Q3 2020 SM Energy Co Earnings Call - Q&A Session

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A young gentleman, thank you for standing by and welcome to the action Energy Q3, 2020 financial and operating results Q1 conference call at.

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 the session. Even star one on your telephone keypad. If you require any further assistance. Please press star zero. Thank you I would now like to hand, it over to David either Jimmy first name your price.

That's an investor relations. Please go ahead.

Thank you got great. Good morning, everyone and thank you for joining US first 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 on the results expressed or implied in our forward looking statements. Please refer to the cautionary information about forward.

Looking statements in the Threeq earnings release, the IR presentation, and the risk factors section of our form 10-Q, which we filed this morning, all of which are posted to our website. Our discussion. Today may include discussion of non-GAAP financial measures that we believe are useful in understanding and evaluating our performance reconciliation.

Those measures to 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, our CEO, Jay Ottoson, who is joining us remotely while he's traveling VP and CFO wafers now I'm president and the.

Herb Vogel before I turn it back to the operator I want to say this morning, we announced that James Laugh at me as CEO will be next week Jane I speak for many things that you will be missed.

<unk> has been a tremendous pleasure for me to work with you. Fortunately you will remain on the board into the next year. So everyone should we go easy on him today with that I'll pass it back to the operator.

Thank you.

China as a reminder to ask a question you will need to press star one on your telephone keypad to withdraw your question press the pound or hash key.

Your first question comes from Stephen Good shirts from Keybanc. Your line is open.

Hey, I, just hoping to get a little bit more detail on the fortune 20 production guidance.

Looks like it's down around 10% from three to 20.

You give maybe the number of 20 year old you can complete the only 42000 or they maybe coming on later in the quarter. Thanks.

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Okay.

Mr. Oh August seven so let me just start on sports you by saying that we probably.

I shouldn't read too much into the production guidance, where we ultimately wind up on working production just depends on which side of the end of the year. We train line, the new completions relative to our assumptions.

Okay, and making you followed us know all this happens every year a few new well the few days early between volumes significantly before especially the patent six wells on it for you but.

Also a paper production looking quite strong.

And he may have all been noting that we're getting we're fishing rather than less fishing camping world you never big efficiency increases into that guidance level that we put out there. So on your specific question.

It's around 20 that will bring online the Bakken you know move plus or minus two fairly easily and very intensely working our program, but didn't think there can pushing back anything that can accelerate things, but it's around 20 days.

We actually come online will be completed because of the.

The programs you have from your Doctor within India.

That help you.

Yeah, that's great.

And then just as a follow up I'm just trying to square.

With oil prices down in last couple of days to around $36 a barrel that each yard.

Has bad maybe because you guys are real Revaluate. This selling 2021 outlook for double digit oil production growth at all but.

Oh no.

No.

We don't react to short term.

Well by.

Fluctuation, we laid out a plan you know right now we are starting to work the budget, which will complete in November December and we'll go from there on we typically use strip in early January to make our call on it so fluctuations right now would not influences at all.

Okay, great. Thanks.

Yeah. This is Wade I will add is you guys are probably where we can continue to hedge as we typically do especially the upcoming year.

I think we've probably got somewhere in the ballpark of two thirds of all page next year just ballpark.

Okay also so that's great deferred until thank you. Thanks.

Your next question comes from Michael CLS from Stifel. Your line is open.

Yeah, Thanks, and good luck.

The Echo Jennifer's settlements to Jay as well really close look let me give you.

Want to follow on to the last question.

But as you go into the planning process, if oil prices kind of stay here.

And looking at your E Jets on your Slide 11, you show.

You know you have the lowest breakeven with your goods are going to go to a.

The breakeven price in the high Thirtys.

They go to 12 month strip looks like it's going to be there.

Play next year any thoughts on running the three rigs in the play.

Strip prices.

They stay here or even move down a little bit would you consider.

Using the plan at all and maybe just focus on introducing the DUC inventory.

Well Michael So we're we're working really on as we talked about 2021 2022. So we really look at the metrics. So we're wanting to generate free cash flow, we are working to pay down absolute pad and we're making sure our leverage drops over time, so we'll be looking.

It was the strip pricing looks like in January when we make that determination and we'll obviously costs are coming down that that helps on our our breakeven economics and now we are having a relatively high return hurdle and we're not going to be doing things, but no hurdles there.

And then you know the the program we've got as Jay just mentioned two thirds of our oil hedges next year also.

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Right, Okay and.

Looking at your last three chalk wells it looks like they actually have a lower breakeven oil price than your.

Average permanent or are you.

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Just curious how many of the 24 Ducs that you have in South Texas, how many of those are.

Yes.

Shock in any chance that that.

