Q2 2024 SM Energy Co Earnings Call
would cause actual results to differ.
We will also discuss non- GAAP measures and metrics.
definitions and reconciliations of non-gap measures and metrics to the most directly comparable gap measures and discussion of forward-looking non-gap 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 Purcell. I will now turn the call over to Herb. Thank you, Jennifer.
Herb Vogel: Good afternoon, and thank you for your interest in SM Energy. We had a terrific second quarter and have enjoyed excellent operational performance year to date. We have also successfully been expanding our top-tier portfolio while managing a very strong balance sheet.
Unnamed Speaker: Turning to slide four, every quarter I speak to progress we are making on our core objectives for the year. I'll start with our objective to expand our high-quality portfolio with low break-evens. We repurchased more than 1 million shares in the second quarter and, in combination with our sustainable dividend, returned approximately $72 million to Stockholm.
Speaker Change: Turning to slide 4.
Herb Vogel: Every quarter I speak to progress we are making on our core objectives for the year.
Herb Vogel: I'll start with our objective to expand our high-quality portfolio with low break-evens.
Herb Vogel: Today we announce that we are exercising our option to acquire 26,100 net acres adjacent to the XCL acquisition in Utah, commonly referred to as the Altamont acquisition, for approximately $70 million.
Herb Vogel: Combined with the XCL acquisition, we are adding 63,300 net acres in the core overpressured oil window of the Uinta Basin, including approximately 44,000 DOE per day of high oil content production and an initial estimate of 465 net locations.
Herb Vogel: Assuming PVP valued at $35,000 per BOE per day, we paid around $1.25 million per location, based on our preliminary counts, including Altamont. This is highly accretive to financial metrics, including NAV.
Herb Vogel: Second, production performance exceeded the midpoint of guidance by about 2,500 BOE per day with higher oil content.
Herb Vogel: successfully demonstrating our core objective to focus on operational execution. In addition, we turned in line our first Woodford-Barnett test wells in the Midland Basin and are very pleased with early results and the potential to add more than 20,000 prospective net acres in this deeper formation.
Herb Vogel: More about that in a minute.
Herb Vogel: The third core objective is return of capital. We repurchased more than 1 million shares in the second quarter and, in combination with our sustainable dividend, returned approximately $72 million to stockholders.
Herb Vogel: Our board authorized an 11% increase in the quarterly dividend to $0.20 per share and reloaded the share repurchase authorization to $500 million through 2027. So we are positioned to continue our return of capital program in the coming years.
Unnamed Speaker: So we are positioned to continue our return on capital program in the coming year. Summing up the Sweetie Peck Extension, Klondike, South Texas Drill to Earn Extension, XCL, and Altamont acquisitions, we have added more than 90,000 net acres. That's nearly 40% growth in core acreage and added preliminarily 465 drilling locations from XCL and Altamont alone. And this is just the beginning
Speaker Change: It was a very successful quarter, and I'd like to thank everyone on the SM Energy team for a lot of hard work and outstanding results.
Speaker Change: Let's look at some detail behind these highlights. Turning to slide 5.
Speaker Change: Starting with expanding our high-quality portfolio, we have added significant scale over the past year plus.
Speaker Change: Summing the SWE Tech Extension, Klondike.
Speaker Change: South Texas Drill-to-Urn Extension, XCL, and Altamont acquisitions, we have added more than 90,000 net acres. That's nearly 40% growth in core acreage, and added preliminarily 465 drilling locations from XCL and Altamont alone. And this is just the beginning.
Speaker Change: The bottom of the chart includes a timeline for your reference. The UINTA acquisitions have an effective date of May 1st and pending approvals we anticipate closing October 1st.
Unnamed Speaker: Turning now to slide six and the Uinta Basin, we have a very high bar in evaluating acquisitions to ensure value creation. The Uinta acquisitions met all of our strategic objectives listed here on the left side, extended our high-quality inventory by three plus years, including our preliminary estimates for Altamont, will increase 2025 oil production by an estimated 45% versus a standalone scenario, and are beneficial to all key financial metrics at a purchase price of less than three times the projected 2025 adjusted EBITDAX contribution.
