Q3 2022 SM Energy Co Earnings Call - Q&A Session

Good morning, My name is Emma and I will be your conference operator today.

At this time I would like to welcome everyone to the SM energy third quarter, 2022 financial and operating results Q&A.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

I would like to withdraw your question again press the star one thank you.

Jennifer Samuels, Vice President of Investor Relations you may begin.

Good morning, and thank you for joining us to answer your questions. Today, we have our president and CEO Herb Vogel and CFO Wade for so as usual before we get started our discussion today may include forward looking statements and discussion of non-GAAP measures I'll direct you to slide two of the accompanying slide deck page five of the accompanying earnings.

Please 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 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 .

GAAP measures to the most directly comparable GAAP measures and a discussion of forward looking non-GAAP measures also look for our third quarter 10-Q filed this morning, and with that I will turn it over to her for brief opening commentary.

Thank you Jennifer good morning. Thank you for your interest in SM energy and joining us this morning.

We've reached a really exciting time for our business and I would like to reiterate that we are very pleased to initiate our return of capital program ahead of expectations.

Our initiation of share repurchases in September was earlier than expected and our first increased fixed dividend gets paid next week.

We designed our sustainable dividend program, assuming $60 oil and $3 gas, which gives us upside flexibility and a stronger commodity price environment, including acceleration of buybacks.

With that let me now turn it to Emma to open the line for questions.

Thank you.

As a reminder, if you'd like to ask a question press star followed by the number one on your telephone keypad.

We do ask today that you limit yourself to one question and one follow up thank you.

First question today comes from the line of Par Ham Lynn with J P. Morgan.

Your line is now open.

Hey, Scott This is Jack on for J P. Morgan.

Just wanted to ask on the the oil cut which which moved a little lower in the <unk> Guide can you just talk about the drivers of that oil cut moving lower and how you expect to walk up the truth and as we move into 2023.

Yes, Zach that that's a question, we hear quite a bit and.

It's really just driven by how many completions come on in Midland versus how many completions come on in South Texas.

Kind of look at it longer term and the quarterly variations in that.

Don't make a difference we just know it's ultimately going to be driven by the capital allocation between South, Texas and Permian, but the returns are what are important and those returns are very comparable between the two areas.

Yeah.

Got it and then just shifting over to the cash returns, particularly on the buyback did about $20 million of buybacks in September .

Can you talk about the pace of that buyback going forward and is that going to be systematic or purely opportunistic and utilized when you're when you're not blacked out.

Yes, Great question. This is wade.

I would I would say it is it'll be somewhat systematic and methodical, but also very opportunistic, we'll certainly hey, Carter it looks on down days I would say that.

But it'll it'll be it'll be down overtime, and we will do some each quarter and.

That's a that's just the way we will play it we always have a view of the Niv and we certainly I believe we're trading below that right now that makes it easy.

Just one quick follow up are you planning on putting in it can be five one plan. So that you can buy back stock consistently when you were in blackout periods.

We have not done that and I would say right now that's not the plan, but thats that could change but currently not.

Hi, Thanks for taking my questions.

You bet.

Your next question comes from the line of Timothy resident with Keybanc. Your line is now open.

Hi, good morning, everybody.

In your press release, you mentioned.

Three high performing wells that proved up the western flank of Sweetie Peck and I was curious if you could provide some more details on the zones or what what essentially you proved up in and why you felt the need to call that out in the release.

Hey, Tim Great question, Yes, those three wells were a one mile step out to the west from our closest producers and they were in three different zones, and we were quite pleased with the outcome of the wells. So thats why we called those out.

Okay and do you have any information on the zones you're testing.

How much acreage maybe that de risks pretty well.

So the ones middle Sprayberry one's lower sprayberry and the other wolfcamp a.

And it just moves to proved the proved category.

Area that would have been in probable or possible previously.

So it's.

It's more.

More or less what we've been doing which is at the same time, we are concentrating on development in the core parts. We're also extending our boundaries and that's a great example of doing that.

Okay. Okay. Thank you for the color and my follow up I wanted to touch on a big topic in the Midland Basin well degradation.

A lot of operators are talking about it you all seem to have been kind of less impacted looking at your results over time.

Just curious kind of what how you think you've sort of sidestep this issue and how you're thinking about that going forward.

Yes, Tim that is an excellent question. So I think if you look at our deck, that's really the whole latter part of the deck is how much time, we spend on modeling the fracs and the wells to get the well spacing tuned to each PSU driven by how much oil is in place in each zone.

The vertical and horizontal interference and that's where I think we really stand out with our ability with the proprietary tools. We have developed and we have that one slide where we show the cloud of all the potential completion designs and where we are compared to kind of the competitors in the in the Midland Basin. So that's why.

We view ourselves as really having predictable wealth for us, it's very easy to predict them.

The performance is.

<unk> always with what we expect.

On a per lateral foot basis, and on a per well basis.

We've got the lateral length fully delivered so it's.

That's really what drives it.

