Q3 2024 SM Energy Co Earnings Call - Q&A
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Greetings and welcome to some Energy's third quarter 'twenty 'twenty four financial operating results Q&A.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: If anyone should require operator assistance. Please press star zero on your telephone keypad.
You're gonna be placed into question chewed anytime by pressing star one on your telephone keypad. We ask you. Please ask one question and one follow up then return to the queue.
Speaker Change: As a reminder, this conference is being recorded.
Speaker Change: It's now my pleasure to introduce your host Jennifer Martin Samuels, Vice President Investor Relations and ESG stewardship. Please go ahead Jennifer.
Speaker Change: Thank you Kevin Good morning, everyone. I Hope you have recovered from a specialty of Halloween.
Speaker Change: Today's call we may reference the earnings release IR presentation, we're prepared remarks, all of which are posted to our website.
Speaker Change: You for joining us this morning to answer your questions today, we have our president and CEO Herb Vogel, our CFO wait for shell and we are also joined this morning by best Mcdonald, Our new Chief operating officer 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 the accompanying slide deck earnings release and 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 also please see the slide deck appendix and earnings release for definitions and reconciliations of non-GAAP.
Speaker Change: Measures to the most directly comparable GAAP measures and discussion of forward looking non-GAAP measures also look for third quarter 10-Q filed this morning with that I will turn it over to her for brief opening commentary her thank you Jennifer.
Good morning, and thank you for joining US again, we had an outstanding quarter underscored by excellent operational execution. The fourth quarter presents an exciting step change for SM energy with the addition of the Uinta Basin, we welcomed the Uinta team and communities to S. M. So with that let's go ahead and get started with the Q&A I'll turn it back.
Speaker Change: Kevin to start taking your questions Kevin.
Kevin: Thank you as a reminder, if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. We ask you. Please ask one question one follow up then return to the queue. Our first question is coming from Gabe Daoud from TD, How would your line is now live.
Gabe Daoud: Hey, Thanks morning, guys. Thanks for the time I was hoping we could maybe start in Utah are maybe you could help us quantify a couple of things.
Gabe Daoud: First is just the.
Gabe Daoud: The delay in volumes you you alluded to given less pills.
Gabe Daoud: Hello could you maybe quantify the impacts of <unk> and then maybe give us a leading edge number as far as what current Utah production might be at this point.
Speaker Change: Yeah, Gabe let me just step back a minute just on on Utah, just so you guys all the time.
Speaker Change: Level set this for you. So you know we got our basic FTC concern around August 22nd and at that point, we were able to get full data from the operator.
We're restricted before that that allowed us to understand specific rig and completion plans status of all the permits were the facility construction stood all those details are we've had about two months now to digest all of that data and really to figure out how to optimize the forward plan and that means.
Speaker Change: <unk> applying a lot of the tools that we've developed over the many years for the unconventional and then how those that optimal would juxtapose with the existing permits and plans.
Speaker Change: So and it also we are looking at how do we optimize with our existing two basin assets with Utah. So we're running a lot of alternatives.
Speaker Change: Scenarios with different commodity price mixes is just our normal planning process and capex allocation.
Speaker Change: And so when we get to February we will have be able to lay that out fully.
Speaker Change: And so I just wanted to just encourage people you can understand you guys are are forecasting a company performance so definitely put less emphasis on the quarterly cadence.
Speaker Change: And I'll get to force you in a second and we're really pleased with the new asset mix, because we do see the ability to get even better capital efficiency, and we will be able to generate more value with the three so we're really excited about what we can do going forward as to <unk> in particular, but the key thing is that the current operator.
Speaker Change: Oh, they delayed six wells three of them are because of extending laterals from 10015 thousand feet. So not only does that mean, they're turned in line a little bit later, because it takes longer to execute but there's also a longer shut in offset wells, while you're fracking nearby so that that's really just.
Speaker Change: How the <unk> is impacted.
Speaker Change: And then I just go back to what I, just said for 2025, it'll be all of the above where we're really looking at optimizing the capital program for the year.
Speaker Change: Oh, that's a long winded answer to your short question there Oliver.
Speaker Change: Okay.
Speaker Change: No. Thanks, thanks, Thanks for that.
That's helpful. Appreciate the color there and then I guess just as a follow up you know you noted.
Speaker Change: Quarterly cadence shouldn't really be looked at all that much as you're still kind of finalizing plans for 'twenty five, but if I look at <unk> capex of $330 million that would imply about 1.3 billion annualized and that's a lot of higher rig count than what you guys hope to it to get to so for 25 Capex is it fair to say Directionally.
