SM Energy Co. (NYSE: SM) shares lost 17% Feb. 19, after releasing fourth quarter and 2013 results, but analysts remain confident in the Denver company’s potential.

SM reported a mixed quarter in which it beat production, but earnings and cash flow missed the mark.

David Tameron, senior analyst for Wells Fargo Securities LLC, rates the company “Outperform.”

SM updated its interpretation of its Eagle Ford acreage resources. Management estimates the changes result in a drop of about 17% in total unrisked resource potential for the Eagle Ford.

“The company has been pressed on its Briscoe Ranch-type curves for some time, so some are taking the change as validation SM was previously too optimistic,” Tameron said. “We expected some weakness in shares today and haven’t worked through the entire NAV impact, but the 17.8% intraday decline feels a bit overdone to us.”

SM reported production in line with its guidance at 143,800 barrels of oil equivalent per day (BOE/d), compared with company projections of 139,000 to 146,000 BOE/d. However, earnings per share were $1.26, $0.18 lower than the Wall Street consensus of $1.44. Earnings before interest, taxes, depreciation and amortization (EBITDA) were $396 million, compared to the consensus of $408 million.

SM said the fourth quarter of 2013 saw cash general and administrative (G&A) expenses higher per unit than were guided, due to performance-based bonus compensation, the result of company performance exceeding its 2013 targets.

The company also reported a proved property impairment of approximately $110.9 million in the fourth quarter in SM’s Mississippi Lime program in the Permian Basin. The company’s effective tax rate for the fourth quarter was likewise “abnormally high,” due to the sale of its Anadarko Basin properties in the fourth quarter. The tax gain related to the sale caused a shift in anticipated recognition of state tax benefits, causing a one-time rate impact effect.

Tony Best, CEO of SM Energy, said 2013 was an extraordinary year.

“Our proved reserves at year end 2013 were up by 46% from 2012 and our drilling finding and development costs were down by 26% for the same period,” he said.

“Our development programs were the performance drivers in 2013, resulting in 33% annual average daily production growth for the company and record annual production," he continued.

“As we look to 2014, we believe we have plenty of dry powder to fund our program and many exciting opportunities in optimizing our existing development programs and increasing the inventory in our new venture plays," Best added.

Tameron said the market’s reaction was an overreaction to negative news. He noted that SM’s capex of $432 million came in roughly in line with its $437 million estimate.

“SM has transitioned to a resource play focus with a high graded asset base,” he said. “We believe the combination of strong fully funded production growth, higher liquids percentage and a diversified asset portfolio will result in share outperformance versus its peers.”

Global Hunter Securities LLC also took the reports as negative, but nothing in them “makes us change our positive outlook” on the company, said Mike Kelly, senior analyst.

Kelly said the stock is still cheap while corporate returns are improving and debt-adjusted growth stands notably higher than industry average.

Kelly said the earnings per share (EPS) miss was caused by a gassier mix and lower realizations, and also by less concerning EPS dings due to the higher taxes and G&A expenses.

SM's first Wolfcamp well drilled on its northernmost Midland Basin acreage was “disappointing, but not tragic.”

Other wells were roughly in line with average 30-day rates for Wolfcamp wells at laterals of 5,560 feet.

“The bright spot of the Q4 release was 2013 drillbit F&D costs, which declined 26% year over year to $7.77 per BOE,” Kelly said. “SM has shown massive improvement here since 2011 when it was at $17.10 per BOE.”

The company also released a detailed 2014 plan for its various holdings.

EF: SM re-delineated its acreage position based on 2013 results. The company will move to 6,000-foot laterals from 5,000 feet where possible. The company’s five year development plan excludes the far western portion of one area. The cost/benefit of the larger frac designs will be evaluated through 2014.

Bakken: Testing 880-foot spacing versus 1,060 feet, which could add 110 gross wells to inventory. The Bakken is prospective at Gooseneck, with four wells planned in 2014. SM is also planning a few Stateline wells in 2014, which could add up to 158 gross operated wells to inventory.

Powder River Basin: 10 Frontier wells in 2014, eight completions. Type curve unchanged. SM could see a three to four rig development program in 2015. Per well costs are set at $13.5 million-$14.5 million.

Permian: Moving towards white sand; along with pad drilling, could see $7.5 million-$8.5 million well costs at Sweetie Peck. The company needs 400 MBOE or more to make Wolfcamp B economic at Buffalo.

East Texas: Testing the down-dip limits of the fields. Early results likely have lower liquids cuts.