Q2 2020 SM Energy Co Earnings Call - Q&A Session

[music], ladies and gentlemen, thank you for standing by and welcome to the C. S. M Energy Q2 2020.

Financial and operating results Q when they call at this time all participants are in a listen only mode. After the speakers presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you're acquiring any further assistance. Please press star zero I would like to now.

I'll hand, the conference over to your Speaker today, Jennifer Samuels VP of Investor Relations. Please go ahead man.

Thank you do and good morning, everyone and thank you for joining a I have to say, it's good to be back this quarter was alive call and have the opportunity to elaborate on the second quarter, where we generated big free cash flow and reduce that despite a challenging macro environment as well have the opportunity to further disguise the very solid outlook we are proud.

Running through to 2021 first allow me to quickly remind you that we may discuss forward looking statements about our plan expectations and assumptions regarding future performance. These statements involve risks that may cause our actual results could differ materially from the results expressed or implied in our forward looking statements. Please.

Part of the cautionary information about forward looking statements and the Twoq earnings release, the IR presentation and the risk factor section of our form 10-Q, which was filed this morning, all of which are posted to our website. Our discussion today may include discussion on non-GAAP financial measures that we believe are useful in understanding in evaluating our perform.

Since reconciliation of those measures and the most directly comparable GAAP measures and other information about these non-GAAP metrics are provided in our earnings release, an IR presentation here to answer your questions. This morning, our CEO, Jay Ottoson, SVP, and CFO way Purcell, and president and COO Herb Vogel.

Let me turn it back to the operator, Joanne if you would take our first question.

As a reminder to ask a question you will need to press star one equal to withdraw your question press the pound or Hashi. Your first question comes on line of gave node from Cowen. Your line is now open.

Hey, good morning, everyone.

Thanks for all the prepared remarks.

Maybe just can you.

Maybe just elaborate a bit on the decision to pursue growth next year and perhaps the followed what meaningful growth.

And your eyes for next year.

Sure I'll answer that certainly the last part I mean, I think we didn't give specific numbers for next year the swayed by the way.

You can you can assume something like double digit growth from a production standpoint, and and even stronger when you're thinking if oil growth. So I would call I would characterize it more like strong double digit growth.

And that's coming off a reduced number this year, obviously with what's going on this quarter.

Yeah. This is Jason Hey, you know I think there's sometimes in in.

In these downturns people have a misunderstanding about levered companies and yet we really don't have an option here to just.

Stop activity and watch our leverage skyrocket right that's just not.

What you should expect a fairly levered company to do so when prices drop we current activity very quickly.

In order to and then yes, as we think costs start to get the bottom then we will increase activity again to keep our cash flows up and maintain our.

And keep our leverage down and that's what you should expect levered companies to do.

At the in this part of the cycle.

Probably three important points for me for that 2021 activity is rich the returns there will be generated are all all well above our hurdles.

I think we stated that it would be within cash flow overall.

And it maintains leverage into the year like a three times level. So.

I think those are the king of Chris.

Yes, thanks, guys that's helpful.

Just as a follow up.

Let me stay within free cash flow next year is that on strip pricing I guess as a quick follow up and then.

So that's surprisingly right.

Yes. This is a strip pricing I can tell you that and just the strip that we were using when we ran at its very similar to today. So.

Okay and then just.

And maybe quantify the amount of activity that you are adding in Fourq you and then you know 10% increase in budget activity or capital activity for next year, what does that mean from like.

A rig in.

And crew perspective.

And it's all that capital there was that for the Permian I'll just off the sense does.

Okay. Yeah Gabe this is her so.

Roughly it's about a 10% capital increase from our latest guidance from this year and in terms of rigs it will be.

Around three maybe a little bit more in the Permian and then in.

South, Texas will be between one and two and that'll depend a little bit on where commodity prices are and we haven't finalized our plans anyway. So we've got multiple scenarios and will depend on where what's the outlook is when we get to the end of year.

Thanks.

Your next question comes from line of Steve to share from Keybanc. Your line is now open.

Hey, guys I'm, just wondering a little bit of color on.

Strategy behind adding the oil swaps in 2021.

And then are you guys at it for plenty to add more hedges in 2021 on top of those thanks.

