Q2 2025 SM Energy Co Earnings Call - Q&A

Greetings. Welcome to SM Energy's second quarter 2025 financial results and operating results conference Q&A session. At this time, all participants will be in listening mode.

The question answer session will follow the presentation.

If anyone today, shared acquire operator assistance. During the conference, please press star zero on your telephone keypad,

please note that today's conference is being recorded.

At this time, I'll turn the conference over to Pat Lidl. Senior vice president Finance.

Pat, you may begin.

Thank you rob. Good morning, everyone. In today's call, we may reference the earnings release IR presentation or prepared remarks. All of which are posted to our website. Thank you for joining us to answer your questions. Today on the call this morning, we have our president and CEO herb Bogle C. Oo, Beth McDonald and CFO Wade Purcell.

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, 10K was described risks associated with forward-looking statements that could cause actual results to differ.

Also, please see the slide deck appendix and the earnings release for a discussion of the forward-looking statements, as well as definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures. Additionally, our second quarter 10-Q was filed this morning. With that, I will turn it over to Herb for brief opening comments.

Herb. Thanks Pat.

Good morning, and thank you for joining us before we get started, I want to make sure that you all took a close. Look at slide 6 in the slide deck, we posted yesterday afternoon and heard best comments on the pre-recorded call.

Over The Last 5 Years, our growth has been intentional, strategic and compelling.

Slide 6 shows that since 2020, we have grown both net, proved reserves and net production by over 60%.

while increasing our oil percentage and production margins,

Amazingly, we achieved this growth while the share count remained flat, meaning no dilution. We also cut our leverage by more than a full turn from the end of 2020 to where it is today.

In other words, we have delivered a step change in scale and de-risked the balance sheet, all while not diluting our shareholders.

Benefiting per share metrics significantly.

You can attribute this exceptional outcome to date to our team's extensive geoscience engineering and advanced analytics experience in unconventional resource development.

All hyper focused on adding shareholder value.

We see a future where we can continue to access underappreciated assets. Apply our deep technical skills. Repeat this level of performance and grow shareholder value, meaning fully with that, I'll turn the call back over to Rob to take your questions.

Thank you.

We'll be talking a question and answer session.

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1 moment, please while we pull for questions. Thank you.

The first question today comes from the line of Zack parm with JP Morgan, please just use your questions.

Hey, thanks for taking my questions. Um, first, I just wanted to ask about cash taxes. You gave me some specific guidance on cash taxes in 2025 post the passage of the tax bill, but how should we be thinking about your cash tax obligations as we go into 2026 and into future years?

What is that? Yes, this is Wade. Good question. You know, at at this point, um, for the foreseeable future, I I would assume something similar, uh, if you look looking into 26, if, uh, under under the new Under the new plan and the, the, uh, increased level of of deductions that we will be able to achieve. I think our our base plan right now, looks looks very similar, uh, depending on commodity prices, of course. And if you're asking about, you know, years beyond that, uh, you know, assuming assuming the, those laws stay into effect, it's and assume our spending stays at similar levels. It's, it's going to be a pretty similar result for, for us, for quite a while.

the capacity of that asset over the back half of the year and as we go into 2026.

Yeah. Hey Zack, it's Beth

you know, when you look

Turn in lines for UA. We had a majority of those coming on in the first half of the year. So we came out of the gate really strong. We also outperformance of our wells and and, uh, the quarter that led to the high production. But, you know, we'll, we'll have more of South Texas and Permian coming online in the second half, but but you went to continue to stay strong and, uh, we were really excited about what we saw in Q2 and, and look forward to seeing continued performance and repeatability in that asset going forward.

Thanks Beth.

The next question is from the line of Theo Mariani with Roth MKM. Please see if there are questions.

