Q1 2023 SM Energy Company Earnings Call - Q&A
Good day, everyone and welcome to the SM energy first quarter results Q&A discussion today's call is being recorded I would now like to turn the conference over to Jennifer Samuels VP of IR and ESG stewardship. Please go ahead.
Good morning, everyone and thank you for joining us today for our Q&A session to answer your questions today, and we have our president and CEO , Herb Vogel and CFO away or so before we get started as usual our discussion today may include forward looking statements and discussion of non-GAAP measures and there are two different geography.
Things like that can page five of the accompanying our.
Our earnings release and the risk.
Factors section of our most recently filed 10-K, which describe risks associated with forward looking statements.
Cause actual results to differ.
I refer to non-GAAP measures, please see the slide deck.
Our earnings release for definitions and reconciliations of non-GAAP measures to the most.
Directly comparable GAAP measures.
Sure.
These non-GAAP measures as a reminder, we have posted.
Investor presentation.
Two our prerecorded call from yesterday that we may reference on the call today and look for the first quarter 10-Q filed this morning with that.
That I will turn it over to her for brief opening commentary herb.
Thanks Victor good.
Good morning, and thank you for joining our Q&A call. This morning.
Before we get started I will reiterate a few key messages this quarter.
We're pleased to report that we have repurchased two 8 million shares since inception of our return of capital program in September and including our increased fixed dividend. We have returned a total of $134 million.
Well positioned to provide a solid return to our shareholders in 2023 through the combination of our fixed dividend and upside through share repurchases.
Execution was solid in the first quarter, not only exceeding guidance for oil and total production volumes, but recognizing notable operational achievements such as drilling 75000 feet of lateral 20 days faster than planned.
Or successfully drilling five to 18000 foot laterals, which are now among the longest laterals in the Midland Basin.
It is a key objective to maintain and build our inventory and during the first quarter. We made progress on this front with organic growth through the purchase of 6300 net acres in the Midland Basin.
This first quarter is a solid start to what we believe will be a great year with that I will turn it back to Liza to start taking your questions.
Thank you if you'd like to ask a question on the phone lines today. It is star one on your telephone keypad and if he would like to remove yourself from the queue that is star. One again, we will take our first question from Scott Hanold with RBC capital markets.
Hey, Thanks, good morning.
You all had a pretty good start to the year on year production performance.
Can you I know you gave some color on your prepared remarks last night and in your press release, but can you give a little more color on you know what sort of things are you seeing it seems like there's better operational efficiency, maybe a little bit better well performance and you know it is it is part of it too as you extend these laterals are seeing better performance or is that more on the come yet.
Yeah, Yeah. Thanks, Scott I would say, it's just a regular blocking and tackling.
Well results are actually quite predictable on.
What they do and.
It's a matter of how much offset activity there is and it was pretty much in line with what our expectations were during the quarter.
The base performance has been great.
Our base decline PDP wells and then the new wells are performing as expected or better and in one case in the case that Eagle South Texas pad seven wells came on a week early.
So I would just say, it's we find it very predictable part of our World and then on the uncertainty is just how much offset activity we've got anticipate.
Okay, Oh, no I appreciate that and you.
As my follow up you talked about that.
I'll pick it up a little bit of acreage can you at a high level talk about the strategy. There and is this more tactical kind of bolt ons or do you see the opportunity to kind of continue to do more of that in scale up a little bit.
I'm just kind of curious like how big of kind of acquisition, how much acquisition activity in terms of size do you feel comfortable to do.
Yeah. Scott This is herb again, I would say, we've all along since we really built our position in the.
The Midland Basin, we've been looking at acreage trades acreage acquisitions, where it makes sense. Unfortunately, our geosciences team has its pretty laser focused on intervals that are differential in terms of their return performance and we keep looking at places where it makes sense and where we can get the acreage at.
A reasonable cost and that was certainly the case.
The last quarter of last year first quarter of this year and we're going to continue to do that.
There are large packages theyre small packages on the market right now private equity is as you know.
Selling some of their their positions we look at those if we can get something that makes sense.
From a returns perspective, we looked at it hard and <unk>.
Obviously, we can keep it at a scale that makes sense for the kind of thing because we're not going to do something that <unk> the balance sheet.
So that's sort of the outlook. So yes, we'll keep looking.
Okay, Alright, So assembly you know theres been some larger deals that have happened nearby you look at things like that it just has to make sense of that is that a fair way to look at it.
Right exactly yes, it makes sense for the scale of our company and the quality of the acreage we have a really high bar on that quality of acreage metric.
So that we make sure we continue to get those high returns that we currently enjoy.
