SM Energy Company (SM) Earnings Call Transcript & Summary

Thank you for standing by. My name is Genie, and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy's Second Quarter 2024 Financial and Operating Results Q&A Conference Call. [Operator Instructions] I would now like to turn the conference over to Jennifer Martin Samuels, Vice President, Investor Relations and ESG stewardship. You may begin.

Thank you, Genie. Good morning, everyone. In today's call, we may reference the earnings release IR presentation or prepared remarks, all of which are posted to our website. Thank you for joining us. To answer your questions today, we have our President and CEO, Herb Vogel; and CFO, Wade Pursell. Before we get started, I need to remind you that our discussion today may include forward-looking statements and discussion of non-GAAP measures. I direct you to the accompanying slide deck earnings release and Risk Factors section of our most recently filed 10-K, which describe risks associated with forward-looking statements that could cause actual results to differ. Also, please see the slide deck appendix and earnings release for definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures and discussion of forward-looking non-GAAP measures. Also look for our second quarter 10-Q that was filed this morning. And with that, I will turn it over to Herb for brief opening commentary. Herb?

Thank you, Jennifer. Good morning, and thank you for joining us. It was an outstanding quarter with a lot of great news. So let's go ahead and get started with the Q&A. I'll turn it back to Genie to start taking your questions.

Thank you. [Operator Instructions] Your first question comes from the line of Gabe Daoud with TD Cowen.

I appreciate the time this morning. I was hoping we can maybe learn a little bit more about the Woodford-Barnett results. I guess, curious about the development plan here, whether or not there are more wells in the formation that are expected to turn in line this year. What does development look like from a spacing standpoint, and then I guess, what are the oil cuts expected on these wells?

Thanks, Gabe, this is Herb. Yes, we're excited about the Woodford-Barnett in the Permian. It's an overpressured play, which is great. The wells initially flowed naturally and for quite a while before we put artificial lift on, they are 56% to 58% oil, and that's on a 2-stream basis. I imagine it will be -- the gas will be quite rich. I don't know the BTU content there yet. And it's about 50 API oil. In terms of the development, we're ways away from that. But we do know that we're well surrounded by offset operators, and we showed that in one of the slides that the performance of these wells is really excellent, and we'll be working the development plans over the coming months. We do not have any additional turn-in-lines planned for this year in Woodford-Barnett.

That's great detail. I appreciate all that. And then I guess just as a follow-up, shifting gears to the buyback and commentary around maybe more of a focus on debt reduction near term versus leaning into the buyback. I think the last several quarters, you've been around $40 million to $50 million a quarter on buyback. So what does the pace look like to close 2024? And then any additional color on the pace in '25.

Yes. This is Wade. As we've said, with the acquisition, we're taking on an additional deleverage, we will be prioritizing free cash flow in the near term to debt reduction before we kind of get back into the pace that we were on buying back shares. I will say, though, that it's not an all or nothing during this period, prioritizing debt reduction. They're very well may be times, probably will be times, where we step into the market and buy back some shares, especially on days of weakness or other times. We certainly still like stock price. There's no doubt about that. We have our internal view of the NAV, but that will be the priority with free cash flow, though, until we get back below kind of in that 1x area which we project being in the middle of next year, depending on commodity prices, of course.

Okay. So not all or nothing approach.

Your next question comes from the line of Zach Parham with JPMorgan.

First, I just wanted to ask a little bit on the trajectory of oil volumes from here and as we move into '25, your implied 4Q guidance rates around 115,000 barrels a day pro forma for the Uinta deal. That compares to the preliminary guide you gave of 100,000 barrels a day for 2025, can you just talk a little bit about the production trajectory you expect through the year? Do you expect -- as you slow down activity, do you expect a pretty steep decline early in '25 and then you kind of level out? Just curious on kind of tying those 2 numbers together.

Thanks for the question, Zach. This is Herb. In projecting what -- how many TILs we have, we're -- obviously early days here. It's August, and we're still in the HSR approval stage. So we'll figure out how many completions XCL actually puts online, and that will sort out where we are at year-end and how 2025 will play out. We're still working a lot of scenarios on -- it depends on what the commodity prices will be next year. And so we're really sorting that out. We don't know the details of all the rig contracts yet on XCL side. So we work in the rig cadence, the completion cadence. But what we'll really look at is how do we get the best capital efficiency between the 3 assets. We know the returns are similar between the 3, which is a great position to be in. Now how do we get the capital efficiency as good as possible. So that's what we're working right now, and we'll get a lot more information assuming HSR approval in late August.