Speaker Change: Turning now to slide 6 and the Uinta Basin, we have a very high bar in evaluating acquisitions to ensure value creation, and the Uinta acquisitions met all of our strategic objectives listed here on the left side.
Speaker Change: These top-tier assets immediately compete for capital.
Speaker Change: Extend our high-quality inventory by three-plus years, including our preliminary estimates for Altamont.
Speaker Change: will increase 2025 oil production an estimated 45% versus a standalone scenario and are creative to all key financial metrics at a purchase price of less than three times the projected 2025 adjusted EBITDAX contribution.
Unnamed Speaker: Continuing with more about Uintah on slide seven. We showed this slide when we announced the XCL acquisition, and I'm showing it again to reiterate the quality of the assets and the upside potential of the XCL acquisition that is expected by our differential geosciences and engineering team. We did our homework and look forward to demonstrating this value as we develop this asset. And Tim Rezvan did some further research into the results in the area and agrees, as quoted here. We believe there are sufficient data points to acknowledge that Uinta is a prolific stacked pay oil play. We come away impressed by the overall raw quality of Uinta, unquote.
Speaker Change: Continuing with more about the Uintah on slide 7, we showed this slide when we announced the XCL acquisition and I'm showing it again to reiterate the quality of the assets and the upside potential of the XCL acquisition that is expected by our differential geosciences and engineering team.
Speaker Change: These charts show comparisons of Uinta upper and lower cube cumulative oil production performance based on normalized lateral length.
Speaker Change: The left graph compares average oil production from both cubes in the Uinta to SM's average cumulative well performance in Midland and South Texas, demonstrating the competitive performance of the Uinta that translates into competitive returns.
Speaker Change: The right side graph compares cumulative oil production performance of both Uintah cubes to top basins in the industry. Again, this highlights the quality of the Uintah, including the prospectivity of the upper cube.
Speaker Change: We did our homework and look forward to demonstrating this value as we develop this asset.
Tim Rezvan: And, Tim Rezvan did some further research into the results in the area and agrees, as quoted here, quote, we believe there are sufficient data points to acknowledge that the Uintah is a prolific stacked pay oil play. We come away impressed by the overall raw quality of the Uintah, unquote.
Unnamed Speaker: Moving on to the Midland Basin, slide eight. Now that production data is public, we are pleased to report today early data related to our first Woodford-Barnett test wells in the area, which just reached peak IP30. Based on our two new wells and existing pier wells in the surrounding acreage, we have confidence in the prospectivity of the Woodford Barnett and believe our greater Sweetie Peck position may have more than 20,000 net acres of prospective area in this formation.
Speaker Change: Let me just say, we agree.
Speaker Change: Moving on to the Midland Basin in slide 8.
Speaker Change: We have been tight-lipped about our activity in the Greater Sweepeck area for some time as we added acreage. Now that production data is public, we are pleased to report today early data related to our first Woodford-Barnett test wells in the area that just reached peak IP30.
Speaker Change: Our first two tests have impressive results with one 10,200-foot lateral reaching peak IP30, averaging 1,622 BOE per day, and a shorter 5,900-foot lateral reaching peak IP30, averaging 830 BOE per day.
Speaker Change: The graph on the left compares these initial results, based on normalized lateral length, to pier wells in the same formation.
Speaker Change: These initial results compare favorably to peers in the area. Based on our two new wells and existing peer wells in the surrounding acreage, we have confidence in the prospectivity of the Woodford Barnett, and believe our greater Sweetie Peck position may have more than 20,000 net acres prospective in this formation.
Unnamed Speaker: Again, we update this slide that compares the performance of SM wells in both the Midland Basin and the high liquids area of the South Texas Austin Shock to our peers, looking at cumulative oil production normalized to a 10,000 foot lateral. In summary, the combination of outstanding performance year-to-date, the pending close of the U.N. to acquisitions that add substantial scale in terms of production, inventory, and cash flow, as well as continued strong performance and expansion of our assets in Midland and South Texas, we are positioned for enhanced scale, a great second half of 2024, and an exciting 2025. We are truly hitting on all cylinders.