Speaker Change: It could be.
1.3, or lower just just given the plans to go from nine to six rigs well I'll keep it there thanks guys.
Speaker Change: Yeah, No I would say I gave were really looking at what the right capital level is so I wouldn't use a multiple of the <unk> capex as a way to look at that.
Speaker Change: Well, we'll be looking at what the rig program is throughout the year, how many at each asset so you know where we.
We've said in that 1314 range for next year, and we'll see what that actually comes down to when we get to February it's still depend again on commodity prices.
Speaker Change: No that's always the starting point for further too.
Speaker Change: Okay.
Speaker Change: Got it thanks Herb.
Speaker Change: You bet.
Speaker Change: Thank you next question is coming from Leo Mariani from Roth I'm Kim Your line is now live.
I just wanted to ask on the fourth quarter production guidance here. So I mean, it looks to me like it's much wider than you guys normally have presented historically I mean you guys.
Speaker Change: On a quarter. So can you kind of provide some color in terms of why the wide range of production in <unk>, because the capital range is quite a bit.
Speaker Change: Yeah.
Yeah sure Leo.
Speaker Change: We just took on the the Utah asset so we're gonna be careful about how we forecast for the for the quarter Oh, we've got it down to.
In South, Texas, and Permian as Micah.
Speaker Change: I'm tuned piano.
Speaker Change: And then we added in Utah, and we've obviously got a larger araban on that street just took over the assets.
Okay, no that makes sense.
Speaker Change: And then just with respect to the share buybacks. Obviously, you guys did not do any in the third quarter. It had some kind of language there I guess in the in the release and the prepared comments, which may be suggested like maybe these arent all that likely kind of going forward do you get to kind of one times leverage if I was reading that right. So could you just kind of.
Speaker Change: <unk> a little bit more color is that generally right should we not expect many and maybe just in times of like material weakness, maybe you'll you'll step in is really the free cash flow goes to debt pay down.
I think that's actually a pretty good summary.
Speaker Change: Yeah.
Speaker Change: We're clearly prioritizing debt reduction right now and getting getting back to that one times area.
I will acknowledge what you said is true we very well may step in different different days.
Speaker Change: And I support the stock, we clearly like the stock price I mean, that's certainly not par.
Speaker Change: Part of the decision right now.
Speaker Change: Really more we think it's best for all stakeholders right now to get leverage back to that one times area, where we have a strong balance sheet a lot of dry powder flexibility all those things, but very well may step in periodically between now and then.
Speaker Change: I'll just remind you know we reloaded that buyback.
Buyback authorization would have been hard to end of 'twenty seven for 500 million. So it's a it's a healthy buyback are that we can we can do over the three year period.
Speaker Change: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: Thank you next question is coming from Scott Hanold from RBC capital markets. Your line is now live.
Speaker Change: Yeah. Thanks, good morning.
Forget it.
Speaker Change: Maybe touch on 2025 right now again I appreciate you're still in the planning phase but.
Could you give us some framework and context on how you think about this given you know.
Scott Hanold: Some of the weakness we've seen in oil prices. How do you think about like when you look at your asset base that you have to say has three distinct basins.
Scott Hanold: Which ones do you find most competitive as oil prices come down so theres more incentives to invest there.
Speaker Change: Yeah. Scott. This is this is pretty much normal and routine for us in how we go about this so at this stage. So now in November we're looking at multiple scenarios.
Speaker Change: That means different capital allocation between the assets.
Speaker Change: Our forecasting and youth.
Speaker Change: Using multiple price scenarios, meaning different gas price stacks different oil price decks and then we look forward that two to three year period, then we say, okay with these scenarios, which which optimizes free cash flow generation over that two to three year period.
Speaker Change: And then when we get to the end of January we say, okay. What do we think the 2025 prices will be and then we lock in on that scenario that optimize the free cash flow for that period of time. We have found this to be extremely effective we've done. It. This way for I think four years now so that's really how the process will run and then we will.
Speaker Change: When we report the full year 'twenty four results in February we will share that full plan. Yeah. I would just add you mentioned the pullback in commodity prices. Just a reminder, all three of our assets have significant amount of inventory at low breakeven.
Speaker Change: So we actually.
Speaker Change: $70 oil is fantastic I guess, what I would say that from the standpoint of returns for our assets.
Speaker Change: Yeah.