My follow-up, just wanted to ask on OpEx, particularly LOE. This quarter, it was $4.82 per BOE that's significantly below the low end of the full year guidance range. Can you just give us any color on why LOE came in so low this quarter and maybe your expectations on how LOE trends from here?

Yes. On the LOE side, the second quarter was excellent. We obviously have seen some cost reductions in a number of areas across the board other than labor. And we do expect a little bit of increase in the third quarter with some additional electric generators as we're waiting for the utility to connect up some of our well pads and then there's some additional water handling costs also that we'll have to cover. So I don't want to say it's an anomaly. We're going to keep driving costs down, but we do expect third quarter to be a bit higher than second quarter.

Your next question comes from the line of Neal Dingmann with Truist Securities.

My first question is around the Eagle Ford activity. Specifically, can you discuss the sort of the future Briscoe C activity? I'm just wondering, will you codevelop the Middle and Lower Austin Chalk going forward along with the Eagle Ford now that you've had that success on the Briscoe C. I'm just wondering how you're going to sort of get after that.

Yes, Neal, I'll answer your question. I didn't catch one word that you said there, but I'll just start and tell me if there was another question there. But on the Eagle Ford, on the west side, we do anticipate codeveloping the upper and lower landing zone that we have in the Austin Chalk and staggering those. We had great results on the first place where we had fully bounded a number of wells altogether. And where judicious we will also tie in Eagle Ford wells over on that western acreage. On the Eastern acreage, we probably won't be staggering wells to that degree just because the Austin Chalk is a bit thinner over there and gassier. But it sure looks to work great on the western side to go with all 3.

Well said. And then just want to make sure on the -- my question is just on the Uinta side now that you are able to add additional acres, is the plan to develop all those acres sort of in that same pattern that you had talked about with the original XCL acquisition? Or is there any change now that you have that additional inventory?

Yes. Great question. You can imagine what the state of play is currently. We will be inheriting a lot of activity underway. We'll be inheriting quite a few DUCs, we'll be looking to optimize the capital. And then ultimately, by the time we get to 2026, we'll be looking at an integrated how do we optimize the infrastructure that's in place. How do we benefit from XCL's infrastructure for the Altamont assets. So we're looking forward to that optimization because we see that as some low-hanging fruit there to take advantage of what XCL pre-invested in throughout their acreage.

Your next question comes from the line of Michael Scialla with Stephens.

Wanted to follow up on Barnett Woodford wells. Just to clarify, those were on that Western extension acreage, I believe, correct me if I'm wrong there. And how do you get to that 20-plus thousand net acres perspective for that. Is that assuming all 9,100 of the extension area plus a portion of the legacy Sweetie Peck, and I guess also, are those zones perspective anywhere else in the Midland, where you, in particular, in Howard County where you have acreage?

Great question, Mike. And I can see why there could be some confusion about that. The 20,000 acres basically is the entirety underneath Sweetie Peck. We did quite a bit of land work to secure the deep rights under our Sweetie Peck position, and then we added that 9,100 acres to the west. If you look at the Woodford-Barnett well control of offset operators, you'll see that there was a gap under Sweetie Peck. So those 2 wells that we just did are actually under Sweetie Peck and that's why we have the confidence, why we said the 20,000 acres because we are surrounded by good Woodford-Barnett wells over there. And then just obviously, there's a lot of vertical well control around and that enhances our ability to map the play. And that's why we have the confidence. And obviously, we'll be working overtime to figure out the optimal spacing for the play. But we're excited by that overpressured nature of it and the oiliness of it is -- really helps on getting the economics improved over time, too.

Okay. And not really looking anywhere outside of Sweetie Peck?

I would say -- I'm never going to speak for our geoscience team because what they come up with is pretty amazing sometimes, and we'll see. I have no doubt that we have Woodford-Barnett maps. And if we can -- with the discipline we have in terms of putting capital to land, if they come up with good opportunities, we pursue them, but they have definitely mapped the Woodford-Barnett, and I'm sure I'll be seeing stuff in the future, that I don't know about yet.

Okay. Look forward to that. And then I just wanted to follow up on the Altamont Energy assets. It looks like that acquisition, like you said previously, it's mostly acreage. How would you characterize that? Is it -- has it been delineated? Is it more exploratory in nature than the XCL properties? Just looking for a little more color there?

