SM Energy Company - Q4 2025

Transcript

Operator (participant)

Good morning, and welcome to the SM Energy fourth quarter and full year 2025 financial and operating results and 2026 outlook live session. At this time, all participants will be in a listen-only mode. A question and answer session will follow the formal presentation. Please note, today's event is being recorded. I would now like to turn the call over to Pat Lytle, SM Energy Senior Vice President, Finance. Please go ahead.

Pat Lytle (SVP of Finance)

Good morning, and welcome to today's call. I'm joined today by our President and CEO, Beth McDonald, and Executive Vice President and CFO, Wade Pursell. We're looking forward to sharing our latest results and our 2026 plan with you and answering your questions. Our discussion today includes forward-looking statements. Please see slide two of our earnings presentation, page two of the earnings release, page two of our 2026 outlook release, and the risk factors section of our most recent 10-K, which was filed earlier this morning, for risks associated with these statements that it could cause actual results to differ. We will also discuss non-GAAP measures and metrics. Definitions and reconciliations to the most directly comparable GAAP measures can be found in both the earnings release, outlook release, and slide deck. I'll turn the call over to Beth. Beth?

Beth McDonald (President and CEO)

Thanks, Pat. Good morning, everyone. It's an exciting day as we provide our first release of the new SM Energy. 2025 was a pivotal year for our company, and it set the stage for 2026 in this transformational moment. We improved on every part of our investment thesis, including returns to stockholders, operational execution, financial strength, and increasing the scale and quality of our portfolio. With the full details in our posted materials, I will quickly hit some highlights from 2025. We delivered record operating cash flow, adjusted EBITDAX, production, and oil volumes. Importantly, oil was 53% of the total. Our teams found new ways to rapidly apply best practices and increase operational efficiencies through longer laterals and development of deeper zones. We integrated our oil-weighted Uinta assets.

Since late 2024, we've applied our proven technical capabilities to unlock greater value from this high-quality oil basin and its multiple stack pays. We strengthened our financial position by reducing net debt by $437 million, ending the year at roughly one times leverage. As a result, we returned capital to stockholders, distributing $104 million through dividends and share repurchases. Lastly, we expanded our scale and inventory across the top U.S. basins through organic reserve growth and our announced merger with Civitas. Let's turn to 2026. We have three strategic objectives that you will continue to hear throughout the year: integrate, execute, bolster. First, integrate. We are focused on integrating Civitas and capturing $200 million-$300 million in synergies.

To date, we have already actioned $185 million of our target, which is close to $1 billion in present value and just under 20% of our market cap. Total synergies could unlock up to $1.5 billion in present value, or nearly 30% of our market cap. Execute. Our plan maximizes sustainable free cash flow. By investing in our high return opportunities, we can continue to strengthen the balance sheet while accelerating the return of capital to stockholders. We will execute with a safety-first mindset and seek new ways to efficiently develop our assets to maximize free cash flow through disciplined capital allocation. We have reset and optimized our activity levels to accomplish this. Here are the key takeaways from the 2026 outlook.

Our plan was developed to maximize free cash flow in a $60 oil and $3.50 gas environment. Capital investments will total $2.65 billion-$2.85 billion, with our high-margin Permian activities receiving about 45% of the total. Total expected CapEx is about 14% lower than pro forma 2025. With lower capital, we reset activity levels to 11 rigs, down three rigs from a pro forma average of 14. We have prioritized value over volume. First quarter estimates reflect only two months of Civitas. Looking forward, volumes in the second half of the year are expected to range between 420,000 and 430,000 BOE per day at 55% oil, more indicative of our go-forward run rate.

There are a few slides in the presentation that provide more detail and a reconciliation of production for your reference. Ultimately, our plan reflects greater capital efficiency to maximize free cash flow, strengthen the balance sheet, and accelerate return to capital. Lastly, our final objective is to bolster. This relates to our balance sheet and our return to capital framework. I'll now turn the call over to Wade to cover this important catalyst for us. Wade?