Speaker Change: Moving now to slide nine. Again, we update this slide that compares the performance of SM Wells in both Midland Basin and the high liquids area of the South Texas Austin Shock to our peers, looking at cumulative oil production normalized to 10,000 foot laterals.
Speaker Change: This underscores the superior performance of SM energy wells.
Speaker Change: SM average well performance in Midland remains about 30% better than the peer average.
Speaker Change: As a reminder, we co-developed so the FM averages include multiple zones. Same for our Austin Chalk well performance, which is 35% better on average. And, as we have pointed out, the oil cumulative curves for Midland and Austin Chalk are similar, leading to comparable returns.
Speaker Change: Turning specifically to the Austin Shock in slide 10, new briscoe sea wells continue very strong performance, including fully bounded tests at 625 foot spacing.
Speaker Change: Outperformance and positive spacing tests in the Austin Shock continue to provide upside, and we look forward to results in the new, drill-to-earn acreage to the west expected in the fourth quarter.
Speaker Change: The quotation here from Enveris emphasizes the upside potential from successful spacing tests.
Speaker Change: saying, quote,
Speaker Change: SM's Briscoe-C spacing pilot in the Austin Chalk is performing in line with more conservatively spaced offsets and could add over 60 locations to our existing inventory."
Speaker Change: In summary, the combination of outstanding performance year-to-date, the pending close of the U.N. to acquisitions that add substantial scale in terms of production, inventory, and cash flow, as well as continued strong performance and expansion of our assets in Midland and South Texas.
Speaker Change: We are positioned for enhanced scale, a great second half of 2024, and an exciting 2025. We are truly hitting on all cylinders.
Speaker Change: I'll now turn it over to Wade to discuss financial results and recent financing activity. Wade? Thank you, Herb. Good afternoon.
Unnamed Speaker: I'll certainly echo that it has been a terrific year, and the SM team has done a great job on a number of fronts. I'll start on slide 12.
Wade Purcell: ill certainly echo that it has been a terrific year and the ssm team has done a great job in a number of fronts
Wade Purcell: I'll start on slide 12. In regards to the second quarter financial results, we beat guidance and consensus expectations driven by higher than projected production volumes, which as Herb mentioned, came in about 2,500 BOE per day above the midpoint.
Wade Purcell: Importantly, this included over 4,000 barrels per day more oil production than the midpoint of guidance. This was driven by continued strong performance from base production in the Midland Basin and new South Texas wells that came on with higher than expected oil content.
Speaker Change: Second quarter results were pretty straightforward so there's not much need to go into detail by line item. Capital was slightly above guidance which was a result of taking advantage of favorable terms on a bulk pre-purchase of pipe.
Speaker Change: that had not been considered in second quarter guidance. This added around $12 million whereas otherwise we would have come in below guidance.
Speaker Change: Bottom line adjusted EBITDAX was $486 million, adjusted free cash flow was $98 million, and return of capital was $72 million. An excellent quarter.
Speaker Change: Moving to slide 13, summarizing the return of capital program, we have repurchased 8% of shares outstanding since inception.
Unnamed Speaker: We repurchased more than 1 million shares in the second quarter, repurchased 1.8 million shares year-to-date, and repurchased 10.1 million shares since inception of the program. Including return of capital through dividends, we returned to stockholders approximately $72 million, or 73% of adjusted free cash flow in the second quarter, $125 million, or 75% of adjusted free cash flow year-to-date, and half a Confidence in our expanded portfolio supported a further increase in the Sustainable Quarterly Dividend to $0.20 per share and reloading the repurchase share authorization to $500 million.
Speaker Change: We repurchased more than 1 million shares in the second quarter, repurchased 1.8 million shares year-to-date, and repurchased 10.1 million shares since inception of the program.
Speaker Change: Including return of capital through dividends, we returned to stockholders approximately $72 million.
