SM Energy Company - Q1 2024 (Q&A)

Transcript

Operator (participant)

Greetings, and welcome to the SM Energy's first quarter 2024 financial and operating results Q&A. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Samuels, Vice President, Investor Relations and ESG Stewardship. Thank you. You may begin.

Jennifer Martin Samuels (VP of Investor Relations and ESG Stewardship)

Thank you, Maria. 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, we have our President and CEO, Herb Vogel, and CFO, Wade Pursell. 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 slide 2 of the accompanying slide deck, page 5 of the accompanying earnings release, and the Risk Factors section of our most recently filed 10-K, which describe risks associated with forward-looking statements that could cause actual results to differ. We may also refer to non-GAAP measures.

Please see the slide deck appendix and earnings release for definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures and discussion of forward-looking non-GAAP measures. Got that out of the way. Also, look for, look for our first quarter 10-Q filed this morning, and with that, I will turn it over to Herb for just a brief opening comment. Herb?

Herbert S. Vogel (President and CEO)

Thanks, Jennifer, and good morning. Thanks for joining us. We're obviously very excited about how 2024 is shaping up for SM Energy. So let's go ahead and get started. I'll turn the call back to Maria to start taking your questions. Maria?

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Zach Parham with J.P. Morgan. Please proceed with your question.

Zach Parham (Analyst)

Thanks for taking my questions. Just wanted to ask on the buyback first. You talked about in the prepared remarks, a ratable pace to the buyback for the remainder of the year. That would imply around $60 million in buybacks per quarter. But at current commodity prices, it seems like you'll have a significant amount of free cash flow that will allow you to build a lot of cash, even after paying the base dividend and finishing off that buyback authorization. How do you think about using that excess cash? Could further accelerating that buyback make sense? Just trying to get a sense of what happens with that cash.

A. Wade Pursell (Former EVP and CFO)

Yeah, good, good question, Zach. This is Wade. Good morning. Yeah, I, you know, we just that the guidance on assuming ratable buybacks, I think is just the best way to model it right now. Obviously, things never happen that ratably, right? And, you know, as we go through the quarters, we, you know, we opportunistically repurchase during the open windows. And, yeah, you could see, under your scenario, with higher commodity prices, that's generating more free cash flow. You could see us buying back at a little bit more accelerated pace than that, given what the opportunity set is before us. So, that could happen.

You know, many people have asked, you know, "What are you gonna do when you get through the commitment?" And the board will consider that, and I can imagine it being possible that we would, you know, continue on with a new buyback, but certainly no guarantees of that at this point.

Zach Parham (Analyst)

Thanks, Wade.

A. Wade Pursell (Former EVP and CFO)

Yeah.

Zach Parham (Analyst)

And then just to follow up, in the prepared remarks, you mentioned flattish production in 3Q, and then kind of another step up in 4Q. That seems to indicate you would exit the year with oil in the upper seventies. Is that a fair number? Just trying to get a little bit more color on what that trajectory of volumes would look like through the back half of the year.

A. Wade Pursell (Former EVP and CFO)

Yeah, I think that's reasonable, mid-seventies-ish, given what we said. You know, what we said about the third quarter being flattish, I mean, it'll be up. I think, you know, what's changed a little bit is the second quarter is obviously with acceleration higher than it was before in our guidance. So, you're reading that pretty well, but you can assume the third quarter is up somewhat over the second quarter.

Zach Parham (Analyst)

Thanks, Wade. Appreciate the color.

A. Wade Pursell (Former EVP and CFO)

You bet.

Operator (participant)

Our next question comes from Gabe Daoud with TD Cowen. Please proceed with your question.

Gabriel Daoud Jr. (Managing Director and Senior Analyst)

Thanks. Hey, good morning, guys. Thanks for the time. Maybe was hoping if we could start at Klondike. You mentioned you did some science there during the quarter, and maybe starting to complete those 8-9 wells, where I think results should be ready by the third quarter call. But just curious if you could maybe talk a little bit about some of the science work there. You know, some of the Deans in the area look quite prolific on an oil productivity per foot basis, so just trying to get a sense if we could assume or expect similar results out of your program.

