Q1 2022 SM Energy Co Earnings Call
Good day, Thank you for standing by and welcome to the SM energy first quarter 2022 financial and operating results Q&A at.
At this time all participants are in a listen only mode.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero.
I'd like to hand, the conference over to Jennifer Samuels, Vice President of Investor Relations. Thank you. Please go ahead.
Good morning, and thank you for joining us for our first quarter 2022, Q&A call to answer your questions today, we have president and CEO Herb Kelleher.
And CFO wipe yourself before we get started our discussion today may include forward looking statements and discussion of non-GAAP measures I direct you to slide two be 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 risks associated with forward looking.
Shipments that could cause actual results to differ we may also refer to non-GAAP measures. Please see the slide deck.
An 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.
Mark This morning for first quarter, 10-Q, which we have filed and with that I will turn it back to the operator blue to take your questions.
Thank you.
At this time so that's a question you will need the breastbone one on your telephone keypad again that is star one to ask a question to be drier question just breadth of banking.
Please limit yourselves to one question and one follow up.
Please stand by while we compile the Q&A roster.
The first question comfortable line of Leo Mariani from Keybanc. Your line is open.
Hey, guys just wanted to touch base with you here on Capex.
So just wanted to get a sense in terms of the year here in 'twenty. Two is the second quarter Capex really going to be the peak and is there a noticeable drop off in the <unk>.
Fourth quarter, perhaps there was a frac holiday you know.
Or something like that and then just additionally is a frac holiday if that is the case in the fourth quarter or is that something that can still be feasible. In this kind of tighter service environment or might you have to keep crews on.
Okay. Thanks.
On on Capex first you probably saw in the first quarter that we underspent by about $20 million and we really just timing.
Move down in the second quarter.
The peak activity is really <unk> and <unk> and so that leaves you know more.
Production in <unk> and <unk>.
We are.
Really really liked to keep crews running consistently if at all possible.
Because we get much better capital efficiency that way. So we will do what we can line things out.
With steady activity through the year.
That's really the way it works.
Okay.
And then just also wanted to ask about return of capital.
Just kind of reading some of the prepared comments in the transcript that it sounded like you all believe you'll hit your debt metrics are in the fourth quarter. So it.
It sounds like maybe the border whatever will be in a position in the fourth quarter to maybe make a decision on a return of capital and that will be something that investors will receive in 23, just wanted to make sure I kind of understood the timing and mechanics there.
Yeah, No you heard the comments right Leo.
We've been pretty clear about our met our targets and we're approaching protein really quickly one times leverage but also when absolute debt down to a $1 billion and you know if things stay the way. They are right now commodity prices et cetera, and that should occur sometime in the fourth quarter as you indicated and that would that would be the.
The time that we would start looking at <unk> and a potential return of cash to shareholders and too early to talk about what that might look like.
But it would be something that we feel very confident in being sustainable.
Then the method would be based on things.
Things that we would analyze it at that time.
Okay. Thank you guys.
Your next question comes from the line of Zach Par home from JP Morgan. Your line is now open.
Hey, guys. Thanks for taking my question I guess, one just just kind of based on production trajectory for the rest of the year.
Your guide you know <unk> will be the third straight quarter of declining oil volumes after a big ramp in the back half of 'twenty one.
Can you talk a little bit about the trajectory of oil production in the back half of the year and into 'twenty three.
Yeah, Zach this is herb.
There's some history there with how much we ramped up.
In 'twenty, one in <unk> and <unk> following the weather event in Texas, So that kind of changed how we ended 21 and how we started 22 with relatively few completion at that time, so as we step through 'twenty, two and our activity levels pretty flat here.
We wind up with more and more completions coming on.
That's what leads to great production in <unk> and <unk> and then in <unk>, we have those four Permian pad, we've talked about before so those don't come online Thats 20 wells that don't come online until early 'twenty three.
So it's really difficult to look at the quarterly cadence type of numbers for us when we have those sorts of things going on we just see it year over year, we're really focused on that plan.
Increase and maximize free cash flow over two to three year period.
And that's how the plans designed and that's pretty much the way, we should look at a year over year.
Low single digit production growth.
And but generating a lot of free cash flow.
Got it thanks for that color and just one on the Eagle Ford in the prepared remarks, you talked about completing some <unk>.
Eagle Ford Wells in <unk>, and then three more Eagle Ford completions to do you can you talk about what the what drove the decision to drill some eagle Ford wells versus spending that capital in the Austin chalk and kind of how you think about it drilling Eagle Ford wells going forward.
Yeah. So a couple of things. So there are two of them that we talked about when we would talk to them about the payoffs already delivered and those were tied together with seven Austin chalk wells. So they were right in that development. So it made sense.
So pretty much staggered, though then the newest two are docs that we've had sitting around for a while we have some other eagle Ford docks. So it's very capital efficient commodity prices are right and it made a lot of sense to do those but those were in our original plan for the year.
