899,122
shares in 2009;

outstanding, net
of treasury
shares:
63,007,433
shares in 2010

and 62,772,229   631           629
shares in 2009

Additional       174,973       160,516
paid-in capital

Treasury stock,
at cost: 102,635
shares in 2010   (489       )  (1,204     )
and 126,893
shares in 2009

Retained         992,685       851,583
earnings

Accumulated
other            15,033        (37,954    )
comprehensive
income (loss)

Total
stockholders'    1,182,833     973,570
equity

Total
Liabilities and  $             $
Stockholders'    2,417,385     2,360,936
Equity

Consolidated
Statements of
Cash Flows

(In thousands)   For the Three Months                 For the Six Months

                 Ended June 30,                       Ended June 30,

                 2010          2009                   2010         2009

Cash flows from
operating
activities:

Net income       $ 18,068      $ (8,322   )           $            $ (95,945  )
(loss)                                                144,246

Adjustments to
reconcile net
income (loss) to
net cash

provided by
operating
activities:

Gain on
divestiture      (7,021     )  (1,244     )           (127,999 )   (645       )
activity

Depletion,
depreciation,
amortization,

and asset
retirement
obligation       79,770        70,391                 157,535      162,103
liability
accretion

Exploratory dry  164           4,573                  327          4,667
hole expense

Impairment of
proved           -             6,043                  -            153,092
properties

Abandonment and
impairment of    2,375         11,631                 3,279        15,533
unproved
properties

Impairment of
materials        -             2,719                  -            11,335
inventory

Stock-based
compensation     6,261         3,733                  11,864       7,509
expense*

Change in Net
Profits Plan     (6,599     )  2,449                  (33,871  )   (20,842    )
liability

Unrealized
derivative       (2,087     )  11,288                 (9,822   )   13,134
(gain) loss

Loss related to  -             5,027                  -            7,120
hurricanes

Amortization of
debt discount    3,366         3,611                  6,657        5,703
and deferred
financing costs

Deferred income  14,212        (7,758     )           78,820       (63,148    )
taxes

Plugging and     (3,988     )  (337       )           (6,222   )   (2,355     )
abandonment

Other            1,988         430                    2,937        1,619

Changes in
current assets
and liabilities:

Accounts         20,872        5,446                  7,628        49,149
receivable

Refundable       (3,445     )  -                      9,558        13,161
income taxes

Prepaid expenses (1,637     )  (1,677     )           (148     )   (7,091     )
and other

Accounts payable
and accrued      (5,103     )  8,583                  26,299       (12,338    )
expenses

Excess income
tax benefit from (938       )  -                      (938     )   -
the exercise of
stock options

Net cash
provided by      116,258       116,586                270,150      241,761
operating
activities

Cash flows from
investing
activities:

Net proceeds
from sale of oil 8,751         18                     247,998      1,081
and gas
properties

Capital          (172,182   )  (82,201    )           (304,627 )   (215,826   )
expenditures

Acquisition of
oil and gas      -             9                      -            (44        )
properties

Deposits to      -             -                      (19,595  )   -
restricted cash

Receipts from    16,565        10,050                 -            14,398
restricted cash

Receipts from
short-term       -             1,002                  -            1,002
investments

Other            8             -                      (6,492   )   -

Net cash used in
investing        (146,858   )  (71,122    )           (82,716  )   (199,389   )
activities

Cash flows from
financing
activities:

Proceeds from    26,500        576,000                204,059      1,766,000
credit facility

Repayment of     (26,500    )  (600,000   )           (392,059 )   (1,791,000 )
credit facility

Debt issuance
costs related to -             (11,060    )           -            (11,060    )
credit facility

Proceeds from
sale of common   2,648         894                    2,916        1,066
stock

Dividends paid   (3,144     )  (3,120     )           (3,144   )   (3,120     )

Excess income
tax benefit from 938           -                      938          -
the exercise of
stock options

Other            (17        )  -                      (544     )   -

Net cash
provided by
(used in)        425           (37,286    )           (187,834 )   (38,114    )
financing
activities

Net change in
cash and cash    (30,175    )  8,178                  (400     )   4,258
equivalents

Cash and cash
equivalents at   40,424        2,211                  10,649       6,131
beginning of
period

Cash and cash
equivalents at   $ 10,249      $ 10,389               $ 10,249     $ 10,389
end of period

* Stock-based compensation expense is a component of exploration expense and
general and administrative expense on the consolidated statements of

operations. For the six months ended June 30, 2010, and 2009, approximately
$3.4 million and $2.9 million, respectively of stock-based compensation

expense was included in exploration expense. For the six months ended June 30,
2010, and 2009, approximately $8.5 million and $4.6 million, respectively

of stock-based compensation expense was included in general and administrative
expense. For the three months ended June, 30, 2010, and 2009,

approximately $1.7 million and $1.3 million, respectively of stock-based
compensation expense was included in exploration expense. For the three months

ended June, 30, 2010 and 2009, approximately $4.6 million and $2.4 million,
respectively of stock-based compensation expense was included in

general and
administrative
expense.

