SM Energy Company - Earnings Call - Q1 2025 (Q&A)
May 2, 2025
Executive Summary
- Q1 2025 came in strong on volumes and profitability, with net production 197.3 MBoe/d at 53% oil (high-end of guidance), GAAP diluted EPS $1.59 and Adjusted EPS $1.76; Adjusted EBITDAX was $588.9M, benefiting from successful Uinta Basin integration.
- Revenue and adjusted EPS compared favorably to Street: normalized EPS beat consensus by ~$0.14*, while reported operating revenues were solid; management flagged higher LOE near term, raising full-year LOE guidance to ~$5.90/Boe.
- Q2 outlook: production 197–203 MBoe/d at 54–55% oil, capex $375–$385M, LOE ~$6.10/Boe; full-year plan otherwise maintained (20% Boe growth, ~30% oil growth).
- Strategic narrative: Uinta now a third core area with margins comparable to Midland; debt reduction prioritized until ~1x leverage, with flexibility to defend equity opportunistically.
Note: Asterisk (*) indicates values retrieved from S&P Global.
What Went Well and What Went Wrong
What Went Well
- Uinta integration outperformed, driving oil mix and production to the high end of guidance; “We took the reins of the Uinta Basin operations on January 1 and are pleased to report a very successful first quarter that exceeded our expectations” – CEO Herb Vogel.
- Adjusted EPS and Adjusted EBITDAX were notable beats versus consensus, supported by stronger volumes and pricing; CFO: “Production…supported adjusted EBITDAX and adjusted EPS that were notable beats to consensus”.
- Balance sheet strength and liquidity reaffirmed; borrowing base and commitments held at $3.0B/$2.0B, available liquidity ~$2.0B, leverage ratio down to 1.3x; focus remains on reaching ~1x quickly.
What Went Wrong
- LOE stepped up Q/Q, prompting a full-year LOE guidance increase to ~$5.90/Boe due to workovers, water disposal impacts from offset completions, and higher fuel gas costs (offset in revenue).
- Capex exceeded guidance midpoints due to $15M accelerated production equipment spend in Texas and $5M non-op Midland projects; front-end loaded capex profile continues into Q2.
- Transportation cost variability in Uinta persists (rail vs refinery mix), necessitating continued marketing optimization; Q1 transportation declined vs Q4, but mix-dependent volatility remains.
Transcript
Operator (participant)
Greetings and welcome to SM Energy's first quarter 2025 financial and operating results Q&A session. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, you can press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Pat Vital, Senior Vice President in Finance. Thank you. You may begin.
Pat Lytle (SVP of Finance)
Thank you, Chomali. 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 Vogel, COO, Beth McDonald, 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 the accompanying slide deck and 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 the earnings release for definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures and discussion of forward-looking and non-GAAP measures.
Also, our Q1 10-Q was filed this morning. With that, I will turn it over to Herb for brief opening commentary. Herb.
Herb Vogel (CEO)
Thanks, Pat. Good morning, and thank you for joining us. We are really pleased with the performance across the company and particularly pleased with how well the integration has gone and the quality of our Uinta Basin assets. As a reminder, our plan for 2025 delivers a 30% increase in oil production, a 20% increase in total production, and that's a step change in scale for SM. We clearly have three top-tier assets. With that, I'll turn the call back over to Chomali to take your questions. Chomali.
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 your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. One moment, please, while we pull for questions. Our first question comes from the line of Tim Rezvan with KeyBank Capital Markets. Please proceed with your question.
Tim Rezvan (Managing Director and Equity Research Analyst)
Good morning, folks, and thank you for taking my questions. My first one, I do not know if this is for Herb or Beth, but I am trying to get an understanding on the shape and the oil skew on 2025 production. First quarter was 53%. You are guiding to a little higher oil cut in the second quarter, but you did not touch the full-year kind of guide for oil. I was curious if there are timing issues with Uinta wells coming online that we should be aware of, or is this just simply you not touching most annual guidance items at this point? Just trying to understand how the year is going to shake out. Thanks.
