Q4 2023 SM Energy Co Pre Recorded Earnings Call
<unk> discussion today will include forward looking statements I direct you to slide two of the accompanying slide deck page seven 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 will also discuss non-GAAP measures and metrics definition and reconciliations of non-GAAP measures and metrics to the most directly comparable GAAP measures and discussion of forward looking non-GAAP measures.
Speaker Change: It can be found in the back of the slide deck in earnings release, today's prepared remarks will be given by our president and CEO Herb Vogel and our CFO wafer. So I will now turn the call over to art.
Herbert S. Vogel: And thank you for your interest in SM energy. We are very pleased to report our excellent 2033 financial and operating results. We made it up very well against each of our 2023 objectives. Today, we will spend more time looking forward into our plans for 'twenty 'twenty four we are well positioned to slightly increase activity and deliver an attractive return of capital to our stockholders initiate development of properties acquired in 2003 and maintain our low leverage.
Herbert S. Vogel: Turning to slide 45, and starting with key 2023 results how do we measure up against our stated strategic objectives, we met or exceeded each objective as I will step through now.
Herbert S. Vogel: Our first objective was to deliver increased return of capital to our stockholders, we generated substantial free cash flow of $509 million and returned $300 million to our stockholders. This is an approximate 7% yield for stockholders and return of approximately 60% of the free cash flow we generated.
This included the repurchase of $6 9 million shares at an average price of $32 eight nine cents for $228 million and fixed dividend paid of $72 million.
Herbert S. Vogel: Notably this is four times the $77 million returned to stockholders in 2022.
Herbert S. Vogel: And we reinvested in our portfolio transacting approximately $125 million in perspective leasehold positions.
Herbert S. Vogel: In addition, we set a company record for crude reserves ending the year with 605 million barrels equivalent up almost 13% from year end 2022, despite our reduced SEC pricing environment.
Herbert S. Vogel: At the same time, we improved our balance sheet, reducing net debt by $171 million to $969 million, which met our objective of less than $1 billion net debt.
Herbert S. Vogel: Our allocation of free cash flow is intended to drive long term sustainable profitability and share price appreciation.
Herbert S. Vogel: Our second objective was to focus on operational execution, including excellent safety and environmental stewardship.
Herbert S. Vogel: We measure operational execution by production performance production came in about three 5% ahead of the midpoint of earlier guidance and production was up approximately 5% year over year consistent with mid single digit growth discussed last June.
Herbert S. Vogel: Increased production guidance over the course of 'twenty three was driven by well performance from our Austin Chalk program, which exceeded expectations, while operating efficiencies serve to accelerate drilling completion times for certain wells in the Midland Basin.
Herbert S. Vogel: As we have emphasized in the past our differential application of technology supports completion designs that optimize well performance to peer leading outcomes. If we measure operational execution by well performance compared to peers as shown on slide six in both the Midland Basin, and Austin Chalk Fml's Sidedly outperform our regional peers. These charts show normalized cumulative oil production per 10000 feet of lateral.
Herbert S. Vogel: Look closely you may be surprised to see that cumulative oil production from an average west condensate area Austin chalk well is almost the same around 230 to 240000 barrels of oil after 20 months of production at an average Howard County, well that leads to simply excellent economics in both plays and we're always working to get even better.
Herbert S. Vogel: Turning to slide seven in regards to safety and stewardship, we had another excellent year. Thanks to the focused efforts of our operating teams.
Herbert S. Vogel: On this slide as courtesy of <unk>, who is the son of one of our operation specialist in South, Texas and in effort to engage SM families with our safety culture annually, we hold a drawing contest for our safety calendar and Aidan was one of our winners.
Herbert S. Vogel: For 2023, we highlight a truly superior total recordable incident rate or <unk> safety metric of 0.2 reportable injuries per 200000 man hours worked which comprises both employees and contractors and as bill rate of 006 barrels spilled per thousand barrels produced just excellent work, but we'll never be an area for complacency.
Herbert S. Vogel: To top it off CDP scores were posted a few weeks ago and SM received a leadership level score of AA minus for a company in our industry that is simply a stellar outcome.
Herbert S. Vogel: We truly believe that safety and environmental stewardship are an integral part of operational excellence.
Herbert S. Vogel: Turning to slide eight our third objective was to focus on replacing and building our top tier inventory, creating value by finding and developing reserves is our focus and as many of you know an area, where we have a strong track record.