The Midland Basin, and the Austin chalk in South Texas.
I appreciate it thank you.
Thanks Scott.
We will take our next question from Leo Mariani with Roth MTN.
Hey wanted to follow up a little bit more in terms of this 6300 net acres shall bought it looks like around 10 million Bucks you know relatively low price I guess roughly $600 an acre or so.
Is this kind of more exploratory acreage just looking at the slide deck it looks like its not in Rockstar.
In Sweetie Peck, if I'm reading that correctly and is there any color you know whether or not there is kind of well control on this stuff is just kind of more away from sort of the existing assets and maybe you've got some some intel there that you think this can be promising just any more details would be great.
Yeah, Leo I know a lot of people would be curious about that and obviously, we're not saying we wouldn't put it on the math, if we were and you'll see more in the future about that but right now, we're really not saying anything more.
Okay.
And then just in terms of the chalk wells you guys have these seven wells whats your you're clearly saying came on early but it sounded like very strong performers as well just trying to get a sense. There have you guys benefited at all from kind of the the new completion designs and you guys have been experimenting with.
Over the past handful of quarters is that potentially leading to some of the strong performance on these wells or is that something that's maybe more late this year into next year and then.
Just on the midstream side you guys, obviously had.
Some issues in the fourth quarter in terms of not being able to flow. Your wells do you feel like those midstream issues are behind you on the chalk now this year.
Yeah, Hey, thanks for the great questions first of all I'll, just say that all our new Austin chalk wells outperformed our expectations.
It has been great to see all of the improvements in some of that is completion design improvement. There's a there's a number of other factors why they perform better.
You'll recall, we did have too much oil in our.
Prof facilities last quarter in the third quarter last year.
That steadily being relieved and we should be done with that by the end of the second quarter.
So that's that.
That kind of which made state data look kind of odd because wells were basically capped and what they could produce because of the high back pressures.
Steadily being relief. So we don't anticipate that problem extending to the end of the year, we do have to watch it when we bring out a lot of wells that are very oily.
We have to really watch and choke back to make sure. We don't wind up with a problem that way, but we've managed through that one and now youre able to see those how good those wells really are that we've been drilling and part of that is all the optimizations, where we're doing and some of that is very detailed and the completion design itself.
And some of it is just more.
The laterals and interval being targeted.
I think that got all your actuals.
Yeah. Thank you very much its very thorough I appreciate it.
You bet.
We will take our next question from Zack <unk> with J P. Morgan.
Good morning, Thanks for taking my question I guess first just on cash return Youll returned over 100% of free cash flow to shareholders. This quarter.
Going forward do you plan to remain purely opportunistic with the buyback or have you considered putting in it can be five one plan just trying to get a sense of the future pace of the buyback.
Yes, good morning, Zach it's Wade.
Just to answer the last part of that question first no no current plan to fit an attendee.
Program.
We're basically executing the way the way we said we would.
I see no reason that won't continue.
It is Tim.
<unk>.
Yes, yes.
During open Windows and I will say the first quarter was probably the shortest open window of the year, just because of the timing of year end reporting.
But we just we just like to kind of methodically go through those open windows and support the stock.
Certainly have a view of NAV.
So when we feel like there are times of undervalue, we lean in a little bit more probably saw some of that in the first quarter, but that will continue and we moderate all of those expectations with humility towards the macro and what could happen over the remainder of this year next year or so.
That's kind of the.
Plan and just to remind everyone. The board authorized up to $500 million share buybacks through the end of next year.
And I guess so far.
<unk> were close to 100 million. So you can just kind of see where executing.
Exactly I think the way we said we would.
Thanks for that color Wade just.
Just to follow up on something you said in the prepared remarks, you mentioned you were starting to see some improvement on cost and mentioning that rig counts have moved lower industry wide. At this point what are your expectations for any cost deflation later this year and how could that impact your capex budget, maybe in the back half of the year and into 'twenty four.
I would just comment and then let her give color if he wants that we certainly are not baking any of anything in at this point with respect to rig rates and completion rates.
There are some as I mentioned in the in the comments.
Utilization does appear to be falling and rates do appear to be plateauing, so that could bode well for the second half, but we're certainly not guiding.
Guiding our planning on any of that yet.
Yes.
That guy anything you'd probably hear this from a lot of the operators, but clearly.
Clearly, we've seen reduction in our diesel costs and diesel costs actually a pretty significant component of our capex and probably call. It a 25% reduction from the fourth quarter.
Steel costs are rolling over very clearly.
Rig costs.
You are aware, we feather our rate contracts are one year contracts. So every two and a half months, we have another rig contract come off and theyre getting exposed to market rates and we see that as so far flattening.
