Q2 2023 SM Energy Company Earnings Call Pre-Recorded
When we get started on our prepared remarks, I'll remind you that our discussion today will include forward looking statements I direct you to slide two of 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 <unk>.
<unk> to different we will also discuss non-GAAP measures and metrics definitions and reconciliations of non-GAAP measures and metrics to the most directly comparable GAAP measures and discussion of forward looking non-GAAP measures can be found in the back of the slide deck and earnings release, today's prepared remarks will be given by our president and CEO .
Herb Vogel and our CFO Wade peso I will now turn the call over to her.
Thank you Jennifer.
Good afternoon, and thank you for your interest in SM energy I'll start on slide four Youll see second quarter performance was excellent and built upon a very strong first quarter I believe that <unk> is well positioned to meet or exceed our strategic objectives for the year, Let me step through the progress we've made against each of these.
The first objective is to deliver increased return of capital to stockholders in the second quarter, we opportunistically repurchased two 6 million shares of stock, having now repurchased five 3 million shares since the program's inception in September 2022.
And then together share repurchases and our sustainable dividend return of capital was $87 million in the quarter or 92% of adjusted free cash flow and return of capital has totaled $221 million since September .
The second objective is to focus on operational execution.
Strong well performance, particularly in South, Texas and completion of this year's expansion of our South Texas oil handling facilities demonstrate our success in this area. As a result, we have increased production guidance for the year by 1 million barrels equivalent while at the same time lowered capital expenditure guidance by $50 million.
Driven largely by deflation in diesel and steel.
Our commitment to being a premier operator includes top tier ESG performance and we were recently recognized by basin wide independent methane emissions for not only ranking in the top 10, but actually ranking number two among Permian basin operators for lowest methane intensity.
In addition, we are ranked sixth out of 41 operators by rice to add for all around ESG metrics.
Finally in the ESG area, we received the Denver mile High United Way Community Champion award for engaging year round to inspire our employees to give volunteer advocate and lead.
The third objective is to replace and build inventory during 2023.
In the second quarter, we added around 22800 net acres in the Midland Basin, bringing our Midland basin position to around 111000 net acres up from approximately 82000 at the start of the year.
Identifying and executing these transactions employees the expertise of our Geosciences engineering and land teams, enabling organic growth, which as many of you know is an area, where we have developed a very strong track record over the past several years.
In turn we expect to add a rig to the new acreage in the fourth quarter setting us up to deliver both oil production growth and inventory expansion in 2024.
I'm very pleased with our performance in the first half of 2023 as you know we issued a release in late June in conjunction with the Jpmorgan conference, indicating that second quarter results were exceeding expectations. We.
We enjoyed a lot of positive follow up from the investment community along with a more than 25% increase in the stock price and the full second quarter results came in even stronger than we expected even exceeding what we announced in the third week of June .
I'll now turn it over to Wade to speak to the drivers of those results and our expectations for more of the same weight.
Thanks, Good afternoon, everyone.
I'll start with my favorite slide which is fine.
I would just begin by saying that during the second quarter all of the strengths of SM were on full display I'll look at those second quarter results first and then turn to guidance for the remainder of the year.
As a reminder, and as we like to say asset in energy as a premier operator top tier assets delivering a sustainable return of capital empowered by our strong balance sheet and world class Technical team, we're poised to repeat this success.
Looking first at slide six as a premier operator of top tier assets execution in the second quarter was fantastic, resulting in production of $14 1 million Boe.
Our 154, 4000 Boe per day exceeding our initial guidance midpoint by 5% and delivering higher oil production caps.
Capital efficiency and cost savings led to Capex coming in 12% below our initial forecast and key Bottomline results included GAAP net income of $1 25 per diluted share adjusted EBITDAX of $390 million cash flow from operations adjusted for working capital changes of $362 million and adjusted <unk>.
Free cash flow of $95 million I believe all of these beat consensus expectations.
Turning to slide seven this slide gives the results by line item, which are generally as expected. Although LOE came in a little better than projected. This predominantly reflects the timing of Workovers, we expect LOE per Boe to increase towards the high $5 range in the second half of the year, including Workover timing and higher water handling costs.
With more oil wells coming online.
Moving to slide eight and delivering a sustainable return of capital during the second quarter, we repurchased more shares in a quarter than we have done since 2006.
The stock was trading in the mid $20 range, we admittedly leaned in a little more purchasing $2 6 million shares at an average price of $26 95 per share and as an aside we believe where the stock is currently trading is very attractive as well.
We also returned capital to shareholders through quarterly dividend of <unk> 15 per share turning now to slide nine and the final part of who we are which is empowered by a strong balance sheet and world class Technical team. We're poised to repeat this success as we announced in June we added 22800 net acres in separate transactions for what we bill.
<unk>, our top tier assets in the Midland Basin, the largest transaction of 20000 acres in North Martin and Dawson counties close for $96 million.
Even after these acquisitions and increased return of capital in the quarter. The balance sheet remained strong at just <unk> seven times levered with lots of liquidity, our cash position of nearly $400 million and a very healthy and well spaced maturity schedule.