Yes, it's a great question, Mike. There's quite a bit of vertical well control around, so we can map it quite well. The industry has learned quite a bit over what makes successful Uinta wells. The southern portion of the acreage is really well delineated, and then a little bit less delayed as you go further north. The technology applied is not as advanced on Altamont as it is on XCL. And I just got to say the XCL team is really excellent at what they do in terms of optimizing and driving capital efficiencies and putting smart infrastructure in place. And so that's why we feel really good about Altamont also. We'll see. Ultimately, we put 75 locations on it for now and we'll see over time how much more we can add. And that doesn't include any deep cube or anything like that, that has upside inventory potential.

Your next question comes from the line of Timothy Rezvan with KeyBanc.

An area that really hasn't been discussed in the release today is on Klondike, and I know I think recent dialogue suggested you'd have more to say with third quarter earnings. But I know there's a lot of completion work going on. So Herb, can you maybe give like a qualitative assessment of what's happening up there right now?

Yes. Great question, Tim. We had to hold something back for the third quarter. So I would say that the Klondike wells, we have them online, doing well. We've got 2 that have been online for a while, 2 more that have come on just recently. We anticipate 2 more during the third quarter, and then there will be a final 2. So it looks like we're tracking for 8 completions in Klondike this year. I guess all I'll say is we don't give rates until we get the IP30s and there's still -- I wouldn't call them IP30s yet, even though they're -- they've been -- some of them are producing a bit, so they're still ramping -- some of them are still ramping up.

Okay. That's fair. We'll stay tuned, I guess. And then I just wanted to follow up on Gabe's question on Sweetie Peck. I understand it's early days and you don't have much to -- too much to disclose. We heard some peers talk about oil cuts more in the 75% to 80% range. I mean, obviously, 50% to 60% is a good number. Can you talk to what you know about how those should trend? And if there is sort of variability across that formation? Any insight would be helpful.

Tim, you could be a geologist there. The east side is deeper, so that will be gassier, and the west side of our acreage is shallower and will be oilier. So you'll see that trending as you move west from our existing wells, you'll see them get oilier. And that's simply the depth in the thermal maturity level in the Woodford-Barnett there. So you will see some variability. And so I fully expect if you look at some of our peer wells that are just off our Western flank, they will be higher oil percentage.

Your next question comes from the line of Oliver Huang with TPH.

Herb, Wade and team, strong quarter, just had a couple of follow-ups. Starting in South Texas, I know you all highlight the new Briscoe C wells performing well. Just wondering how do the initial results that you've all seen thus far on that 625-foot space fully bounded test impact your thinking about optimal spacing on future development in that liquids-rich area, part of the play for you all? And then just kind of additionally on the Briscoe C well, I noticed that while you all typically drill wells going northwest to southeast, there is this one pad where the geometry of the wells are moving northeast to southwest any sort of observations or takeaways worth highlighting that came about from that set of wells?

Oliver, thanks for that question. That's actually an excellent question, and very few people have noticed that. But let me start with the spacing. We believe that we could get to that spacing and get good results with co-development and pretty much the results confirmed what we expected, and there's quite a few wells there. We'll continue to track on that kind of spacing where it makes sense. And obviously, the returns did not degrade like some people expected. And it kind of was in line with how we modeled it, in terms of the reservoir models. So that is something that we will continue where it makes sense. And then Eagle Ford will be selective depending on where there's less Eagle Ford development currently. The off azimuth wells that you noted are performing excellent. We were doing that to see if we could get costs down and lower the risk on some of the wells in terms of just the -- because of the orientation there. And those have turned out excellent better than we expected. You'll note that our first 3 wells over in the Chupadera area that net 8,000 acre drill-to-earn area. We have drilled 3 of off azimuth wells over there also. So you'll be seeing the results from those also. So we see that as a way to really help capital efficiency with those off azimuth wells.

Perfect. That's helpful color. And just a quick follow-up on Permian LOE. Just kind of considering next year's preliminary outlook that you all had alongside the Uinta deck back in June, anything that we should be aware of or thinking about that might be driving another leg down further to the low 6s on Permian LOE after the step down we saw this quarter?

Yes. I don't know yet on 2025, we haven't worked up the plans on 2025. So if we get in areas where there's already power supply, then it's pretty straightforward to keep the LOE down, if we're near our existing water injectors, it's going to be lower cost when we go to third-party water. So it will really depend on specific -- very specific things on where we're locating the wells in 2025. And I don't have that yet. The team is working that up right now. But just rest assured, we're going to be really driving capital efficiency again, and we're in a good operating environment right now with the activity reductions in the industry for both rigs and frac spreads.