Yes sure. This way so so it's it's a you probably know our hedging strategy really well and it's tied very directly to our leverage levels and with with our projected leverage next year and maintaining in that three times area. We think it's really important to protect the cash flow to supports that.

So so pretty we've been as oil kind of trended back up towards the towards the 40 area in the low Fortys area. We've been we've been adding we've been adding hedges swaps.

For next year and very similar.

Program on the natural gas side, we've been very pleased with the moves up in the strip on the natural gas and so we've been adding hedges there as well when all the details are already in the appendix you can see that but that's that's our strategy. We don't we don't go too far out because we know that with a recovery the cost the cost will likely go up over a period of time as well.

Well. So we're just now starting to add to put in.

Slivers I'll call them have hedges in 2022.

Alright. Thank you and then just I'm on the NGL and gas for 2021 kind of whats the level of growth. There you guys see I know you guys said.

Obviously, a strong oil production growth, but just on those two because a little color there would be great. Thanks.

Steve I couldn't quite catch the start of your question the phone cut out right. There can you repeat the star started that question.

Yeah, just just on the.

We have some color on the level of gas NGL production in 2021.

I guess, we should start by repeating that what we're saying is double digit overall growth next year with strong double digit oil growth next year. So that implies obviously less that when you. When you look at gas and Ngls and frankly, we haven't put those plans together, we've got multiple scenarios. So.

So depending on the environment, the gas and NGL could decrease a little bit or it could increase a little bit depending on the scenario. So when we get to the year end, we'll we'll finalize those numbers and.

And in all scenarios as weights as you know, it's double digit growth and then its oil weighted.

Okay, great. Thank you.

Again, if he would like to ask a question. Please press star one on your telephone. Your next question comes from the line of Brad.

Okay.

RBC capital markets. Your line is now open.

Hi, everyone. Thanks for taking my questions I've, a couple on South Texas.

For the Austin Chalk results, you know, sometimes farther to they need to do you see this relatively rapid.

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I know you. It seems like you have something of a sweet spot, but maybe as a whole different geologically. So I was just wondering if you could talk about how the oil rates hold up over time, and if you do indeed see a rabbit patient.

Okay, Brad Serb so first of all you know we're super pleased with what our geoscience teams have come up with that on the Austin chalk up as Time's gone on they've really refined the landing zone and Thats really shown that where you have higher permeability rock and are on our acreage than elsewhere.

And so the productivity is high and then you're correct that the phase that's produced varies over our acreage to the northwest it's much oilier and less gas very NGL rich can you move east and south and it gets gas here and it's it's like trends the same with Eagle Ford excess.

At a completely higher level of condensate and NGL than the Eagle Ford just because its shallower.

So yeah, you as we go east it'll be high productivity and I'll just be gas here and you can see that in those well results we gave with.

58% oil over on the northwest and 32% oil over more towards the southeast.

Ah so and in all cases, the NGL conference by high.

Okay got it I'm sorry, maybe it's around language that was more talking about the productivity of the well over time do you see you like a significantly more rapid oil decline then you see from from the liquids and gas or is it sort of more study in this area.

No I did it's it's a transition from both oil and condensate through our acreage and so another rate hang in there quite well, it's not like ER.

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Permian, Oh, well that will decline relatively rapidly the ER. The we yeah why that facility limited. So we can only produced so much so the gas stays on plateau for a while in the condensate stays up there with it and then it will decline overtime, but yes, a different character of decline then would you'd see from the Permian.

Okay, great. Thanks, and just a couple served and that history of things on South, Texas as well. So I know you guys have called out that and the 20 to 2021, you have the transportation contracts rolling off but the last couple of quarters like the transportation expense has been quite low relative to where it sort of you're saying.

Out at least on a nominal basis. So I was wondering if anything has changed there and then also you called out this $5 per barrel improvement and destined 2021 is that associated with like a new contract or what's what's the reason for that thanks.

Okay I got to serve again, so so there's two parts to your question. Let me just the second one for so on condensate.

We have a contract that have the specific volume amount and we will have fulfilled that contract sometime later in the year and then we'll re up the contract and currently contract rates are quite a bit better than they were from that older contracts. So that's that's oh benefit there.