I will point out that our net debt of $1 $2 billion is after acquisition and leasehold cost of more than $100 million. This year and return of capital since inception of the program last September of $221 million.
<unk> been asked about the allocation of free cash flow, which is clearly a balance and we are well positioned as we consider returning capital to stockholders reinvesting to maintain and build our high quality portfolio and further reducing debt.
Now I'll turn to guidance on slide 10.
As recently announced we increased full year production guidance by 1 million Boe.
To reflect better performance in South, Texas, and additional volumes from our North Martin and Dawson Counties acquisition. This includes a slight uptick in the oil production percentage as well.
We reduced full year capital guidance by $50 million to incorporate deflation realized in steel and diesel costs as well as a flattening of rig rates versus our February assumptions.
We also reduced full year LOE expense per Boe 50.
And are keeping LOE guidance at $5 25 to $5 50 per Boe for the year.
Slide 11 drills down on guidance and provide you some specifics for the third quarter and capital activity by area given the synergies of the recent 20000 net acre acquisition, we plan to add a rig in the fourth quarter, which will stop elsewhere and Rockstar and move to the acquired acreage. However, the added rig is not expected to add production.
Action this year, but will contribute in 2024.
In general, we reaffirm that $1 5 billion capex for the year and expect the capital cadence for third quarter and fourth quarter to be flattish, despite adding a rig in the fourth quarter.
Second half of 2023 capital activity is weighted toward our Midland Basin operations, and our recent acquisition leading to stronger oil production for 2024.
Production cadence is also expected to be flattish at around 14 million Boe in each of the third and fourth quarters, which points to the higher side of that full year guidance range.
The oil percentage, peaking around 44% in the third quarter and around 43% in the fourth quarter I'll just close by repeating all of the strengths of SM sustainable and repeatable business model were on full display in the second quarter I will now turn it back to her to walk you through a few highlights from the field Herb. Thank you Wade.
Skipping to slide 13 in the Midland Basin here, we have mapped our 20000 net acre acquisition located in Dolphin and North Martin counties, which closed at the end of June .
As previously reported based on extensive geologic data and demonstrated economics from nearby wells, we intend to target that Dean and middle Sprayberry sand intervals.
Duction from the areas about 1200, 50 Boe per day and is 90% oil.
We estimate that new wells will breakeven on average at less than $50 per barrel oil, assuming $2 50 per mcf gas and a 10% discount rate, we will update inventory to reflect this acquisition at year end.
Year to date, we've also acquired leasehold positions covering another 9100 net acres in the Midland Basin located in an area that we have not yet disclosed skipping.
Skipping to slide 15 to look at Midland Basin, well performance and regional breakeven cost benchmarks.
We have updated the chart on the left which now includes more operators demonstrating our superior well performance in Howard County.
The chart represents wells completed between January 2021, and April 2023.
The lower Black line represents the average cumulative oil performance from a peer group of 17 operators in Howard County during the period and the upper Blue line is the average of SM wells.
The SM average outperformed the peers, assuming normalized lateral length, producing 31% more oil as updated through the first 25 months on production.
The chart on the right we have shown before which shows FM has the lowest breakeven cost operator, among 11 Midland basin peers.
This is essentially the result of our exceptional well performance shown on the left combined with capital efficient operations.
Having among the lowest breakeven assets in the Midland Basin underlies, our sustainable profitability and underpins our top tier assets label moving onto our South Texas Austin Chalk on slide 16, which is updated for our second quarter performance.
The 10, most recent wells for each IP 30 had an average 30 day peak production rate of 2330 Boe per day, producing an average 42% oil and 71% liquids.
These wells are located across our position as you can see by the Blue stars.
SM has completed 85 wells in the Austin chalk that reached IP 30 as of July 2023.
On the right is updated with more time on previously reported wells and the 10 new wells.
Here you see the continued and consistent excellent performance and on Slide 18, a reminder of the predictability and repeatability of the Austin chalk wells in our area.
Let's take a minute to look back at the positive evolution of our South Texas assets over the past few years.
In the second quarter of 2019, so four years ago oil made up only four 9% of South Texas production.
Transportation expense was $8 46 per Boe.
And our cash production margin was $5 59 per Boe.
Fast forward to today, and South, Texas production is 23% oil and Austin chalk LOE and transportation charges are cut in half from the second quarter of 2019.
As a reminder, our legacy transportation contract expired at the end of June this year and that is expected to reduce costs, even further by about 35 per mcf.
The tremendous improvement in our South Texas Economics is attributable to the incredible success of the organically identified and developed liquids rich Austin chalk and improved midstream costs moving to slide 22, I Hope you caught last week's press release, indicating that all of our updated ESG materials posted to our website.
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Again, we have included responses to the CDP Tcf D and FASB frameworks.
We also provide summary pages of key metrics for each of E F and G, which had been expanded this year.
I will wrap up by reiterating our theme SM energy presents a sustainable and repeatable business model that is characterized by outstanding operations.
Strong balance sheet growing return of capital stockholders and strategic inventory growth.
Thank you for your interest in SM energy and I'll look forward to our Q&A call Tomorrow.
Yes.
Yes.