Adjusted Net
Income

(In thousands,
except per share
data)

Reconciliation
of net income    For the Three Months                 For the Six Months
(loss) (GAAP)

to Adjusted net
income           Ended June 30,                       Ended June 30,
(Non-GAAP):

                 2010          2009                   2010         2009

Reported net                                          $
income (loss)    $ 18,068      $ (8,322   )           144,246      $ (95,945  )
(GAAP)

Adjustments net
of tax: (1)

Change in Net
Profits Plan     (3,907     )  1,519                  (21,102  )   (12,901    )
liability

Unrealized
derivative       (1,236     )  7,000                  (6,119   )   8,130
(gain) loss

Gain on
divestiture      (4,156     )  (771       )           (79,743  )   (399       )
activity

Loss related to  -             3,117                  -          # 4,407
hurricanes (2)

Adjusted net
income (loss),
before           8,769         2,543                  37,282       (96,708    )
impairment
adjustments

Non-cash
impairments net
of tax: (1)

Impairment of
proved           -             3,748                  -            94,790
properties

Abandonment and
impairment of    1,406         7,213                  2,043        9,618
unproved
properties

Impairment of
materials        -             1,686                  -            7,017
inventory

Adjusted net
income,
non-recurring
items

& non-cash
impairments      $ 10,175      $ 15,190               $ 39,325     $ 14,717
(Non-GAAP) (3)

Adjusted net
income per share
(Non-GAAP)

Basic            $ 0.16        $ 0.24                 $ 0.63       $ 0.24

Diluted          $ 0.16        $ 0.24                 $ 0.61       $ 0.24

Average number
of shares
outstanding

Basic            62,917        62,418                 62,855       62,377

Diluted          64,566        62,418                 64,493       62,377

(1) Adjustments are shown net of tax using the effective income tax rate;
calculated by dividing the income tax benefit (expense) by income (loss) before
income

taxes as stated on the consolidated statement of operations. Effective income
tax rates for the three months ended June 30, 2010 and 2009, were 40.8% and

38.0% respectively. Effective income tax rates for the six months ended June
30, 2010 and 2009, were 37.7% and 38.1% respectively.

(2) The loss related to hurricanes is included within line item other expense
on the consolidated statements of operations.

(3) Adjusted net income excludes certain items that the Company believes affect
the comparability of operating results. Items excluded generally are one-time
items or are items whose timing and/or amount cannot be reasonably estimated.
These items include non-cash adjustments and impairments such as the change in
the Net Profits Plan liability, unrealized derivative (gain) loss, impairment
of proved properties, abandonment and impairment of unproved properties,
impairment of materials inventory, gain on divestiture activity, and loss
related to hurricanes. The non-GAAP measure of adjusted net income is presented
because management believes it provides useful additional information to
investors for analysis of SM Energy's fundamental business on a recurring
basis. In addition, management believes that adjusted net income is widely used
by professional research analysts and others in the valuation, comparison, and
investment recommendations of companies in the oil and gas exploration and
production industry, and many investors use the published research of industry
research analysts in making investment decisions. Adjusted net income should
not be considered in isolation or as a substitute for net income, income from
operations, cash provided by operating activities or other income,
profitability, cash flow, or liquidity measures prepared under GAAP. Since
adjusted net income excludes some, but not all, items that affect net income
and may vary among companies, the adjusted net income amounts presented may not
be comparable to similarly titled measures of other companies.

Operating Cash
Flow

(In thousands)

Reconciliation
of net cash
provided by      For the Three Months                 For the Six Months
operating
activities

(GAAP) to
Operating cash   Ended June 30,                       Ended June 30,
flow (Non-GAAP):

                 2010          2009                   2010         2009

Net cash
provided by                                           $
operating        $ 116,258     $ 116,586              270,150      $ 241,761
activities
(GAAP)

Changes in                                            $
current assets   $ (9,749   )  $ (12,352  )           (42,399  )   $ (42,881  )
and liabilities

Exploration      $ 14,498      $ 19,490               28,396       33,088

Less:
Exploratory dry  $ (164     )  $ (4,573   )           (327     )   (4,667     )
hole expense

Less:
Stock-based
compensation     $ (1,684   )  $ (1,309   )           (3,438   )   (2,864     )
expense included
in exploration

Operating cash                                        $
flow (Non-GAAP)  $ 119,159     $ 117,842              252,382      $ 224,437
(4)

(4) Beginning in the third quarter of 2009 the Company changed its definition
of operating cash flow. Prior periods have been conformed to the current

definition and the change in the definition did not result in a material
variance to results under the prior definition. Operating cash flow is computed
as net cash

provided by operating activities adjusted for changes in current assets and
liabilities and exploration, less exploratory dry hole expense, and

stock-based compensation expense included in exploration. The non-GAAP measure
of operating cash flow is presented because management believes that it

provides useful additional information to investors for analysis of SM Energy's
ability to internally generate funds for exploration, development,
acquisitions, and to

service debt. In addition, operating cash flow is widely used by professional
research analysts and others in the valuation, comparison, and investment

recommendations of companies in the oil and gas exploration and production
industry, and many investors use the published research of industry research
analysts

in making investment decisions. Operating cash flow should not be considered in
isolation or as a substitute for net income, income from operations, net cash
provided

by operating activities or other income, profitability, cash flow, or liquidity
measures prepared under GAAP. Since operating cash flow excludes some, but not
all

items that affect net income and net cash provided by operating activities and
may vary among companies, the operating cash flow amounts presented may not

be comparable to similarly titled measures of other companies. See the
consolidated statements of cash flows herein for more detailed cash flow
information.




    Source: SM Energy