I think we talked about 38 completions for the year I believe.
Around 30 of those are Austin, chalk, maybe 32% and six to eight our Eagle Ford.
So that was the original plan, but very capital efficient when we can get to the docs.
Okay.
Got it thank you.
Okay.
Your next question comes from the line of Michael <unk> from Stifel. Your line is now open.
Hey, good morning.
Just looking at slide six.
It shows your AR and your slide deck shows you the capital efficiencies clearly been among the best in the industry over the last five years.
Wanted to see if you could provide any update on current well costs I think it's.
Been a while since you put anything out on core current well costs are.
Mike.
Thanks for the question so.
We're still running off of contracts in the first quarter that we've had for awhile. So Ah ha and that goes for <unk> largely baked in cost that we had contracted a while ago. So that's really helps us on the capital efficiency side. The others. We continue to use the same day.
Willing and completion service providers.
What what what happens is we actually wind up drilling faster than expected. So when you when you see things happening with is really just things happen faster and we don't bake that into our budget process, but every year.
I think we're at peak efficiency and then we do better.
So that that's really just a really experienced team with <unk>.
Sustained commitment to those.
Those service providers.
Okay.
Sounds good is it fair to say you're still in the kind of the sub $700 per.
Foot range with those given those contracts and the efficiencies that you're seeing.
Yes definitely.
Sounds good and then.
One of your largest competitors in the Midland Basin, just recently mentioned, they're having issues getting sand wanted to see if you guys are having any problems with that and any plans to.
To address that if it does become an issue for you.
No Mike we're really fortunate there we were quite strategic in getting sand supply committed in 2017 being anchor customer of our new sand mine in Lamesa and are we also use their logistics arm. So we are not having any sand availability problems at all and I'm real pleased with that relationship.
It continues to deliver and we.
Is that fine line is closer to our operations. So we.
I'm on the last mile logistics costs.
Great. Thanks Herb.
You bet Mike.
Again as a reminder to ask a question you will need to press star wondering your telephone.
You have a follow up question from Michael Sharla from Stifel. Your line is open.
Oh, Yeah, I guess keep going here.
No. It's a it's a continuous process when you're working on your your well design.
It sounds like you're pretty far along with the Midland now can you say, where you are in terms of.
The chalk.
Maybe in terms of earnings relative to where you are in the Midland.
The.
Completion design well.
Yeah, Mike that's a great question. So you know we are.
And you're probably aware, we last quarter, we talked about that additional $18 million in data gathering, which will help optimize the completion design and we're in the midst of gathering that data in some cases, we've got some additional data. So we're hard at it we have not implemented anything really differently. So far.
There's one minor variation, but that's that's.
There's still lots to come the interesting thing, though is that we've noticed now that theres 11 operators active in Webb County, and the Austin chalk five of them are public and private so our well resile so definitely been noticed by a by industry.
Activity is picking up out there.
Anything you can.
So in terms of have you seen any other wells being drilled in plants do you share data with any of these or.
Any thoughts around that.
Our approach to the competition.
Yeah.
So Mike we do engage with a few of the other participants on data trades and then some of them are the ones that are quite quite new.
And then we're in the oiler part.
So there's not we're not doing that much with the dry gas folks down there.
But but it's encouraging to see and I'm looking forward to seeing what the well results are looking like.
They sort out the right landing zone.
Some of the early wells were probably not in the optimal landing zone and now you see people moving towards towards the better landing zones.
Got it and then I know you were asked about the Eagle Ford earlier I just wanted to follow up on that.
It looks like those were.
Wells are you'd mentioned, they're going to pay out in less than six months.
Is that strictly attributable to higher prices or did you do anything different with the completion design in the Eagle Ford relative to what you were doing previously.
While our prices definitely help.
On the completion design is.
Pretty much the same that we've been running in the Eagle Ford.
There were a couple that were drilled in 2019 and those.
Our targeting.
Great landing zone, and they're decently long laterals and that helps also.
But we do feel like we have a great Eagle Ford option out there.
That's really not much in our proved reserves, but it's out there in our inventory. So if there is a sustained high gas price out there we have quite a bit of inventory too.
Laughter.
Got it and then I guess, just one last one in terms of inventory anything different on the 400 locations that you've talked about in the in the chalk I know you got the 40 wells now that you do.
Delineated the play with.
Still looking at that 400 locations as kind of the.
The best number for the inventory there any update there.
Yeah, Mike what were sticking with 400 now you know.
What we will see what what more we can do but 400 is quite a bit of runway.
In front of us and we'll work to optimize that over time.
So but.
But they're just a great resource base out there.
Great. Thanks Herb.
Yeah.
Your next question comes from the line of Scott Hanold from RBC capital markets Your line smelting.
Hey, Thanks Hale.
I'm just kind of curious then.
