Q2 2022 SM Energy Co Earnings Call

For we get started our discussion today may include forward looking statements and discussion of 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 <unk>.

<unk> filed its 10-K, and 10-Q, which describe risks associated with forward looking statements that could cause actual results to differ we may also refer to non-GAAP measures. Please see the slide deck appendix and 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 also look for our second quarter 10-Q, which was filed this morning with that I will turn it back to Angela to open it up for questions Angela.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

Yeah.

We will now take our first question.

From Jack Paar Ham with J P. Morgan.

Go ahead.

Hey, guys. Thanks for taking my question I guess first just on the Capex raise could you give us a little more detail on the decision to add a bit of activity.

The 2022 program and maybe just also detail how much of the increase in the budget is from that incremental activity versus the increased inflation expectation.

Hey, good morning Zach.

Thanks for calling in.

So.

How much is from continuing operations.

<unk> background is we've got some great crews that are out there working for us and even when we look within those those operators those service providers, we have some of their best crews when they benchmark them against all the crews that branding.

So we had about four months of activity that was opened in the back part of the year and we said lets close that down and that was on the frac spread side on the drilling side, we've been having improved penetration rates with our drilling which is just you know one of the things we assume we're not going to have improvement in then.

We keep improving and that was a benefit also so there was some additional on the drilling side.

I think we mentioned in the prepared remarks that we had about.

Fix additional drilled in a three turn in lines later in the year. So we put in the capital for that and so the way you can look at is really we just added.

Some inflation of around 10% to 15% on the inflation side and then the remainder was for the continuing activity. So.

That's how you could look at it and some of that roll into 'twenty three yeah, Oh, yeah.

I should mentioned for 2023 is where we actually get the benefit of a lot of that completion. So theres. Some additional completion activity that does not result in an incremental turn in lines. This year that does result in more in 2023.

Yes.

Help me out on that one.

Yeah, that's great color.

My follow up really just one thing we noticed in the guidance update.

It looks like you're now completing five additional wells in South, Texas now up to 43, two last wells in the Permian.

Anything specific that drove that mix shift or is it more timing related really just looking for a little more color on that change.

Yes, no you picked it up back so really what that was is we had a larger gap in south Texas. So we close that gap, it's primarily in south Texas on the Frac spread side and on the Permian side. It's just the timing around the end of the year on the turn in lines.

And we have two that turned in line.

At the after the start of the year, you probably noticed from <unk> wound up shifting some that just turned in line just after the start of the third quarter. So the same sort of thing that you just can't.

Pin down exactly by a matter of a couple of days, which side of it.

And a month, it's going to be that's all that is.

Got it thanks, that's great color.

You bet.

Next we have Gabe.

With Cowen Your line is now open.

Hey, Thanks, and good morning, everybody. Thanks for all the prepared remarks, so far maybe just.

Just piggybacking off of Zacks question, a bit more could you remind us I.

I think there were 20 completions in Midland that were supposed to.

Or 20 wells that were supposed to be completed very early in 'twenty. Three I think January February is that is that still the case and and then would just be curious what the.

With your securing additional equipment into 'twenty three how does that change your view on volumes.

Okay. So gave that that one is difficult to answer it. This way what we said he actually previous quarter was that we had quite a few turned in lines and the beginning of 2023 and that was the result of four pads in the Permian with about 20 wells that.

We said, okay, they're actually going to start up on the other side of the year and so that's.

<unk>.

The crux of what's going on there.

Drill them Fracked, and then drill out the plugs all before bringing on all 20 wells and you can see how that's a massive amount of activity.

No understood. Thanks, Herb that's that's helpful. And then maybe on the cash return angle. Appreciate the prepared remarks from last night, but curious if you can maybe give us a little more color and then also do you anticipate you would do.

Do a little bit of a formulaic approach similar to peers, where you would kind of allocate X percentage of free cash flow to shareholders. Just curious how how the framework. Good luck. Thanks guys.

Yeah, I'll just start that and then hand it over to way just I think gives us great how fast we've gotten this position.

We're able to return capital to shareholders.

We're way ahead of what our original plans were.

It's just the underlying assets that we have they keep on.

Performing better than expected our base performance is doing great the well theyre doing great the enhanced completion designs.

In the Permian have really paid off and then the Austin chalk is just continued.

Help us out on the upside so with that I'll just hand, it over to Wade because that's really what's underpinning that free cash flow generation.

Yes, no I appreciate the question.

And.

I'm not sure I can add a lot you'd be able to premature to be getting into any specifics at this point, but we are really close and thats very exciting being below one times already and having real line of sight to getting below that net debt target of $1 billion. It's obviously exciting and what we shared with you in the prepared remarks, hopefully helps you think about.

How we're thinking about it right now.

Pacific question about percent of free cash flow, it's too too early for me to say anything about that but we're going to do something.

I'm confident as very sustainable and.

I'll just repeat that I mentioned, you could expect something in the fixed dividend area increase there.

And Thats something Thats very reliable that you can count on even at lower commodity prices and we mentioned that debt.

Right now would be something in terms of stock buyback and we always have a view of an internal view.

Hi, My.

My comments.

Saying that we thought that we feel like that's very appropriate at these prices should obviously tell you that our current view of NAV is a higher number and going forward, we will continue to.