Wade Pursell (EVP and CFO)

Thanks, Beth. Good morning, everyone. Let's talk about bolster now and how we'll strengthen an already strong capital structure. Starting with the balance sheet on slide 15. This reflects the impact of the Civitas merger. I believe the three categories for measuring balance sheet strength are, one, liquidity, two, maturities profile.

and number three, total leverage multiple of annual EBITDAX. First, liquidity. As we announced in late January, in our secured bank facility, the borrowing base was increased to $5 billion, with lender commitments increased to two and a half billion dollars. The maturity date was extended to January 30th, 2031. We currently have nearly $3 billion of liquidity. Last week, we announced the sale of select natural gas-weighted South Texas assets totaling $950 million, which we expect to close in the second quarter. The metrics behind this deal are very favorable to where SM stock trades today. This will further strengthen our significant liquidity position, which leads me to number two, maturities.

We anticipate using some of this liquidity to take out all of the 2026 bond maturities this year and the $417 million bond due in 2027 at some point as well. The remaining maturities are staggered nicely. We'll continue to delever with our free cash flow. We may also look to term out some of the earlier maturities should the bond market terms look compelling. I should also mention that we recently received credit upgrades by S&P and Fitch. Number three, total leverage multiple. Our total pro forma leverage is in the mid ones area. We are comfortable with this area, given the liquidity and maturities profile just discussed. Our goal is to drive it down into the low ones area, further strengthening our position, which is a perfect segue to return of capital on slide 16.

The increased scale and quality of our assets, combined with our strong balance sheet, give us confidence to increase the fixed dividend by 10% to $0.88 per share annually. Our base fixed dividend remains a core component, and with this increase, provides a current yield of just under 4%. Remaining free cash flow will be allocated between debt reduction and stock buybacks, enabling us to delever from increased post-merger debt levels while continuing to take advantage of the compelling value we see in our equity. Today, our plan is to allocate 80% of our quarterly free cash flow after dividends to debt reduction and 20% to stock repurchases. On that note, I'll turn the call back to Beth for closing remarks. Beth?

Beth McDonald (President and CEO)

Thanks, Wade. As our results and plan demonstrate, we are relentlessly focused on maximizing free cash flow, reducing debt, and accelerating returns to stockholders. We have new flexibility in how we allocate capital across our expanded portfolio, where our inventory now spans more than eight years. We are able to prioritize value over volume. We look forward to reporting on our progress throughout the year. Joe, this concludes our prepared remarks. Now we're ready to take questions.

Operator (participant)

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two 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 call for questions. Our first question comes from the line of Brian Velie with Capital One Securities. Please proceed.

Brian Velie (Energy Equity Analyst)

Good morning, everybody. Thanks for taking my question.

Wade Pursell (EVP and CFO)

Good morning, Brian.

Brian Velie (Energy Equity Analyst)

Just wondering, just thought I could maybe dive in here real quick. In terms of total production guidance for this year, that you put out your initial numbers last night there. You pointed out in the release that a portion of the decline year-over-year is the result of the three-stream conversion to two-stream conversions. I wondered if you could talk through where those conversions are happening. That'll give us an idea of the magnitude of that piece of the impact. Maybe after that, you know, how we can think about modeling or anticipating price realizations that go with those NGL and gas streams on those assets?

Beth McDonald (President and CEO)

Yeah. Thanks, Brian, for that question. You know, the plan is really focused on prioritizing value over volume. We're maximizing free cash flow to bolster the balance sheet and enhance our return on capital framework. We have a lot of confidence in this plan, and we understand there's a lot of movement going on within the production itself. If you turn to slide nine, you can see a reconciliation for your reference. When you normalize for all those moving items, the production change is not that different. Let's speak specifically to the question that you had on the three-stream to two-stream conversion. You know, if you look at it by basin, there's really no change for SM South Texas or Uinta Basin, clearly. For the DJ, we would expect about 20% of DJ BOEs to be allocated to NGLs.