Herbert S. Vogel (President and CEO)

Yeah, Gabe, this is Herb. Yeah, we're quite excited about the Klondike acreage, and we've already drilled a 4-well pad and completing it right now. I will say on the science side, we did take a vertical pilot hole down quite deep and did a lot of sidewall cores and high-end logs through that interval, so we could assess all the intervals that are potentially prospective up there. But we're focused now on the development of those, initially, the Dean and those 8-9 wells this year, and the first 4 will be online during the second quarter. So it looks like a great play for us, and you know, we have quite a few wells offsetting into the southeast, plus the wells we that came with the acquisition in Reliance, from Reliance.

Gabriel Daoud Jr. (Managing Director and Senior Analyst)

Yep, no, that's right. That, thanks, Wade, that's helpful. I guess as a quick follow-up to that, just sticking to Klondike, 20,000 net acres, if you were to progress towards a true development program, is there any type of infrastructure spend that we should be thinking about up there?

Herbert S. Vogel (President and CEO)

Well, there is quite a bit of infrastructure there, but mainly it's the getting the gathering lines in place so we don't have to truck as much and getting the gas, lines built to the scale, which is, a lot of the midstream. And then, but otherwise, it's just pretty much normal equipment up there.

Gabriel Daoud Jr. (Managing Director and Senior Analyst)

Okay, okay, great. And then just the last one, the South Texas drill to earn, any additional color you can provide on that? Thanks, guys.

Herbert S. Vogel (President and CEO)

Yeah, you know, a lot of people wonder, you know, how does a drill to earn works if they're not familiar with it. And you know, generally, a drill to earn is where you agree to drill a well or wells in return for acreage. In this case, we're gonna operate and drill wells to gain a 50% working interest in around a 16,000-acre block, so that will get us about 8,000 net acres. The other details around that drill to earn really are kept confidential between us and the company that farmed out to us.

Gabriel Daoud Jr. (Managing Director and Senior Analyst)

Okay. Okay, got it. Thanks, guys.

Operator (participant)

Our next question comes from Tim Rezvan with KeyBanc Capital Markets. Please proceed with your question.

Timothy Rezvan (Analyst)

Good morning, folks. Thanks for taking the question. I wanted to follow up on Gabe's question on Klondike. You know, we did an analysis of the area, and I know you all have talked about the Middle Spraberry and the Dean. The Wolfcamp A looks extremely strong with sort of offset results. So I was curious, kind of among these three initial wells being completed, excluding the science well, can you talk about what intervals you're targeting and kind of maybe why you haven't talked about the Wolfcamp A as a primary target on that acreage?

Herbert S. Vogel (President and CEO)

Sure, Tim. But one thing I want to correct you on that there, there would be four producers. Just one of them, we took a pilot hole down first, then we plugged back-

Timothy Rezvan (Analyst)

Okay.

Herbert S. Vogel (President and CEO)

and drilled the lateral. So there are four wells there, just one of them we have that-

Timothy Rezvan (Analyst)

Okay.

Herbert S. Vogel (President and CEO)

Vertical, that we just gathered data on. So you know, it's great to hear that there's prospectivity in the Wolfcamp A. I would say we, we are not counting that. If we're surprised and the thermal maturity is higher for some reason there than we expect it to be, that'd be great news. But, we're really counting on this being more a migrated oil play, which I've talked about before, which is oil comes from a bit deeper in the basin and migrates into the sandstone intervals, and, that's why they are so prolific up there.

Timothy Rezvan (Analyst)

Okay. And then are these initial 4 wells Dean, all Dean, or?

Herbert S. Vogel (President and CEO)

Yes, they are. They're all Dean wells.

Timothy Rezvan (Analyst)

Okay. Okay, that's great. Appreciate that. And then, as a follow-up, you know, I think the comments on the Briscoe pad and the stacked pay opportunities are pretty interesting. Some other public companies are talking about that. I know it's early days from one pad, but you know, a big marketplace debate was on the validity of your claims that you had 300 locations there. And I guess just to help kind of frame the resource, if this stacked pay proves, you know, to be something you can replicate, does that 300 location count kind of move up dramatically? I'm just trying to understand sort of what the significance is of this test that you're doing, that you disclosed. Thank you.