Herbert S. Vogel: In 2003, we acquired 29700 net acres net of divestitures in the Midland basin, increasing our leasehold position by 37% in that basin.
Herbert S. Vogel: This includes the 2700 acres, we referred to as Klondike located in North Martin and Dawson counties as well as what is often referred to as our new stealth acreage, which I can tell you know and as you can see on the map is located just west of our existing Sweetie Peck position and up and trained counties.
Herbert S. Vogel: Congrats with expansion as a result of collaboration between our Geosciences Reservoir engineering data analytics and land teams. They are working nonstop to identify find and transact on assets that we expect to grow our top tier inventory in this case, we have confidence from detailed evaluation of offset well performance and subsurface data, indicating extension of certain intervals into our buy areas I'll talk more about our plans here in a few minutes.
Herbert S. Vogel: Given the outstanding performance in all of these dimensions in 2023 I'd like to say thank you for your commitment to excellent to each of our 544 employees for a job really well done.
Herbert S. Vogel: Turning to slide nine let me just summarize our strategic objectives for 'twenty 'twenty four it before wave covers the specifics of our plan, we are really well positioned coming into the year with a low breakeven cost portfolio low leverage ability to increase oil directed activity given the current commodity price outlook and finally, the upside value proposition presented through recently acquired acreage.
Herbert S. Vogel: Our 2034 strategic objectives first to execute operationally to deliver low breakeven high return wells through the implementation of new technologies to drive efficiencies and continued leadership in ESG stewardship second to return capital to stockholders through share repurchases and dividends, while transferring value to stockholders to reduce debt and third maintain and expand our portfolio quality and depth by employing advanced analytics and technical innovation.
Speaker Change: Now, let me turn the call over weighted to speak to the 'twenty 'twenty four plan.
Speaker Change: Thanks, Good afternoon as a reminder, we're a premier operator of top tier assets delivering a sustainable return on capital and powered by a strong balance sheet and world class Technical team. We're poised to repeat this success, we certainly demonstrated that in 2023 with solid operational execution driving results that exceeded street expectations. Those results are actually quite straightforward. So let's spend some time looking forward into 2024.
Speaker Change: 1024 plan is designed to support each of the three strategic objectives that hurt just outlined as we've discussed over the years. Our methodology is to develop a multiyear plan that optimizes free cash flow through the most capital efficient development program. This generally result in flat to low single digit production growth starting with slide 10 for 2024 capital program increases activity over 2023, which reflects our counter cyclical approach.
Speaker Change: In a deflationary environment, we expect the program to deliver an attractive free cash flow yield while enabling the team to initiate delineation and development of properties acquired in 2023 total capital expenditures are expected to range between one six and $1 2 billion.
Speaker Change: Key inputs include first activity level can we expect to drill and complete a 115 to 120 total net wells with roughly 60% in the Midland Basin and 40% in South, Texas, We plan to retain the fourth rig in Midland for the majority of the year second cost the cost of increased activity is expected to be largely offset by realizing certain efficiency gains which include running a sample frac fleet for the entire year and Midland drilling <unk>.
Speaker Change: 5% to 30, 15000 foot laterals as well as recognizing around 10% on average year over year deflation, we're seeing deflation essentially across the board on larger items with the exception of labor.
Speaker Change: As a result, well cost per foot to drill complete and equip are expected to range in the low $800 with Midland South, Texas, well costs being very similar I would point out that our well cost per foot include our notably higher than average sand and fluid loadings, which we employ to optimize well performance and returns. We also report cost based on D. C and E. This can be apples to oranges and comparing to D&C only together.
Speaker Change: These factors add approximately $130 per foot, which is normalized to peer metrics would compare with a $700 per foot per well, assuming flat prices of $75 <unk> $2 75, Henry hub and $27 for Ngls. The 2024 drilling program is expected to deliver an average return, including drill complete equipment facilities of around 55% to 60%.
Speaker Change: Total capital cost, if we facilities and infrastructure cost related to continued expansion of our south Texas oil and water handling facilities. They also include facilities upgrades and expansion in the contact area such as improved emissions controls saltwater disposal upgrades in our pipeline intended to reduce the operational footprint around the local community, which also reduces costs and emissions turning now to guidance on slide 11 production guidance of 50.
Speaker Change: 659 million BOE for the year is an output of the capital program. This is an increase of 3% to 4% year over year on a BOE basis, while oil volumes are expected to increase around 6% production volumes are expected to average 44% oil and be split roughly 50 50 from the Midland Basin in South, Texas on a BOE basis production cadence is expected to increase each quarter through the year.
