SM Energy Company (SM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to SM Energy's 2019 Results and 2020 Operating Plan Q&A call. I would now like to hand the conference over to your speaker today, Jennifer Samuels, Vice President of Investor Relations. Thank you. Please go ahead, Ms. Samuels.

Thank you, Julian. Good morning, everyone, and thank you for joining us. Allow me to quickly remind you that we may discuss forward-looking statements about our plans, expectations, and assumptions regarding future performance, these statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. Please refer to the cautionary information about forward-looking statements in the 4Q earnings release, the IR presentation and the Risk Factors section of our Form 10-K, which was filed this morning. All of those documents are posted to our website. Our discussion today may include non-GAAP financial measures that we believe are useful in understanding and evaluating our performance. Reconciliation of those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are provided in our earnings release and IR presentation. Here to answer your questions this morning are President and CEO, Jay Ottoson; EVP and CFO, Wade Pursell; Chief Operating Officer, Herb Vogel. So we have some very positive news to talk about, so let's get started. I'll turn it back to you, Julian, to take our first question.

[Operator Instructions] Your first question comes from Brad Heffern from RBC.

I'm looking at the 0-time plot that you guys gave for the 41 new RockStar results. Obviously, they're outperforming the prior average by a significant margin. I'm just curious, how much of a driver of that -- was that for the strong 4Q performance? And then how much of that stronger performance is assumed in the 2020 guide?

Brad, this is Herb. Yes. So the 41 wells that we showed there, they're excellent performers. There are no unbounded wells in there at all. They're all fully bounded and half bounded. And so yes, they're part of the reason 4Q performed really well. And then some of that performance will continue into the first quarter and normal decline, normal decline curves, nothing really outstanding there. The one thing I will say is that we do periodically have shut-ins to keep from flaring, in some cases, and we did that during fourth quarter and again in January. And then we do have events like we had a 12-inch snowstorm in Big Spring, believe it or not, at the beginning of February and that limited our access to some wells. So we have wells that perform as predicted. And then we have other events that we got to consider with third-party gas processing, et cetera.

Okay, got it. And then I was wondering if you could just comment on inventory. At this point, do you have any sort of numbers that you could put around how much of -- how much Midland Basin inventory is left either in terms of wells or years or maybe in terms of the percent that's been developed at this point?

Yes. Brad, this is Herb again. So the -- what we did in -- I think it was Slide 17, we showed frame of reference, since there are so many different basis between companies on how they count inventory, some do just the sticks on a map. I think I had -- put that in the call, the taping yesterday. Some do sticks on a map, some have IR cutoff and then the cutoff vary. So the way we look at it is, we just have more than a decade of some of the highest quality inventory in the entire Midland Basin. And that's why we show that is because of the inventory we have is really high quality. And then we're continuing to grow inventory as we look at additional intervals. And you know we really scratched the surface on that over the last year, and most of our developments to date have been those co-developments of Lower Spraberry, a little bit of Dean in there, Wolfcamp A and Wolfcamp B, and we vary that co-development depending on the specific geology of a drilling spacing unit. I hope that answers it.

Your next question comes from Neal Dingmann from SunTrust.

Two questions, Jay. My first question for you, Herb, on South Texas. Specifically, looking at Slide 20, you certainly had strong results on that latest Briscoe well. So does this give you confidence that further wells maybe in that northern area could be as high liquids or is positive? Just any color you could talk on that.

Yes, Neal, yes, we're really pleased with that well. We are -- immediately started drilling another well in the general vicinity, the Austin Chalk, to confirm that type of result. Whenever you have just one well of that nature, you want to check it out. But overall, the overall average, what we're really pleased to see is that that's pretty much -- if you average those 5 wells, that's about in line with a Delaware Basin average that we've seen from a couple of different banks issuing and that particular well is considerably better than Delaware Basin wells. And we don't have any takeaway issues here. So we're pleased with it, and we're going to go confirm it, and we're going to drill longer lateral into it in that area.

Okay. Then my second question also on South Texas. You mentioned in prepared remarks that a potential JV in the play. I'm just wondering, could you speak to when, Jay, when you guys are weighing all the options on this, how you think about keeping versus a sale versus JV or some other structure? How sort of all that thought process is going?

Yes, thanks for asking the question. I think we're doing exactly what all our stakeholders should want us to do, which is exploring every option to generate more economic activity and value from the South Texas leasehold that we have. We've engaged Scotiabank to help us, do a broad search, including, really, for funding partners, including international players and large gas consumers. It could be that we'll receive some proposals as part of that process that could involve an earn-in to our acreage or a purchase of some or all the assets. Our existing PDP covers all our volume commitments or MVCs, some people call that. So -- and our plan assumes that nothing gets done. I want to be real clear about that. So anything that we do here is really upside to our plan, which is to drill economic wells. So with that said, again, this is a -- it's obviously a difficult A&D market out there. We're doing what we think any active as good activist management team would do to pursue all the alternatives and no specific time line. We're going to -- anything we get here will be upside to what is a very robust plan. Did we lose?

What happened?

What happened? Long answer. Feel to call.

Your next question comes from Gabe Daoud from Cowen and Company.

Jay, I guess, just given a decrease in Permian footage turn to sales or expected to turn to sales in '20 versus '19, I think there's some worry over the trajectory of Permian volumes throughout the year. And even though it's early, also some worry about how Permian volumes trend into 2021. So can you maybe just address the cadence for this year and how you view the Permian program overall evolving over the next couple of years?

Yes, Gabe, this is Herb. Yes, I don't really see any concerns on cadence at all. Really, what we're doing is we're growing oil production at a pretty good clip there at 5% to 10%. And we're really working on the free cash flow, and that's really the focus, and we plan for free cash flow to continue to grow, 2020, 2021 and beyond. So it's a program that I think does all the objectives we set from a strategic level.