Q1 2024 SM Energy Co Earnings Call - Pre-Recorded

An 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 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.

Speaker Change: <unk> and our CFO weight yourself I will now turn the call over time. Thanks, Doug Good afternoon, and thank you for your interest in SM Energy 2024 is off to a very strong start as our focus on operational execution delivered excellent bottom line results I'm pleased to headline this cortisol by increasing our production guidance and lowering our capital expenditure guidance for full year 'twenty 'twenty four as Youll hear in todays call given our most recent outlook for well performance development pace.

Doug: And costs, we have the confidence to up our guidance now.

Doug: In a relatively short period since we delivered our 2024 operating plan at the end of February we have made steady progress on each of our core objectives meeting or exceeding expectations on what has been described as a straightforward 'twenty 'twenty four operating plan as a result, we'll keep our prepared remarks brief today and look forward to our live Q&A discussion tomorrow.

Doug: Turning to slide five and our core objectives for 'twenty 'twenty four or.

Doug: Our first core objective for 'twenty 'twenty four is to focus on operational execution to deliver low breakeven high return wells here, we delivered better than expected well performance in the first quarter, beating the high end of our guidance.

Doug: Four months is attributable mostly to south Texas from two sources, we were able to complete 14 wells on average about two weeks early thereby accelerating the start of their production and performance of new wells reached peak rates earlier than anticipated in turn higher production drove better bottom line results for earnings EBITDAX and free cash flow.

Speaker Change: Core objective number two for <unk> going forward is to maintain an attractive return of capital to stockholders through dividends and share repurchases in the first quarter, we returned about $54 million or 79% of free cash flow and we expect to fulfill the share repurchase authorization, we have for 'twenty 'twenty four.

Speaker Change: Core objective number three is to maintain and expand our high quality asset portfolio in the first quarter. We entered into an agreement that provides the option to increase our south Texas Austin chalk position by 8000 net acres through a drill to earn arrangement. This acreage to the west of our current acreage position in a high oil and NGL content area with favorable rock properties.

Speaker Change: Before I turn the call over to Wade, Let's review a few slides that underscore our operational focus turning to slide six. This updated slides are intended to reiterate the superior performance of <unk> in both our areas of operations versus peer averages for each area as highlighted by the quotation from JP Morgan, we strive to increase returns by optimizing well performance through the use of an enormous amount of data sophisticated data analytics and enhanced completion designs with.

Wade: Individualized horizontal and vertical well spacing.

Speaker Change: Mmm, Howard County, wells averaged more than 30% better cumulative oil production through two years compared with the average per well in our South Texas Austin Chalk wells also averaged more than 30% better cumulative oil production grew 15 months compared with average per well.

Speaker Change: As we have mentioned many times the incremental return for the additional capital we put into these wells for our completion designs is very attractive you can now see firsthand. The immensely positive production response, we have from our optimized development.

Speaker Change: I'd like to point out that cumulative oil production through 20 months normalized for lateral length is almost identical for each area. The Austin chalk is very much on par with Howard County, which is reflected in our respective returns.

Speaker Change: Turning to slide seven this is a new slide demonstrating efficiencies we are gaining in drilling and completion efforts that translate into cost savings on the left you can see improvement in feet drilled per day in both Midland Basin in South, Texas operations amounting to 10% and 20% improvements realized in the first quarter 'twenty 'twenty four versus 2022 respectively. This was driven by optimization of drilling parameters rig equipment and downhole equipment within our target zones.

Speaker Change: On the right side of the slide you can see improvement in feet completed per day in both Midland Basin in South, Texas operations amounted to 85% and 30% respectively. Over the same time period. This was driven by better efficiency of Sinopec and zipper fleets by achieving an increased number of pumping hours per day.

Speaker Change: Turning to slide eight we are seeing some exciting preliminary results from four new pads located in the northern high oil content area of our South Texas position. These pads include 11 wells that reached peak IP 30 in the past several days, we are testing several potential optimizations with these pads and results are exceeding our expectations. These ads contributed to the production outperformance in the quarter.

Speaker Change: Looking at the map on the left three Briscoe see pad located the east include eight wells. These pads code about seven Austin chalk wells in one Eagle Ford well. These wells perform favorably with an average peak IP 30 of just over 2000 Boe per day per well with 49% oil and 77% liquids.

Speaker Change: Of these wells test different completion designs and the pad group includes the first fully bounded lower Austin chalk central.

Speaker Change: Initial results the Eagle Ford, well, which test a new completion design is among the best deal to date into that interval and the high oil content area.

Speaker Change: So the worst of that is one pad with three wells co developing two benches in the Austin chalk. These wells were drilled off azimuth to test optimal well orientation for the localized geology in this area that was very successful averaging a peak IP 30 of nearly 2000 Boe per day per well with 46% oil and 70% liquids on this that you may know from state data that theres actually a fourth well while we have the rig on location. We also conducted a separate shortly.

Speaker Change: Exploratory test of an interval shallower than the Austin chalk and we are currently evaluating results.

Speaker Change: Overall, the new Briscoe C wells are outperforming expectations by 5% to 10% as I mentioned earlier. These pads were turned in line ahead of schedule and reached peak rates earlier than expected.

Speaker Change: Turning to slide nine here, we summarize the acreage positions, we have added over the past year or so that add up to about 37800 net acres in our core areas. Our team is doing really great work through our Geoscience engineering Atlanta funds to add core inventory.

