Q2 2023 SM Energy Company Earnings Call - Q&A

If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again press. The star one. Thank you Jennifer Samuels, Vice President Investor Relations and ESG stewardship, you may begin your conference.

Thank you Rob Good morning, everyone first off I do apologize for any inconvenience yesterday for the delay in posting I'll, let their quarterly materials. Our third party web host had technical issues I guess reporting on the busiest day can overload. The system, we may reference those materials stay including the investor presentation.

And call transcript during today's Q&A call. Thank you for joining US. This morning to answer your questions. Today, we have our president and CEO Herb Vogel and CFO Wade perfect prints out before we get started I need to remind you that our discussion today may include forward looking statements and discussion of non-GAAP measures.

Do you to slide two with the accompanying slide deck page five of the accompanying earnings release and the risk factors section of our most recently filed 10-K, 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 definite.

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 filed this morning, and with that I will finally turn it over to her for a brief opening commentary her. Thank you Jennifer good morning, and thank you for joining us.

Before we get started I just wanted to reiterate a few key messages this quarter.

Our return of capital program has been well received with the repurchase of up to 6 million shares in the quarter and $5 3 million since inception of the program last September <unk>.

Including our sustainable dividend, we have returned $221 million to stockholders in September for a 6% yield over nine months based on the June 30th market cap.

Execution was solid in the second quarter building on a very solid first quarter.

We're very pleased to have increased production guidance reduced capex guidance and geared up to add a rig in October that will help drive slightly higher order growth in 2024.

People, who have followed us know that our ability to build inventory organically really differentiates us that.

We've added 29100 net acres this year to date in the Midland Basin, a 35% increase and the team is excited with these latest 20000 acres to target more deemed potential which today has been producing interval and some of our very best wells in the Midland Basin.

I've got to say this is the best way to add true value to an E&P company.

The first half of 2023 puts us on a trajectory for an excellent year with that I'll turn it back to Rob to start taking your questions Rob.

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 and your first question comes from the line of Zach par him from J P. Morgan Your line is open.

Thanks for taking my question.

I guess first off just like cash return.

Europe returned a significant amount of free cash flow through buybacks over the last couple of quarters in the second half of the year. Your free cash flow is set to expand its production increases in capex declines how.

How should we be thinking about your buyback in the second half will you continue to utilize 70 plus percent of free cash flow to buy back stock and maybe just talk about how the stock price plays into how youre thinking about the buyback.

Okay.

Hey, Good morning. This is Wade yeah, great question Yeah.

All I can say there is as you know.

500 million authorized we've now I used $166 million of that.

So $334 million to go.

I think I did say in the in the in the remarks that the current price looks very attractive to us.

Yeah.

The rest of this year and into 2024.

Thanks, Wade and maybe just one on the new operating position.

20000 acres can you just talk a little bit more about your development plans on that new acreage I know you've talked about developing the team there, but when will you start to initially drill some wells there when would when should we expect to see some results.

Yeah, Zack that's fair. So I think we flagged this at your conference in June , but we're picking up a fourth rig in the.

In the Permian basin in the fourth quarter, and we're going to be first going into another pilot rock Star and then moving over to the acreage as soon as we're ready, but we should start drilling on that acreage.

We will be doing the normal efficient pad execution in terms of when we put the frac spread on there and how quickly we'll we'll do it. So we're just lining up the plans now we're really excited about it.

This is this is the sort of play that.

Our best Wells have been in the game.

So we're really excited to see what we can do up here, we do have a lot of confidence given offset well data both vertical and horizontal wells.

So that's really the plan no more than that.

Thanks, everybody really appreciate the responses.

Got it.

And your next question comes from the line of Oliver Wang from G. P. <unk> company. Your line is open.

Good morning, Herb Wade and team congrats on the strong quarter and thanks for taking my questions.

Just wanted to kind of follow up on the Martin Dawson acquisition, a little bit more I know you. All are very excited about the asset adding highlighted the Dana middle Sprayberry sand intervals as key targets just any initial thoughts in terms of how you all are planning to develop the asset from a spacing perspective.

Also what's the opportunity set to other zones within the area and any color with respect to H B P commitments that you all might have to carry out if any.

