Q3 2021 SM Energy Co Earnings Call - Q&A Session
Good day, and thank you for standing by welcome to the asset managing QC 2021 financial results and operating results Q&A Conference call.
At this time all participants are in a listen only mode. After the Speakers' short remarks, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone if you require any further assistance. Please press star zero and now I would like to hand, the conference over to your first speaker today, Jennifer Sam.
Oh, Vice President Investor Relations. Thank you. Please go ahead.
Thank you Paul Good morning, and thank you for joining us for our third quarter 2021 question and answers call. We had a fantastic quarter to answer your questions. Today, we have our president and CEO Herb Vogel and CFO weight per cell before we get started our discussion today may include forward looking statements and discussion.
Non-GAAP measures I direct you to slide two of the accompanying slide deck page six of the accompanying earnings release and the risk factors section of our most recently filed 10-K and 10-Q, which described risks associated with forward looking statements that could cause actual results to differ and refer to slides 20 through 21 of the slides.
And pages 14 through 17 of the 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 I'll note. Our third quarter 10-Q was filed this morning with that I'll turn it back to the operator to take our first question.
Paul.
Thank you ma'am, we will now begin the question and answer session to all participants if you have a question. Please press star one on your telephone keypad again, that's star one on your telephone keypad. Please standby, while we compile the Q&A roster.
Your first question is from Leo Mariani with Keybanc. Your line is open.
Hey, good morning, guys.
Just wanted to kind of ask you about kind of the plan as we head into fourth quarter.
Clearly it looks like you guys are kind of slowing down.
On the activity side here in <unk>, perhaps maybe you can talk about.
Sort of rig pace and translate that into kind of what's happening in the field.
He dropping some rigs like you had temporarily dropping some crews maybe theres. Some frac holidays can you give us a little insight into how you're slowing down here in <unk> and then I guess just the the other sort of related question areas. Obviously commodity prices are the best they banned in a number of years, how do you think about that decision to the comp slow a bit.
Head into the fourth quarter given that the returns right now are still great and the payouts on these wells look great.
Yeah.
Yeah.
Leo this is herb.
Thanks for the question so for the for the year, we accelerated into <unk> and <unk>.
Some of our activity and we tested a number of things lifetime of fracking and other optimization. So now we're putting together the scenarios for 2022, and how we gear up and how we lay out that program for 2022, So that's really what's driving what we do <unk>.
Really about free cash flow over the next two to three years and laying out that program that maximizes that that's really what we're doing there so looking at the rig counts.
Any individual time, there is not really going to tell you much but we want to do is have a very capital efficient program. That's really what we're driven to do and that.
Incorporates quite a few of those enhancements that we really test this year during the year.
Okay I appreciate it.
And I guess just wanted to ask about the chalk certainly some.
Very strong well results certainly helped drive the great earnings here of late I, just wanted to get a sense of how youre thinking about you know.
What kind of phased that window to drill here in the chalk. Obviously you guys have got acreage that kind of range is more on the oily side to the gas side do you guys kind of have a preference in how you're thinking about drilling may be some other more gassy stuff given that we have the highest gas prices. We've had a number of years here.
Yeah.
Yes, Leo so so we're really pleased with the way they all sorts turned out I mean, the inventory potential here and how the wells are coming in and phenomenal. We've really just started doing development spacing as you've seen in the results are coming out.
Good so we'll be laying out a 2022 program out in five years.
A mix of locations across our acreage position and but we haven't lost that in yet. So I would say is not going to be just oil <unk> gas is going to be a blend of.
Across our position.
Okay. That's good to hear and then just lastly can you talk about well costs in the chalk as you move into development mode are you starting to see money on those wells can you comment on that.
So on the chalk we really have continued as we've learned over time more and more improvements.
That's really what's driven so we'll probably get some efficiency gains will encounter a little bit of inflation. So we have not locked in a number for 2022 yet.
Okay. Thank you.
Your next question comes from the line of Scott Hanold with RBC capital markets. Your line is open.
Thank you great quarter guys.
I was wondering and I know, it's gonna be too early to talk about 2022, but I know earlier. This year you did provide a reference.