Herb Vogel (CEO)
Yeah, Tim, I'll start, but I think Beth can dig into that one a little bit more. Yeah, we didn't see material changes to change anything for the full-year plan, but she can elaborate a little bit on the percentage improvement in oil cut from Q1 to Q2 and what that means later in the year.
Beth McDonald (President and COO)
Yeah. What I would say is, as you look at the production rates, and as we've said the whole year, we go from Q1 to Q2, increasing modestly, and then you'll see a major increase in the Q3. As far as oil mix, you know we have a bit more Uinta wells coming on, but it's important to kind of take a step back and just know that every single quarter that we have variability in that oil mix depending on what wells we bring on. We have large pads coming on in the Uinta, and that is driving our oil mix a bit higher. For the year, we would stay within the guidance range that we've already put out there.
Tim Rezvan (Managing Director and Equity Research Analyst)
Okay. Okay. That's helpful. Thank you. My second one, I guess maybe more for Wade on the topic of cash returns. Your path back to one-time leverage is now a little steeper with oil below $60, but we see the balance sheet getting there around year-end. Is it safe to assume repurchases are going to be off the table this year until you get there, or do you feel compelled to maybe step in and defend the equity with where shares are now? Thanks.
Herb Vogel (CEO)
Yeah, good. Good question, Tim. I think my answer would be very similar to what I would have said a quarter ago, that we certainly like the stock price. I mean, that has nothing to do with it. We are being disciplined about allocating free cash flow to getting leverage back to that one-time area. Yes, prices are lower than they were a quarter ago, but you're right, even at current prices. Certainly, if you assume something like $55, we generate a lot of free cash flow, plenty of cash flow to, frankly, pay off maturities. That leverage metric kind of gets down into that really, really close to one-time area. I think you can assume that we are prioritizing debt reduction until we get there.
I think that's a good assumption, but I wouldn't take off the table our ability to step in occasionally to support the stock.
Tim Rezvan (Managing Director and Equity Research Analyst)
Okay. Thank you.
Herb Vogel (CEO)
You bet.
Operator (participant)
Thank you. Our next question comes from the line of Oliver Huang with TPH. Please proceed with your question.
Oliver Huang (Director of E and P Research)
Good morning, Herb, Beth, and Wade. Thanks for taking the questions. I just wanted to start out in the Uinta, looking at slide seven in your deck, the one showing productivity charts by various key regions. I know the lower cube is the primary focus for you all today in the Uinta, and I imagine the data set from Enverus that's being cited there likely shows a heavy lean into the Uteland Butte as the most developed horizon within that part of the stack. My question is, what is the expectation for being able to hit the underwritten assumptions for the lower cube when you're co-developing with other zones like the Wasatch and the Douglas Creek, which haven't been quite as prolific, historically speaking, on an oil-per-foot basis?
Beth McDonald (President and COO)
I would say, Oliver, thank you for the question. 90% of our program is focused on the lower cube, and we have a majority of those going into the Uteland Butte and the Wasatch and some in the Castle Peak, right? 90% lower cube proving up the value there. We're highly confident in the forecast that we have coming out of those zones, very competitive. The rest 10% is focused on the upper cube. As you saw from Enverus, strong results there in the Douglas Creek, and we'll continue to test other intervals within the section.
Oliver Huang (Director of E and P Research)
Thanks. That's helpful color. Maybe for a follow-up, just on LOE, I know you all called out a few items impacting the corporate LOE guide for this year. Maybe a greater mix of horizontal wells in the Uinta should help over time in addition to getting some of the costs associated with getting facilities and whatnot up to SM spec. The question is, as we think through the uplifted cost in this year's program on a corporate basis, should we view this as more one-time in nature type of impact, or are there some of these costs that are going to be much more sticky beyond this year if you could walk through that?
