Q2 2021 SM Energy Co Earnings Call
Volume.
Good day.
Okay.
Good morning, Thank you for standing by.
Welcome to the SM energy second quarter, 2021 financial and operating results Q&A call.
To ask a question. Please press Star then 1.
Telephone keypad once again Thats star 1 to come to the question queue to withdraw your question press. The pound key please be advised today's conference is being recorded I would now.
Now I'd like to turn the conference over to Vice President of Investor Relations Jennifer Samuels. Please go ahead.
Good morning, and thank you for.
1 on your net.
Very pleased to report second quarter across the board in conjunction with an improving outlook for free cash flow generation and absolute debt reduction in 2022.
Answering your question today, we have on president and CEO, Herb Vogel and CFO Wade per cell.
Nor are we.
Joining artist our discussion today may include forward looking statements and discussion of non-GAAP measures I direct you to slide 2 of the accompanying slide deck page 5 of the accompanying earnings release and the risk factors section of our most recently filed 10-K and 10-Q, which describe risks associated with forward looking statements that could cause actual results.
Our results to differ and refer to slides 26 through 28 of the accompanying slide deck on pages 12 through 15 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 of note. Our second quarter 10-Q was filed this morning.
With that I will turn it back to the operator to take our first question Holly.
And once again to ask a question press star 1 lend your telephone keypad.
Our first question is go on it come from the line of Leo Mariani with Keybanc.
Yes, good morning, guys.
Was hoping to talk about Capex you guys obviously.
We're expecting kind of be at the higher end of the range for the year it looks like Capex sustain.
A pretty robust year engine, <unk>, and I guess to get to the high end.
Kind of implies a pretty big drop in the fourth quarter.
We're seeing a fourth quarter activity card. She can you just talk about the dynamics that are giving you to the high end of the range.
This is Wade I'll make a few comments and herb can add some color if you'd like that yeah.
You said that up pretty well I mean, we gave a range for the full year and we're still seeing that.
Getting towards the high end with some.
On some moderate inflation assumption in there, but in terms of the cadence we did accelerate program and that's enabled us to achieve our objectives.
Quarter to quarter kind of is what it is and it will tail off in the <unk>.
Fourth quarter from a capex standpoint for sure.
And.
I just wanted to ask about production I think you guys put a.
Comment on the transcript.
We were talking about kind of low single digit growth in.
In 2022.
Not really sure if that's just kind of.
High level comment for now and you guys will refine that.
<unk> going forward, but if I can just kind of run the math.
Youre talking about second half 'twenty, 1 production of around 142000 Boe per day at the midpoint.
It was to hold that 142, even flat.
For next year, I guess that would get me closer to 7% year over year gross I'm just trying.
To understand the comment around the low single digit growth next year.
Yes.
Yes.
Real simple number when we say that it's really just can we take the annual average for 'twenty..1 and then we say what's the annual average for 'twenty 2 depending on the actual cadence of the capital then well come on.
I'm trying to determine that quarterly phasing and we have not budgeted for 'twenty 2.
We just do our outlook.
<unk>.
At this stage and then as we get into September through November then, we really locked it anymore. So.
I wouldn't read a whole lot into that.
Low single digit growth when we look at the annual average for <unk>.
21 annual average of 22.
Just remind you that essentially acts.
Polluting output.
We put this plan together to generate the most free cash flow that we can.
It's exactly what's going to happen it generates significant amount of free cash flow next year and beyond and deleverage the balance sheet and the production number that comes out is what it is and we just.
And sort of said got it generally today right now that looks like a low single digit growth rate that we will refine that as we get closer to the end of the year.
Okay.
But there's no plan for any like big activity decline anything like that is there.
No I mean, we're we don't have it.
Worked at this stage so no no big Big changes.
It says what we call the optimal activity level projected out into the future and that's still the case.
Okay. Thank you.
Net.
Once again to come into the queue Press Star 1.
Next question will come from the lineup.
Michael Gallo with Stifel.