For our investors and analysts at a much lower deck can you give us an updated view on that reference point with respect to capex, given obviously, a much higher commodity pricing and a little bit more inflation and along with that is as you think about 2022 and I know the point is to maximize free cash flow.
But given the outperformance.
That you all have seen with your better completion techniques in the Midland and just great results in the Austin Chalk when you look at next year would you paper Capex at all.
All given production outperformance or we just flipped production into word ends and just focus on on like a well count that you think maximizes free cash flow.
Yes, Scott.
We do this where we run a lot of scenarios at this time and then as we get closer to locking the budget has been we optimize it to maximize the free cash flow over a certain period of time two years, plus and that's really what drives. It. So we don't have a 2022 capex number or production number yet.
We've got scenarios and we use strip pricing as we get closer.
Two the day, we lock in the budget. So I can't really give any any additional color there other than we're going to incorporate what we learned this year in terms of chalk performance Permian performance and.
The benefit of the larger completion designs in the capital efficiency from final practice longer laterals et cetera.
Understood, but could you provide a reference relative to the earlier this year. The 2022, Capex number and what that in theory looks like now based on the service cost inflation that's.
Occurred or anything else that's occurred with efficiencies at this point.
Yeah. So so we have not locked into place and we're kind of in data gathering mode right now I'd call. It where we're sorting out okay, which service lines would we expect to see inflation, which service lines would we expect to be flat.
Increases and where can we see efficiency gains and we are in that process right now so.
Can't can't I can't get ahead of the game there.
I appreciate that and then my follow up question is on shareholder returns, obviously youre hitting your leverage reduction targets a lot sooner than expected and can you give us.
Framework of.
When when we all should think about like S M, having that conversation about shareholder returns in more detail.
When when it would actually.
Start to be an actual payout to investors.
Yes, Scott, it's a great position to be and then I'll ask Wade.
Answer that one.
Yes, Hey, Scott Thanks for thanks for asking.
Yes.
We're obviously very excited to be.
To be Delevering, a little bit ahead of schedule and frankly, we're below two times already which is just fantastic.
It does relate to the quantum of debt also though while the debt to EBITDAX as following quickly and we want that net outright that number to fall as well.
So just.
Just from a framing standpoint, I mean, I think that's your question for.
For me getting leverage down kind of close to that one times area and maybe absolute debt down in the $1 billion area is something too.
To look forward that feels like a prudent area to be considering.
Same thing in a meaningful way from a dividend or stock buyback.
Program standpoint, so I guess, that's what I would tell you there.
And it is the one point over leveraged.
Just on a mid cycle price.
Or would you use whatever it is could you give us a little color on that.
That's a great question Ryan.
I mean, I think getting below one five times you could bucket at mid cycle prices is probably.
<unk> to be considering but the one point is just to factor all of that in a little bit better. If we get there really quickly and at a price of around $80 I think thats. One fact, if we're getting there.
To see that everything appears very sustainable and reasonable mid cycle prices that's different setting.
All of those factor into the decision.
Okay.
At the appropriate time to consider something like that.
Alright, I appreciate the color. Thank you.
Your next question comes from the line of Michael <unk> with Stifel. Your line is open.
Yeah, good morning, everybody.
Maybe just another question on the cost side, you maintained that 520 per foot cost guidance for the Permian as an average for the year.
Is that reflective of current.
Or could you say, where the current wells are relative to that average.
Yes, Michael.
So the 520 number with our number for the year, we front end loaded all the.
The Capex so really the 520 is predominantly.
Spend with the program we had.
It's a good number for the Permian looking forward, we're just going to see what parts of our inflation.
As I just answered.
The sectors. Our service line, we will see some inflation and some will be flat and then we're going to get some efficiency gains. So we haven't set the <unk>.
<unk>, yet for 2022, and when we do we'll see where it comes down relative to that 500000.
Okay.
A question on the other chart you gave a pretty wide range of spacing there.
The.
Development pilot I guess you'd call. It 675 to 1000 foot are you seeing any performance difference between the wells at the low end versus the high end of that range.
If you're leaning towards one end or the other as you look to advance that played a full development.
