Q2 2021 SM Energy Co Pre-Recorded Discussion

Our discussion today will include forward looking statements 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 can cause actual.

<unk> results to differ we will also be discussing non-GAAP measures. Please see slides 26 through 28 of the accompanying slide deck and 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 today's prepared remarks will be given by our president and CEO Herb Vogel and CFO Wade for yourself I will now turn the call over to her.

Thank you Jennifer.

Good afternoon, and thank you for your interest in SM energy.

We're very pleased to report exceptional.

<unk> second quarter financial and operational results the quarter exceeded expectations on several measures and puts US ahead of schedule in meeting our key priorities.

Turning to slide 3 I will reiterate our long term objective and progress in meeting them.

First maximize cash flow over the next 5 years sustaining a reinvestment.

And sort of less than 75 per cent.

During the second quarter, we accelerated certain capital activity to effectively make up for lost time as a result of the Texas weather event in the first quarter.

Production came in ahead of expectations and capital came in lower delivering free cash flow neutrality.

Our outlook from here for.

Free cash flow and free cash flow yield is highly competitive for our sector and favorable compared to other market sectors.

Our second long term objective is to improve the balance sheet by applying free cash flow to absolute debt reduction targeting less than 2 times leverage by year end 2022, and generating sufficient cash flow to.

<unk> re bond maturities due through 2024.

Our outlook on leverage is more favorable on 2 fronts given the strength in price outlook for all 3 commodities since we constructed our plan in February the target of less than 2 times leverage by the end of 2022 is now looking like less than 1.5 times levered at the end of 2022.

Secondly, our second quarter bond tender and new issuance reduced near term maturities by nearly $400 million.

We now believe that free cash flow generation through 2024 will be sufficient to cover bond maturity through 2026.

I'll, let wade expand upon that great outcome.

Our third long term objective is to maintain top tier.

To exceed high return inventory or.

Our success here, maybe the most exciting of all despite a particularly challenging 2020 and weather related bumps during the first quarter. Our team has continued to delineate and develop the Austin chalk. This is real value creation as I will elaborate on later.

Fourth long term objective is to report differential.

ESG stewardship today, we have posted our responses to the 2020 CDP questionnaire as well as posted the data in the format of the task force on climate related financial disclosures or T. CFT.

We will be posting additional ESG disclosures in the coming days, including the sustainability accounting standards Board.

For our SaaS P framework updated for 2020 data.

Among reported ESG metrics. Most notable on a reported 37% decline in greenhouse gas emissions intensity in 2020 versus 2019, and a 20% decline in methane intensity.

Turning briefly to slide for this chart depicts.

Our highly competitive free cash flow yield as projected for 2022.

I'll now turn the call over to Wade to speak to the second quarter results and outlook Wade.

Thank you Eric I'll start on slide 5 I think you'll find most of the information straightforward. So I'll just add some context just few items starting with production we beat the top end.

And a guidance with production of $12.4 million Boe for.

136, and a half thousand Boe per day.

This was due mainly to performance from the Austin chalk for them.

Both base production and new wells were stronger than we had modeled.

For the quarter oil production percentage was a healthy 54%.

Yeah.

Capex for $214 million under.

Under our guidance range of $230 million to $240 million.

Related to timing as our capital expenditure estimate for the full year remains unchanged.

Drilling and completion activity is on schedule, we drilled 22 and completed 45 net wells.

In the quarter for.

The first half of 2021 capital expenditures totaled $399 million and we drilled 40 net wells and completed 62 net wells. So we're roughly 60% through our capital program for the year.

And general line item costs are tracking guidance, but I would expect that LOE per Boe.

Bowie to pick up to the high end of the range in the third quarter as we have for Workover schedule during the quarter.

Thanks for the balance sheet on slide 7 here.

Here, we see the substantial reduction in near term maturities due through 2020 for quick hit second quarter end stood at $223 million, including the revolver.

I'll also note since quarter end, we redeemed the converts so for modeling purposes assume that went on the revolver.

We termed out approximately 400 million in debt with the issuance of new 6.5% notes due 2028.

The tender offer initiatives transactions went extremely well was actually oversubscribed by.

Price and serve the purpose of strengthening the balance sheet by removing any perceived risk associated with near term maturities and positions us to reduce the highest cost debt sooner.