Yeah, Oliver So so first of all you know this is not your usual stack Madras Permian play in this area, we're really targeting much more conventional fans with a higher porosity and it's really oil saturated rock and that underpins the prolific wells with that.

Kirk characters is a bit different than your normal place quite good from an economic standpoint.

Right now we're looking at optimizing the lateral length.

As part of that will be putting the spacing in at.

But we will optimize our economics, we use the same approach throughout where we really look at the incremental return for the last well assign to a DSO. So that all that will basically be making sure that we achieve great economics on the levels.

That's that's really the.

The story, there and we'll be getting some well results there and we'll probably be in.

In the first half of next year, we should get some well results from up there, but there's already been quite a bit of offset drilling too.

Just to the southeast of the we have our best wells ever in the Permian Basin that are in the Dean.

Okay.

Okay. That's helpful color and just for a second question in South, Texas, certainly great to see the positive ops update out of there, but just really trying to understand the oil handling project a little bit better it sounds like its completed at this point, but just are we now at the point where volumes from.

Okay, Yes, Oliver I'm, just going to refer back to what we said about a year ago. So b, we're expanding the pipeline to carry the oil out.

Over a three year period at progressively synced up with where we were developing so last year, we did the first part.

This year, we did the second product we finished that early in the second quarter and there will be a third extension of that pipeline next year.

The constraints are relieved at this time.

The.

The only time that we would.

Wind up with constraints that we put a couple of really oily pads on adjacent to each other.

That can flow quite strongly it doesn't affect the world at all it just means that stretches out how long.

Total longer.

We're doing that.

Very efficiently and we try and schedule things, so that we mitigate that but.

We wanted to bring the wells on timely and efficiently and that's what drives it. So the bottom line is yes.

Strains are relieved the constraints will continue to pop up if we don't manage things tightly, but we're planning to manage things tightly.

Awesome, Thanks for the color.

You bet.

And your next question comes from the line of Tamara has been from Keybanc capital markets. Your line is open.

Hey, Thanks for taking my questions everybody.

Oliver hit on.

On one I plan to ask so.

If I could pivot to the mystery Midland Basin asset.

Thank you.

You talked about 90 9100 net acres.

I was wondering.

You know were trying I'm trying to think about that in context of the cash on the balance sheet right now.

And your decision not to redeem.

Your notes that are callable at par right now.

How.

How big is this opportunity set that youre pursuing do you think youre close to kind of getting the acreage put together that you wanted.

Is there a time, where you may be able to sort of share some more information with the marketplace.

Yes, Tim I think we mentioned this before at the J P. Morgan conference that.

We're still see some opportunity to get additional acreage around that.

I'll just give you a heads up that on that slide 13, we show 2023 newly acquired acreage. That's only the most recent 20000 acres, we haven't disclosed yet where the 9100 acres are that we'd like to expand.

So we haven't really given more color, we will at some point and once we have some wells in there will be.

Sharing the results.

But you won't be seen until mid next year sort of timing.

Based on the way, we're planning to go about things.

Yes.

I'll just add to that on your on your balance sheet question, Tim It's a good one.

Carrying the cash right now for me, it's pretty close to a no brainer.

There's 25 notes don't mature for a couple of years and the coupon is five and five eights.

Our cash is earning pretty close to 5% now so it's not a big negative carry to that.

To be able to be more conservative and opportunistic and have some cash and liquidity is always a good thing.

That makes sense.

And then.

One more question I guess circling back on on sort of the gene opportunity.

I spoke to you in December .

You went into great detail on on your.

Do you believe there's more potential to add kind of dean inventory.

And I was hoping opinion down a little more on sort of spacing.

Can we think about this traditionally and like.

Four wells per unit type development.

So just trying to give them a context on kind of what you see there because there's been some debate in the marketplace and you seem sort of firmly.

In the view that this is a distinct and highly prolific area.

Yeah, Tim So I understand why people would have.

Different views about it it's really it doesn't work everywhere you have to really understand.

<unk> and the nature of the and where they are and where they are oil saturated to where the porosity is strong that would allow for high productivity. So that takes quite a bit of detailed mapping you can really start with the vertical well and then it helps when there is offset horizontals to confirm a thought.