Herbert S. Vogel (President and CEO)

Yeah, Tim, you know, I would say it's not that much of a big increment in the test. The only difference is really that the lower wells are fully bounded versus in other places, they've been half bounded. But we've had fully bounded in the upper interval on several other pads. The thing to note is these are spaced about 625 feet, and we've done that before. These go between two different subtle differences in the landing zone in the Upper Austin Chalk or the Middle Austin Chalk and the upper interval that we developed. So it's just really exciting because of how productive they are, how oily they are, and how NGL rich they are.

And those wells on that one pad are between 11,600 and 14,500 feet long, so we didn't have difficulty executing there. And the other three are between 11,900 and 14,000 feet, so they're long laterals too, and that just really helps the economics also. And they're, they're oil-rich, so really excited about it on that area. And you can see the, the strength of the wells and just how they started. But it's not like they're a really big step in any way other than the bounding of the Lower Austin Chalk wells.

Timothy Rezvan (Analyst)

I appreciate the color. Thank you.

Herbert S. Vogel (President and CEO)

You bet.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Oliver Huang with Tudor, Pickering, Holt & Co. Please proceed with your question.

Oliver Huang (Managing Director)

Good morning, all, and thanks for taking my questions. I just wanted to start on the efficiencies. Certainly good to see the continued capture there. I was just kind of wondering of what you all have kind of achieved in Q1. Is it something that's already been baked in for new planned activity starting in Q2 when you're kind of providing the quarter ahead of full year outlooks? Or is there kind of a wait-and-see aspect to it, since it's kind of only a quarter before kind of baking that fully on that incrementally cash flow case that we saw?

Herbert S. Vogel (President and CEO)

Yeah, Oliver, you know, when we change guidance, that means we've got a lot of confidence that it's appropriate to include it. So we're continually working new aspects of efficiencies in, and we have quite a laundry list that our team's running through right now that looks quite attractive, but we're not counting ones unless we see them working. So the big-ticket items for us right now are the increased substitution of natural gas for diesel and frac pumping operations of those DGB fleets that we're employing. And Wade mentioned those on the prepared remarks, and that has the added benefit of the reduced CO2 emissions from completion operations. Then we're seeing quite a bit in the way of efficiency gains in drilling, so this translates to number of feet we drill per day.

It's more advanced and reliable downhole equipment, so you don't have to trip the bit as much. And we're using rotary steerable assembly, so we can keep the bit on bottom longer. That helps also. Then, on the efficiency, on cost efficiency side, a big one is using existing central production facilities that now are sitting there with some latent capacity, and that avoids the need for capital into new facilities. We knew all along that that was gonna happen, and we're just starting to see it really happen in a pretty significant way now. And then, we're also bundling some services between South Texas and Permian, so we've got the benefits of the scale of the full operation between the two areas, and that helps.

And then, you know how activity has reduced, so rig counts are down, frac spread counts are down, so we're actively rebidding services and seeing discounts that way. And I can't tell you when that'll stop or how much more we'll get there, but that, obviously, is a contributor. So that's, that's a list of things that I'd say we're highly confident in and not a list of things that we're still pursuing.

Oliver Huang (Managing Director)

Okay, that's super helpful. And maybe for a follow-up, I know you mentioned earlier some of the details are confidential on that drill to earn, but I just wanted to try and clarify: Are you all responsible for 100% of the D&C for that 50% working interest that you kind of referenced? And is there any sort of details in terms of how many wells you're planning to do on that acreage this year, and if that's already embedded within the full year well count out of the South Texas region?

Herbert S. Vogel (President and CEO)

Yeah. Okay, you got two questions there. The first, you know, we can't reveal or divulge details on the deal, but I'd say no is the simple answer to your first question there. No, we're not paying everything for the 50%. And then the second question was, have we baked this in? Yeah, we knew the deal was far enough along when we set the budget in February, that we integrated that into our plans for the year. The three wells that we'll drill there this year.

Oliver Huang (Managing Director)

Awesome. Thanks for the time, guys.

Herbert S. Vogel (President and CEO)

You bet.

Operator (participant)

There are no further questions at this time. I would now like to turn the floor back over to Herb Vogel for closing comments.

Herbert S. Vogel (President and CEO)

Hi. Thanks, Maria, and thank you for joining us, and we look forward to seeing a number of you at upcoming events.

Operator (participant)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.