Yes, thanks. Um, wanted to just

Activity. I think if I read this, right, sounds like you guys are adding an additional um 10 net Wells uh to the drilling program uh for roughly 75 million blocks, was that the

The total uh that got the 75 million bucks. Seems maybe a little high, if you're just drilling Wells. Seems like you're not completing them but maybe these are just drills and sounds like they're also. Um, all non-op have some of those kind of already happened or they hitting in.

Third quarter, and do you expect to see capex come down and force you?

Yeah. Hey Leo.

It's Beth. Um, you know, when you when you look at the timing of that we had additional activity pull into Q2. So we had the 2 in additional net, drill Wells and 6, turn-in lines that came in and Q2. But when you look at the overall Capital raise that we had in new guidance for the year it's primarily associated with non-op and better line of sight to those projects. So some of it is acceleration and some of it is um non-operated projects that we we know now that we're participating in high return ones in the Midland Basin, primarily associated with this,

Yeah, and Leo. Those don't add any production in 25.

Okay, so do you guys expect to see capex come down here in the in the fourth quarter? Then I know obviously you dropped a lot of the operator rig activity.

Yes, Leo we expect fourth quarter Capital, come down.

Okay.

That's helpful. And then on the Ina obviously it sounds like well performance has been um certainly quite a bit stronger. Uh this quarter. You have a lot of wells. Look like the, the IP 30s were up quite a bit despite shorter. Laterals. I was hoping you could provide a little bit more color on, you know, sort of what drove the improved results and can you also comment on how well costs are trending? Have you been able to bring the well cost down? In addition, to seeing better performance,

On both. So what I would say is that what we're seeing is our technical expertise combined with that of xl's, former operational execution and we're seeing Capital efficiency really Drive costs down there and we showed that also on slide 11 you know especially as it relates to the conveyor system and where we are now.

So costs are coming down there in the UA. And also, when you when you look back on slide 10 and you see the well performance,

Truly stellar. Well performance. Our subsurface team worked very well with our completion optimization and our design going forward, and I think you're seeing some of the benefits of that combination.

Okay, appreciate it.

Our next question is from the line of Oliver hang with tph, please receive your questions.

Good morning, herb, blade, and d, and thanks for taking the questions.

Wanted to hit on the Ina Basin, uh, first, a little bit more detail. I I know we're still waiting for the first fully, uh SM start to finish well-designed. So year to date. I think all these Wells thus far were kind of part of the inherited duct backlog from the deal when thinking about what spacing or zones that might have been targeted. But it just kind of given how you all had close to 50 of these Wells online in the first half of the year. It's a decent sample size with the handful of month of public data, which all look to be performing better than what we saw from the program last year that your predecessor ran. So, just trying to get a sense for when you all, look at the data and changes within the program on a year-over-year basis. What are some of the main differences? You all would pinpoint a specific drivers for that positive rate of change.

You know when you look at our top initiatives, as we evaluate the UA, we're really looking at the entire development of the wine rack. So we're looking at Landing Zone, our co-development strategy within the lower Cube as well as looking and evaluating the upper Cube. We continue to extend laterals across the acreage position. And we really look at maximizing Capital efficiency. So I think when you combine all those things you see that repeatability and the 22 Wells that we put on line

makes sense.

Maybe just a quick follow-up on the uh, trajectory just thinking through how the program was fairly front and weighted with respect to capex until so

just doing some back of the envelope math that looks like 15 to 20% of your full year. Capex remains for Q4 roughly, 15% of tills and most of the UA oilier Wells were very front and weighted. So when we're kind of thinking about just Q4 and q1, any sort of color that you all could provide on the magnitude of potential roll offs on oil volumes,

Or any sort of color on the expected shape as we kind of head into 2026.

Yeah, Oliver. You're you're I think you're back of the animal math is pretty accurate there for fourth quarter, you know, and especially on the tail counts and and what that implies uh, so we're we're not really going to discuss our plans for 2026 until our normal timing which you know, is February and and last uh in July last year when we announced the unit to transaction, we said we were going to reduce the rig count and we're doing that. So and we're getting we're down to 6 already and it would be pretty much safe to assume we stick with 6 rigs for next year.