Hey, good morning, everybody.
Just to follow up on <unk> first question.
The.
The implied.
Drop in activity for fourth quarter is that.
We anticipate it being both your operating.
All areas or is it.
Concentrated in the South, Texas or can you say any more color on what the activity might look like for fourth quarter.
Mike We're just basically the executing on the program through the year and meeting kind of.
The expectation overall on.
Operating on a number of completions.
The number of drill wells on the Capex spend so.
I will drop from <unk> to <unk>, but there is nothing really remarkable or.
Intentional about anything other than the gross.
Gross free cash flow objective, we would have in our plan longer term.
Okay and.
And I guess as you look forward.
I realize you just said you haven't.
Otherwise the 'twenty 2 budget.
Obviously getting some.
Very positive results out of the chalk just wondering as you think about allocating capital between South Texas from the Permian net.
On the or thoughts on the chalk getting or South Texas getting.
A bigger percentage of the capital for 'twenty 2 versus what you saw this year.
Asset simple time.
We obviously have not that R 22 allocation between the 2 assets.
Next year and what we really found is that it doesn't make that much difference from a free cash flow delivery perspective longer term.
60, 40, 70, $38, 1 however, reallocated.
But commodity price you will make it a little bit of difference and so we'll just look at the time and decide on the.
On the allocation of the time, but I will say, we're real pleased with the way the Austin chalk and performing.
I'll call 1 of our asset managers.
Well, there's a little energy the low engine that could.
The yields on our hanging in there longer in some cases than we expected and that leads to the outperformance on the oil so we're happy.
The program, we're continuing to delineate and test development and.
We'll continue to do that at the right pace.
And that pace will be determined as we learn more we will.
Continued to design the program in the out years.
Okay.
And then just wanted to follow up.
On.
Wade comments in the prepared remarks.
You had said you probably hedge less as the.
Leverage comes down.
You give any color there on what you've taken the appropriate.
Level of hedging might be for next year. It looks like you did add some hedges.
With the per next year, but wanted to.
Yes, maybe give a little more detail on that.
Yes.
Very relative question.
Look.
And it's still consistent with what we've been saying regarding our strategy, which is always tied to leverage and as we as we look out and see leverage falling pretty dramatically I think.
Right now the forecast based on stripping.
Current cost estimate shows us getting below 1.5 times by the end of next year.
So looking at those metrics were much more inclined to target a hedge percentage.
No more than 50%. So that's kind of the number we're looking at as we approach next year.
Because we are forecasting a leverage number still well out.
Year on a half from now so so we will be we will be.
Wanting to lock in some of the cash flow to protect that but not near the levels that we would have when the leverage was that it was a higher number which is what you see this year than last year.
Hope that helps.
Thanks, guys.
Yes.
Our next question will come from the line of Nicholas Pope.
The seaport.
Good morning.
Good morning, Mark.
Just a couple of questions.
I guess as you.
You've done a lot with the balance sheet here.
2021.
Looking at.
Free cash flow from here on out with kind of where commodity prices are set up for the next 2 years.
I guess, how are you thinking about where priorities are.
Theres not a lot on near term.
It can be paid down anymore.
So when you look as you look at kind of the opportunity set with.
Additional balance sheet work or.
I guess, maybe how do you think about the dividend that's in place and how that's related to the free cash flow profile.
Yes.
Yes, Great question, Yes, great question.
Yeah.
As I just said on the last answer we do project.
Getting below 1.5 times by the end of next year based on what we see right now current market conditions.
We put on with this long term plan.
Term debt. It focuses on free cash flow focuses on debt reduction and that is absolutely still the case.
So as we move along next year getting to that point that I mentioned there is certainly are still pre payable auctions no question about it.
Theyre not near term anymore, which is great because we moved out.
Near term maturities.
But if you look at the debt structure. There is there's call features.
And then and for example, the 20 fives as we move into next year callable at a pretty.
Pretty pretty favorable area of 100 to 101 ish.
But then you have the more expensive second lien notes, which.