Speaker Change: That's a great point, where it makes because we have driven the portfolio to be able to generate those returns even in a.
Speaker Change: Below mid cycle pricing.
Speaker Change: And that's.
Speaker Change: We're getting the benefits of that now.
Speaker Change: Understood and then my next question is on the Quantic Wells, obviously, we've got some initial rates on those right now.
Speaker Change: Can you give us some color you did comment in your prepared remarks that.
Speaker Change: The productivity in the first 30 days seemed to exceed your initial acquisition economic parameters can you give us a little context like how do how do they look compared to some of your legacy Midland activity is that is it more in line with that overall, but just some color there.
Speaker Change: Thanks.
Speaker Change: Yeah sure Scott. So so first of all we're real pleased because.
Speaker Change: The wells are kind of confirming our geologic model and that there's oil saturation in an area. That's more of a conventional play. So it's a sandstone. So these are really highly productive wells and then there is variability in how much water is produced but overall the water oil ratios are coming in as well.
Speaker Change: We saw it and we have the ability to predict based on where all the vertical wells are where the high water will be versus lower water. So that allows us to map and steer where we put the wells. So that's turned out quite positive in terms of productivity. You know if you compare to a full a co development, where you've got you know.
Speaker Change: One really good well and two wells that are lesser on average these are very economic wells for us and so we're happy with the with the result, and with what we saw in the first two wells and really the first eight wells, we said well, let's put the rig back up there and drill six floor and so we're back.
Speaker Change: Up there now drilling those.
Speaker Change: Because it's one interval that we're doing there and there is no interference from others, there's less interaction with offset wells. So that's a positive as long as these space correctly, and we believe we spaced correctly.
Speaker Change: Yeah.
Speaker Change: Thank you.
Yeah.
Speaker Change: You bet.
Thank you as a reminder, that star one to be placed in the question queue.
Speaker Change: Our next question is coming from Neal Dingmann from mature security sure why there's that life.
Speaker Change: Martin Thanks for the time My question, maybe just following a little bit on the other.
Neal Dingmann: I'm curious for your sort of future Midland plans you'd had a lot of success you know Klondike another areas, obviously that sweetie Peck continues to do Super well just wondered.
Neal Dingmann: Kind of looking regionally and formation of <unk> next year could we assume that I know obviously you don't have detailed twenty-five got out yet, but I'm. Just wondering would you assume the Midland plan would be relatively similar to this year just when you think about areas and formations you might tackle.
Neal Dingmann: Yeah.
Speaker Change: Yeah, Neil Great question, I have not seen the specifics of what our Permian teams going to where they're going to locate specific wells, but youre right. We have a broader mix of opportunities between Klondike, the Woodford Permian, obviously, sweetie Peck and the Rockstar area.
Well just know we'll be optimizing it but what we keep in the back of a remind us the competitiveness with the other assets. So it has to be a good program.
Speaker Change: And it has to be designed as a good program and that means a spacing selections completion designs asked to give us the good wells compete with South Texas and in Uinta.
Speaker Change: So it's kind of nice having three assets compete against each other because it drives those returns.
Speaker Change: And people know and you get high returns you get more capital the following year.
Great details and then just second around the Uinta and maybe specifically around the marketing there I'm. Just wondering if you move forward you already like the cube and you seem to be doing a lot of things too.
Speaker Change: Likely boost and improve production there I'm just wondering what type of options do you all have when it comes to takeaway in order to maximize pricing going forward.
Speaker Change: Yeah.
Speaker Change: Yeah, Neil So theres there there is a.
Speaker Change: A lot bigger playground than I ever anticipated when we got into this and started looking at it back in April.
There's a lot of competitive sensitivities around.
Speaker Change: What you do specifically, so we can't get into the details there, but I would just say that no that we will be optimizing our to get the best netback, we can.
Speaker Change: Through all of this are the.
Speaker Change: Also surprising thing is just how much more attractive.
Speaker Change: Actually crude as to the refiners given what their product slate.
Speaker Change: What optimizes their product slate.
So we'll just be working that over time, and I think we'll get better and better as time goes on.
Look forward to it thank you.
Speaker Change: Right.
Speaker Change: Take the next question is coming from Michael shallow from Stephens. Your line is that life.
Speaker Change: Yeah.
Michael shallow: Thank you good morning, everybody.
Michael shallow: Wanted to go back to Klondike, you mentioned that some of the wells.
Michael shallow: They're going to be coming on will be constrained due to the water infrastructure. There I guess what are the plans to you.