Yeah, Michael it's early days so three of them are spaced at 675 feet and three are spaced at 1000 feet.
And then we've previously done those eastern task.
Our problem, but foot and then those southern ones at about.
Prominent 50 feet staggered the Eagle Ford at 625 feet. So we're gathering data in multiple places and we'll see how far it but typically you would you guys you got to give it some time to see how they perform where it would have been really happy with what we see and what the returns and the payoff on those right now.
Okay.
And then just maybe one last one for Wade.
When you look at the fixed debt you mentioned you'd like to continue to reduce absolute debt.
That obviously in the third quarter as you look into 'twenty, two maybe thoughts about.
Your ability to retire some additional debt there versus would you.
Look to refinance the.
The $24 25 maturities are you more likely to just retire those with free cash flow.
Yes.
The plan is certainly to generate free cash flow and to use that cash to actually retire debt. So.
All of our.
What are how our maturity profile lays out I think actually slide six in the deck. There is a pretty decent job of showing you.
Kind of initial call dates.
There's a lot of flexibility within our debt structure and we do that on purpose.
Early callable debt at different prices, we've always had pre payable debt. So I would anticipate to 'twenty four is getting taken out burst with free cash and then we will start as we as we generate cash and.
We feel sustainable about it.
We will be targeting the 20 box as we move through the year and Theres a couple of tranches there with the unsecured bonds, which are pre payable and also of course, the second lien notes, which become pre payable in the middle of the year that eight months from now you can imagine I think I've said it before those will be kind.
Right in our right in our sights.
As they become pre payable we'd like to eliminate those from the from the capital structure. So that's kind of the plan for next year.
Sounds good thank you.
Your next question comes from the line of.
Our London with Goldman Sachs. Your line is open.
Morning, Thanks for the time and congrats on the deleveraging progress.
Just two.
Firm up some of the questions on the debt reduction when you think about that roughly a billion more of that to come out.
M&A play a role in that could that slows the reduction could speed the reduction when you think about.
Selling assets or buying assets.
I'll make a general comment and then let.
<unk>.
Comment.
Each one.
The debt within the context of M&A is just one of many factors.
So weather, whether that became a deleveraging part of the process through M&A or acquisition it would be it would be one factor.
What's exciting is we don't we don't need any transactions.
To execute at a very very delivering process on our balance sheet. So do we look at are there ways to accelerate those things yes.
Debt reduction a driver it's one factor I guess is the way I would answer that.
And then Karl just generally on M&A, our stance hasn't changed at all.
We think scale matters, but more than just a lower G&A stronger and we've said these criteria are that we got to have comparable quality assets and we have really high quality asset.
Got to be accretive to free cash flow and it's got to be neutral to beneficial to leverage so thats pretty much the position we've taken and then there should be some industrial logic around it and some capital efficiency.
So that's really how we look at it so it's not like we're going to go.
Look for M&A to go Delever as a as a.
A single partner influence.
In fact, the cash flow at this point.
Just on the hedging strategy you've seen a couple of other players in this space change the way they approach that I know historically.
Indicated that as leverage comes down hedging could decline a bit is there any bigger change contemplated as you go forward based on your oil price view slates on Florida.
The continued approach yes.
Yes, great question.
Short answer is no change I mean, we've been we've been implementing the same strategy for over a decade, and it's served us very well.
Actually during downturns like last year.
You said, it well, we tied directly to leverage.
So that means during periods like this where our leverage is going down our hedge percentage will go down as well that the hedging does it go away. So we have been layering in Macau.
Methodically <unk>.
Smaller slivers I would say, though and we don't hedge too far out and Thats actually a good thing when that when the school districts are still backward dated let's say hard currency.
So you won't see us hedged over 50% next year and I think I mentioned in my notes, we're below 40% on a BOE basis right now for 'twenty two the other thing that is a whole unique that we do is during periods. Like this we use a lot more callers I think we do swaps to retain more of the upside at these higher prices.
Helpful. Thanks, very much thanks Herb.
Yes.
Once again as a reminder to all participants if you have a question. Please press star one now again Thats star one on your telephone keypad.
Your next question.