Yeah, there's a larger portion of the 21 program that was this year.

So Michael what we talked about before that we have several scenarios and different levels of activity in the Permian in South, Texas, and we got one that will be picked about scenarios right now, but as we get into budget process, we'll look at where prices are and what the well performance looking like and make that determination, but we haven't locked in.

On this but yet obviously going to be more Permian just because of how many docs you have there and the program that's underway and the three rigs we have running but exactly how many completions. We'll have we'll we'll lock that in later in the year, but.

But you're right. If we were really pleased to see with high gas prices in particular.

Those breakevens really drop on those Austin chalk wells, we're real pleased with what we're seeing and we do have some dots on that rig is drilling Austin chalk right now.

Can you say, how many of those 24, ducs or or actually chalk wells. When would you think that the Gulf is comparable to the last three or.

Is it.

Are those primarily Eagle Ford wells.

So no it isn't the completion for 2021 should be all Austin chalk and the number that are.

Dr., Bob Chuck is obviously more many more eagle Ford Ducs, but you're not necessarily completing them.

But we're not planning between 21.

But I don't want to put a number out there because I know, it's going to be at least six but I don't know how many more and we've got right now and I know, we just finished drilling a couple of them so that will add to the msix. So yeah.

Yeah, it's it's not going to be more than half of those ducs that's for sure.

Okay. Thank you.

Your next question comes from Gail Nicholson from Stephens. Your line is open.

Hi, Good morning, Jay congratulate retirement, it was a real pleasure working with you over the last couple of years on.

Well one thing I will give you guys lowered the full year guide when you look into kind of that four to 20 and 21 environment how much of the hourly savings that you achieved in 20 do you think it is attainable.

Hi, good started again.

That is it.

It's great to point that out because we've been doing great on how if at all our costs have come lower classes were doing structural changes to our.

Embed those some of those lower costs there.

Swing is going to be how many workovers, we do so in a low price environment, it's harder to justify doing workovers as prices improve then you can justify more workovers. So that's always going to be a little bit of a swing but.

And the more we produce from South Texas that also reduces the salaries of Permian as being boiler will will have lined up with little bit higher salary. So I think we haven't given guidance yet for 2021, and we'll do that when we come out of budget process.

Okay, Great and then.

Our remarks last night, you talked about having a higher cost completion design can you just provide some details on what that entails and what you're trying to achieve there.

So on the bed that we've seen some offset operators.

Some other completion designs, which look a little more coffee, but may enhance production, where the return on the incremental spend is significant and if thats. The case and we we see that then we would take that into our budget for 2021. So.

So you could have.

Fewer completions that performed better or you may have the same number that we're thinking and.

Not quite as good as though those enhancements, but we want to see how those wells perform before we make the call and we want to have at least six to 12 months.

Oh production performance history to make assessment, there and we made some ourselves where we may say, let's wait on this or we may say, let's let's put them in place. So we havent done made put the budget together, yet and we'll see where we get to on those.

Okay, great. Thank you.

Again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from James Gowda from Cowen Your line is open.

Hey, good morning, everyone and congratulations.

On your retirement.

I was wondering if maybe you could elaborate a little bit more on the prepared remarks last night that indicated there I guess could be a potential for a small scale JV in the drier portion of your Eagle Ford assets. So just curious if you could maybe talk a little bit about potential timing or what what the structure could look like.

Sure Dave.

So weve talked to third parties, some that just came to us and others that the bill.

I have been talking to for quite a while and it's really the combination of great recent well results and this improving outlook for natural gas and NGL prices and it's getting quite a bit of attention as you are aware.

I can't really comment further on any discussions, but just keep an eye out I mean, if we do one of the world by issue an announcement, but we don't have it.

Locked in yet we don't have it in any of our guidance or plans at this time.

Okay understood thanks for that.

And maybe just a follow up you mentioned in the prepared remarks potentially growing free cash flow in 2022. They sensor pricing I think you had also mentioned that.

That assumes that that capital spending will be would be lower than 2021 could you maybe just elaborate a little bit more on those high level a goalpost for 2022.

So yes that that's true what you mean.

We've talked about things, we're focused on just free cash flow generation absolute debt reduction and leverage and because we come out of 2021 with a high level production.

We continue to generate a lot of free cash flow in 2022 at strip prices.

And what we'll do is we'll see as we get through 2021, we'll see where where things look for 2022, but we're obviously working the budget for 2021 just over the next several weeks.

In the lower cost coming in is not about deflation, but we're not we're not assuming cost go down its current costs current cost.

Great. Thank you guys.

Your next question comes from Mike CLS from Stifel. Your line is open.

Thanks for the follow up where you said in your prepared remarks that you don't foresee any surprises on the Redetermination Keith.