To analyze that but that's probably all I should say at this point.

No understood. Thanks, so much for that way thanks, guys.

Yes.

Quick reminder, if you would like to ask a question. Please press star one on your telephone keypad.

Your next question comes from Michael shallow with Stifel.

Please go ahead.

Hey, good morning, guys.

I wanted to follow up on the.

The change in plans with the.

Additional rig and crew.

We're filling those gaps I guess I'm.

I'm wondering how far you've contracted those and I guess for all of your contracts how far are you contracted.

Into 'twenty, three and maybe any kind of insight you can provide on what you would expect when you re up those contracts for next year.

Okay, Yeah, Mike Thanks for joining the call.

There's quite a bit behind that question actually and it deals with the entire supply chain that we have so let me just start with if you're going to be drilling wells you need to have the tubular orders are ready to go to all the casing and.

We're into 2023 on getting the firm allocation and.

Most of it the prices locked down there's some met in 2023, where you still have to pin that down but so the supply chain. We've got to basically run everything through the end of the year on the rigs were actually not picking up incremental rigs here. We're just closing gaps that we had in the schedule, where we would have given them a break.

For some period of time, so a rig wise, it's the same number it just because we drilled faster than expected we are getting more.

Well done.

On the pumping service side.

We're contracted.

But those are different than rig contracts on the pumping service side, but we've got.

Reliable commitment from the <unk>.

Frac service providers, where we're using.

And that is through the end of the year and into next year. So there is we know we can close those gaps without any problem at all and.

And we can continue on into next year.

Without any issues either.

Okay.

Okay I guess.

Have any sense of what you might expect for inflation for next year based on what you've seen so far this year.

No.

We figured you guys would be wondering it's just one of those things that you know after after Russia invaded Ukraine, which is really hard to figure out the supply chain and we Fortunately were had commitments through much of this year on most of what we needed and then we locked that down real fast for this year and start to go into next year much earlier.

Than we normally would and that one first steel on sand. We've also now locked in our sand for 2023.

For South, Texas, which we had opened before so we are progressively going through every single part of our supply chain, making sure. We've got everything when we need it at the best price possible.

It is.

So in some cases, we know what our inflation would be for.

Activities for some others, we don't yet know what it'll be like so it's going to be just part of our normal process. It in the fourth quarter and as we get into the budget for 2023, when we'll pin all of that down.

Okay understood and on to ask it in your prepared remarks, Herb you've mentioned.

13 years of drilling inventory in the Midland Basin, and then you've got some.

Citing results from some new zones looking at slide 16, you've got a lot of zones listed there I'm. Just wondering what is built into that 13 years of inventory in terms of some of these new zones.

If theyre not all built in.

What the potential upside could be there in terms of the.

The overall inventory of these these new zones workout.

Mike I'll, just start by saying, we have a little bit and in every one of those zones, but what we're really doing is expanding what the potential is in each of them.

We.

Run a normal annual process on that which will really be in November we'll start paying that down on how much. We've added in every interval. So we're not really going to update anything on inventory until usual year end.

And then talk about them in February .

More thorough in it.

It's just a comprehensive look at what we can do and end with the same criteria that we've used in previous years, and it's worked well for us and we will do that again last year, we Fortunately we did.

Did a great job of replacing all the inventory we drilled up are completed in 2021, and we hope to have done the same thing in 2022, and we'll see you at the end of the year how that came out.

Okay, well look forward to that.

Yes.

You bet.

If you would like to ask a question. Please press star one on your telephone keypad now.

We have a question from Zack <unk> with J P. Morgan.

Please go ahead.

Hey, just one follow up on the A&D market.

Chesapeake announced they were going to be exiting their eagle Ford position and while that's still early on and we don't know exactly what that sale process is going to look like.

They do have some acreage that directly offsets your northern area in South Texas.

Could that be something you are potentially interested in and maybe just general thoughts on the A&D market in general.

Yeah.

Yeah, Zach gave that thanks for asking that yeah.

Austin Chalk, we think there is just some great acreage out there.

You always got to look at what are the specific land terms in one of the specific midstream commitments on those sorts of things to really get our assessment of value and I don't know how that how that looks and we always evaluate those and if there's something that makes sense for our shareholders. We would obviously look at it.

Our very recent announcement.

So I don't know how that will look in general you know, it's hard to do A&D when commodity prices are where they are and there's a pretty wide bid ask spread from our understanding of how things look with between the sellers and potential buyers to the sellers are looking for the buyers to buy it.

Strip.

And you know a buyer would be looking at more something mid cycle or below the to make sure they could get returns for their shareholders.

It's not a great time from a pure A&D perspective.

From our perspective, and we'll see where things shake out on commodity prices, but there's clearly some great acreage offsetting us in south Texas.

Thanks, That's all for me thanks for taking the follow up.

You bet. Thanks Zack.

There are no further questions at this time I would now like to turn the call over to Mr. Herb Vogel, President and CEO for closing remarks.

Yeah, I'll just be really brief here thanks for joining the call.

If you're wondering why invest in asset manager now I just want to repeat.

We're producing really top tier low breakeven assets in two excellent basins and it's really a great time to be NSM stock. Thanks, again have a great day.

This concludes today's conference call. Thank you for your participation you may now disconnect.

Please wait the conference will begin shortly.

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