Q1 2021 SM Energy Co Earnings Call - Q&A Session

And then.

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Thank you.

Next up on the answer Mark.

And.

Thanks, David.

Okay.

Okay.

Okay.

Sure.

And presenters and preventive.

Okay.

Anthony.

Okay.

Yes.

Ladies and gentlemen, thank you for standing by and welcome to SM Energy's first quarter, 2021 financial and on everyone and everyone.

Hello, everyone and good morning, Thank you for your.

A question and ask a question.

Thank you Mark.

Okay.

Oh.

Okay.

If you have a question. Please press star one of your telephone keypad at this time I would like to turn the call over to Jennifer Samuels Vice President of Investor Relations. Please go ahead.

Thank you Sharon good morning, everyone and thank you for joining us before we get started our discussion today may include forward looking statements I direct you to slide two of the accompanying slide deck page four of the accompanying earnings release and the risk factors section of our most recently filed 10-K and 10-Q.

Which describe Bruce associated with forward looking statements that could cause actual results to differ the first quarter. Thank you was filed this morning.

And we May also discuss non-GAAP measures. Please see slides 22 through 24 of the accompanying slide deck on pages 11 through 14 of the accompanying 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.

Sure to answer your questions today are president and CEO, Herb Vogel and CFO Wade Pursell I will now turn the call back to the operator to take the first question Shaun.

Okay.

As a reminder of a question. Please press star one on your telephone keypads and.

One moment for your first question.

Okay and your first question comes from Michael <unk> from Stifel.

Yes, hi, good morning, guys.

Wade you had mentioned.

On your prepared remarks that some completions planned for two.

2022 could be pulled into 'twenty one.

Just wanted to see how many you were thinking and what kind of impact that may have on your 'twenty one capex.

Yeah, Mark this is of this firm.

And it's pretty straightforward.

And in February that we had a number of completions that were just on the other side of the year and now we've gotten on this side of the year. So the Capex spend is the same and just when we turned those in line. We made the assumption before they start just on the side of the year now we've accelerated and some into this year, but the <unk>.

Capex spend was there so it really doesn't change and capex.

Okay. Good here.

And I guess.

On the housekeeping item.

EBITDAX.

Thus there was about $21 billion of other operating income and just wanted to see if you could give us any color on what all was built into that.

Hey, Mark it's Wade yes. There is there are several items in that line and they actually go both directions and obviously it's a.

And net number.

We do have the there's a and I mentioned it and in the prepared remarks. There is a there is a gain and the instruments from our power hedge and I'll call. It on the cost side.

We're not going to quantify that but thats in there and there is and there are several other items in there and as I mentioned, we're still working out details. So that's probably all I should say right now.

Okay.

Okay.

And just one last one for me.

Just your thoughts on the NGL markets.

Do you see any more upside or any thoughts on trying to hit.

<unk> prices here.

Yes, Mike Ngls and had been pretty strong and it's really the propane exports and the international hub being open on that and the thing.

And so.

We're really sticking with our routine hedging program that we've targeted and total percentage level lower than we were before because our leverage is lower but yes, we do see strengthening on.

Ngls and don't know how that will continue and the future, but we're not really change on hedging program and.

Response to short term prices.

Okay. Thank you guys.

Thank you and your next question comes from the line of Gail Nicholson from Stephens.

Good morning, and just talk about your thoughts on inflation kind of and the back half of the year and what is your current contract and in regards to the completion services and the decision to do the 50 net completions and the second quarter.

Yes, Gail and thanks. Thanks for the question there on the inflation side of things.

Long bought and I think everybody knows that it's driven by activity.

And activity increases Youll see inflation coming some number of months later in our case, we have a lot of the key cost locked in and so the rig costs and the sand costs are locked in for a certain period of time some of the other services are and a little bit shorter term.

And whenever we are running our budget and then our revised plans. If there is things like weather man and we just optimize free cash flow and that includes the details of the contracts we have in place.

So if there is in place and Youll see it coming on based on activity and Thats pretty much the way I believe it and and we do everything we can to insulate ourselves against that.

And by locking in with <unk>.

Contractors that we've used for a long time.

Great and then.

And South Texas on the oil side was really strong this quarter was that all driven by the storm I know there was the renegotiation of a contract. They are just trying to understand how we should think about south Texas oil pricing on a go forward basis.

Yes that is same thing we talked about fourth quarter. So there is a big element of better realizations on the oil side because of and.

Contract that expired and beginning of October force that was a big uptick and then.

And the rest is really just.

And what current prices are at.

Not nothing really different there, but you should look at it and the forward similar to what it's been.

And as I mentioned on the inflation inflation side, some services and we see going up slightly but some we see still dropping so for example on OTT G and diesel there is inflation and and some other services and areas like chemicals, and even tank batteries, we see deflation.

So we've seen a combination and the first quarter.

Great and then just on the activities that and the second half of the year and.