Okay, and then if I could just follow up on that.

Your spacing assumptions over the last couple of years versus how you're thinking about the next two years are those consistent or if you've made any up spacing changes.

We have basically lined out by <unk> and after all these years of tuning.

There is less and less tuning going on each year. So I think we were pretty much.

Right on.

We have done really well with the dean well if those have really outperformed and so we modified some when we saw zones that performed particularly well we've done minor modifications, but.

And the entirety, it's pretty much the same.

Thank you I appreciate the comments.

You bet.

Your next question comes from the line of Gabriel Daoud with Cowen <unk> Company. Your line is now open.

Hey, guys gave here.

Thanks for all the prepared remarks last night I was curious if we could maybe just get an update on some of the supply chain.

Issues that were referenced in the pre released about a month ago or a couple of weeks ago.

And then also the offset Frac issue I guess, how long do you think these issues could linger in just given all the wells that were anticipated to come on and maybe pushed to the right a bit should we expect like a pretty nice start to the year in 2023.

Yeah, Great question, Yeah, we.

Put that early release out to.

Covered the production differences from our expectations and that was really about 60% from delays in turning wells in line and about 40% from offset activity.

The supply chain difficulties really is where we've got a really finely tuned instrument out there, especially when we're simultaneously or even one visit for fracking and if.

The provider has to wait for parts.

Slows us down.

If there's slowdowns in trucking whether that is spare parts or other materials required on our side that can slow us down and then for.

For the service sector, finding and keeping experienced folks labor on the job. That's another challenge so those sorts of things with the activity at the highest level it's been in.

Several years now that's what's really driving that.

In the overall.

The number of completions in the Midland Basin, we completed 14, but some came on later in the quarter then.

Expected and then South Texas, we brought online.

For fewer and two of those are already online now, but two more are yet to come.

So our base production looks great, but it's just a matter of what the uplift timing is that's really the story on that one on the offset activity.

We ate.

Kind of funny actually.

We've been accused of being.

And conservative in our forecast and it's kind of funny that we three quarters in a row, we were accused of conservative well that offset activity was lower than we expected and then this quarter. The outset activity was higher than what we had baked into our estimates so that that will happen at times and not much really we can do about it.

Okay got it. Thank you that's that's great color.

Helpful. Maybe.

On the buyback maybe just.

Curious what do you have to see to get comfortable.

With either accelerating it or or or even raising it.

You noted, it's at a pretty conservative price deck.

Calendar 'twenty three.

And I'm, showing 84 bucks or so so like how long does that have to be sustained or is it something on the debt side. Obviously, you are pretty close to or about to exceed your target. So maybe just help us think about upside to that program and what you guys need to see thank you.

Sure Great question.

As you mentioned, we are kind of right at our target on the leverage side of the well below one times and right around the $1 billion.

Net debt and all I can say right now is that we will move we will move forward.

We will deliver on our commitment to.

Turning to levels to the shareholders that we've that we've talked about and as you mentioned, we built that in pretty conservatively to make sure that would happen. So we used 63, so as we move forward into <unk>.

Finalizing our plans for 'twenty, three and and.

Looking at other opportunities we might have in seeing how stable that the commodity prices end up being that will just be part of the decision, making as we go as we move forward can't give you any like metrics to watch for right now, but the more comfortable we get with the stability.

The commodity and the free cash flow, we're generating theres, obviously, a an opportunity and a possibility that will increase the levels.

On the return to the shareholder side, but too early to indicate any of that yet.

Okay understood. Thanks, Craig Thanks, guys you bet.

Your next question comes from the line of Oliver Huang with T. P. H. Your line is now open.

Good morning, everyone and thanks for taking my questions just wanted to follow back up on the Q4 guide I guess compared to the prior to the initial expectation.

Having encountered the offset frac and supply chain issues in Q Q3 does that 60 40 mix that you just kind of reference for Q3 also hold for Q4 or does it lean a bit heavier one way or the other.

Yeah, Oliver for <unk> always we'd say, it's you know there's been delays in when we can turn some wells in line offset activity is something that's really hard to forecast.

So what we did for our <unk>.

More or less delay.

Turning lines somewhat and then for the opposite activity. We just use our offset activity model, where we know our own offset activity and then we know what offset operators will do sometimes they'll change their schedule, sometimes we will have a delay but it's.

There's nothing specific that I would say pin to percentages of one versus the other.

Kind of all grouped together.

Okay. Thanks that makes sense and for a second question I know you all.

Historically bacon some risking for us a breakdown, but just kind of given the strong commodity prices more players and activity in the basin just kind of wondering if you all are expecting a more elevated in <unk> relative to historical norms when thinking about 2023, just based on conversations.

Other operators have communicated with you in the planning phase for next year at this point in time.

Okay.

Not not really it's something that you know it's it's you know every month to get an update on things that sort of thing. So it's really hard to forecast exactly what the rig count will be in Howard County, That's one proxy is just look at the rig count in Howard County, when its way up there's going to be more activity in the area.