Beth McDonald (President and COO)
Yeah, I'll take that, Oliver. We see the use of the fuel gas and our change in the way that we record the cost to continue moving forward. We use the fuel gas within our operations, and we see that going forward, and that's about a third of that increase. You know, the workover activity was moved forward a little bit, and we have an increase in water production that came from offset activity. Some of that may continue, but we've included all of that in our adjusted full-year guidance.
Herb Vogel (CEO)
Just a reminder, the first item has revenue offsetting it, so the accounting.
Oliver Huang (Director of E and P Research)
Awesome. Thanks for the time.
Operator (participant)
Thank you. Our next question comes from the line of [Fu Fan with Roth Capital. Please proceed with your question.
Hi, good morning, guys. Thanks for the KeyBank questions. I saw that you dropped two rigs in the Q1, and you also said eventually the total rig count will be six. I was wondering if you could be more specific about timelines when to drop one more rig. Thank you.
Herb Vogel (CEO)
Fu, thanks for the question. We are really not giving any guidance on what our plans are for specific rigs at this time. You can just say we'll drop six rigs when it makes sense based on the program as we've laid it out. What matters is the turn in lines in terms of translating things to production. That's really what we're still sticking to, our TIL plan for the year. No change on that part.
All right. Thank you. Bye.
Operator (participant)
Thank you. Our next question comes from the line of Michael Furrow with Pickering Energy Partners. Please proceed with your question.
Michael Furrow (VP)
Hello, and good morning. Thanks for taking my questions. Last quarter, Herb, when asked about capital allocation between your assets, you mentioned that returns were really comparable across the three areas. If prices moved, the company would have the ability to kind of flex between regions. At that time, prices were $70 and $4. Today, we're looking at sub-$60 with gas prices relatively flat. My question is, have the returns between regions changed? If so, should we expect sort of a higher allocation of capital activity towards South Texas versus the previous update?
Herb Vogel (CEO)
Yeah, that's a great question, Michael. You know it's really difficult to change a program that quickly. You know the commodity markets work on intraday timelines, and our plans work on timelines quite different from that. With the program we've laid out, it looks quite good at strip for the year and achieving our objectives for the year. You know, realistically, if prices for oil were to drop below $50 per barrel, you'd expect most companies to really revisit their programs. We're kind of in that situation of looking. We're really comfortable above $55 with the program we have that delivers everything we want. Pullbacks in activity take quite a bit of thought and are tied to our procurement contracts. I don't know if that answers the question for you, but we don't see a change at this time at all.
It would need to be a more dramatic change in commodity prices for us to consider doing something different. We do have plans made as for contingency on what we do later in the year or something to change.
Michael Furrow (VP)
No, that answers my question. That's understood. It's not so easy to just drop a rig and pick one up as quickly as we'd like. For my follow-up, I just want to ask a quick question on the Uinta. Now that the company's had more time to kind of look into the acquired assets, how are they looking versus the original expectations? Is there anything that the company is learning that would alter the drilling or completion designs that you guys get to have in 2026 versus the prior operators' designs?
Herb Vogel (CEO)
Yeah, I will just say, Michael, I'm really pleased with the assets. It's definitely exceeded our expectations, and we're really pleased with the XCL team and what they did setting us up with quite a bit of investment and infrastructure that we're really getting the benefits of now. I will turn it over to Beth because she can dig into the details more about specifically what we like so much.
Beth McDonald (President and COO)
Yeah, I would say just to start and kind of piggyback off of what Herb said, the innovation of our drilling completion and operations team has really been phenomenal, and we continue to just beat a lot of the records that we set previously. We are just overjoyed with the fact that we're able to drive capital efficiency there even more than we thought going into it. Now, as far as the synergies and the great things that SM brings to this asset, it's really associated with the geoscience and reservoir engineering teams that continue to look at the well performance. As I mentioned in the prepared remarks, we are not popping or turning in line the new SM design pad until 2026.