I think I've mentioned before.
Before by Us doing.
The refi transaction I'll call. It late in the second quarter that really enables us to use free cash flow to 2 to really target some of the more expensive debt in the structure, which obviously the second lien notes qualify for that and then they start becoming callable in the middle.
Next year, so we will be targeting those things and deal and continuing to de lever. Your question about at what point do we consider like dividends or raising dividends things like that that will definitely be on the table.
Once we start getting to those low leverage levels.
And so.
As I've said in prior.
On the question is asked let's get to that point and then let's look around and see what the market conditions are there that are creating that in other words. If you had a really really high oil price that would I think that would be a factor in whether it's kind of a mid cycle type.
Level on a comfortable level, but if it feels more like.
Call sustainable.
I think you said.
Then something along the lines of.
Dividend program with Delta will be on the table at that point.
Got it that's very helpful.
Do you think I mean, I know there's been a lot of questions trying to get you guys too.
And on on work.
Like for like the next year, but I mean, what do you think the triggers might be as you look at that cash flow profile for win.
Maybe maybe adding a sixth rig like what I guess, what would you need to see from a from a high level.
<unk>.
For that to be incorporated into what 2000.
22 program might look like.
Yes on Nick the service, so we're really sticking to the plan.
Wanted to generate that free cash flow and getting our absolute debt down so we're not really.
Playing out there to add activity, we're really steady activity, we can be very capital efficient.
Our capex really helps on the free cash flow generation side of them.
Got it.
Thank you Andy.
Just a little bit clarity on <unk>.
Texas 11 wells I guess that have been drilled in 'twenty 1.
Are any of them, what's the split with.
After.
And that versus kind of on the more traditional.
Eagle Ford focus.
Well.
Moving to talk about completions, because actually we probably drilled more than that on the news.
<unk> filed we completed 3 Eagle Ford well down on that JV and 3 Austin chalk wells on that JV.
And.
So when we.
Chuck talked about.
On the 3 additional eastern Eagle Ford Eastern Austin Chalk well and then we've got a couple more online we saw that where that total of 17 I think.
Total number of wells 9 were last year and then we've got several more that are.
Just started producing or will.
<unk> weighted in the year.
Got it.
That's helpful. Thanks, That's all I had I appreciate the time guys. Thank you.
Thanks.
Our next question will come from the line of Karl Blunden with Goldman Sachs.
Good morning, Thanks for taking the time.
A couple different.
On items touched on in terms of capital allocation.
Net loss.
Discussion of M&A, whether it's acquisitions or divestments is there any update on that from the telecom.
Yes Carla.
Really no real big update on M&A, we've been pretty consistent on our messaging there, but really no change in our.
Our views at all.
We do think scale does matter and it's more than just lower G&A.
And when we talked about our criteria and it's really got to have comparable quality assets net.
We've got really high quality assets.
Everyone's aware.
It's got to be accretive to free cash flow and.
It ought to be neutral to beneficial to leverage at the levels, we're talking about now.
And when we when we look at scale.
It would really help to have some industrial logic behind it and improve capital efficiency, and then that could lead to lower cost of capital.
And then there is on some belt.
And then the ESG side from scale also but yes, no no action at this time.
Okay.
Then.
On some nice work in reducing.
All of our borrowings and it gets down to a relatively low level. When you think about the next time you have discussions with the banks in terms of extent.
That's nothing.
Setting up a new or updated facility can you remind us when that happens and what your goals might be in those discussions.
Sure that's a good question.
On our revolver.
Doesn't mature until second half of 'twenty 3.
So it's still a little early I would I would.
And that will be I think there is.
There are several peers that are doing new revolvers and this fall we'll be watching those closely just to kind of see what the market looks like and and maybe start start thinking strategically.
As early as the spring of next year.
As far as looking at possibilities.
We anticipate our.
Extending that.
We still have a little time to watch and in the meantime generate free cash in and basically get out of the revolver, frankly, so and not be not be using it which is typically are on.