When you're modeling that, you can continue to use CIVI historical gas and NGL realizations as estimates. When you turn to the Permian, the value is really small. We really only expect about 5% of the BOE to be reported as NGLs going forward there. You can use CIVI's historical NGL realizations, and for Permian gas, you could use SM's realizations. Within that reconciliation, I think it's important that most of you guys kind of focus on the right-hand side of that slide, the second half 2026 volumes, which are expected to be the 420 to 430 MBOE per day at 55% oil. That's really where we start to see our capital efficiency increase as we have our go-forward run rate.

Wade Pursell (EVP and CFO)

Yeah, if you look at total capital, Brian, about 45% will be in the second half. If you think about what that run rate looks like, I think it's gonna look pretty capital efficient.

Brian Velie (Energy Equity Analyst)

Okay, that's great. Thanks, Wade. That's a good segue maybe to my follow-up, if I can. I did notice, you know, 1Q CapEx, you know, it's a little bit of a heavier spend versus, you know, a straight ratable through the year. I guess, would it be fair to assume that a piece of that is just the pro forma 14 rig total that Beth mentioned in the prepared remarks there, that that's kind of your starting point, and you're, in that presentation, you're shedding down to about 11 rigs by year-end. Is that kind of what's driving that front half spending, or is there anything else at play that I should maybe be thinking about?

Beth McDonald (President and CEO)

Yeah, I'll start and then let Wade finish on that. You know, first of all, we just love the strength of our combined portfolio, and this transaction really provides us some optionality and really, frankly, optimization beyond what either company could do individually. With that, you know, we come into the year with 15 rigs, so we started with a high CapEx spend, and then it will lower throughout the year to average out around 11. Yes, there is that optimization of the program on the back half of the year, and we really look forward to our technical team seeing them in action on this new portfolio and seeing that continued optimization on the back half of the year. Wade, you want to add anything?

Wade Pursell (EVP and CFO)

No, that covered it well.

Brian Velie (Energy Equity Analyst)

All right. Thanks very much. That'll be helpful, you know, modeling out everything going forward. Appreciate it.

Wade Pursell (EVP and CFO)

Yeah, thanks.

Beth McDonald (President and CEO)

Thanks, Brian.

Operator (participant)

The next question comes from the line of Tim Rezvan with KeyBanc Capital Markets. Please proceed.

Tim Rezvan (Managing Director and Equity Research Analyst)

Hey, good morning, folks. Thank You for taking our questions. I want to follow up with Wade Pursell. Good morning. We had a quick chat last night. You mentioned you're not gonna have a formal debt or leverage target in place going forward. You know, our modeling, which is a work in process, you know, shows a path to sub $5 billion in 2027, and I know you highlighted the liquidity, but we're also looking at the other side of things, where we see, you know, we appreciate your honesty on that eight-year inventory life. Given that's, you know, maybe shorter than some peers or maybe where you want to be, you know, how do you think about the appropriate leverage profile, given you're not really where you want to be with inventory life?

I'm just trying to kind of weigh those two topics.

Wade Pursell (EVP and CFO)

Yeah, that's a great question, Tim. By the way, we love our inventory. On the leverage side, you know, we're, I mentioned we're in the mid-ones area, which we're very comfortable in that area. I said that in my remarks, and I'll say it again, especially given all of our liquidity and the maturities profile and the fact that that's being calculated at an oil price that we believe is mid-cycle or below. I think that's really important. Our desire is to get leverage into that low ones area, I'll just call it that, without getting too spec, you know, precise. As we move down into that low ones area, when I say that, I'm, you know, one, two, one, three.

Assuming the liquidity position is similar to what it is, assuming the maturity profile is manageable, assuming that's at a reasonable commodity price assumption, then you'll see us increase that stock buyback %.