From the line of Gabe <unk> with Cowen Your line is open.
Okay.
Hey, good morning, guys.
Question, just going back to the cost.
Equation in the Midland.
You had mentioned $5 24, it was the number all year and then you also.
They talked about Upsized completions, just curious is there what's the delta between.
The upsized completions that maybe the the base completion design that you had coming into this year, just trying to get a sense of.
Meaningful that delta could be.
Yes Gabe.
You can set that at the beginning of the year when we set the budget. So we were running actually in fourth quarter below 500, and then we kind of looked at and said with the old completion design would be about a 500 per foot and now and then we said well we're going to budget at $5 20, with the Upsized completion and those range from 23.
Pounds per foot over 3000.
So.
Uptick from our 18 to 1900 that we were at before so that kind of tells me the numbers about 20 in incremental now as we go into 2022, we will look at.
<unk> going to be.
Okay got it that's great. That's helpful. Thanks for that and then maybe if you could just give us an.
An update on inventory in the Permian.
I think maybe coming into this year you had said there.
Eight years or so.
10 years left can you just give us an update on that number and does that just assume the three primary zones. There the wolfcamp, a b and lower sprayberry. Thanks, guys.
So where we do that look once a year and it did.
It kind of starts with our reserves profits, which is underway right now.
We.
Update inventory with all the difference.
Additional wells, we did with different intervals and we see what the potential is in different intervals and what the returns are so thats just a once a year process and so basically everything standards from what we showed in February and then we update at Ash.
At the end of the year and we will share it in February again.
Okay understood. Thanks, guys.
Your next question comes from the line of Iron pay around with JP Morgan Your line is open.
Hey, good morning, I wanted to get a.
Bit more detail.
The new Frac design that we initiated in the fall of last year.
I was wondering if you could give us a sense of.
How the results of <unk>.
Formed in Howard County versus maybe Sweetie Peck.
So it looks like.
A few months of data and how the Qs trending relative to offset wells in each of those areas.
Yes.
We did start implementing this in <unk> and we have.
So the data from offset operators and others to again my view of what these.
Improvements could do and we thought a very capital efficient incremental capital spend and then Theres just mentioned going from 500 to 520 per foot.
<unk>.
We.
We put it in an 80 of our completions out of the 90 in the Permian year to date and of those 28 have been in place over six months and we saw a clear very discernible uptick in the performance through six months, but as you can guess that the wedge that opens up over time.
No.
It's premature to say exactly what the ultimate benefit will be but we definitely saw a clear trend and then in specific places like coyote valued on our eastern position, we saw a significant uptick and thats. The three wells the miracle Maxwell's that we showed in the slide deck.
So we do see a benefit but I would say we've got a bigger database than just those 28 wells that tells us that.
It's the right thing to do and it's very economic to do so.
Great and just.
My follow up.
Ethane is kind of that.
Okay.
Completing a lot of the extended reach laterals.
In the Midland Basin quite a few wells over.
<unk> K and I think he did you talked about one of the 20, but as we started thinking about 2022 kind of capital efficiency Herb.
Would you expect.
The body that maybe drive lateral lengths could that being kind of a tailwind to your capital efficiency would start putting back together on next year.
So the way I would answer that Arun is that our team and we do these scenarios and so we really model.
And get to know.
The plan that lays out the most free cash flow, so that 210000 foot wells versus the $1 20.
Well, we wouldn't have done the analytics to determine which was the better choice so very.
Thorough and detailed.
In establishing what we're going to do on lateral lengths and so far you've seen steady increases in lateral length.
And that depends on the cost environment.
The production growth.
All I can tell you that we are going to do what maximizing free cash flow in bond and the lateral length.
Great. Thanks, a lot nice results this quarter I appreciate it.
Thanks.
And that concludes the question and answer for today I'll hand, the conference back to Herb Vogel, President and CEO for closing remarks.
Okay, well I just wanted to thank everybody for their <unk>.
Interest in SM energy, we're doing our best to.
Maximize.
<unk>.
Value the company and we will continue to do so thanks Ken.
Ladies and gentlemen. This concludes today's conference you may now disconnect.
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