Q4 2020 SM Energy Co Earnings Call - Q&A Session
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Ladies and gentlemen, thank you for standing by and welcome to some energy Q4, 2020 financial and operating results question and answer session.
At this time all participants are in a listen only mode. After the Speakers' remarks, Tony.
Is there a session to ask a question during the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you have.
Fire any further assistance please press star zero.
I'd now like to hand, the conference over to your Speaker today, Jennifer Samuels, Vice President Investor Relations. Thank you. Please go ahead Ms angles.
Thank you Julia and good morning, everyone and thank you for joining us I hope, you're all warm and safe.
Please 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.
The earnings release, the IR presentation, and the risk factors section of our form 10-K, which was filed this morning, all of which are posted to our website.
Discussion today May include discussion of non-GAAP financial measures that we believe are useful in understanding and evaluating our performance reconciliation of 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.
Sure to answer your questions. This morning are president and CEO, Herb Vogel and EVP and CFO Wade per cell I will now turn it to herb Vogel for some opening remarks her.
Thank you Jennifer good.
Morning, and thank you for your interest in SM energy before opening up the call to your questions I would like to say a few words to our Texas communities.
With millions of testing still without power, mainly without water and many homes that have not had feet per day. The SM energy community is certainly affected by these storms.
Our focus is on the health and safety of our employees and doing what we can look at.
Immunity.
In South, Texas Regional gas processing plant was grateful Monday night that SM natural gas is moving and instrumental in keeping the plant open enabling them to support power generation and Keith many people's homes heated.
In terms of implications to our first quarter production certain weather related issues continue as we speak and our team is responding with their best efforts.
We will be assessing in quantifying the impact over the coming days.
Now, let me turn it back to Julian to open up for questions.
Thanks, Neil if you'd like to ask a question. Please press star followed by the number one on your telephone keypad.
Our first question will come from Scott Hanold from RBC capital Capital market. Please go ahead. Your line is open.
Thanks, Good morning.
Brian can I ask you about those five Austin chalk wells that you talked about wellbore issues in.
Some deferrals can you give us a little bit of color and insight into what happened there and.
Has this happened before in either the Eagle Ford to the Austin chalk before.
Yes, Scott this term yeah, I'll get to that here.
It's a really localized issue and just briefly we just had five newly drilled Austin chalk wells on two pads that were close to each other in the northwestern portion of our acreage that had not been completed yet.
And on one pad three wells.
Developed in case of issues in the vertical section up above the Austin chalk so nothing related to the chalk reservoir at all.
Fortunately, we got service companies on it with us and they've had success running.
Method basically run the pipe by pipe to fix that problem. So what we do is in our planning we just signed.
Worst case, we'd have to re drill.
Three out of five wells and possibly five out of five wells, which is a total exposure of about $6 million to $10 million because of about 2 million per well. So we just thought it was important to bring up because that was the reason for the adjusted the production and Capex in the fourth quarter.
So but nothing.
In terms of the long term in terms of impact really none and then we drilled through the suitable and with 600, well, we only have one problem before.
This is a local issue there.
Okay. When you when you say local as you just just to clarify is it.
Was it something to do with with something that happened and I guess, the geology gone down there or was it more of an operational issue a service issue.
Whether it was a mistake or whatnot, but is it more of that or was it more of something on the geology side no. It's a casing issue and so.
It's quite local and.
We know we can run right through where the problem areas.
Make sure we have integrity through that section.
Thats not geology.
Got it okay understood and my follow up question, then is obviously, you're allocating more to the Austin chalk.
Next year and can you give us a little bit of like high level color on your thought there obviously you get great returns.
In the Permian and performance and cost continue to look pretty solid.
Is the move there.
Really based on just the strong well performance and you think it is a good contribution or is part of it you just wanted to get a little bit more delineation and stay within your sort of budget range.
Yes.
Well Scott first of all these wells with what we can see our fully competitive with the Permian with our co developments there and there is an element of wanting to demonstrate the Austin chalk and how well it can do and what it can do for our inventories and our reserves. So there is a component of delineation in the 2021 program. There is a component of development.
And there also.
Understood. Thanks.
Your next question comes from Leo Mariani from Keybanc. Please go ahead. Your line is open.
Hey, guys I know this is probably a tough question to answer.
Do you have any.
Indications you can tell us about kind of downtime you're experiencing.
The Permian at this point in time and just based on your prepared comments.
Sense that there was no disruptions in the South Texas assets I just wanted to.
