Q3 2023 SM Energy Co Earnings Call

Greetings welcome to SM Energy's third quarter, 2023 financial and operating results Q&A.

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At this time I'll turn the conference over to Jennifer Martin Samuels, Vice President Investor Relations and ESG stewardship Jenna.

Jennifer you may begin.

Thank you. Good morning, everyone. We are speaking to you today for my particularly beautiful day in Colorado land Prime time events. So let's get started on our event today in today's call. We may reference the earnings release, IR presentation or prepared remarks, all of which are posted to our web.

Site to answer your questions today, we have our president and CEO her bogo and CFO weight or so before we get started I need to remind you that 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 our most recently filed 10-K, which describe risks associated with forward looking statements that could cause actual results to differ please see the slide deck appendix and earnings release for definitions and reconciliations of non-GAAP measures to the most directly comparable comparable GAAP measures and discussion of forward looking.

non-GAAP measures also look for our third quarter 10-Q filed this morning with that I will turn it over to her for brief opening commentary.

Thank you Dan.

Good morning, and thank you for joining US let me start by reiterating a few key messages. This quarter a return of capital program continues to be well received we have repurchased approximately 6% of shares based on shares outstanding as of September 2022, we've increased the dividend twice most recently, a 20% increase while at the same time.

We are maintaining net debt to adjusted EBITDAX at one seven times and increased our Midland basin acreage position by 35%.

Execution has been outstanding in 2023 underscored by several third party charts, we presented a slide deck and we are excited to get out and demonstrate the value of our new assets with a fourth added rig in Midland as you can see we have increased the number of expected fourth quarter completions in Midland from six to 11 and will have added benefit in the first quarter.

From the higher working interest in wells gained through the asset.

Exchange that we just reported setting up for a more oily first quarter and stronger oil trajectory in 2024.

As we close 2023, SM energy is very well positioned to deliver on a continuation of our core strategic objectives in 2024 with that I'll turn it back to Rob start taking your questions Bob. Thank you.

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One moment, please while we poll for questions. Thank you.

Thank you and our first question today is from the line of Dave Daoud with Cowen. Please proceed with your question.

Yeah.

Hey, Thanks morning, everyone. It's Gabe <unk> from Cowen was gosh I was hoping we could maybe start with for Q looks.

It looks like oil are expected to decline quarter over quarter, but Midland sales have actually increased relative to your prior outlook. So just curious if you can maybe give us a bit more color on what's going on there.

Yeah. Gabe this is herb so yeah, we were really not really focused on that quarterly cadence.

Bringing on a large new pad earlier later by a month can have an impact on quarterly rates, but it's really not material at all from a valuation or cash flow perspective.

So we're not really focused on that.

Okay. Okay got it got it so just timing related to.

To a large pad, okay, and then as a follow up I was hoping we could maybe get some more color on the asset exchange.

And specifically, how the nine docs and the increase in working interest there set you up for a strong <unk> in any way that you can maybe quantify oil volumes for <unk>.

So Gabe I'll first of all I'm, just really excited we were able to do that asset exchange, so getting a substantial increase in wells, where you've already drilled.

And our working interest through our next has changed was just great value for us and it really.

Goes to what we'll be able to produce in first quarter, but we haven't put any numbers out there yet for 2024, but you can see how it positions us well for a pardon oily first quarter, how oil either this will depend on exactly how early they come on in the in the first quarter, but it's just just in the right direction for what we're trying to do strategically.

Okay.

Okay understood. Thanks, I'll hop back in thank you guys.

Okay.

Thanks.

Our next question is from the line of Zach <unk> with J P. Morgan. Please proceed with your questions.

Good morning, Wade maybe one for you on the buyback.

Up pretty significantly this quarter.

Any thoughts on the future pace of buybacks and I'm also wondering if you plan to ask the board to increase the size of the authorization because if you. If you ran at the <unk> pace for us.

Another couple of quarters.

You would finish up that authorization, so just curious on that as well.

Yes, Thanks, Zack good good questions and and we spoke about this in the in the prepared remarks and gave some nice pie charts on our on our capital allocation you're right. We do have a we do still have a ways to go on our authorization I think we still have another $237 million to go on that.

So all I can say is we really I think we've been showing an end and we talked about it in our prepared remarks that that we clearly prioritize returned to stockholders are within our within our capital allocation.

And there's no reason to believe that that would that that would change.

So I guess, that's all I can say on that.

Or is the pace by quarter.

Yeah, we we we've said that we're going to be methodical in some quarters lean in more and that's really all I can say at this point.