Beth McDonald (President and CEO)

Tim, I'll just hit on the inventory real quick since you brought it up. You know, the inventory was run at $60 and $3. That's quite different than last year, where we had it at $70 and $3.25. And our inventory really is 3P high confidence locations rather than sticks on a map or acreage map math. We're very confident in these high quality, low break-even inventory that we have on here. It's resulting in longer laterals and greater CapEx efficiency.

Tim Rezvan (Managing Director and Equity Research Analyst)

Yep. Okay, I appreciate the context. As a follow-up, this is sort of a related theme, Beth. You know, the Permian assets you're acquiring from Civitas on the Midland, you've operated there obviously many years. Civitas had commented in the past about really focusing on the Wolfcamp A and B for their inventory. They didn't talk about the Jo Mill, the C or D, or even the deeper intervals. I know it's early days, but that's probably the easiest asset to sort of integrate, given your skill level there. Can you talk about what's sort of baked into that eight-year number? Are you using those same assumptions that Civitas had? Maybe broadly speaking, do you anticipate organic additions as you do more work on those Civitas Midland assets? Thank you.

Beth McDonald (President and CEO)

Yeah. First, good question, Tim. The first thing I would say is that, you know, we love the strength and position of our portfolio, especially as it relates to the Midland Basin, and our technical team is jumping right in and combining with the prior team from Civitas, which we now just call those people our teammates at SM Energy. We're very happy with what we've done so far. You know, we're four weeks in, but we'll continue to use our high-quality multivariate analysis, our, you know, geomechanical modeling that we have going on in the southern Midland Basin as we optimize that stacked pay development. We'll continue to see those optimizations in the back half of this year and into 2027. Is the work done? No.

We have a lot of work to do, but we have the best people and the best processes, along with the best technical data to get us there.

Tim Rezvan (Managing Director and Equity Research Analyst)

Okay. Thank you.

Wade Pursell (EVP and CFO)

Thanks, Tim.

Beth McDonald (President and CEO)

Thanks, Tim.

Operator (participant)

The next question comes from the line of Phu Pham with Roth Capital Partners. Please proceed.

Phu Pham (Equity Research Associate)

Hi, morning. Thanks for having me on.

Wade Pursell (EVP and CFO)

Morning.

Phu Pham (Equity Research Associate)

My first question is gonna be, like, can you please walk us through the capital cadence of the characteristics and also the production cadence? I knew that you just said it's going to be fit front half well and also the production. It's going to be around 420 to 430 thousand BOE per day in the second half of the year. I just want what I'm thinking right now is like, if the first quarter's capital is going to be the highest of the year, and also the productions will be picked in second quarters of 2026.

Beth McDonald (President and CEO)

I'll start on that. You know, again, we're prioritizing value over volume in our plan to maximize free cash flow. We understand that the first quarter, and even into the second quarter, has some, you know, variables and things changing in there, which we've highlighted on slide nine. One of the things that's really important to take timber into kind of January of this year, there was a significant decline on those assets, about 14%. We have inherited that and pulled it into our program. That's a result also of the underlying decline that you're not seeing in this reconciliation. That's one piece that's not shown on the slide here.

I think the important piece, Fu, is as you move past this and you look at the second half of the year, that second half, 2026 run rate is clean. We have 45% of our capital in the second half of the year, and it's a 55% oil mix. That's really where you should focus, where there's less changes going on in the front two quarters.

Wade Pursell (EVP and CFO)

It's built to where it rolls right into 2027 with that level.

Phu Pham (Equity Research Associate)

Okay. That's very helpful. Maybe my second question, would just be about the cash tax. I don't expect to pay any cash tax for 2026?

Wade Pursell (EVP and CFO)

Yeah, pretty minimal this year. Pleased to report, that's just due to the benefit of IDCs, some of the benefits from the Big Beautiful Bill. Even with the divestiture and the gain on that, we're not projecting minimal cash taxes this year.

Phu Pham (Equity Research Associate)

Thank you.

Wade Pursell (EVP and CFO)

Thanks.

Beth McDonald (President and CEO)

Thank you.

