Q3 2024 SM Energy Co Earnings Call - Pre-Recorded
Results Webcast.
Before we get started on our prepared remarks, I remind you that our discussion today will include forward-looking statements.
I direct you to slide two with the accompanying slide deck, page six of the accompanying earnings release.
and the respect or section of our most recently filed 10K, which described risk associated with forward-looking statements that could cause actual results to differ.
We will also discuss non-gap measures and metrics.
Definitions and reconciliations of non-gap measures and metrics to the most directly comparable gut 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, her vocal, and our CFO wait for so. I'll now turn it over to her.
Thank you, Jennifer.
her vocal: Good afternoon and thank you for your interest in SM energy. We are pleased to report another consecutive quarter of excellent operational execution that delivered financial results exceeding expectations.
This is a chief, I also closing the Utah Acquisitions and completing a number of financial transactions which combined results in a step-change and scale with a very strong balance sheet.
Truly excellent performance for all. Training to slide five, as I do each quarter, I will speak to progress we are making on our core objectives for the year.
I'll start with our objective to expand our high quality low break even cost for Vogel.
With the clothes of the UN to acquisitions on October 1st, we have now made a step change in the scale of our operations, which begins here in the fourth quarter.
As a reminder, we have increased core acreage by more than 93,000 net acres, or by about 40% over the past year plus.
With the closely-utacquisitions, we added 63,300 net acres, extended our inventory life by 3 plus years, and we will see an increase in net oil production around 40% sequentially, after midpoint of guidance.
In short, we are very excited about our expansion in the Utah and we'll speak more about that in a few minutes.
The second core objective is to focus on operational execution that deliver high return wells.
We seem to be knocking this one out of the park with a nice third quarter production being based on strong performance from both Midland and South Texas, as well as the early turn in line of two pads with eight wells in South Texas.
her vocal: I will have this stewardship as a component of high-Eyes level operational execution. I will point you towards the extensive sustainability reporting recently posted to our website that further discusses our application of technology and innovation in operations.
Our third core objective is returning capital to our stockholders, which comes in the form of our sustainable fixed dividend, transfer of enterprise value to equity holders through debt reduction and share repurchases.
her vocal: Our increased dividend to 20 cents per share quarterly is effective this quarter and we have returned 146 million to share holders to you today, 62 million in dividends and 84 million in buybacks.
Following our UN tap positions, our emphasis is currently on debt reduction, which Wade will speak to shortly.
Who is a very successful quarter and would like to congratulate the team for getting a fear from excellent operational execution to closing the U.T. transaction to extensive financial transactions. All great work.
Before I turn the call over to Wade, let's look at some regional highlights.
Turning to slide six, let's start with the you into basin, starting here with a few photos of the area.
This includes a couple of photos of the sand mine that we acquired in the transaction that just started up at the end of September. The facilities run by a third party operator on our surf sacred and is expected to produce more than 1 million tons of sand per year.
This supports both capital efficiency, providing savings of a few hundred thousand dollars per well, as well as reducing truck traffic by an average 90 miles per sand truck load. That reduces both diesel usage and wear and tear on roads.
We also have a picture here of a rail transfer facility. About 15 to 20% of our Utah production is currently sold to the Salt Lake City refineries with a remainder railed to sales in the Rockies, at Cushing and the Gulf Coast.
I mentioned it before, but as we're emphasizing that the Oaxi UNTACRUDE is high quality oil at around 40 degrees API, but low sulfur, low metals, and low nitrogen content.
While the high-pair thing content makes an optimal feedstock for products like lubricants and in certain markets it attracts a premium to WTI.
At the top of the slide, we quote Gabe at TD-Counne. Quote, we believe SM stands out as retaining multiple resource call lists. At a time when that's largely non-existent in the NP, that can shape a more capital efficient, 25 versus what's appreciated.
Speaker Change: Thanks Gabe for recognizing SM's focus over the past many years on technical innovation and geoscience expertise to create additional resource opportunities in the Tory and Value.
Training to slide 7, we have updated the slide from last quarter to emphasize the quality of our UN to basin assets.
The left graph compares average oil production from the lower and upper cubes in the UNTA to SM's average cumulative well performance in mid-line and south Texas. Demonstrating the competitive performance of UNTA to each of our core areas.
Speaker Change: The Rights I Graph compares cumulative oil production performance of these same UNTQs to top basins in the industry. This highlights both the qualities of the UNTF and the prospectivity of the Upright Cube.