Our strategy.
Alright, it's helpful. That's helpful. I appreciate it.
Our next.
Sure.
It comes from the line of Gail Nicholson with Stephens.
Good morning.
Good morning, you guys had finished Jeff Keith.
Simultaneous frac operations on the Midland can you talk about the cost savings you saw there and how applicable that is across the remainder of your Midland inventory.
Do you have any plans to test it in South Texas.
Hey, Thanks, David Yes, it was a great accomplishment on the Cymer Fracs went really smoothly, we've run with 2 different paths.
We actually 2 different service providers on those.
And so.
So bottom line is you can see the way the efficiency gain would be is because you have about 60% more horsepower on size than you would with just regular zipper fracking, but you are pumping at twice the rate the numbers David you can do.
In a day so you can see the intrinsic efficiency that we.
And.
So when.
When you schedule it out, though there are certain pads, where they're very.
Amenable to final fracking, so if you've got on the larger number of wells on the pad. It's easy to do if you just have a single well, it's obviously not going to work and then you just stick to.
Single Frac operations would be up.
And 2000 zipper frac them. So when we look at 2022, we'll be laying out on those places where we can use Simon from noteworthy zipper frac versus single well operations rely on that out and.
The benefit is if we have.
Spread or on a provider that can do both diamondback.
To refresh from the operations to layer in efficiencies in the scheduling side of things. So yes, we do anticipate on like for like basis, we could achieve some savings.
Hard to put a percentage on it because we have a combination not every pad is amenable to pharma PRASM, but we.
And then how it worked for us in these 2 cases.
Great and then you also get a 4 mile lateral this quarter in the Midland can you just talk about how that.
Now that was does that change the technical difficulty on the drilling and how applicable that apple below that the super long laterals are in the 2020.
We share essentially.
Yeah. Thanks, thanks for pointing that out.
Feels really good for our team to have done the record long lateral in the state of Texas, which is a lot of wells in fact the strength.
So felt really good and where it is applicable as it obviously gives us a lot of capital efficiency. It works income.
Some areas to access acreage net.
Quite far out and that you may not get to for a while so.
So for us it works like a charm, we drilled that in 20 days.
I think it's 105 frac stages on that well, which was a lot and then we drilled it out without any difficulties and we.
Bought it online June 25th and amount announced producing learning so keep us keep a look out for the performance of that well.
It's still the same size pipe the 5.5 inch pipe down the well so you can't get that many more barrels out faster and which leads to us.
Plateau level on a little bit lower decline rate.
You've had on a sort of well, but in terms of the economics of the efficiencies are great.
But we'll see how it hard for me to buy it but we also you have seen on the slide deck that we.
Tend to be the longest lateral well drilled in.
Midland Basin.
Yes.
On average.
And then.
Great, Thanks, guys and excellent quarter.
Thanks, Kevin.
And okay.
No further questions in queue I'll turn the call back over to CEO per Boe.
Vogel.
I actually have a question that just came into the queue that will come from Scott.
With RBC capital markets.
Hey, Thanks, sorry forgot to hit the old Star 1 there but.
You've had a lot of success in the Austin chalk and obviously more recently continuing to see very good results.
And can you can you talk a little bit about those 400 locations you have identified.
The success you've.
Channel or give you more confidence in those 400 wells and do you think there could be potential to expand that.
Given what you've seen so far.
Scott Thanks for noticing that.
So we have quite a bit of confidence the Austin chalk and I've talked about this before where.
Where we had 600 penetrations of the Eagle Ford.
That went through the Austin chalk so we could map it extremely well we got core than with the delineation program was spread over a larger area. Now we are expanding that area and we're also testing development on a number of locations.
Theres.
Seen some momentous amount of geoscience work on just what the mechanism of the high permeability is and where to land and that we've improved upon quite a bit.
So the.
On the recent well results kind of has come in line with what we were expecting and then we've got I think the first 1 we put online was in.
July of 2018, so we've got some performance history that makes us feel good.