Should we assume that's more on a completion standpoint, and agile aspects Mark <unk> at this point and time.

GAAP and can you repeat that I couldnt quite catch the end of that one.

Alright and from a comp.

Please go and activities that and the second half of the year should we assume that mark <unk> weighted than <unk> at this point and time, no I would not assume net.

And.

It's going to be a low more and <unk> and <unk>.

Okay, great. Thank you.

As a reminder, if you have a question. Please press star one on your telephone Keypads and your next question comes from Karl Blunden from Goldman Sachs.

Hi, good morning, Thanks for the time.

Yes, I noticed obviously the pull forward and some capex I was wondering is there any change and.

Your capex by geography or location that youre pursuing at this point.

And if the Austin chalk results on strong could you shift out overtime.

Karl Thanks for question and no there's really no material change and the balance of where we're spending the capital.

And so.

No.

At the same and Austin chalk.

And we're happy with what we're seeing and we're going to continue on the program and as you know, we we up the on accounts on drills and completes in the Austin chalk this year.

Got you.

Is there anything.

Changing with what Youre seeing and the A&D market certainly seems to be more active.

Recently and is there other opportunities for you to.

Do some tuck ins or.

Potentially sell some some acreage that could improve your liquidity as you look at some of these bond maturities.

Carl Youre right and the activity has picked up very recently.

We do see some.

<unk> there.

Hi.

It's something that really makes sense, we'd look at it but we are really focused on generating that free cash flow and reducing our absolute debt and improving the leverage metrics.

It would have to be really compelling for us to consider something like that and I think expectations on the sales and are still quite high.

Hi, so, but we obviously look at everything we can.

Got you that's helpful and then.

I guess the last one from me is just on managing the balance sheet, you sketched out apart to free cash flow.

And with the hedges is quite a good a good deal of visibility into that and sort of the balance sheet doesn't look problematic and any way when you take a look at the maturities, but is there opportunity to be a bit more proactive around that and extending maturities given how strong the debt markets have been recently.

Yeah.

Yes. Good question I guess, the first thing I'd say is I'd kind of repeat what you just said, we certainly don't have to.

And we and we certainly have nothing planned.

But it is.

If you follow us and the past that we try and we do try to be opportunistic when they're on the capital markets provide those opportunities were for managing risk on the balance sheet risk to the downside I would say so.

We're pleased that the bonds are trading better and the rating agencies have has that have made some news recently, which I think have helped and will help. So we'll continue to watch that but certainly don't need to but it's something we'll keep our eye on.

So I think it's Jeff and agencies, thanks, very much for the time I appreciate it.

Okay, and you have a follow up from Michael Scala from Stifel.

Yes, I just wanted to follow up on the Austin chalk.

You said you were pretty pleased with some of these new wells, but don't have 30 day rates there yet just wondering.

When you think you would have that data and.

Would you anticipate releasing that on the second quarter call or is that something that you could potentially.

Release interim during the quarter.

And.

Michael This is herb yes, we're happy with the way the Austin Chalk program is going and we like having more and more data coming in and.

I'd say.

And would certainly.

Have them at the second quarter call and I don't know, whether we do anything earlier than that but we.

We do have quite a few more on right now and early days on them, but.

It's coming in and we.

We thought they would.

Okay sounds good.

Lastly, I just wanted to get your thoughts on.

Any potential impact on your cash flows as say, the Bud and administration successful and removing the intangible drilling credits for oil and gas companies.

Yes, good question.

I think theres clearly.

There is clearly potential for a big impact on the industry I would say overall we.

And we've we've ran numbers, we Brian kind of worst case, what we think and kind of a base case and what we think that none of US know, obviously exactly what's going to happen I guess I would say from a standpoint of what we've laid out as far as our objectives and.

And at the Delevering and getting below two times next year and generating net free cash flow that covers all the maturities through 2000 and for things like that.

And all the cases that we put in and do not do not change those outcomes.

And especially when you think in terms of 'twenty, one and 22.

And the impact on our cash would not would not be significant.

But again, there's a lot of a lot of different assumptions flying around there and.

In general I guess that would be my comment.

Okay, that's helpful and any.

Anything that you could do to.

<unk> any current tax liabilities at this point I think he is.

Do not and so I'm not mistaken do not have much and the way of Nols left with anything else you could do there.

Yes, I mean, our tax department works really hard on that and they're doing that right now under different what if scenarios.

And any silver bullets to lay out to you. This morning now.

Okay.

Thanks, guys you bet.

Your next question comes from the line of Steve Dechert from Keybanc.

Hey, guys just wanted to see what the thought process was behind drilling of three gas wells and three Ngls versus more earlier wells and these new South Texas wealthy group reported last night.

Oh, Youre talking about Cytosorb, and just talking about the JV wells down there. So those were.

We entered into the JV and the fourth quarter and there were six <unk> down on the south and and three Eagle Ford and three Austin chalk wells. So.

The economics look robust.