We will continue that that that strategy.

On the current authorization and then when we get to the end of it will we will consider what to do from there.

Got it thanks for that color and then also just had a question on the tax credit that was mentioned in the prepared remarks, you all posted on the website maybe.

Maybe could you give investors some detail on why exactly you receive that tax credit and maybe.

Talk about if there's potential that the credit could increase in size over time.

Yeah, great Great I appreciate you asking that.

As we as we said in her remarks.

We've been saying for years.

Being a premier operator is constantly pushing the envelope with innovation and technology.

And a lot of what we do I, just just kind of hits right down the fairway.

Of what the R&D tax credit.

<unk> four so we did a lot of work in the.

<unk> did a ton of work qualifying for that credit and quantifying the amount that we believe fit.

Fit those criteria.

And.

Went back several years and that's the that's the reason for the size of it you might you might ask somebody might ask why now you know we haven't been a cash taxpayer until recently and that's obviously part of it because it has a ton of work to do.

To quantify these amounts.

And build build the position to <unk> to take the credits, but that that's the primary point to your question about will it continue it absolutely should.

We continue to do similar things operationally, so we kind of set up the processes.

And then in the procedures to to hopefully continue to quantify those R&D tax credits going forward and so beyond the amount that we that we disclosed I think $77 million as far as the amount from the past that we're able to use in the coming years significantly.

Significantly offsetting our cash taxes in the next in the next few years. Thanks.

Thanks for asking.

Great. Thanks for the color.

Sure.

Our next question is from the line of Oliver Huang with T. P. H. Please proceed with your question.

Good morning, Herman Wade and thanks for taking my questions.

One on the extra rig that got added in the Midland in early October on a six month contract.

Anything you all are kind of able to offer up in terms of the thought process on what would dictate keeping that rig on for the remainder of next year or is it pretty firm at this point.

In terms of just wants to QC kind of rolls around you all are going to go back to that three Midland rig program, you're off and running and also I was just going to necessitate the need for bringing on a spot crew to help get these wells done and that contact area.

Oliver This term yeah. Thanks for asking the question Yeah, you're right that fourth rig has a six month term and it's got a excellent rate, we havent decided whether to extend it or not yet we.

We haven't set our budget for 2024, yet, it's certainly possible that we could extend it.

And we haven't made a decision yet.

In terms of the completions crew.

It's a pretty rigorous scheduling process, we undergo really oh, well almost continuously but for 2024 right now so we'll determine what the schedule will be for the Frac spreads you're probably aware we're running simultaneously.

Crews and that's led to some of those great numbers that we showed in the deck.

In terms of execution. So it'll just be part of our schedule, whether we have to pick up a spot crew or not we don't do that very often.

But he really drive for those capital efficiencies.

I never rule it out because sometimes.

One that's freed up from another operator really cheap for a pad and we will take advantage of those situations.

Yeah.

Okay. That's helpful color and maybe just a follow up to jacks earlier question on the tax credit.

And any sort of updates with respect to how that might impact our cash taxes for next year. I think previously you all kind of talked about that $16 million or so run rate just.

Wanted to see if we could get maybe an update there.

Sure Yeah. Thanks.

Thanks for asking that so that's a good that's a good point. So so next year. If you think in terms of $60 million six zero.

That's what we've talked about and kind of what our model shows right now the tax credit will enable us to offset 75% of that so that so the number will be more like 15, one 5 million next year. There is a limitation in each year that you can only offset up to 75% of your of your cash tax.

So that'll be that'll be the result next year and it'll be but frankly, it'll be similar I think in 2025.

Awesome, Thanks for the color guys.

You bet. Thanks Oliver.

Thank you.

Our next question is from the line of Tim <unk> with Keybanc capital markets. Please proceed with your questions.

Good morning, everybody and thank you for taking my my question Wade I wanted to dig back in on the repurchases a little bit following up on <unk> question. If you look at your history.

You walked at about two 6 million shares in the second quarter.

At about $27 and you did about the same amount.

This quarter at a higher price. So I know you cant show your cards too much but it is it is it safe to say that use board C shares extremely undervalued at that $40 level and that we would assume you. All would continue Lady then if the share price stays here.

I I think you can I think generally you can assume that yes, I mean, we clearly have a view on what we think the stock price is worth our own internally in a V and the fact that we are.

<unk> leaned in as you said this quarter it at prices averaging around $40.

Thank confirms our belief.

And that is that our visits.

Undervalued.

Okay. Okay.

And then.

My final question.