Spread pretty evenly across all our assets between South Texas, Midland, Basin and UA. And we've kind of flagged that that would generate pretty much flattish. Boe production on uh, a little bit less, capex year-over-year.

In without assuming deflation, so we're going to look at the plan later in the year, evaluate where we are on commodity prices, and then really work to maximize that free cash flow over 2 to 3 years as we usually do.

So, uh, you know, with the commodity price.

Experience that we've had this year. It's just really difficult to figure out exactly where things are going to be. Is there going to be a tailwind on gas or headwinds on gas, and then on oil likewise? So, we'll do our normal program there. And, as usual, it'll be focused on free cash flow generation.

Okay, fair enough. Thanks for the time.

You bet.

Next question, the line of Scott Hanel with RBC. Please receive your question.

Yeah, thanks. Um, you know certainly a lot of focus on you went to and and you all had a nice uh, you know, step up in in sort of the returns and performance there. Um my my question is is do you think there's some sustainability for that? I know there's going to be gentle es and flows but um you know should we level set things to you know, this was a sort of a peak quarter, do you, you know expect things could be status quo or even better you know moving ahead based on what you know today

Hey, yeah, Scott, I'll start and then hand it over to Beth. Uh, but you know, we went into you into Basin because we saw all this potential and not just near-term and in the lower Cube but beyond that, for massive inventory expansion. So, uh, we do see as quite sustainable on a drilling program and the ability to to grow inventory. And with that, I'll I'll hand it over to the best for the rest of that. Yeah, I agree.

And if you're looking specifically at the production this year, and what does that mean? Moving forward? It's really all timing of our turn-in lines so we have Stellar performance. Most of that's weighted toward the front half of the year. So, um, as we continue to complete Wells throughout the year, we'll still bring on great. Just just as herb, said that repeatable performance that we have and sustain our cash flow coming out of the UA.

Senior sooner than later. And and uh you know what kind of scale would you feel comfortable doing that at?

We are we are we line of sight that that is a good word. I mean we're closed getting getting there and we ended the quarter at 1.2 times really, really more like, 1.1 times if you look at it on a full year basis for xcl and I think we mentioned in our comments that based on, you know, just just using the current commodity prices. We, we see it happening by the end of the year. So, we're, we're really bouncing along, really, really right there. Close to 1 time the second half of the year. So, to answer your question, you know, I, I, I could see us, uh, I I could see us opportunistically stepping in at some point. Uh, as, as we see stability in the market, we're looking for that. Also, um, you know, we we've seen some stability, uh, in recent weeks. Um, we, we, we'll continue to monitor that and I'm talking about oil prices, uh, primarily. Uh, so, yeah. So you, you could, you could see us, uh, stepping in. We we have just remind everyone we have authorization from the board. Uh, 500 million dollar share buyback program. So so, uh,

yeah, you you very well could see us step in their specially uh if if there's a period of weakness that we want to support,

Okay, I appreciate that. Thank you.

You bet.

Our next question is coming from the line of Michael scaly with Stevens. Please receive with your questions.

Good morning everybody. Uh, wanted to ask on the, uh, you went to. I think you said, 90% of this year's program was focused on the lower Cube. You you've talked about the 17% of intervals there.

Just uh, could you provide an update on how many you've tested thus far? And as you look into next year with this year's program being so much focused on the lower Cube, any more plans to uh delineate some of these other zones next year,

Yeah, thanks Mike for that.

Being a cross, a majority of those have been in the lower Cube. So there's seven different landing zones within the lower Cube itself. And we've had production out of all of those that we're evaluating and taking into account in our geological model as we set the first SM at the first SM well-designed and executed pad that we talked about on the call that will come online in 2026. We also have about 10% of our program associated with the upper Cube, and we have several landing zones in there too that were.