And then on the transportation costs or are you talking on our overall corporate transportation cost because that's simply there's more of a mix weighted more towards the Permian, which has transportation costs effectively zero. So if you take the transportation cost for South Texas it'll.

The blended down from the additional Permian production and then there is an additional impact and that's with the Austin chalk, it's more liquids rich so it's going to be a little bit lower transportation cost per deal you also.

Okay. Yeah, I was more looking at like just on nominal basis like typically the the transportation expense for South, Texas is like 45 million a quarter or something like that that's gone down into sort of the mid thirtys, but maybe the Austin chalk aside explanation for that well on that and that's a rate to the rate's gone down right versus also takes its driven by the rate at.

And higher Austin chalk percentage.

Okay. Thank you.

Your next question comes the line as Michael Scalia from Stifel. Your line is now open.

Hi, good morning.

Yeah, I know you got done yet, but I want to congratulate you on your upcoming Pablo good career.

The rest is when your role.

Wanted to ask on.

As a preliminary 21 point.

Or south that does that come to place I'm going to pay me partner, though.

Yeah, Mike that that's a that's I'm no does not contemplate a JV.

Got it thanks and.

When you talk about the door growth just to clarify is talking about year over year growth.

Or just in that though so fourth quarter.

Hi, guys. If I heard your question correctly. It was is that year over year growth or Fourq to Fourq you do you do year over year your year over year over year after an annual gross number yet.

Got it thank you.

Oh.

A question comes the line as Neal Dingmann from Suntrust. Your line is now open.

Well my first questions around slide nine just talking about the revised plan there like my specifically [laughter] really what into this get it looks like the drilled wells Didnt change dramatically, but you know I would say together the completion didn't either but I'm just one of the thoughts on the revised plan.

Now that prices are back up you I think of the revised plan now you're talking about 68 wells completed for the year versus previously thinking around 77, So just your thoughts around that.

[noise] Yeah Neel. This this service so that is just the Midland basin, what you're quoting there and if you combine south Texas, we've actually dropped our.

Total number of drills by 12 for the year in a number of completions by 26 for the year and obviously, that's the extraordinary environment, we encountered in March and so we did what was any company would do as we quickly reacted and putting the proactive plan in place to Oh.

Buys plans and optimize our cash flows to reach our objectives.

For 2020 as well as 21, so we didn't do it just an isolation of one year, we looked longer term in define the new new scenarios for the plan that will develop later in the year [laughter].

And you know just heard that just kind of leads my second question is just you you've been wanted a few you know I would just new capex. It looks like you've spent almost exactly 50% in the first half where most others. You know spent very heavily into first quarter and our state sexually spending very little in the fourth can you just talked about.

You know what's the thoughts behind that is that you think that that will lead to a better 21 or you know it's just definitely noticeable that you all are definitely much more sort of equal weighted on on spending this year than most of the other.

Piece out there.

Right. So so Neal we we basically hasn't as I said, we'd look at 2020 and 21 and a win March came around we put in place a plan very quickly and that really cut our activity and we wound up with curtailments in May and June and so we really had a tough.

Often capex spending in second or third quarter, and then we ramped up at the back into fourth quarter and get into 21, which based on strip pricing was the optimal way to work our way through this.

Unprecedented that led to significant deflation versus first yeah, Oh, Yeah, and then then obviously we've had significant deflation in ER.

Twoq Threeq, you and we've locked in a great prices for services.

Okay that makes a lot of sense. Thanks, guys.

Again, if you would like to ask a question press Star one on your telephone. Your next question comes from the line of Harry held back from Raymond James Your line is now open.

Hey, guys just some quick questions on your premise different 2021, they'll say it would be more heavily weighted to completion activity and I see that you. All drops you know around 12 drilled wells in 26 completed so what 14, you know extra completions compared to trails next year be a good proxy for that and how many.

Dr. You plan on entering the year with.

Okay. Harry the serve again I think I kind of you got your you're right, we dropped 12 drills and 26 completions.

So obviously, we build our DUC count through this year, that's kind of slow pace.

And then as we go into next year.