Maybe more for her on Klondike, you talked about Dean and in the Middle Sprayberry as your targets I was under the impression that that was underwritten solely on the Dean So I wonder if you could refresh our memory on on the intervals you used to underwrite the acquisition and then maybe what youre going to be targeting with that for.

Rig on your first few wells up there.

Yeah, Tim Yeah, we are very excited about like Oh.

Look at some of the offset wells in that area and our experience in North Park, we're real pleased with the Dean well.

And middle Sprayberry sand is lesser portion of the the value up there, but it's still great.

Value contributor and we are initially going to a pad to exploit the dean.

So that's our plan there.

But yeah, we are excited to get up there and show what the wells can do up there.

Okay. So those initial wells could be targeting today.

Yeah.

Okay.

Alright, Thank you everybody.

Thanks, Tim.

Thank you.

Wonder if you'd like to ask a question today you May press star one from your telephone keypad will pause a moment to assemble the queue. Thank you.

Thank you we have a follow up from the line of Oliver Huang with T. P. H. Please proceed with your questions.

Yeah, just had one more follow up guys just with respect our lateral lengths.

Just kind of with the 915000 foot docks in Sweetie Peck, what it looks like you all are kind of extending laterals a little bit I think you. All did 15 those longer laterals. This year, but just wondering any sort of trends that we should be kind of aware of as you're pulling together the 'twenty 'twenty four plan in terms of.

This.

Lateral length migrating higher in either of your two areas relative to this year.

All over this term.

It's pretty straightforward just when we get into a year, we look at the pads that we're going to develop and we'd look at the acreage position and how contiguous acreage is in general it's quite good for us and you're probably aware we hold the record in Texas for the longest lateral of anyone or miles. So we can do that.

We want to so it's really an economic optimization question for us and generally.

10000 foot laterals will.

You get a benefit in terms of rate of return is as you can in fact, so we'll put 15000 foot laterals and wherever it makes sense how it turns out for the year on the average lateral length. You know we've been bouncing in between the 11 and 12000 on average I can anticipate that's sort of where things will be.

So, but we don't have our 2024 program outlined with a planned lateral length, yet but in general you can bet that we're gonna be optimizing the economics here.

Okay.

Awesome. Thanks once again.

You bet.

Our next question is a follow up from line of Tim <unk> with Keybanc capital markets. Please proceed with your questions.

Hey, Thanks for letting me back in folks wanted to circle back on the asset exchange a little more I'm trying to understand essentially you're adding five two net wells. If we think about 58% working interest in nine wells.

Understand that the $50 million in Capex is that the completion cost for those wells.

Or is that are you kind of buying into that.

The whole working interest the whole the whole D&C side.

And then I guess as a follow up are there more opportunities like that or was that really unique kind of one off event.

15 minutes.

Sure.

Thanks Sharon.

You said, it's a great question, Tim It's really you know their docs now so they've been drilled we spent the capital and then for the fourth quarter, we'll be.

Completing the wells.

So that's largely what incremental Capex is.

Yes.

So essentially 9 million per well completion costs for the three miles.

No because there's some some additional where we had.

Basically cover the cost that we already have in the wells.

I think they were third quarter costs associated with the completions.

As well as fourth quarter costs associated with the completions. So that $50 million is representative at the net completion cost added for the five additional wells yes.

Okay. Okay.

And then.

The second piece of the question is are there more opportunities like I know ideally a 100% working interest is where you want to be but.

Are there more meaningful opportunities like that or was that sort of unique one off.

That's a great question you know you never can quite anticipate what happens youll see working interest change that the way to look at it is when we first acquired for example, the Rockstar acreage we were around a 60% working interest and we worked our way up to an average of over 80% on that acreage. So.

So there are opportunities to just a rise all the time as operators adjust there are non operators adjust their interest in wells. So we were very opportunistic on that we're in the land game daily and we'll do what we can to increased working interests that generate.

High returns for us so I'd look at it that way, it's very hard to predict you'd never put it in our plan, but when the opportunity comes in front of you you you grab it wasn't as much value as for example, this one did.

Okay. Okay. Thanks again.

You bet.

Thank you.

We've reached the end of the question and answer session I'll turn the call over to her vocal for closing remarks.

Okay. Thank you all for joining we're very pleased with our performance in 2023, and we're well positioned to continue this trajectory to build value and deliver returns going forward. Thank you for your interest and we look forward to seeing a number of you at upcoming events.

Thank you. This will conclude today's conference you may now disconnect. Your lines at this time and we thank you for your participation.