The process that you have so I would say it isn't for everyone and everyone's acreage, but there are certain areas, where it will work extremely well and that's what we'd homed in on and we've mapped throughout.

Throughout the basin and said, okay, here's the beams being works here that dean would be wet and hear that Deane. The thin sands are too thin here the fans are really thick.

So we map that through to identify the sweet spots that will give.

What I call top tier returns, which is what we've had in our existing <unk>.

North West Rockstar position.

Which.

Which was underpinned on being performance.

Okay. Okay. That's helpful. So I guess, we should think about this as sort of an ongoing.

The process to continue to find more inventory.

Prospective for the Dean.

I would say I would say, we know where the inventory is and then it's whether we can get access to the land or not.

Okay. Okay fair enough and then if I could just sneak one last one and then to sort of close the loop on the oil handling question.

So in theory, there could be some constraints next year.

If there's issues with the build out but that.

That piece next year would that sort of handle your medium term development.

In South Texas for many years once that final Bill just on next year.

Yes that would do it given that it's just the last southernmost extension of that line.

As al will have left.

And I will make sure we get it in there before we bring the pads on.

It's unlikely that we get pass out early but if it does happen.

That's always an issue, but in this case, where we're ahead of it.

Okay I appreciate all the answers thank you.

Okay.

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

Our next question comes from the line of Scott Hanold from RBC capital markets. Your line is open.

Yes. Thank you.

I'll give some pretty good color on how you're thinking about buybacks.

A little context of.

The dividend side of things do you feel comfortable with where it is do you want.

Do you think about the yield and Michael.

Michael B going forward.

Hi, Scott its weight good question.

We kind of established that dividend level I guess last September October so it will be coming up on a year.

We'll take I certainly can't predict anything at this point, but as we said we will.

We will reassess.

Denali and you can assume we'd be doing that soon and decide whether whether we wanted to.

To increase it or not or leave it where it is based on based on our view of.

The market in commodity and free cash flow generation in the coming years, so stay tuned.

Yeah, but if you could give us some context like how do you think about sizing that is do you want it to be.

Competitive with some peers in this mid cap with larger caps with the S&P 500, a percent of cash.

Cash flow in any kind of view on like how you think about sizing it.

Yes.

That's hard to answer at this point, whether we want to compare it to match with who we want to compare it to I think it's a great question, what we really want to accomplish as a yes.

Is a very sustainable dividend that shareholders can count on even even in low commodity price environment. I think we used 60 in three before so we'll do the same analysis again.

Determined what we think fits that bill.

Okay fair enough.

Thinking about 2020 for you you gave a few breadcrumbs on on how Youre thinking.

The mid single digits growth can you give some context around and I think there were some context around that you know maybe the Permian gets.

There's a little more momentum going into next year. So if you can get kind of discuss how you think about capital allocation and you.

It kind of further cost savings tailwind that would have some implications to the budget.

Yeah, I'll say, a word about that herb can.

Can answer better I mean.

As far as.

Capital allocation.

Deflation is a big question and you know it appears that cost will be lower next year.

Commodity prices kind of stabilizing here at a higher level hopefully so.

That theres Darryl there'll be some.

Simpson.

Allocation decisions coming out of that but determining how much free cash flow, we're going to have first I think as.

Is going to be a big thing for us in the coming months.

Yes, Scott I'll just add yes.

Just picking up the fourth rig in the fourth quarter and we Havent identified how long will it be running it through next year.

But just that alone would with.

With allocate more to the Permian.

Then we did this year and last year.

And obviously it is oily and.

Bobby environments.

Good for that.

So that's really what we're what we're planning to do.

Okay I appreciate the color. Thanks.

Thanks Scott.

And there are no further questions at this time, Mr. Herb Vogel I turn the call back over to you for some final closing remarks.

Okay, well. Thank you Rob and we are very pleased with our first half successes and we are well positioned to continue this trajectory to build value and deliver returns.

Thank you all for your interest and we look forward to seeing a number of you at upcoming events.

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

Please wait the conference will begin shortly.

Sure.

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