To reiterate, you went to offer his competitive returns, you will immediately compete for capital and the transaction is a creative to all key financial metrics.
Next on slide A while the UN to base an assets were operated by the seller in the third quarter. We want to show you recent well results in the status of the area upon SM's acquisition at the beginning of this month.
Here we are currently running three races in one track room.
The well results shown here are from three wells that reach peak IP 30 day rates in the third quarter. These are all Douglas Creek wells in the upper cube and averaged 870 B o e per day for well at 94% oil, which is actually a higher oil percentage than the lower cube.
Turning out of the Midland basin, on Slide 9, we are pleased to report continued to strong performance from our new Woodford Barnett Test in the Sweet Pequ area.
This chart averages the cumulative well production performance of peer wells in the area and we see that our two test wells are outperforming peer tests on average by more than 50% normalized to 10,000 foot ladders.
As we talked about last quarter, the significance here is that we have about 20,000 net acres in the area of perspective for woodford by net development.
On slide 10, we have our first look at Clandike area results. We have A-wells online, all Dean Wells, of which two have reached peak IP 30 day rates.
He's first two wells that shown on a map average 918 B.O.E per day per well at a very high 93% oil. We're pleased to see early results coming in a little stronger than our acquisition model.
Given the confidence we have gained in the oil productivity here, we have moved to rigged back on location and will spot another six wells at Klondike by year end.
I'll note if you follow the state data on these, you will see more moderate pic rates with longer platos as these highly productive wells meet our capacity limits in water handling for a period of time.
Turning to South Texas and slide 11. The Austin Shock continued out perform and were pleased to show the bounded pilot test at Riscoci Continuital Look really good. These Austin Shockwells all paid out in six months.
UPDating for our most recent wells to reach peak IP30 day rates on the right side of the chart, 2 wells and the Liquor's Rich Gas Area Abaged, 2317 B.O.E. per day per well with 22% oil and 63% liquids.
Also, there are some encouraging early flowback results from our newly developed high-oil content drilled to earn area. These wells have not yet reached peak IP 30 rates, but are producing 76 to 80 percent oil on a two-stream basis.
Speaker Change: So stay tuned for more information as they build up to peak rates.
And as we have updated over time, slide 12, compares our performance in both of Midland-Dason and the South Texas Austin Choc High Liquid area to our regional peers.
Comparing cumulative oil production, normalized 10,000 foot laddels to peers, we underscore SM's ability to deliver superior performance by approximately 30% in both midland basin and south Texas.
and as we have pointed out the oil cumulative curves for Midland and Austin Chock are similar leading to comparable returns.
Speaker Change: In summary, the first nine months of 2020 for have demonstrated outstanding operational performance, delivered better than expected financial results and position the company for substantially increased inventory and scale going forward.
I'll now turn the call over to wait to discuss third quarter financial results, recent financing and energy and guidance. Wade? Thank you, Herr, good afternoon. Well, the team certainly delivered outstanding results for the third quarter, so let's start there. Then I'll speak to our balance sheet and review fourth quarter guidance.
Starting on slide 13.
Strong production supported our excellent third quarter results, topping the high end of guidance and consensus expectations.
Speaker Change: Production volumes were 3% ahead of the midpoint of guidance. This was driven by continued strong performance from base production in both the Midland Basin and South Texas, as well as the early completion of eight wells on two pads in South Texas.
The quarter results also benefited from lower L.O.E. than projected, coming in at $4.73 per V.O.E. This was largely driven by optimizations that lowered projected cost for chemicals, generators and water handling.
Capital was also a positive story, coming in about $15 million below the midpoint of guidance, which included some efficiencies related to faster drilling and pumping, as well as just general timing of expenditures.
I already expected production and lower than expected cost supported notable beats to consensus EBITACs, adjusted EPS, and adjusted free cash flow.
Now turning to slide 14 in the balance sheet, let's look at this as of September 30 as well as October 1st, reflecting the impact of the UN to acquisition. So a lot to impact here.
As you know, during the third quarter we completed very successful, upsized bond offerings of $750 million of $6.75%.
5 years senior notes due to 2021.
and $750 million of 7% 8-year senior notes due to $232 and we were deemed that $349 million of senior notes due to $2,025.
So the September 30th balance sheet reflects 2.74 billion dollars principle amount of senior notes, zero drawn on the revolving credit facility, $1.7 billion in cash, and 102 million restricted cash, which was the deposit on the acquisition.