400, well inventory estimates a round number on assuming the 11th hour per lateral length.
If we choose to go shorter laterals and the number of micro opt to go longer than that number would go down and then we.
<unk> talked about.
<unk>.
<unk> very oily northwest and then gas here to the south So we will do our normal thing on in terms of.
On the conversion into proved reserves over time.
Under SEC guidelines being within the 5 year plan and.
And going that route so.
Bye.
Bottom line it just depends on the economics of the time and we'll just.
Watch that number as time goes on on on how we see things working but the confidence level. It continues to improve as we get more well results.
So what I'm hearing here is you guys seen expected some good results for those 400 locations and certain.
Underpinned by by what you've seen but I guess from from our perspective, it should get continue to give us more confidence to derisk that inventory over time.
Some upside.
Okay, if if I could just 1 more in.
I apologize for hitting on 2022, but certainly there is some questions.
Certainly on that.
Commentary on the path of potential production into next year.
But I guess I had a basic question.
When you look at going forward and it's not as much 2022, but it's even beyond that I mean is your base view and I know, it's about maximizing free cash flow, but as part of that I would assume it's.
It also includes some level of at least maintaining production and so it looks like 'twenty to 'twenty 'twenty, 2 sort of soft guide.
Talks about.
And it feels like it's maintaining production.
Throughout the year.
The right way to kind of think about it I know you are maximizing free cash flow, but part of that has to be strategically.
Having some sort of a maintenance level on production.
Yes, Scott I mean, we were truly do.
9 out of our filing based on the free cash flow generation targets.
Getting certain leverage target and that's where we start from and then the production truly is an output and just so happens that winds up being on average year.
Year over year single single digit.
Production growth.
That can vary quarter to quarter on where that fits just like it did in 'twenty 1.
And that's really how we do.
We plan on output.
I don't anticipate on production decrease at all if we're meeting our free cash flow.
Our objective and it's just a matter of how much it grows in and Thats year over year, yes.
The key is at the lights on long term plan.
It's putting together a long term plan that generates a lot of free cash flow not just 1 year, obviously theres 1 year, you can slowdown and that would not achieve long term objectives at all and this is long term. So it is.
It's flattish to single digit production growth is what we can see out too because it's because it's sustainable long term.
Yeah, and I guess thats spot on to the point and I guess, the only nuance is with year over year comparison, obviously to the.
The shut ins.
Or I'm, sorry, not the shut in but obviously the weather.
It is usually early this year had an impact on production so the year over year.
Arguably if you're keeping flat from exit rate should be up is that a fair way to think about it.
We don't really look at exit rate, that's just too short a time period don't worry about and I think that whether that's a classic example, right.
We have to shut in on a power to cut opex.
Who didn't pay our bills.
Because of the lack of power and.
So we had lower production, but then we made up for in second quarter and third quarter and the rest of the year. So.
2021 on will look quite lumpy, but we reached our overall <unk>.
<unk> per or we intend to reach our objective from over the entire year and that's just the way the way you have to look at it you can't pin down an exit rate from last months of the year because it depends on the timing of completions and they can bind up on this side of the end of the year that can line up on the other side of the end of the year just a matter of.
On execution.
When you get the wells actually hooked up and producing and how quickly the flow back half.
You really got to look at a longer time period.
Thank Glenn client.
Mining everybody is that the long term plan, we put forth is on less than 75% reinvestment rate, which delivered continue.
<unk> loan growth and production.
And if people are getting cut off on quarter, maybe it's not a straight line number 5 years, but it delivers annual year to year year to year growth in production.
That investment rate, which quite frankly with higher commodity prices may be maybe less yes.
<unk>.
Alright I appreciate it thank you much thank.
Thank you.
I'd now like to turn the call on over to CEO Herb Vogel for closing comments.
Okay, well, thanks, all for joining US and you are in fact question.
We will send to you and Entercom in mid August.
Thank you for participating on today's conference call you may now disconnect.
Okay.
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Okay.
Yes.
Okay.
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