All of the information that we're gaining through 2025, we're putting into that design to make it optimal and create the highest returns and free cash flow. I think across the board, we're seeing outstanding results in our Uinta Basin.
Michael Furrow (VP)
Thank you. That's helpful.
Operator (participant)
Thank you.
Herb Vogel (CEO)
Thanks, Michael.
Operator (participant)
Our.
Beth McDonald (President and COO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Michael Scialla with Stephens. Please proceed with your question. Michael, is your line on mute?
Michael Scialla (Managing Director)
Sorry about that. Good morning, everybody. I wanted to see if you could say how much oil went to the local refinery or refineries in the Uinta during the quarter and kind of the difference in transportation costs there between the two and what determines that split from quarter to quarter.
Beth McDonald (President and COO)
Yeah, I can jump in on that. You know, typically, we sell about 15%-20% of our crude into the Salt Lake City refineries. It has a lower transportation cost. Anytime that we can get the higher percentage of our oil going to Salt Lake City refineries, we will do so. We continue to just try to maximize that market as much as possible. The rest, we send by rail.
Michael Scialla (Managing Director)
Is that just based on capacity? There's no contracts that are underwriting or underpinning how much goes to one or the other?
Beth McDonald (President and COO)
Yes, that's correct. We work with multiple refineries up there. Yeah.
Michael Scialla (Managing Director)
It looks like you had pretty minor non-op activity in the first quarter, anticipating a little bit in the second quarter as well. I just want to see if you have any better visibility on the remainder of the year. Do you think there will be any material change to that $1.3 billion of CapEx that you have planned for the year?
Beth McDonald (President and COO)
Yeah, Mike, what I would say is so far, you could expect a similar run rate in the second half of the year as we're seeing in the first half. We don't deem that as material to our full-year CapEx program, and that's why we haven't changed guidance.
Michael Scialla (Managing Director)
Got it. Thank you.
Herb Vogel (CEO)
Yep.
Michael Scialla (Managing Director)
Thanks.
Operator (participant)
Thank you. Our next question comes from the line of Zach Parham with JPMorgan. Please proceed with your question.
Zach Parham (Executive Director of Equity Research)
Good morning. Could you talk a little bit more about your operational plans for the year and going into 2026? You've gone from nine rigs to seven rigs. You're planning to drop to six. As you see things today, would you plan to add back a rig in 2026, or is six the run rate going forward for the pro forma company with the three assets?
Herb Vogel (CEO)
Yeah, I'll start with that one, Zach. You know, I got to say, hey, what do you think the strip will look like in November of 2025? You know, I don't know. We have really got scenarios and plans laid out that really are tempered, call it, by the commodity prices that may show up or not later in the year and what the cost environment will be. We really do not have a 2026 plan laid out there. We have scenarios. As we see a pathway unfold, we will pursue the scenario that we have lined out for that price outcome, call it. You know how it is. We work on a timeline that is quite different from the daily prices in the commodity markets.
We have to kind of sort out what is a short-term phenomenon versus a trend in terms of what it leads to in commodity prices and costs. That is how we set things up. Zach, we do not have a specific plan for 2026, but we have multiple scenarios and we model the company. That is why we can say, hey, we stick with this plan at current strip. You know, it looks good down to $55, and then below that, we would start looking at do we change anything? How long would that last? That is really how we look at it.
Wade Pursell (EVP and CFO)
What happens to cost?
Herb Vogel (CEO)
Yeah, what happens to cost? Wade's done quite a bit of modeling the company in even more adverse environments, and we feel very comfortable from a balance sheet perspective. Wade, do you want to add anything on that?