Or monitoring to make sure that we pull that in design, the right completion and make it most capital efficient and value adding going forward.

appreciate that Beth and then, um,

You know, you had a pretty large beat on production. This quarter, you did raise your oil guidance for the year, but I guess I'm a little surprised you didn't push the overall production guidance higher. Could you speak to that at all? What prevented you from taking the total BOE guidance up for the year?

Yeah, I think you know, the increase in volumes that that we saw this this quarter was really uh, due to the mix that we had coming from the strong performance on our UA. And all of the Pops that you saw there. Um, the production profile really has just shifted to earlier in the year. So that's that's shifted forward if you will, we still see Q3 slightly higher than Q2. And that's, that's reflected in our guidance for Q3. Um, but that production has moved forward in time due to our efficiencies and and putting more Wells online. But primarily associated with the outperformance that we've seen in all 3 of our assets,

That's good. Thank you.

Our next question is from the line of Michael Furrow. It was Pickering Energy Partners. Please just see you with your questions.

Hi, good morning, thanks for taking our questions. Uh, just got to follow up to, to Zach's cast tracks. Question earlier in the obba. The capitalization of R&D seems to include a multi-year catch-up and should benefit operators, like, SM that if you know, historically at higher levels of R&D. So, I'm curious if you could ask some color to that statement and affects them expects to see some benefits to longer term, cash taxes, particularly from the R&D contribution angle,

Every year and and now having the ability to deduct those uh, quicker. Um, is is is definitely part of the impact. Uh, and that'll, that'll be a recurring thing for us. We do, we do incur R&D uh expenses every year. And so that that that is a component for sure.

Great, appreciate the caller. Um, and then just a follow-up for me on the, uh, it looks like operations are humming along, uh, Cadence themes that had a schedule for the full year. Guidance of 59 completions, uh, completing 41 year-to-date. So, you could reconsider the 50 completion guidance as sort of a hard target for the year, or would the company consider continuing to run a steady program in the Basin and potentially turning into sales a bit more well, as they originally contemplated, if the efficiencies allow for it.

Yeah, thanks Michael. This is Beth. I just wanted to point out 1 thing that herb mentioned on the call. Also as it relates to UA, we started the year with a double barrel which is is similar to what you might call a simal Frac and other basins. So we started with the double barrel and are down to Single Barrel. As our. Frac Fleet runs very efficiently and catches up with our rigs but we're going to continue to run that Frac Fleet as efficiently as possible and if that moves more of those turn in lines into the year, that's great. Um, but but right now, we're we're catching up to the rigs a little bit and we're seeing those efficiencies, and that's just a product of of going going from the double barrel to The Single Barrel in our frack.

Understood, thanks for the time.

Thank you. As a reminder, if you'd like to ask a question today, you may press *1 from your telephone keypad.

The next question comes from the line of Tim risvan with keybanc capital markets, please receive your questions.

Good morning, folks, and thank you for taking my questions. Um, not sure if this is for Beth Or herb. Um, the release in the prepared comments, you know, repeatedly sort of, uh, reiterated, the importance of logistics and optimizing takeaway out of, uh, the price River terminal. I was curious if you could be a little more specific about what was done. And um, if that if you that more reliability issue or could we see a potential uplift to realizations, as you look to maybe get more, um, you went to barrels on on rail. Thanks for any color on that.

Yeah, that thanks Tim and uh, that that is gets in the details of the rail transports. I'll hand that 1 over to Beth and there's a lot of great opportunities in front of us there. Uh, we should be pretty exciting to see. We anticipated some, but it's, it's probably even better than we thought.

Yeah. And what I would say is that our team had to respond to that increase in production growing faster. Um, as a result we sold of course we maximized and we said this before, we maximize as many barrels as possible to the Salt Lake City refineries and we were able to do that and then we we were able to work with our team at pry server terminal as well as our railroad Logistics team.

To move. We just moved more cars and they did an amazing job moving the barrels in and out of that terminal. And we hit record volumes.