Michael shallow: Expand that and what might be the timeframe there.
Speaker Change: Yeah, that's a great question, Mike Yeah, Yeah, we build facilities for optimizing over time, rather than for peak rates.
Speaker Change: What weighed always says as you know you basically don't build your church for Easter.
Speaker Change: So it's not efficient to build water handling facilities to peak rates. So the way we do it is we just basically produce the wells off their E. S. Teased at certain rates and then you bring on a number of wells and you're going to be constrained a little bit on the production rate and then you just wind up with a slower decline.
Speaker Change: Afterwards, so you don't get quite as high an IP, but you also get a slower decline in value wise, it's the right way to go because you spend less capital.
Speaker Change: That's the story there.
Speaker Change: Okay. So there really won't be any of the infrastructure that you need is pretty much in place would you should look for a little flatter declines lower peak rates out of these newer wells as you go forward is that.
Speaker Change: The bottom line that that's exactly right.
Speaker Change: Okay and.
Speaker Change: And the Utah properties, you you'd mentioned, you're paying a transition service agreement in the fourth quarter I guess, how do you expect that to change going forward and is the fourth quarter run rate for your G&A is that.
Speaker Change: Good run rate to look forward to for 2025 at this point.
Speaker Change: Yeah, Mike. So we are we the transition services agreement started when we closed October 1st and this is really just an agreement where there's a period of time, where the X L. Team continues to operate and we get progressively more involved where in the more in the day to day decision.
Speaker Change: So we would have been.
Speaker Change: September 30th.
Speaker Change: And there's.
Speaker Change: There's a there's a pre agreed what we paid them during that period of time and then on January 1st we take their employees, who accepted our offers and I'm pleased to say that 100% of their field employees didn't take our offers.
That's a pretty smooth transition over there. So it's really just where we're working together during this period of time. They are a really great team. So so it works quite effectively.
Speaker Change: And then in terms of G&A, it's just a oh, what we will be seeing as we'll be seeing increased G&A as we allocate more people's time B S M people over to Utah.
But the running change won't occur till January when we have it fully staffed up with the people we've hired from Xel, Yes, Mike. It this way that we're working the details obviously and we'll share that with you in the guidance, but if I were modeling right now I think that's a pretty good starting point.
Speaker Change: Fourth quarter number so.
Speaker Change: Yeah.
Speaker Change: No that's helpful. I appreciate it guys.
Speaker Change: Yeah.
Speaker Change: Thank you. Your next question today is coming from Kim <unk> from Keybanc capital markets. Your line is that life.
Speaker Change: Hey, good morning folks lots.
Kim <unk>: The potential questions here, but I'll start in the Uinta I thought it was interesting your first well results were from the Douglas Creek, which is not one of the three sort of standards Derisk zones.
Speaker Change: So obviously, maybe it's not 17, but it looks like it's greater than three the number of productive intervals. So as you go forward in 2025, how do you think about the allocation between sort of development drilling in defined areas and then sort of step outs to other areas.
Speaker Change: Yeah, a great question, Tim and I really appreciate you recognizing the importance of that because a lot of people have not counted inventory are in.
Speaker Change: In the Oh.
Speaker Change: From all the intervals in the Uinta. So we haven't laid out the specific 2025 plan yet, but just know that just like we do in other places we'll have a blend of.
Speaker Change: None intervals known spacings in known.
Speaker Change: Everyone has done things and then we'll have a mix in there are ones that had been partly delineated and then we'll have some completely new tests.
Speaker Change: We'll give xel credit for having done more than a typical P. In terms of looking at some of those intervals and that gave us more confidence when we were putting our bids together.
Speaker Change: May and June.
Speaker Change: Okay, that's great and then.
Speaker Change: If I could follow up with weighed on on the repurchase.
Speaker Change: Topic, you mentioned waiting on leverage back to kind of one times, but it's pretty easy to see that in the relatively near future counting the legacy EBITDA you acquired so.
Speaker Change: Based on I know you haven't given 2025 guidance, but you did.
Speaker Change: Do you see that coming possibly by mid 2025 or sooner if oil holds a 70.
Ability to hit the parameters to start repurchases again.
Speaker Change: You you could you could you could definitely see that if the commodity prices hang in there.
Speaker Change: I'd agree with that.
Speaker Change: Okay.
Speaker Change: Alright, thank you.
Speaker Change: Yeah.
Speaker Change: Thanks, Tim.