Wade Pursell (EVP and CFO)
No, you said it well. I mean, I think I mentioned it earlier. At $55 flat, I mean, you see us generating lots of free cash flow, paying the dividend, paying off maturities. A leverage metric in an area that we're very comfortable in. You know, if you're wondering about hedging, that's kind of influenced our hedging decisions a little bit. You'll see us do a lot of $55 floors on costless collars just to protect that level because that's a very positive level for us, if I could say it that way.
Zach Parham (Executive Director of Equity Research)
Thanks for that color. Just to follow up, I think you've messaged in the past you could generate single-digit growth at kind of flat CapEx year-over-year. Is it fair to say if you were to go to a maintenance program, CapEx would be down year over year based on costs that we're seeing now? Obviously, you could have service cost deflation as well.
Herb Vogel (CEO)
Yeah, Zach, that is a big wildcard. We do not know exactly how things will go on costs for 2026. I mean, things are looking pretty good. The tariffs are really only influencing a small percentage of our cost. You know, under scenarios that are a little bit more adverse price-wise, you know, it is pretty close to flattish. You know, obviously, there is quarter-to-quarter variation depending on when turning lines are coming on. I think that answers what you are looking for.
Wade Pursell (EVP and CFO)
If you're just looking at year-over-year dollars going from nine to six this year and being at six-ish next year, obviously, the cost would be overall lower.
Zach Parham (Executive Director of Equity Research)
Lower. Yep.
With those six rigs, you could hold flat next year. Is that fair?
Herb Vogel (CEO)
Yeah, it depends a little bit on the mix, you know, and where you are on BOO versus BOE. You know, if we drill more on the South Texas side because of the gas and NGL prices being better, then obviously, it's easier to be above flattish. If you drill more heavily into the oil, you'd be at the lower end just because of the nature of BOEs versus BOO.
Wade Pursell (EVP and CFO)
It's in the flattish area.
Herb Vogel (CEO)
It's in the flattish area. Yeah.
Zach Parham (Executive Director of Equity Research)
Okay. Thanks, Herb. Thanks, Wade.
Herb Vogel (CEO)
You bet.
Thanks, Zach.
Operator (participant)
Thank you. Our next question comes from the line of Gabe Daoud with TD Cowen. Please proceed with your question.
Gabe Daoud (Managing Director of Energy Equity Research)
Hey, thanks. Good morning, everyone. Appreciate the time. I was hoping maybe could just start with a clarification on the trajectory for the second half of this year. Did you say earlier that Q3 should show, I guess it'll show sequential growth, but is Q3 growth more than the type of growth that we will see or that you guided to in Q2? Is that fair?
Beth McDonald (President and COO)
Yes, that's fair.
Gabe Daoud (Managing Director of Energy Equity Research)
Okay. Okay. Thanks, Beth. Maybe this is a follow-up. If we could maybe get a one-on-one type explanation around how you went to production/sales is booked from a revenue standpoint and just given the lag between when the barrels get transported versus your revenue recognition, will there always be a mismatch between sales volumes and production at the wellhead? Should we expect a true-up at some point to make you whole on that, or will there always just simply be a little bit of a discrepancy between those two?
Wade Pursell (EVP and CFO)
Yeah, this is Wade. I would not call it a true-up. There will be slight lags, you know, just depending on a cutoff at the date for the reasons that you articulated. There will always be some lag there and some small difference there going forward is the way I would say it.
Gabe Daoud (Managing Director of Energy Equity Research)
Okay. Okay. Thanks, Wade. Thanks, everyone.
Wade Pursell (EVP and CFO)
Sure.
Beth McDonald (President and COO)
Thank you.
Herb Vogel (CEO)
Okay. Thanks, Ed.
Operator (participant)
Thank you. We have reached the end of the question-and-answer session. I would like to turn the floor back to Herb Vogel for closing remarks.
Herb Vogel (CEO)
Thanks, Jamali. Thank you all for joining us today. We look forward to seeing a number of you at upcoming events. Have a good day.
Operator (participant)
Thank you. This does conclude today's call. We thank you for your participation. You may disconnect your lines at this time.