So it was south Texas is different because we've got quite a bit of its.

One wells really very few places, where we've got offset activity directly office.

Perfect. Thanks for the time.

Again as a reminder, if you would like to ask a question Press Star then the number one on your telephone keypad.

Your next question comes from the line of Gregg Brody with Bank of America.

Your line is now open.

Good morning, guys.

Just a follow up the terms on the debt side clearly you are below your leverage target and you've paid down your revolver. So still got another $600 million or so to produce in terms of debt from the bond side to try to get to your $1 billion target.

Talk to us about how youre planning on approaching that is.

Should we think about it you're just calling on the first maturities as they come due or are you thinking about it in a different way.

Yes, Thanks, Greg Good question.

No.

I would you know how we.

Typically bond maturity so.

You can assume that when we're ready to reduce the absolute debt numbers to get down to that $1 billion. As you mentioned, we have a lot of cash right. Now that's why we can say that's close to $1 billion.

It would probably be the 20 fives would be the first target.

Although we watch the trading levels of the others as well, but thats just generally speaking how we do that.

We tapped the brakes a little bit.

On that just given the uncertainty with inflation and interest rates.

It feels like a good time in this in this time of uncertainty and rising rates to have cash. So that's kind of the way we're running things right now as we move forward and build more cash then that will yes.

We'll make those decisions as we move forward, but that's kind of the general thinking.

That's helpful and then.

You had some comments in your pre call, but I just wanted to clarify to make sure I understand them.

When you were talking about inflation you talked about how this year your model for 'twenty, two you averaged <unk>, 20% to 30%.

I think you said that you expected exit rate to be above that number so by 'twenty two.

'twenty three inflation is higher than 25% 30%.

Did I understand that correctly and just how does that translate potentially for your capital budget. Let me think about what you may have locked in.

From this year already and maybe how youre approaching contracting are you thinking about having longer duration contracts to try to address some of the inflation.

Yeah, Yeah, I will I'll respond to your comment on my prepared remarks, let herb add any color. He wants but you did hear it correctly 25, 30 and that we're seeing in an exit rate out of 'twenty to hire and we.

We listed the things that are that are still that are still going up too early to give any specifics on 'twenty three on in those areas though.

Yeah, the only thing ill.

Greg I'll only thing I'll add on that is that we have not done that 2023 budget, we're watching things really closely.

Got it as much as we can lock in the supply chain for next year.

But.

There is no doubt there is inflation going on and.

We don't know when it'll top out.

Because as you considering smaller duration contracts now with some of your providers.

It's also address some of the supply chain issues that you that you have that occurred this quarter.

Yes. It is.

Mix of.

The contracts themselves.

Getting the steel, making sure we've got the steel that we can drill the wells that's a critical starting point and then on the Frac service providers, making sure. We're set there were really good stand supply we are in great shape, because we do lock that in but longer term. So.

We really work that hard.

I'll add summed it up.

Great.

Thanks for the time guys I appreciate it.

You bet.

Your next question comes from the line of Daniel John with Daniels Energy Partners. Your line is now open.

Hey, guys. Thank you for including me.

I've got a quick question on just the supply chain.

The industry activity stabilizes from here do you think the industry sees these headaches ease in 'twenty three.

But what happens in your view, if we see another 5% to 10% activity across the board.

How what's the duration of the headaches if you will.

Yeah John .

Thanks for the question, you probably know better than anyone.

But what it looks like there's areas that are quite tight and if if there, whereas the hypothetical of increase in activity those tight areas. We'll obviously have more inflation I think there's quite a bit of discipline on the E&P side and the service side, but.

But I'm not.

I think the thing is if youre going to forecast forecast often I don't think we're ready to forecast out we're going to we're going to make a put a budget together with our expectations.

November through January timeframe, and we'll go with that and then we'll see where things come but we are focused on our relationships with those key suppliers and service providers and.

Materials.

So thats just.

So what I'd say on that.

Fair enough I've got a dumb Guy question for you know where are we on the evolution of well completion designs any big picture thoughts on that like how often you're testing new designs.

So John I'm going to point you to one slide in our deck I don't know if you've looked at it but.

It really just shows.

Pardon my truck sorry.

And they haven't had.

I'm going to point you to slide 13, and you can see how we.

Moved our completion design to add value.

In some cases it does take additional capital, but the performance that incremental return for that additional capital is phenomenal.

Going to continue to do that you're going to continue to see us get better and you're going to see our competitors moving towards our designs over time.

I think we're right at the cutting edge on that and it's a place we want to be.

Awesome I really appreciate you guys. Let me ask some questions. Thank you.

You bet drop.

This concludes today's Q&A I'll now turn the call back to Herb Vogel, Vice President President and CEO .

Thank you Emma and thank you all for your interest in SM energy.

Thank you.

That concludes today's call. Thank you for attending you may now disconnect.

Please wait the conference will begin shortly.

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Thanks.

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