To clarify that and I guess, just a final point related to that.
On the guidance that you just came out with is that already contemplate any significant first quarter 'twenty, one weather disruption and the full year 'twenty one guidance.
So let me start with the last question first yes, we have not baked any sort of weather related impacts into our estimate and its really deferral rather than.
It can be a first quarter impact, but then you wind up getting when we bring wells back on so the answer really.
It really briefly is the growth of our.
Problems, So you can't and trucks and so our Frac operations are shut down.
Our rigs generally just shut down for a little oil, but most of them are running now and then in terms of production there arent impact where basically when there's no electricity shutdown pumps and compressors and opex production certain certain production that doesn't rely on electricity.
Can flow as long as everything downstream of them, it's up and running.
Does that help.
Yes that definitely helps I didn't get into the last part of South Texas was that totally unaffected in South Texas is this just a west Texas problem I'm, just trying to isolate that little bit.
Some problems with Opex as the impacts from FEMA, there, but we're going to come back we're going to look at everything once we're past this short term debt weather event.
Even though significant and see what the impact is and then we'll be able to make an estimate but when we set the world and this is simply a deferral really.
Right.
Okay. That's definitely helpful. And then just with respect to the Capex plan for the year here certainly saw the numbers.
It looks like your first quarter Capex will start a little bit higher annualized volume.
Full year budget.
Wanted to get a sense is there a plan to kind of have capex more front half weighted on 'twenty. One you can kind of look at the activity Paul can kind of tell me on that.
Yes.
Original plan had frankly.
And loading to the first half of the year.
They're not major but there was front end loading and now with Frac spread shutdown that obviously reduces our capex spending right now and so we don't know exactly where we wind up until this event over with.
Yes.
Got it no that makes sense I guess, a quick follow up on the South Texas asphalt question was sort of asked.
Previous phone call there is an element of that.
Delineation here and what Youre doing.
If you look at this asset now is something you see as a very much core to the company because I know a year or so ago. You guys were talking about potential divestment and you know at some point, but obviously the returns look very strong. So it's kind of been S&P put a bit more off the table and willing to keep also something thats kind of foundational you can.
Drill inventory on for years.
Yes, Leo so the key thing is.
In late 2019 early more.
More or less unpractical, it a little bit in the Austin chalk down there. So our perspective on the wells improved and then we confirm that with the wells that we drilled in 2020, and we found that they were fully competitive with.
The Permian so when I said, we have a combination of delineation.
In development, we're really looking at development in areas, where we know the returns could be very competitive with the Permian and then continue to delineate to expand inventories and that will determine the extent of the core nature of it but in terms of returns its a great asset.
Okay. Thank you.
Your next question comes from Iran. Gerard <unk> from Jpmorgan. Please go ahead. Your line is open.
Hey, good morning.
Wanted to see Herbert if you could just give us some thoughts on.
How the 2022 plus.
How we should think about the 2022 plus plan.
On a long term basis, obviously, you've provided some thoughts on.
There's some charts on free cash flow, what happens to the balance sheet and reinvestment rates.
But should we be thinking about the 'twenty to 'twenty. Two plan is one that is designed to hold production flat and I'm thinking about oil and Boe.
Yes, Arun what we.
Very clear with the quality of our assets is so strong and the returns are quite good and you'll see that our base production keeps outperforming so when we look at it we could.
Keep production flat to single digit growing.
With.
Less than 75% of the reinvestment rate.
And.
I don't think people realized the quality of our assets, but now you're really starting to see it in our results with.
With this transformation, that's really taken place over the last three or four years.
Got it got it so longer term.
Net investment rate and flat to single digit type growth opportunities over the long term.
Exactly got it got it one kind of.
Kind of housekeeping question is.
This year.
22 in South, Texas, 21, completions 39 wells drilled to building some ducks.
And Midland and a 72 completions 55 wells drilled so youre pulling down on some ducks fair as we think about that.
2022 mix should we anticipate a little bit of a higher mix.
In South, Texas, or just trying to think about kind of a longer term model.
Well.
Frankly, we run multiple scenarios and we can change the capital allocation.
Between the South, Texas, and Permian asset and in terms of the returns we get in the financials, we get we can get to pretty much the same level.
With everything panning out that way and so we can mix between the two and get to the same results.
The bottom line.
And so we'd have one scenario here.
But we're using for this this plan and the only variation will be somewhat in the oil percentage to be.
<unk>.
Got it got it okay, alright, thanks a lot.
Thank you Matt.