Speaker Change: Thank you as a reminder, that star one to be placed in the question queue. Our next question is coming from Oliver Wong from Tudor Pickering Holt. Your line is now live.
Oliver Wong: Good morning, Herb Wade and team and thanks for taking the questions.
Oliver Wong: Wanted to kind of try and get a better understanding around the moving pieces on the Q4 pro forma guidance for LOE.
Oliver Wong: Or are there any one offs that we should be aware of that's expected to kind of drive a legacy, Texas side of things higher quarter over quarter for <unk>.
Oliver Wong: And then when we're kind of thinking about the U N. A how are you all thinking about this line item training for Q4, and just given how there's lower volumes from fewer completions in the offset frac shut ins occurring I do want to be careful about just extrapolating this for getting potential efficiencies as the operator in a readout.
Oliver Wong: And volumes that might impact certain costs that are more fixed in nature, but just trying to think if there is a good proxy in terms of how to think about it for 2025.
Okay, Yes, let me start on this one Oliver that I think you've pretty well understand on the oily assets have higher LOE in the gassy assets at below are low.
So as we transition over time to a being aware of their company and getting over 50% oil you expect alloy you to go up somewhat.
Oliver Wong: And the margins are obviously higher on the on the well side.
Speaker Change: Uh huh.
Speaker Change: And we during the third quarter, we saw some optimization in the Midland.
Speaker Change: And that brought down.
Speaker Change: Basically the constructive environment from a deflationary perspective, and the team optimizing things like chemicals and other things.
Speaker Change: Then you have another component when you look forward with Utah.
Speaker Change: Got that.
Speaker Change: The vertical wells LOE per BOE is relatively high just because the rates are lower than the vertical wells and as we get a greater percentage of horizontal wells in the mix those are lower alloy.
Per Boe because of the higher rates coming out of the Horizontals. So if we think about our model for you expect the low <unk> to be dropping over time intrinsically because of that change in mix of verticals horizontals.
Speaker Change: And then just overall you expect Utah to run somewhat higher with that oil percentage.
And just the operating environment. There do you expect it to run run higher but again the margins are quite strong.
Speaker Change: Just because of the oily nature of it on a per Boe basis.
Speaker Change: So that that's really the way I'd look at it did that that get.
Speaker Change: To answer your question Oliver.
Oliver Wong: Yeah. That's helpful color for sure and maybe for a second follow up question just on the you incur.
Speaker Change: He's now in hand, any sort of color.
Speaker Change: You're able to speak to in terms of what your current backlog might look like out of the basin.
Exiting the year.
Speaker Change: And just kind of how that might compare to a normalized run rate in terms of how you all are thinking about it just trying to think through the possible efficiencies that you all might be able to capture on this front moving.
Speaker Change: The 2020, yes that program.
Speaker Change: That's a great question Oliver and just this is this is the observation is.
Speaker Change: Because of the stacked pay nature of the <unk>.
Speaker Change: So which is even more than the Permian in some ways.
Speaker Change: The pads are larger so we'll typically drill more wells on a pad at a time before completing just you know and this is just conceptually I would expect that DUC count to be higher than say, the Permian and then south Texas definitely and in some cases.
Speaker Change: Much of the Permian.
Speaker Change: So we don't have an official duck forecast, we actually don't manage to doctors about it.
Just no knowing how we're running and how efficient it is.
Speaker Change: The impressive thing and utilize the <unk>.
Speaker Change: Integrated nature of the sand mine.
Next to E Frac, which is run off.
Gas turbine for electric power and then we.
<unk> started fracking as far as two and a half three miles from that site. So the frac spread doesn't need to move. This is highly highly finished probably the most efficient operation I've ever seen and bye.
Speaker Change: By having a lot of wells on a pad that.
Speaker Change: Helps on those efficiencies so that that's the way I'd look at it. So that's that's a long winded answer to a dumb question, but it's just kind of gives you a picture of.
Speaker Change: How effective it can be there, but it all starts with the stacked pay in contiguous acreage, which is the type of thing, we like and drives us because that's what gives us higher capital efficiency and better returns.
Speaker Change: Okay perfect. Thanks for the time.
Speaker Change: You bet.
Speaker Change: Thank you we've reached end of our question and answer session I'd like to turn the floor back over for any further or closing comments.
Speaker Change: Okay, well, thank you everyone for joining us today.
Speaker Change: And I'm happy November.
Speaker Change: Take care.
Speaker Change: Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Speaker Change: Yeah.