So that's another component and then on the pumping services side.
It looks like Theres, some gas basins that are lending crews go in some Permian pickups.
Fracs, we monitor how many new ones are coming into the market in the fourth quarter. There were seven new frac spreads in the first quarter. There were three in the factories can be quite a few coming on in the second quarter. So.
And.
We got a great contract and a great provider on the sand side.
And then the <unk>.
Sand last mile logistics is another area and thats, partly driven by diesel costs. So we benefit there.
And that's something that gets.
Renegotiated quarterly based on what cost indexes are so there's quite a bit to look at on the inflation side, but we're pretty comfortable with where we are what we budgeted and our assumptions. So we don't see a need to change anything at this time.
Thanks, that's great color.
We will take that question.
We'll take our next question from Tim <unk> with Keybanc capital markets.
Good morning folks I wanted to dig in a little more on the South Texas gathering issue because I know it was a big headwind in the end of the year.
Herb you just gave commentary you think it will be behind you by mid year.
Can you talk about specifics about what is happening and what gives you confidence that that'll be behind you.
Yeah, Tim Yes, it's all around the facilities together with our midstream gathering partner.
There's a lot of components to what we're doing there. So we've talked about before the backbone, where we put in or.
Or aggressively putting in larger pipe line.
Your line looping to get more capacity, but there's components from separation optimization pipeline modifications, then theres some automation to reduce manual intervention. So overall, it's just to increase the liquids handling capacity.
To a system that was designed for much dry gas from the Eagle Ford and so when we drill very oily wells, particularly in that northwest area.
To expand the capacity of the oil rates are much higher and faster than we would have anticipated when we commenced the Austin chalk program and so now where we're playing a little bit of catch up and we should be there by the end of the second quarter.
So it's a great problem to have too much oil.
Yeah.
She could flow it yeah, it's a good problem I guess.
Okay I appreciate.
We said that that context and then.
I just wanted to circle back to the repurchases I guess wait had mentioned.
The window with sort of short in the first quarter, but $40 million was slightly higher than what you did in the fourth quarter.
Barring any unforeseen issues.
You can't repurchase does that seem like a good steady cadence to model going forward.
Generally yes.
Every quarter, we will have it.
When we look at it every day and as I mentioned, we there will be periods, where we lean in a little bit more based on our view of how the stocks trading but generally speaking.
Yes, you could assume something like that.
Okay. Okay. Thank you and then if I could just sneak one last one and Tom you continue to build cash on the balance sheet.
You have.
Well over $350 million, which is the.
2025 note.
Size.
To view that cash is sort of the offset for that debt maturity.
Would you expect to continue to grow cash.
The next year or two as you have these bond maturities due or how do you think about the right capital structure.
Yeah sure. Good question and yes, everything you said is accurate.
We are we are building cash we are generating free cash flow, so kind of everything else equal you could anticipate that dip.
Depending on when we decided to take out the maturities.
The 2025, which is obviously the first maturity that's facing us is still over a couple of years away.
Credibly attractive coupon in this environment at five and five eights.
That's probably better than investment right now.
For our peers. So the interest we're earning on the cash is not that far away from that so theres not a lot of cost to.
Continuing with the cash to continue with the cash deals.
Feels like the right thing to do in this environment still a lot of uncertainty. So we'll take another hard look at it.
And a couple of months or less and a couple of months those 25 become callable at par.
So we will take another hard look at that at that time, but youll see us take those out at some point, but in the meantime, you'll I think we've got a nice cash balance and it will grow in.
Subject to two opportunities.
That are always hard to predict so really happy with the condition of the balance sheet obviously.
Okay. Thank you for the color.
You bet.
As a reminder, everyone that is star one to ask a question. We will take our next question from Oliver Honk with T. P. H N continuum.
Good morning, everyone and thanks for taking my questions.
Quick question on the longer laterals, but it looks like the team has been able to successfully push the envelope at this juncture on lateral length with the $5 18000 foot lateral wells online in Q1, just wanted to see if we might be able to get a bit more detail in terms of what from the primary challenges that you all.
Third were expectations for well productivity on a per foot basis relative to the smaller came all are as you all have been predominantly averaging over the last few years.
And just how many more of these currently sit as prospective on your acreage footprint is.
Yes, although that's a great question, obviously, one that we monitor very very closely.
As you're probably aware we have.
Do you have the longest wells in the Midland Basin, where you have a big database and I will say I was skeptical at first but its pretty much one to one and you are aware, we hold the Texas record with the longest lateral all just about four miles. So we do have a big database and we're pleased with the way the.
The long laterals are panning out about lease geometry is really what drives how long those laterals are.