[Operator Instructions] Your next question comes from the line of Nicholas Pope with Seaport Research Partners.

Hope we could dig a little bit more into South Texas because, I mean, it was a huge jump in oil production. And just kind of curious with this basket of wells that you saw come online during the quarter, I mean you have a lot of well control in South Texas. What is your ability to kind of maintain that oil percentage that we saw here in the second quarter? And in terms of how you're I guess, selecting wells and what you're going to bring in online? I guess, how consistent can we expect these kind of oil percentages going forward in South Texas?

Yes. Nick, this is Herb again. So on South Texas, you know we regularly optimize and we keep improving the performance in each area, when you look at oil percentage, that's going to depend a little bit on how much capital allocation is on the West side and how many new turn-in lines we have on the west side versus on the East side, which is higher BOE rates on the east side, but lower oil percentage. So you'll just see that move around somewhat. But the more capital we put in the west side will wind up with a higher oil percentage, the more capital we put on East side, will wind up with a higher gas, higher NGL percentage, and that really drives it. But overall, if you just look at it, we just keep improving the well performance. And we're really aware of where the high oil percentage and where the higher gas percentage, and we're really just looking at the returns. We're not worried about the oil percentage so much. It's -- we're driving the capital efficiency side of things. So that's really the way I'd sum that up.

Got it. Appreciate it. The other thing, and I know there's like dig a little more that I think you'll probably want to. But in 2025, the production kind of broad range that you all gave during XCL release that 195, gotten a lot of pushback on that number. Just kind of curious as you kind of look at where things are now, what's your current kind of implied guidance is with the added production in Uinta coming in, that you added with this release. kind of how you're thinking about that, the implied decline that you're seeing there in 2025 from that fourth quarter rate? And if there's anything, I guess, maybe when we can get some more clarity on kind of what you're expecting there for 2025.

Yes. Nick, it's a real fair question. I mean it's early days like this on a new acquisition. We are working out scenarios and really figuring out the capital efficiency that we can gain. We are somewhat limited in what we can see in terms of rig contracts and other contracts because we are in that HSR period. So the best we can see are redacted contracts. So we don't know the how the term of the contracts and what will make sense. So we are working that. I will say, we'll really be able to ramp up our certainty after HSR approval, assuming we get that at the end of August, and then we'll be baking that into our 2025 plans that we released in February. So we're just excited that all 3 assets have really similar returns, and we're just looking at how we can optimize that in terms of rig and frac spread cadence. We know that we get better capital efficiency, if we can get the right mix of rig and frac spread in a given play.

And maximize free cash flow.

Yes. And the objective is, we will maximize free cash flow over the next 2 to 3 years as we always do.

That concludes our Q&A session. I will now turn the conference back over to Herb Vogel, President and Chief Executive Officer for closing remarks.

Okay. Thank you, Genie, and thank you all for joining us. I do have one area that we got some questions on that did not come up today, and they're about the takeaway in the Uinta Basin for both oil and natural gas. And the question is really, is it sufficient in terms of takeaway and can we grow production. And we believe that was a great question because their perceptions about takeaway -- or complications related to rail that are -- were actually quite outdated now. Until mid-2021, waxy crude production was limited like in the 80,000 barrel day range for the industry and was all delivered to Salt Lake City refineries. The sharp rise since mid-2021 is due to growth and interest from Gulf Coast refineries in incorporating waxy crude into the crude slates, favorable oil prices and gains in production efficiency. And that's increased to include Cushing and Wyoming refineries. There are no real constraints for current production or for expanding production, the railways are generally underutilized in the region because there's less coal being moved, as most of you know, while only a portion of the oil goes to Salt Lake City, there's a number of outlets by rail, including Wyoming and Golf Coast and Cushing. And the oil is in insulated cars, not heated cars. So in regards to gas, there have been constraints, but these are being alleviated. Pipeline expansion was completed last month by Mountain West, capable of moving an additional 80 million cubic feet a day, and Kinder Morgan recently announced that they're proceeding with a pipeline project to relieve constraints in the basin, their pipe will carry up to 150 million cubic feet a day from the basin to a processing plant and will be in service in mid-2025. So with that, thank you for joining us, and we look forward to seeing a number of you at upcoming events.

This does conclude today's call. You may now disconnect.