Updating our hedge positions on slide 8 we have 75% to 80% of oil production at about 85 per cent of Nash.

Natural gas production hedged for the second half of 2021 details by quarter in the appendix as.

As we previously stated our methodology for hedging is aligned with our outlook for leverage. So you can expect a directionally lower percentage of production to be hedged in 2022.

Say it again, we now see get to.

Tim that's trending below 1 and a half times by the end of next year and that is based on current strip and estimated cost so now turning to guidance on slide 9.

That is for the year remains unchanged.

We did narrow the range around production to 47, and a half to 49 and a half million Boe.

That range really.

EBIT to ultimate timing of wells coming on there.

Third quarter production is expected to range between 13 to 13.2 million Boe.

For 141 to 143000 Boe per day, 53% to 54% oil.

This implies fourth quarter production to be relatively flat with the third quarter.

Relate in terms of cadence the remaining capital activity will be heavier weighted to the third quarter with the third quarter capital guidance range forecast it to be between $170 million to $190 million I think was a lean toward the high end of full year capital guidance accounting for some inflation that may kick in.

We're now expecting full year activity to include about 85, net wells drilled and 100 to 110 net wells completed.

Sets us up for low single digit production growth in 2022 and of course substantial growth in free cash flow.

I'll now turn them for it to herb to make comments on operations hurt.

Thank you Wade I, just like to highlight a few operational accomplishments skipping to slide 11.

In the Midland Basin, I have to boast about the longest lateral ever in the state of Texas, while we have previously confirmed drilling the 20900 foot almost 4 mile long lateral which we drilled in 20 days.

I don't have the well on production and I can tell you and anyone with field experience with no drilling out the plugs and cleaning out a well with a lateral this long is no easy feat.

Project went smoothly and the well is the non production since June 22.

Keep an eye out for the performance of the Clarice Starling sundown the 40.

542, W. A well in Howard County, and actually long name for a really long lateral.

Also in Midland, We just finished our first to Simon Frac operations on 2 pads located in Sweetie Peck and North Martin.

These operations went smoothly and we were able to complete an average of 16 stages per day about.

Twice the pace of a typical zipper frac and were able to complete as many as 24 stages in a day.

I think many of you already recognize that we're always in pursuit of commercially astute technical advancements.

I would also draw your attention to slide 12, showing that SM has already recognized for drilling the longest laterals on average.

In the Midland Basin.

Our ability to do this as a result of our contiguous land positions and really good work by our land department and blocking up positions.

Longer laterals present, a tangible benefit in terms of capital efficiency.

Wrapping these concepts together longer laterals and Samuel Frac operations in areas, where.

Where the development design has a minimal we clearly have the potential to offer additional capital efficiencies.

We are often asked if we expect to keep improving our already efficient operations, which we continue to run at around $5 to $20 per lateral foot.

It's hard to imagine material improvements, but this is a great example.

We will be working with the longer.

Longer lateral and simulcast concepts are successfully tested as we put together our 2022 operations plan.

Turning to slide 14 in South, Texas, we have updated the Austin chalk cumulative production plot, which continue very favorably.

And on Slide 15, I will reiterate the great Austin Chalk 30 day peak rate.

We announced in June 3.

3 new wells averaged 3300 Boe per day, and the wells have an estimated breakeven oil price of just $24 per barrel.

We should have additional Austin chalk results in the third quarter, and we look forward to sharing more with you.

Also I will remind you that our transportation costs for natural gas in south.

Great.

GAAP by about 25 per Mcf, starting this month.

Another factor contributing to better economics in the South Texas program.

In summary, second quarter results were outstanding and we are on track to return to free cash flow generation, starting in the third quarter and on track to deliver highly competitive free.

Texas, well as measured by yield to market capitalization going forward operationally, we have been able to keep costs flat and through our successful testing of longer laterals and simultaneous completions, we will seek to drive increased capital efficiencies through technology.

Keep watching for updates on our Austin chalk results as we continue.

Moving to successfully build grassroots inventory and asset value.

Again, we have posted CDP and Tcf day responses, which you can access on our website and expect more ESG related disclosures in the coming days.

Thanks again for your interest in SM energy.