And your next question comes from Karl Blunden Goldman Sachs. Please go ahead. Your line is open.
Hi, good morning, thanks, very much per client.
Question really focuses on the balance sheet their bonds have had a very nice run.
Probably in the middle of last year as you think about what's the optimal capital structure is going forward are interested in your thoughts maybe just walk away.
On the benefit of interest cost savings from adding second lien debt relative to the increased flexibility you have from.
Issuing regular way high yield bonds.
And then I guess one year.
Now on to that is there is there an element there around your discussions with your bank lenders that would suggest one.
Coach or another approach.
Thanks Wade.
I think there's a lot of questions. There I think just in general I would answer that you should assume I mean, I think one of the biggest comment I made in the in the <unk>.
In the remarks was that our long term plan has us generating more free cash flow in the actual debt maturities are from here through 2024. So I think you should I think.
There's not much doubt in my mind that using that free cash flow to Delever is great for the shareholders great for bondholders and I think that should be your base assumption as we move forward.
Asking about second lien debt certainly no no interest in looking at that in higher cost and EBIT EBIT increasing debt at all so delevering below two times a day into next year approaching one time into 2025 and.
Free cash flow.
Paying down debt maturities procured through 'twenty four I think is the main idea.
Yes sort of.
Comment on the tax thing adequate to pay down debt maturities through 24 in time before the share when you think about now you're coming into a period of cash generation Wade.
Yes inventory acquisition or M&A sit on that on your priority list in terms of use of cash.
I'll make one comment on inventory and then herb can chime in.
One of debt.
Citing things to me is just when we could lean forward and talk about these metrics over the next five years, knowing that theres no need to replenish inventory during that period, because we have.
A very high return inventory.
I just wanted to slide shows as well beyond that period. So certainly gearing during the years that we're talking about no no.
No need to add inventory, but I'll, let her talk strategically.
Yes.
Carl.
<unk>.
We work inventory on a day in day out basis, and there is room for optimization. There are additional intervals and we're real fortunate where we're located with the stack pay.
<unk>, we'd be able to see the Austin chalk that would see today.
A few years ago right. So.
There's going to be organic inventory growth in there and then we continue to do acreage trades that sort of thing to do.
Basically even improve the returns from there.
So thats really how we look at it.
Not for us to go do something because we do have quite a runway of inventory, particularly with these only 75% reinvestment rates.
Okay.
That's helpful. Thanks, very much for the comments separately when you look at the bond levels of pricing.
A lot of options that you have available to yourself. Thank you.
Your next question comes from Gail Nicholson from Stephens. Please go ahead. Your line is open.
Good morning, everybody and you guys made really good improvement on your D C any cost in South Texas.
Thank you Mark.
Previously modeling can you just talk about the drivers there.
So David term the drivers are really just across the board reductions from the cost of our rigs the cost of services associated with the rig the sand costs are down pumping services comps are down.
That is key to this and then that minute by minute efficiency again, so basically less run time on each well.
By pumping more stages per day, but it's really combination of sector deflation and efficiencies.
Great and then can you you guys did some higher proppant loading in the Midland. This quarter can you talk about what you saw there and also the fact that the higher profit loading.
You were even able to get your well costs, both have previously anticipated with the higher proppant loading.
So gail on the proppant loading what we do.
Did is we tested some higher proppant loading in the fourth quarter, but that wasn't a real material amount and then base.
Based on our results and others results with high proppant loading we increased proppant loading assumption for 2021, and so we baked some additional cost in there. So we were running below $500 per lateral foot in the fourth quarter and as you can see we said 24 2021.
And that does integrate to higher profitability.
It takes a while opex do you anticipate staying with the higher proppant loading.
I'll show you once we've got a bunch of results to share with you.
Fair enough and then just from a standpoint of.
The significant amount of free cash generation you guys had the upcoming mid 'twenty, one 'twenty five timeframe you talked about as kind of a lower hedge level really into 'twenty. Two forward outlook can you just talk about what is the appropriate target had level you guys would like to be in 'twenty two.
That's great question.
I think we've said in the best it seems maybe tied to leverage as we mentioned in the past when we've been looking more and more at the three times area.
We've kind of dense and Matt that is instead is kind of.
Driven us to a 75% just a general number area of hedging as you go into the year I think if you are thinking more and getting more confident that that's more like two times area.
Then youre going to be thinking somewhere closer to 50% hedged as you approach here.
Lee.
Tony.