So it's it was a collective team effort. Across our infrastructure Partners as well as our operations team.

Okay, so we shouldn't think of this as a sort of marketing strategy change. This is just good execution.

Yes, exactly.

Okay. Okay, I appreciate that, that contacts, and as my follow-up, um, for her. Um, you know, in the past you've been pretty cautious on on natural gas and you've allocated capital. I guess the board has accordingly. Um, I know the last time I spoke to you in person about this, it was December. You were cautious on gas and, and it feels like we've had several price Cycles, you know, since last December. Um, I was curious, are you getting more constructive on gas is 2026? Approaches are sort of, what's the kind of internal view, um, given that the volatility and the the export. And, you know, Outlook

Yeah, Tim it's a great question and and and Wade always reminds me if you're going to forecast forecast often. Uh, I would say that um, you know, we're just cautious on gas because of the ability to

Does respond, the mark to Mark a signals? And, uh, we, we feel like we've got a great plan. Uh, oil has turned out a bit better than we expected from April and May and it's actually right at our budget for the year. So, uh, and I don't know how that'll continue through the end of the year, but, uh, um, we we didn't see a reason to change our plan to respond to the shorter term, gas, price signal and and obviously there's been a little bit of erosion. Unfortunately, in that 1, we are happy to hedge gas in the out years. Yeah.

Okay. Okay thanks so yeah, we share that. That that caution I appreciate the insights.

The next question is from the line of David Deco with TD Cowen, please just see you with your questions.

Uh, thanks, everyone, for taking my questions this morning.

Um, I I did want to follow up just on on the marketing and the UA. Um, just giving the wider basis this quarter, particularly with the higher production levels. What? What is the Outlook?

uh, for, for basis, in the back half of the year and then heading into next year, as as you continue to ramp the asset

Yeah, and David, it's asking about basis for you. And to is a bit challenging because the rail bonds are sold at the refinery locations, and those can vary, you know, from about Houston being most of them and the markers there versus in Salt Lake.

Uh, where we sell at uh, more or less the Wellhead or the tank. Um, but I I'll I'll let Beth answer. Uh, give it a little more granularity around that but it it's not like a single basis Market that you'd look at in the Parian uh, or other markets. Yeah, totally agree with you herb and you know, our marketing team, just continues to work with different purchasers. As we see that demand for our product continue to increase. We look for the highest realization that we can have across. And of course the transportation cost to get us to Salt Lake City is lower than than railing it to Houston and to the Gulf Coast. But we continue to look at what are our ultimately, what's the best margin and best return and that's what our marketing team focuses on on a monthly basis and so we'll continue to do that and optimize as best as possible.

Appreciate it. And then was asking for a little bit more color on, on the, the increase non-operated, um, budget this year, uh, is, is that mostly a function of of catch up in activity, just giving commodity signals that are out there or are these efficiency gains that you're seeing on the non-operated side as well in terms of just Drilling and completion times.

Uh, David, I'll start that and then turn it over to Beth, but we sort of unique this year and when we put the budget out there in February at 1.3 billion, we noted that we did not include non-op because it wasn't clear exactly what the non-op program would be from a couple operators. Uh, then that was exacerbated with the uncertainty and commodity prices, uh, particularly after April. So given that we we we didn't include it, but we said we'd tell you how much we were spending each quarter. Now, it's clear Outlook, we also have the ability to potentially adjust that program with the different, uh, non-operators. And we've, we've dialed in what we think they're going to do and how they're going to execute. And so, we just brought that all in for the full year but Beth you want to add anything on that 1. No nothing really to add. We just have better line of sight of what those projects are. And we participated in them because they have

Very strong returns.

Appreciate it, guys.

Thank you. At this time, we've reached the end of the question-and-answer session, and I'll now turn the call over to Elizabeth McDonald for closing remarks.

Thanks Rob. And thank you all for joining us today. We look forward to seeing a number of you at upcoming events. Have a great day.

Ladies and gentlemen, this will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.