The JV partner with interested and we proceeded to complete those and turn them in line. So.

That's really.

Pretty simple story there.

Okay, I guess I meant.

Or are you just testing different areas and I guess was there a certain reason behind Joe on the Ngls and gas wells versus.

Just more oil wells.

Those were really on our part of our delineation program. If you look at our map you'll see we were looking at all different areas of the field and.

And basically identifying the productivity of the Austin chalk through our broad area and Thats, what increases our confidence and the ultimate inventory that we can deliver from the Austin chalk.

So that's really what what.

That was attributed to.

And in that case, we we staggered and with Eagle Ford Wells.

Got it okay. Thanks, and just one more question.

Could you quantify the production downtime and the first quarter I know you guys do have a number of days, but.

Moving to the actual production and Thats something you can do.

No no when we released in February and that was right and the middle of the event.

So we didnt really do it that way. So obviously, we did have some some impact on.

On the first quarter and it was really 2014 days of production that were impacted to some degree.

That's what it came down to and then there was a knock on effect on the logistics side for our really our frac spreads we didn't have much downtime on rigs, but we did have downtime on frac spreads and.

Bringing things back and including even getting people to work the facilities and there were a lot of people impacted and Texas the individuals and.

And they have to go 10% of things at home too.

And that made it a little bit more difficult to get people called out two facilities, but.

No.

And we're just looking at it that we maintain guidance for the year and 2022 looks the same.

ESG performance wise, we're doing great.

So those.

And I don't really see that.

And anything there really.

Okay. Thanks.

Your next question comes from the line of Scott Hanold RBC capital markets.

Yeah, Hey, just a little bit of a follow on to that question and you know obviously it was pretty rough turn that winter season, and we've heard from a.

A few other companies that you talked about having crews out there and $24 seven and keeping things up and line and seeing a lot better.

Uptime than originally expected as is there is there any kind of learnings you all have taken from that event. So something similar happens the outcome might be less.

Less impactful or was there something unique about just you know your operations and maybe relative to some of the others and I guess in particular more so it felt like in the Permian.

Yes, Scott it was pretty straightforward for us.

Electric utilities had brownouts and blackouts and.

And in our case, where we've got and ESPN and pump tracks and electrically driven when they Brent.

Did those rolling brownouts and the blackout it shut down all our pumps and.

And that prevented us from producing and that's on the on the West Texas side on the <unk>.

South Texas side, it was more on the gas gathering side that electric driven compressors and some cases.

And actually at <unk>.

Plants more than anything and.

And so then the plants went down.

So that's really what impacted us the most and from a production standpoint.

So what could we do differently, it's really making sure that we've got the prioritization from power companies that they recognize when they cut the power to us and that will impact your gas supply.

Rich.

And our ability to generate power and on the <unk>.

So that's really what it came it came down to from a fundamental standpoint, we used instrument air and Theres a lot of details behind and so that minimizes our risk of downtime from cold weather just on its own but theres still still things that happen like starting up compressor again when you got.

Heavy oil and there and it cools down its harder to start them up so those are relatively minor, though the key thing is the power cut.

Shutdowns.

Okay.

And then with respect to the pull forward on.

On a handful of the wells and 2022 or I'm, sorry from 2022 2021.

It.

And it doesn't sound like there's a capital impact to that is there any kind of a.

Pull forward of production or is it at the end of the day pretty immaterial given the timeframe that youre shifting here.

Yes, it's relatively immaterial 2022 is pretty much as it was.

And moving around some completion timing and so that's really what it is fewer and the various started the year and more in the second quarter, but.

Not materially impacting 2022.

Okay, and then and then with respect to your obviously guidance. This year that Hasnt changed and you know and we all know first quarter is pretty rough for everybody and <unk>. It looks like things are starting to get back to normalized a little bit maybe a little bit of.

Delayed completion and stuff getting impacted to that but when you look at the balance of.

When you look at your guidance in the back half of this year and the second half I mean, do you feel pretty confident yet that.

And in your targets is there enough I guess cushion in there or should we think about you all turning maybe to the lower half at this point.

The production range.

Yes, Scott when I look at and it looks very very similar to in terms of what we can do and 2021 and 2022.

And moves 100000 barrels here there per quarter, but it is not not that material.

And well within our ability to forecast.

Okay, Yeah, I guess, Mike the players Vic and like it is is there sort of a quarter or two in the back half of the year. You were you kind of make up for some of the stuff you all lost and in the front half of the year.

Non no not really it's not like results on the big silver bullet quarter that net net curious what what happened and the first quarter.

Just kind of comes along as the completions come on come on line.

Alright fair enough. Thank you.

Thank you I would now like to hand, the call back over to Herb Vogel CEO for closing remarks.

Okay, well. Thank you all for your interest and SM energy and thank you to all our employees, particularly for outstanding ESG performance during 2020 and through the events in 2021. Thanks again.

This concludes today's conference you may now disconnect.

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