Speaker Change: According to him at Keybanc quote <unk> ability to replace core inventory without diluting shareholders or stretching the balance sheet is noteworthy and growth at <unk>.

Speaker Change: We have drilled the first pad. This includes four wells one of which included science work, where we acquired core and log data to evaluate in place oil volumes across multiple formations of interest completion activity commenced here this week.

Speaker Change: On a new position in South Texas located in the very oily northwestern area. We got started right away. We reached total depth on our first earning well in only five five days release the rig after less than 700 days and are now drilling ahead in the lateral section of the second earning well on this new acreage. We look forward to sharing results from each of these new areas later this year.

Speaker Change: Slide 10, we say that our high standards for safety and stewardship are integral to being a premier operator, we recently took our board of directors on a field tour to see firsthand, what we're doing with respect to safety protocols and water stewardship and to see the technological advances we have implemented to support both capital efficiencies and stewardship.

Speaker Change: So I'll point out on the right hand side of the slide that we received our CDP score for supplier engagement, which is an a minus this signifies our leadership and stewardship and best practices in engaging our supply chain in short I am very pleased with operational performance year to date, well productivity outperformance plus cost savings from optimized drilling and completions I mean high return wells and supported our updated guidance higher production and lower capital costs.

Speaker Change: We're also getting off to a good start on our new acreage position and excited to share. Those results. Later this year, we are well positioned for an excellent 'twenty 'twenty four.

Speaker Change: I'll now turn the call over to Wade to provide more detail on our financial results waste. Thanks, Eric and good afternoon, I'll begin with slide 11, and the bottom line high production performance, specifically higher liquids production and a better bottom line results, including adjusted EPS of $1 41 per share adjusted EBITDAX of $409 million and adjusted free cash flow of $68 million.

Wade: All of which meet street consensus next on Slide 12, and a comment on return of capital 79% of free cash flow was returned to stockholders, we returned $21 million to our sustainable dividend and $33 million through share repurchases since inception of the program, we've repurchased around 9 million shares or about 7% of shares outstanding and returned approximately $429 million to stockholders, we have about 182 million.

Wade: And share repurchase authorization remaining in 2024, and I would assume a generally ratable repurchase rates over the next few quarters, turning to slide 13, and the balance sheet, we think long term sustainable profitability and our uses of free cash flow, while we continue to expand our portfolio and provide a substantial return of capital to stockholders. We are maintaining very low leverage currently at two six times leverage ratio, we continue to retain a sizable cash balance.

Wade: And expect to keep that flexibility a little longer since we're earning interest nearly commensurate with the coupon on our 2025.

Wade: Now turning to guidance on slide 14, I would summarize our changes to guidance as more for less increasing production, while lowering costs. We're very pleased to be able to positively update guidance with our first quarter results, giving confidence in production performance and capital cost savings first production, we've increased production guidance, 2% at the midpoint to a range of 57 to 60 million Boe or 156 to 164000 Boe.

Wade: Per day to reflect the performance of new wells in the better completion cadence that benefited the first quarter second Capex, we lowered our capital expenditure guidance, 2% to a range of $1, one four to $1 8 million.

Speaker Change: First quarter capital was on track with guidance of around $300 million. We completed 27 net wells in the quarter versus the expectation of 20 net wells looking forward the reduction in capital expenditures guidance is due to both realizing capital efficiencies and cost savings capital efficiencies have come from faster drilling and more completion stages per day and sort of described a few minutes ago and cost savings are being realized from lower rig rates diesel cost in San Francis.

Speaker Change: We're also seeing high rates of substitution of lower cost gas for higher cost diesel thanks to our upgraded <unk> used dynamic gas blending or DGB. In addition, we are lowering guidance for transportation expenses by 9% at the midpoint to $2 10 to $2 20 per Boe as lower gas prices have reduced the cost for fuel gas bottom line all else being equal. These changes are expected to increase <unk>.

Speaker Change: <unk> 2020 for full year free cash flow by around 15%.

Speaker Change: Lastly, I'll make a few comments regarding quarters two through four it might be helpful. In your modeling timing of production is slightly modified now that we are seeing acceleration in certain drilling and completion timing. The expectation now is for second quarter production to be a bigger step up around 7% sequentially to a range of $14 one to $14 3 million Boe at a 44% oil third quarter is expected to be flattish to slightly up compared.

Speaker Change: With the second quarter with another step up in the fourth quarter futures pricing, indicating week, while retail pricing for the next two quarters, which affects only our Midland basin natural gas production for I think it's important to note we are able to move our gas our Midland basin gas accounted for only 7% in the first quarter oil and gas revenue and approximately 50% of Midland gas is hedged the basis, so exposure to weak regional pricing is mitigated to affecting only about.

Speaker Change: 3% to 4% of our total revenue capital expenditure guidance for the second quarter is $315 million to $325 million. This includes an expected 31 net wells to be drilled in 38 net wells completed.

Speaker Change: Capital expenditure of cadence is relatively flat with a step down in the fourth quarter. So in summary, we're very pleased with a more for less trajectory. We are on this year and look forward to further communications and updates for you as we progress I'll now turn the call back to her.

Speaker Change: Thank you Wade and let me. Thank all of you have joined US for your interest in <unk> I look forward to our live Q&A call Tomorrow morning.

Speaker Change: Sure.