An October 1, we close the contact positions impacting the balance sheet as follows.
We continue to have $2.74 billion in principle amount of senior notes. We drew $190 million on the revolver, which is less than $300 million anticipated. And had a cash balance of $21 million plus restricted cash of $36 million.
Using SEM Energy Trailing 12 Month Evidax and assuming a rough estimate of Trailing 12 Month Evidax for Utah, we get a Proform and NetDead to Evidax number of about 1.2 times after closing the U into acquisitions.
As discussed last quarter, over the next several months, we intend to direct a greater portion of adjusted free cash flow to debt reduction, transferring out in our prize value to the equity holder. We will be looking to return the leverage ratio back closer to one times before resuming our previous pace of share bybacks.
Subsequent to Cordery and the borrowing base on our revolving credit facility was increased to $3 billion. It also featured rated SM's Senior Unsecured Notes to Double B and the Secured Revolver to Triple B Minus.
which are all a reflection of confidence in our expanded portfolio and increased scale.
Turning to hedges on slide 15.
are philosophy has always been to align hedge volumes to the leverage ratio. As a result, we added around 2.5 million barrels in 2025 WTI hedges during the third quarter in early October.
The slide provides fourth quarter-hand data and details for 2025 are in the appendix.
Moving to slide 16 and guidance.
This will be our first quarter, including the Utah assets and it is exciting to speak to production volumes that are up sequentially by around 25% on a BLE basis and around 40% on oil. And that's at the midpoint of guidance.
I think the slide lays out the numbers you need, but I'd like to walk through a few of the line-adends that will really change with the addition of Utah.
Production guidance for the fourth quarter is 205 to 220,000 BLE per day, which is the highest production rate in the company history, and that approximately 51% oil is the highest oil production rate in company history.
Court of Volumes includes sequential growth from Texas operations at about 43 to 44 percent oil and adds you into basic operations at about 87 percent oil.
This guidance range takes into consideration that we are operating under a transition services agreement with the seller and are in the process of assuming all operational activity by a year end.
Speaker Change: The fourth quarter projection for the UN to basin defer certain volumes into 2025 as the seller completed fewer wells from July to October than they previously projected.
The world design for three wells was revised to extend the laterals from around 10,000 to 15,000 feet, thereby increasing capital efficiency. I'll be at delay in completions and extending offset well-settings.
Speaker Change: These wells are currently being fracted and we expect to turn in line all wells planned for 2024 by year-end slash January.
In regards to the UN to Basin, a few other modeling guidelines that you should find helpful.
Remember the royalty rate is 20% and working interest should be in the 67 to 70% range.
As for realized prices for the UN to base in production, there are several moving pieces. Net net, Utah oil realizations are expected to reflect a couple of dollars off WTI.
Speaker Change: Operating cost in the fourth quarter and corporate the UN to base in in certain efficiencies gained in the third quarter. The full company fourth quarter average is expected to range between $4.90 to $5.10 per BLE.
Speaker Change: In regards to the transportation line item, the transportation cost for railed, you into basin oil volumes.
will be classified on the Transportation Line Item. This is around $16 per barrel for Utah Oil.
which modifies the estimated company-wide transportation expense to $4.30 to $4.60 per BOE in the fourth quarter.
GNA, including non-cash compensation expense for the fourth quarter is expected to be between 35 and $38 million, which includes the transition services agreement with the UN to base in the acquisition seller.
Capital Spinachers for the full year, including the UN to Basin, are estimated between $1.24 to $1.26 billion.
which translates into 320 to $340 million for the fourth quarter and is expected to include drilling approximately 40 net wells and completing approximately 36 net wells.
and lastly, Cash Taxes are on track for $25-$35 million for the year, net of refunds.
Finishing with slide 17, this last slide echoes Herb's comment that premier operations include being a leader in stewardship.
and the new documents recently posted to our website, describe the collaboration, innovation and technologies we apply to ensure our leadership level stewardship.
I'll just wrap up with a thank you to the team for our outstanding third quarter results.
Both operationally and financially, as well as to thank the team for the hard work going on now to deliver the step change growth. We expect to see in the fourth quarter and beyond. It's a very sadting time for us in stakeholders. They are in poor ease. Our communities, our stockholders, our lenders and our ulti owners.
as we all strive together to make people's lives better by responsibly producing critical energy supplies. We look forward to the live Q&A with Cast and call tomorrow morning. Thank you.
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