What the company asked for from the banks use this request them to maintain the borrowing base.

Versus works there.

Hey, any color you can add to the comments made from us.

Sure sure Mike.

All I can really say is that we should expect something in the area, where we are I guess, what I would say I don't want to give any specific numbers as we go through the process right now, but I don't think.

You should be surprised that it should be in the area.

And frankly, it's a testament to the assets how resilient. They are these lower prices, but I can say those remarks.

That's helpful.

On the cost side or.

You said, you've been seeing better than the 560 per foot.

Even though you haven't put it in the <unk>.

Slide yet but.

Can you give any sense of how much better.

Obviously, you think it's sustainable.

They committed to your quarter one plan.

I was wondering if that.

The player or included any changes in the well design that contribute to that reduction.

Specifically like or lower frac intensity or.

Any other changes that have pushed that number down.

No I mean, Michael it's really just a combination of deflation really strong execution on our part and you've seen some peers with low numbers and let's just say, we're not going to be any worse than the the best peers.

But then when we look at completion design, we may do things, where we put a little bit more into get better production basically, especially we've tested it. So that's why we said for your.

It's a good assumption just to use our 560 or little bit less for 2021, but we haven't finalized yet what were going to do there.

We are evaluating right now.

And Thats really just comes down to so efficiencies deflation and execution.

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Really good.

Students at a lower cost.

Got it okay and thats in there due to the strong production.

Heading into 22 as Q.

What do you see the base decline heading into 21.

And.

What do you need to still there to just say.

For oil prices.

Our oil you hope if you just want to maintain production at that fourth quarter level.

Any idea of what the sort of maintenance capital would be.

For for 21.

Yeah. So so the base decline on Permian was around 48% a year ago and now it's about 46%.

On South, Texas, I think it was running around 29% by 27% now somewhere in that range.

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And so as as we go on you know generally drops somewhat depending on how many new well completion do you have in as you've seen 2021, we've set around a 110 completions, which is a big uptick from this year, so that contributes to the strong production growth.

We have scenarios in that we can choose if we saw something materially different just like we did in Twoq you we've.

Adjusted our program for the change in commodity prices.

And we have that flexibility here, we don't have to do.

Anything but at strip pricing, which is kind of the basis, we we make our plan.

That's what we've seen at current strip prices, if we see significantly depressed strip prices in January.

We adjust appropriately.

Okay.

Just last one from add one follow up on that you mentioned the.

Some operators approaching you.

In the Eagle for dry area of realize we haven't done anything there yet but did say that you are seeing.

Some significant.

Well performance there I assume other operators somebody is active in that area.

Curious based on on what you're seeing there right now okay.

What kind of gas prices need to make sense of that area to be able to compete for capital.

Yes, so even if.

Those those.

The JV.

The economics that the JV partner would want to.

Pursue and.

The economics vary significantly depending on where in the field in the liquids content.

It's mainly our rich obviously in the news quite a bit of condensate as you move further north so that they vary quite a bit.

I think if you look at embers, they've got numbers out there for.

Breakeven.

And you can see that the west Eagleford has.

Breakevens when you look at the current strip.

That that they can make the returns that people would expect and I think that's what we're seeing happening. So you can see western Eagle Ford activity picking up from other operators. We are focused on the Austin chalk, we're not focused on trying to predict the bunch of dry gas in response to potential short term market.

Please.

Got it thank you.

There are no further questions at this time I will now turn the call back over there in terms of local president and CEO for closing remarks.

Okay. Thank you jaclyn, so I'd like to just take a moment to thank Dave for his leadership and enormous contributions to SM energy during his 14 years with the company and nearly six as CEO. He.

We initiated the transformation that's led to our current status as a premier operator with truly top tier assets.

The results were seeing today are a testament to the success of his leadership.

Personally I know Jay for many years is without doubt an outstanding leader and an individual the highest integrity and passionate about supporting the communities, where we live work and operate is truly cared and take.

Taken action to ensure the safety and health of our employees and contractors and that's been very visible during this call the time.

We wish him the best in the loan LP and enjoyable retirement.

And with that I'll turn the call over Jay.

Well. Thank you. Thank you very much.

Its always a mixed.

Several multi year on these last few days I want to say how much I appreciate it.

The opportunity I've had to work with all of you on all the animals and humans and.

Our management team as well.

Wilson extremely excited about the future of the company in terms of leadership I think is a terrific leader fantastic business person you can visit it will happen.

Obviously I assume.

In home for our country and for our industry veterans.

Better times ahead.

So look forward to all your success.

And the machine the very very best Thank you for that.

Jennifer.

At the end of the call. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.

Okay.

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Okay.

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Hi.

Mhm.

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