So it's just a matter of when we see an opportunity to extend and improve the economics significantly then we'll pursue the longer laterals. If we don't see that improved of economics. Then then we don't.
What are some of the issues with long laterals as you're probably aware a lot of these when we start production with the lower <unk> wells with the high oil percentage that the.
Electric submersible pumps can only pump so much.
So they wind up on plateau, a little bit longer than it would be with a short lateral.
But the overall returns on these wells are great because the costs are so much lower.
Technically what's important is to really get a slick straight drilling process, you really have to have great coordination junior drilling completions team and what they can do with the Fracs and then the drill outs.
We have some things that we do to make sure that we get full contribution from the from the toe stages.
I think some companies will bend their pick on that one, but where we've been successful on that that part of it also so that's really the summary, and I'm not going to forecast how many of these come up but there are great opportunities and we look at them hard and we do have a big database.
That makes sense. Thanks for the color there and for a second question.
Just on the production side solid quarter relative to expectations, you all had laid out and another sort of difficult question to answer but we were wondering if there was any level of detail you all might be able to provide in terms of how much higher production levels could have luck with wells are performing at optimal levels, if not for frac shut ins from.
Operator activity just to kind of help investors better understand the full potential of your asset base.
Yeah, Oliver I would just say you know the <unk>.
Number of wells.
Wells, we have and in the Permian Basin.
Our type curves there they are solid we don't move them around much year over year. They are solid and we have additional intervals coming on as Youre aware, we broadcast the eight different potential target zones.
And they're coming in as expected we are really good at optimizing the spacing, both vertical and horizontal where we're co developing.
So I would say the well results are very predictable in the Austin chalk now where I think we have 75 wells that have already reached their IP 30, and we've got another seven online beyond also 82 total.
That's very predictable also so what what.
What is hard to predict it.
When theres offset operators lessor problem in south, Texas, but in the Permian, if theres offset operators and we do have a reasonable forecast we do communicate so we know when they're going to have that can happen, but sometimes somebody will be delayed.
Changed their schedule and that May change things. So that's the way I'd sum it up I don't think it makes any sense to say here's what the wells could've done and then we're going to subtract this for potential shut ins.
I think we'll just show over time continued great performance of the wells and it's really bottom line. It comes down to how much free cash flow right. Because our plan is set up to maximize free cash flow over a two to three year period. So that's the number we focus on free cash flow more than that.
And then anything else.
Awesome, that's helpful and if I could squeeze one last question.
On the inventory side I know you all highlighted six Leonard well test in the first half of the year and seven Wolfcamp D. Test in 2023, just any color to provide in terms of the spacing designs that these tests are they part of the co development pad are these tasks across specific.
Specific portion of your acreage or is that something thats looking to be a little bit more localized just trying to understand that a bit better.
Yeah, I'll, just say the Wolfcamp b is entirely isolated with a thick thick section.
Between the Wolfcamp D and the prospective Wolfcamp b, so theres no frac interference. So you don't need to do co development, there and we've been working on what's the appropriate lateral spacing in the the best target intervals Wolfcamp these quite thick.
So that's that's really the focus of our effort we have quite a few wells and then theres a lot of offset operator wells also.
Trying to get a big database.
The forecast the performance there.
On the Leonard the Leonard will work, where it's thermally mature and so you have to have a pretty good sense of thermal maturity and the Leonard to understand where those wells will perform well and we're gathering additional data on that we really don't have any additional results to share yet on the Leonard and Wolfcamp B.
But as they get to their IP <unk> and <unk>.
Then we will start having some data out there, but so far.
It's up it is a focus for 2023.
Awesome, Thanks for the time.
You bet.
And we have a follow up question from Leo Mariani with Rob and Ken.
Hey, guys. Just a quick question around cash taxes do you guys have kind of an estimate of roughly how much do you think thats going to be at kind of current commodity prices here in 2023.
Yes.
It's pretty similar to what we said before a pretty pretty nominal this year 2023, probably.
Wrote it $10 million based on current commodities. If you look out to next year, it's probably a little lower than I would've said before something in the 66 zero.
Dollars range, and that's kind of a run rate for a few years beginning next year.
Estimate right now.
And it was of course zero and it was of course zero this quarter.
Okay. That's helpful. Thank you.
You bet.
And there are no further questions at this time I would like to turn the call back over to Herb Vogel for closing remarks.
Thanks, Lisa and.
Thank you all for your interest and we look forward to seeing a number of you at the upcoming May and June conferences in Houston, and New York.
And that does conclude todays presentation. Thank you for your participation and you may now disconnect.
Please wait the conference will begin shortly.
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