Starts in Verde going up that that could change our thinking as far as trying to be opportunistic but in general. We're just trying to manage the risk of the balance sheet in and if you think of something two times I think you think closer to 50% using round numbers as we move forward and get below that and then the percentage starts to go down from there as well.
Great. Thank you you bet.
Your next question comes from Tom <unk> from Wells Fargo. Please go ahead. Your line is open.
Yeah, Thanks, and hey, guys congrats on the quarter.
Wanted to see how you're thinking about development versus delineation results from the chalk maybe if you could go into both spacing and productivity applications.
Yeah.
Tom.
<unk>.
The way, we bring into the lineup of Premier I think we've shown the slide where we are drilling the.
Austin chalk wells in 'twenty, one and so on.
Leaving the 21 wells in 'twenty one.
And we also show where the existing wells.
So that's really where you can see what it looks more like development and what looks more like.
Delineation when were really stepping out.
So we have a combination there and that will be testing a number of different things with those.
With those different pad areas.
So amit.
Okay.
And then as a follow up the changes made versus preliminary guidance indicate you're probably better said our setup for 2022 from a prime production standpoint.
He still activity into 2022 is it fair to assume you'd begin to eat into the DUC backlog.
To better match the rate base.
So.
Is that year end issue that always comes up so we've got wells. So we're completing the wells in terms of Capex. During 2021, and then 2022 comes on and we turn a number of wells I think it's about 10 wells on that we completed in 'twenty one at the start of 'twenty two.
No.
It's real hard to locked down exactly what your DUC drawdowns will be year in year out overall were pretty flat in 'twenty. One in 2022 overall it'll be the same sort of thing, where we're either going to be flat or it will just depend what happens right near the end of the year and the start of the year.
Okay. Thank you.
As a reminder to ask a question. Please press star followed by the number one.
Your next question comes from Michael <unk> from Stifel. Please go ahead. Your line is open.
Good morning, guys.
Good morning.
Total detail on your Baidu.
<unk> five year plan or a sense of.
What would maybe cause you to deviate from that by your plan, particularly in terms of prices. If you said youre going to.
Hedge 50% of production from 'twenty, two and beyond.
What.
Kind of price range would cause you to do anything differently than what you've laid out there.
Okay.
Pointing to the risk factors in the moving.
The slides so that's a really hard question to really pin down.
We look at things and we constantly re look at our five year and 10 year plan.
And we say, okay, given the circumstances, there's things around gas relative to oil and Ngls are trading that can affect how you. How you go ahead and.
And where you develop.
There is no general answer I can really give on that Mike.
Our hedging just to be clear when we when we say 50% is more of a target. That's a one year at a time, we're not going out and hedging 50% of all of the commodity for the next five years right now certainly not.
Just informs our decisions as we move close to the year and time as we go forward and as you know when prices move as they move too far in the upward direction eventually cost volume. So there's a lot of we like to stay as variables we can there.
Understood.
Want to see too.
You mentioned the difficulty you had with the Austin chalk.
<unk> the casing problem.
When would you expect some more incremental data on on any new chalk wells that you'd be willing to share with debt.
With the investors.
Well they'll be coming in throughout the year those 21 completions those 'twenty one do not include those bonds in the <unk>.
The three that had the issue so we will be getting those through the year.
We'll wait a couple of three months after we got them online to really report on them.
I don't see anything.
Until later in the second quarter.
And then you will then there'll be just be coming on.
Relatively quickly after that.
Okay.
Just wanted to ask one more on <unk>.
The higher proppant loading.
In the Midland Basin.
Experimenting with the both the Wolfcamp and the best Sprayberry and just looking at the <unk>.
Data for the Sprayberry it looks like you are.
2020.
Vintage was really doing better than prior wells I don't know.
That's consistent with what Youre seeing there.
Good day, with Texas oil it was a little bit suspect, but wanted to see if that was the case in ex U.
As a result of higher proppant loading there or something else.
Okay.
That's a great question Michael.
That is not related to the proppant loading that is detailed optimization of other completion factors a little bit of spacing that all rolls into that but yes, we do see improvement from 2017 to 18 to 19 to 20 and our teams are focused on that.
No.
They are really motivated to keep.
The World has gone up even when we're co developing practically all of the.
All of those areas.
Very good thank you.
Thank you.
This concludes today's question answer session I would like to turn the call back over to <unk>, President and CEO for closing remarks.
Well. Thank you for your interest in SM energy.
Any questions you can always contact Jennifer Samuels half the number shown in the deck.
Okay.
This concludes today's conference call you may now disconnect.
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