Speaker Change: <unk> based on the timing of completions first quarter guidance is approximately 13 million Boe or 143000 Boe per day, which takes into account only 11 net wells turned in line in the fourth quarter of 2023 as well as the effect of adverse January weather, we're guiding low at $5 30 to $5 60 per BOE, which considers the need for temporary electric generators in the Midland Basin.
Due to increasing demand on the electrical infrastructure as well as increased water handling cost.
Speaker Change: Regards to cash taxes during last quarter's call, we talked about the significant R&D credits that we earned the carryforward of these credits are expected to reduce cash taxes for 2024 to around $10 million, which will likely carry through to 2025, there is significant cash flow benefit here.
Speaker Change: <unk> <unk> hundred 12, I'm very pleased to report we have achieved net debt of less than $1 billion and net debt to adjusted EBITDAX of $5 seven times low leverage affords flexibility in the allocation of free cash flow in 2024 and positions us for continued growth and return of capital to stockholders. We ended the year with more than $600 million in cash, which gives us the flexibility to call. The 2020 fives. This year, if we choose.
Speaker Change: Given the year end reserves on slide 14, net proved reserves of 605 million Boe or a company record as art mentioned proved reserves are up 13% year over year and the net increase in reserves year over year replaced production by more than two two times. The net proved reserves to 2023 production ratio is 10 nine years.
Speaker Change: Lastly from me, let's look at inventory on Slide 15, we ended 2023 with approximately 10 plus years of inventory, assuming 80 to 100 average completions per year. It is notable that the estimated average IRR of inventory is greater than 65%. In addition, more than 80% of inventory is categorized as <unk>, which implies the inventory location count is very high quality, we believe our inventory calculations are potentially conservative compared.
Speaker Change: Other companies May calculate inventory as a reminder, all wells within our three P. Reserves estimate are economic had an area specific type curves are defined laterally are at optimized well spacing and have an assigned spot on the latest development schedule.
Speaker Change: And here in 2023, the gross inventory in the Austin chalk, including wells drilled to date increased 16% to 465 locations with more than 350 locations remaining this significant increase reflects our confidence given the excellent economic performance of the 106 Austin chalk wells, we have already brought into production over the past five years. We also added 40 wells so far from 2023.
Speaker Change: So delineation and development of new acreage offers upside to identify and add inventory in 2024 from those acquisitions.
Speaker Change: 2023, we tested the Leonard and the Rockstar area and determined that we can optimize capital efficiency by removing winter locations from inventory and instead drill more wells in the underlying middle sprayberry, increasing middle sprayberry locations, where <unk> will grow into the overlying Leonard.
Speaker Change: Long term benchmark pricing used to calculate our inventory was $70 <unk> oil and $3 50, Henry hub gas.
Closing I would like to say again, how proud we are at the 2023 results in a corresponding outperformance in Essent shares total shareholder return at G. For some shares was positive 13% despite oil being down 11% in 2023 and gas being down 44% in 2024 appears to be set up for more of the same. Thanks for your support and I'll now turn the call back to her.
Speaker Change: Thank you Lee.
Turning to slide 16, let me wrap up the call by focusing on some specifics of what we're doing to extend our high quality low breakeven and high return inventory at Klondike for 'twenty 700, net acres located in North Martin and Dawson counties that we acquired last summer we have drilled one science wells from which we gathered volume core data and plan to start acquiring three D. Seismic in March we conduct this work in order to optimize our development plans our.
Speaker Change: 'twenty 'twenty four program is expected to include development of three pads, having a total of eight to nine wells versus completions are expected to come online in June and we should have initial results reported by the end of the third quarter.
Speaker Change: As you know some of our most prolific Rockstar area wells are drilled into the bin and located North Martin about 10 miles away.
Speaker Change: We added locations and contact based on offset well data and we expect further delineation and development to bring upside.
Speaker Change: The acreage you all referred to as stealth includes approximately 9100 net acres adjacent to our Sweetie Peck position in up and Green counties, we have not yet counting inventory from this acreage acquisition and while we have a primary target we will evaluate multiple intervals. We're excited to see well results on this acreage later in the year.
Speaker Change: Let me. Thank you for your interest in SM energy I look forward to our live Q&A call Tomorrow morning.
Speaker Change: Yes.
Speaker Change: Yes.