Speaker Change: or 73% of adjusted free cash flow in the second quarter.
Speaker Change: $125 million or 75% of adjusted free cash flow year to date and half a billion dollars or 54% of adjusted free cash flow inception to date.
Speaker Change: Confidence in our expanded portfolio supported a further increase in the sustainable quarterly dividend to 20 cents per share and reloading the repurchase share authorization to 500 million dollars.
Unnamed Speaker: Over the course of the next several months, we intend to direct a greater portion of adjusted free cash flow to debt reduction, transferring that enterprise value to the equity holder before resuming our recent pace of share buyback. Net debt was $1.1 billion, and the net debt-to-adjusted EBITDAX ratio was 0.6 times. This strong balance sheet supported the all-cash terms of the UINTA acquisition. The 2029 notes are subject to a special mandatory redemption contingent on the consummation of the XCL acquisition by July 1, 2025.
Speaker Change: Over the course of the next several months, we intend to direct a greater portion of adjusted free cash flow to debt reduction, transferring that enterprise value to the equity holder before resuming our recent pace of share buybacks. Moving now to slide 14.
Speaker Change: In regards to the balance sheet, let's look at that as of quarter end and then consider subsequent events.
Speaker Change: At second quarter end, the cash balance was $488 million, and there was zero drawn on the revolver. The cash balance excludes restricted cash of $102 million placed in escrow required for the XCL acquisition.
Speaker Change: Net debt was $1.1 billion and the net debt to adjusted EBITDAX ratio was 0.6 times. This strong balance sheet supported the all-cash terms of the UINTA acquisition.
Speaker Change: In July , we completed very successful upsized bond offerings of $750 million of 6.75% 5-year senior notes due 2029 and $750 million of 7% 8-year senior notes due 2032.
Speaker Change: The 2029 notes are subject to a special mandatory redemption contingent on consummation of the XCL acquisition by July 1, 2025.
Unnamed Speaker: The $1.5 billion in proceeds will be used to fund the UNTA acquisition, as well as the redemption of the $349 million senior notes due 2025. Skipping ahead to slide 16, in regards to guidance, let's also look at this pre and post transaction. We are increasing oil production as a percent of total production given the strong performance in Midland and higher oil content we are seeing in South Texas. We have also adjusted cash taxes to approximately $30 million net of refunds, reflecting a projected increase in book income.
Speaker Change: The $1.5 billion in proceeds will be used to fund the Uinta acquisition as well as the redemption of the $349 million senior notes due 2025.
Speaker Change: A combination of cash on hand and the revolving credit facility will be used to fund the remaining portion of the Uinta acquisitions, which we anticipate to close October 1st.
Speaker Change: Due to the highly cash flow accretive nature of the XCL transaction, based on our $78 oil and $3.25 gas commodity price deck, at the time of the announcement, we expect to return to an approximate 1x net debt to adjust to the EBITDAX level sometime mid-2025.
Speaker Change: Even assuming a $60 oil and $2 gas long-term price deck, peak leverage remains in the one-and-a-half times area.
Speaker Change: Skipping ahead to slide 16, in regards to guidance, let's also look at this pre and post transaction.
Speaker Change: for full year 2024 on a stand-alone basis.
Speaker Change: We are increasing oil production as a percent of total production given the strong performance in Midland and higher oil content we are seeing in South Texas. We have also adjusted cash taxes to approximately $30 million net of refunds reflecting a projected increase in book income.
Speaker Change: Other than increased oil percentage and cash taxes, our guidance remains unchanged.
Speaker Change: Last quarter, we increased full-year guidance for production and decreased full-year guidance for capital expenditures.
Speaker Change: We're maintaining full year expected production at 57 to 60 million BOE.
Speaker Change: or 156,000 to 164,000 VOE per day but increasing the oil percentage from 44% to 45%.
Speaker Change: Capital Expenditures Guidance remains at $1.14 to $1.18 billion and includes an updated estimate for NetWell's drilled and flowing completions to $123 and $125, respectively. All other line items remain unchanged.