As you start looking into 2020 through there's a lot of obviously concerns about Permian gas takeaway and I know your your production in the Permian typically is a little bit more oily, but you know can you remind us of how you're positioned there if you're if you've got you know firm takeaway, that's gonna be ample and not seeing these issues and you know also in the.
Eagle Ford given the I guess larger kind of gas component. There is there any can you just remind us of what the gas takeaway capacity for you guys is in the Eagle Ford and and you know how.
How are you guys price that are you know are you seeing some pretty good differentials to be able to get into the LNG corridor or other places.
Okay. Yeah. Thanks, Thanks, Scott so.
Let's go to the Permian gas takeaway, so perception last quarter was that we'd see quite a bit of tightness in the takeaway in fourth quarter of 'twenty three.
Since that time Kinder has gone out there and.
So they've been able to do compression expansions and those would be online by fourth quarter of 'twenty three.
That really pushes things out where you wouldn't be oversupplied until the back half of 'twenty four.
We're not really changing our plans at all for any of this because.
On the volume risk side most of our purchasers.
Old firm capacity.
Capacity or they're selling the firm markets. So we don't expect any production curtailments. There that's on the volume of side and then on the price risk side of things do start getting tight.
Put basis hedges in place you'll see in our appendix, we've got basis hedges in place through 'twenty five.
So that that mitigates the risk on pricing if there is a law low out of some sort, but overall no it's going to depend on supply and demand.
Out of the Permian.
People really crank up production when that shortfall might occur, but it's encouraging to see the midstream are stepping up and making sure that we can.
And deliver the gas, which allows the oil to flow.
So that's the Permian on the Eagle Ford you are probably aware that there was a lot of gas production out of the Eagle Ford.
The mid decade from 2014, 15, so theres a lot of spare takeaway capacity.
And what we see and have baked in for July 23, and beyond as some of our old legacy contracts that.
We're at higher takeaway cost higher takeaway.
Basically they will drop by about 35, an mcf and there's plenty of capacity.
The LNG uplift.
We are really just going to be going with the marker. So of LNG pulls out Houston ship channel or Tennessee zone zero or a hub, we would see it brought in that way, we wouldn't see it directly where we could access in international are on the LNG side.
Okay and back to the Permian can you tell us on the purchasers that take away. Your gas. There you said they affirm capacity you know can you say where that capacity down there is there like a you know ample room on those lines right now or is that you know do you have.
As you look at your projections I guess through 'twenty four I mean do you have that you know pretty.
Pretty much locked in.
So what we do is we sell to the purchaser at the wellhead and the purchaser, we only will sell two parties who represent that they have firm capacity on the line or are selling into a firm market like a local market.
So that's that's how we mitigate the volume risk we won't sell to somebody who doesn't have any capacity at all so because they have that capacity. So let's say they got 20%, but one of the pipelines and 15% of another mines capacity, that's where our Mcf will flow.
Got it Okay and then my follow up question is you know as you start in and I think this this quarter you guys Didnt book, a valuation allowance in taxes can you can you remind us of your positioning on cash taxes.
And at this commodity price strip, you know when that when that could occur.
Hey, Scott its way good question.
I I would assume that if things stay the way. They are currently with the strip and in our in our kind of our steady activity.
Profile that we would we would probably begin paying some cash taxes later this year in the in the kind of turned in mid teens.
Area, so not a significant obviously on a go forward basis.
And this is very.
Very round forecasting, but I see something for us.
That getting up to kind of peaking in an area of the $100 million to $150 million a year and that again that.
That assumes kind of a strip type price. So obviously that assumes a significant amount of free cash flow offsetting that.
That's kind of where things could be added assuming assuming theres no no no big changes.
Yeah, and just out of curiosity, what is that like 100 150 million imply on a effective cash tax rate on pretax income yes.
Certainly well south.
The statutory rate.
20% area.
Are we talking like 10, 10, 10, 15% somewhere in there around 10%, yeah, very very round numbers.
Probably somewhere in the half half of the statutory tax rate area, but that's very round numbers.
But that's simply because of the.
The assumption that we continue with a steady capital program all of the tax rules stay the way they are idc's et cetera.
As long as long as those things are in place.
That's what's going to happen with respect to our rate effective rate if you will.
Got it okay that makes sense I appreciate it.
Again, that's a question. Please press star one on your telephone keypad.
Wanted to ask a question.
Yes.
There are no further questions at this time I would like to turn the conference back to Herb Vogel.
<unk> remarks.
All right well. Thank you all for your interest in SM energy and.
Since I've got the time I, just thought if youre asking why invest in SM energy now just consider these key attributes.
First we're producing top tier low breakeven assets in two great basins number one and number four in the country.
We're able to generate significant free cash flow.
Rapidly paying off debt and really moving EV to equity.
We're definitely a premier operator, pushing technical advancements to add value and we are enjoying an intrinsic increase in NAV or E V from confirmation of the Austin chalk. So thanks again for your interest.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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