The way we would do this is we pulled down the DUC count and that will be just kind of getting more to natural levels by the end of of 21.

And Oh, we don't have a plan for 21, so I can't give a specific DUC count right now for where we see it did that we that somebody chair later in the year.

Okay, great. Thanks, and do you think you could possibly.

Give me as rough split inflation screen two basins.

Completion is no well that's that's really when we look out right now we run multiple scenarios and we can say okay. This is the environment, we get to the ended the year. This is the scenario that optimizes our to our objectives and if the environment. This way. It's a it's a it's a different ones. So no we wouldn't we wouldn't give them but yet.

Alright, well thanks for the help.

Your next question comes the line I'd Gail Nicholson from Stephens. Your line is now open.

Good morning.

Some really nice tellawi improvement in the Permian Basin, you know since the fourth quarter, two that said 2019, I know some of that as.

<unk> activity and curtailments that when we look at kind of a normalized Halloween right. We are right I mean for two quarters ago, and what have you really done to drive that help lower.

Okay. Gail this is her but you're right our elouise come down significantly and there was a component there was less workover expense, obviously doesn't make sense to spend much on workovers when prices were where they were in the second quarter. So.

Unilaterally across the board, we wind up with a lower service costs are in and that our Halloween expenses and we've aggressively contracted for lower lower expenses. That's the main driver and then we've also optimized things like a use of compression.

Use of generators that also reduce costs. So it's it's pretty much across all Halloween categories that we've reduced cost.

Okay, Great and then I'm looking at the Austin chalk and the presentation deck you guys talk about the latest pretty wild having a breakeven at 17 to $31 oil I think that uses like a two year or $240 gas environment I just kind of curious if gas is three how does that change the oil breakeven for the often.

Jail. So then the the gas where three than the oil breakevens withdraw lower significantly actually with as gassy and adult eastern ones that 31 dollar when it was dropped more than the 17 dollar one whereas boiler.

Okay, great. Thank you.

Your next next question comes from the line of Joe is just wrote Chris from Goldman Sachs. Your and your line is open.

Hey, good morning, since you're focused on for Karl Blunden.

I think he discusses the little bit so apologies if I missed the answer here, but what was what are the main driver if that reduced well costs guidance versus April results is the main driver their service cost inflation or are mainly efficiency gains getting there.

Yeah, Hi, Joe the this herb so there's there's if you're looking at like just wasn't single well deflation how much that is versus Twoq you. How much we saw when it was a blend versus what we've done for the year. The whole are you asking about for a single well or are you talking about for our program.

I think over with overall across.

Just overall Oh, yeah. So so it's more deflation and or anything else. So a single well so you're looking to single wells, 75% deflation in 25% improvements if you're looking at program. Obviously, it's it's that's a blend of first quarter costs and later cost but for single well 75.

Percent deflation.

Got it thanks very much and then my follow up Ah you discussed what are your preferred method. The refinancing your remaining bond maturity is when they come due.

[noise] I think I heard the question is.

Upcoming maturities and 21 22, we wanted to know yeah. So weve method for dealing with it yes, I mean, we have.

Obviously I can't give you a specific a plan today that wouldn't be very prudent, but we had multiple options.

Significant liquidity significant sure I'll call. It should get significant secured capacity overall significant liquidity and revolver also pretty significant remaining second lien capacity. It was not used earlier.

That data now is actually in excess of the assets what is coming due in 21 and 22 and continue no. There's nothing in 23, yeah no bonds mature so a multiple options, we'll we'll we'll be opportunistic and try to look at the at the lowest cost alternative for a retiring does.

Great. Thank you much that's a color I'll turn it over.

Your next question comes the line as Michael Skalla from Stifel. Your line is now open.

[laughter] actually away that's quite a follow up.

Thanks [laughter].

Thanks.

Well that exhaust sorry, a list of questioners. Thank you all for attending today. We appreciate your interest in the company. It's obviously been a very challenging second quarter.

We were accomplishing our goals generating free cash flow reducing debt.

And over time, we intend to increase debt adjusted per share cash flow for our equity holders.

So thank you again, and we'll talk to you next quarter.

Ladies and gentlemen. This concludes today's conference call. Thank you for to stay didn't you may now disconnect.

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