Unnamed Speaker: Third quarter guidance includes production volumes of 15.0 to 15.4 million BOE or 163 to 167,000 BOE per day at 45 to 46 percent oil. Capital expenditures are expected to range between $300 and $310 million and include drilling 33 net wells, of which 14 are planned for South Texas and 19 are planned for Midland, and bringing in line approximately 39 net wells, of which 22 are planned for South Texas and 17 for Midland.
Speaker Change: Third quarter guidance includes
Speaker Change: Production volumes of 15.0 to 15.4 million BOE, or 163 to 167,000 BOE per day, at 45 to 46% oil. Capital expenditures are expected to range between $300 and $310 million.
Speaker Change: and include drilling 33 net wells, of which 14 are planned for South Texas, and 19 are planned for Midland, and turning in line approximately 39 net wells, of which 22 are planned for South Texas and 17 for Midland.
Unnamed Speaker: I will also mention that LOE per BOE came in below the guidance range in the second quarter, but we expect third quarter LOE to fall within the range due to higher expected water handling and generator costs. In regards to additional production and capital associated with the UNTA assets, this will affect fourth quarter results, assuming the proposed October 1st close date. In the fourth quarter, the Uinta assets are expected to add approximately 44,000 BOE per day at 87% oil.
Speaker Change: I will also mention that LOE per BOE came in below the guidance range in the second quarter, but we expect third quarter LOE to fall within the range due to higher expected water handling and generator costs.
Speaker Change: In regards to additional production and capital associated with the Uinta assets,
Speaker Change: This will affect fourth quarter results, assuming the proposed October 1st close date.
Speaker Change: In the fourth quarter, the Uinta assets are expected to add approximately 44,000 BOE per day at 87% oil.
Unnamed Speaker: Of note, at the time of the XCO acquisition announcement, we included September production in the numbers, so the total production contribution for 2024 is slightly different. Of course, the May 1st effective date is unchanged, so the benefit of the September production is simply recognized as a purchase price adjustment. In June, we presented a generalized scenario for capital allocation across the three assets, Uinta, Midland, and South Texas. All of these areas offer very high returns and high-quality, long-duration inventory.
Speaker Change: of note, at the time of the XCO acquisition announcement.
Speaker Change: We included September production in the numbers, so the total production contribution for 2024 is slightly different.
Speaker Change: Of course, the May 1st effective date is unchanged, so the benefit of the September production is simply recognized as a purchase price adjustment.
Speaker Change: We expect capital expenditures for UINTA to add $100 to $120 million to the fourth quarter.
Speaker Change: Looking ahead to 2025.
Speaker Change: In June , we presented a generalized scenario for capital allocation across the three assets, Uintah, Midland, and South Texas.
Unnamed Speaker: As we work towards our detailed 2025 program, we have the luxury of allocating capital across three high-return assets, and we will seek to demonstrate the quality and value of Uinta while optimizing the capital efficiency and free cash flow of the combined program over a multi-year period. This entails right-sizing the rig-to-completion crew ratio for the combined program. We expect to reduce the combined rig count from currently 9 to 6 to 7 during 2025 while maintaining approximately three completion crews.
Speaker Change: All of these areas offer very high returns and high-quality, long-duration inventory. As we work towards our detailed 2025 program, we have the luxury of allocating capital across three high-return assets.
Speaker Change: and we will seek to demonstrate the quality and value of the Uinta while optimizing the capital efficiency and free cash flow of the combined program over a multi-year period.
Speaker Change: This entails right-sizing the rig-to-completion crew ratio for the combined program. We expect to reduce the combined rig count from currently 9 to 6 to 7 during 2025, while maintaining approximately three completion crews.
Speaker Change: We will be working through detailed pad-by-pad scenarios during our fall strategic planning process. It is an exciting time at SM.
Speaker Change: And we're very well positioned to deliver around 45% oil production growth in 2025 as we roll together the highly accretive acquisitions and continue to see excellent results from our Midland and South Texas programs. We look forward to the live Q&A webcast and call tomorrow morning. Thank you.