Operator (participant)

The next question comes from the line of Oliver Huang with Tudor, Pickering, and Holt. Please proceed.

Oliver Huang (Director of E&P Research)

Good morning, Beth, Wade, and team, and thanks for taking the time here.

Wade Pursell (EVP and CFO)

Morning, Oliver.

Beth McDonald (President and CEO)

Morning, Oliver.

Oliver Huang (Director of E&P Research)

For my first question, when you're thinking about the Permian program that you all have laid out for this year, any sort of color you can provide around the composition of the program? Just how much of that activity is expected to come out of the Delaware? When we're looking at the Midland, any sort of split on your traditional oilier RockStar area versus the southern part of the basin where assets carry a higher GOR mix?

Beth McDonald (President and CEO)

Yeah. Let me just dive in. Just like I just told Tim, we really love our strengthened inventory position, especially as it relates to the Permian Basin. I think this is a cornerstone asset for us, and we'll continue to optimize it over time. You know, when you look at the program having most allocation going to the Permian because it has great returns and great margins, the composition of that program is about one third Delaware, two-thirds Midland Basin. Within the Midland Basin, we're still optimizing on kind of the allocation between the overall program, and we'll continue to do that and increase our returns and capital efficiency late through this year and into 2027.

Oliver Huang (Director of E&P Research)

Okay, that's helpful color. Maybe just for a follow-up question, I know you all mentioned earlier that back half of the year run rate seems like a good starting point to carry forward. Just given all the moving pieces for A&D, the conversion to two stream on certain volumes, any sort of color on where maintenance CapEx for you all sits on a pro forma basis at that run rate?

Wade Pursell (EVP and CFO)

Well, I think looking into 2027, you know, look, we haven't gone, you know, to the detailed level that we, you know, that we will do eventually. If you're assuming a, you know, a CapEx in the area of this year's CapEx or slightly less, you're gonna be, you're definitely gonna be in the ballpark.

Oliver Huang (Director of E&P Research)

Okay, perfect. And just to clarify, when you say this year's CapEx, is that assuming 12 months for both CIVI and SM or what you all kind of rolled out for the 11 months of CIVI and 12 months of SM?

Wade Pursell (EVP and CFO)

I'm assuming the guided number there when I say that.

Beth McDonald (President and CEO)

Yeah.

Oliver Huang (Director of E&P Research)

Okay.

Beth McDonald (President and CEO)

That's one time call.

Oliver Huang (Director of E&P Research)

Thank you. Awesome. Thank you so much.

Wade Pursell (EVP and CFO)

You bet.

Beth McDonald (President and CEO)

Yep.

Operator (participant)

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from the line of Michael Scialla with Stephens. Please proceed.

Michael Scialla (Managing Director)

Hi, good morning.

Wade Pursell (EVP and CFO)

Good morning, Mike.

Michael Scialla (Managing Director)

I wanted to ask, when I look at slide four and compare the % production from each of your four core areas with the CapEx going into each on slide eight, they look, I guess, somewhat similar. I know production's an output, not really something you're targeting, but I guess as you look at those, do you anticipate production growing in any areas that may be growing in the Uinta and declining in the DJ and Permian a bit? Anything we can deduce from how much you're spending versus what you anticipate the production profile to be for each of those areas?

Beth McDonald (President and CEO)

Yeah, thanks, Mike. I'll just start, and then I'll let Wade add any color to what I'm saying. You know, if you look on slide four, those are really the 2025 production volumes and where that stands kinda on a pro forma basis. Then, as we roll into 2026, just like you said, we're prioritizing value over volume, specifically. When we looked at the capital allocation across all of the basins, we're really focused on maximizing free cash flow. That's why on slide eight, in the bottom right, you see the capital allocation by basin. I think that really addresses most of where the production is, as well as kind of the split there in the Permian of 1/3 to Delaware and 2/3 to the Midland Basin. Do you want to add anything?

Wade Pursell (EVP and CFO)

No, that's good. I mean, it's, as you know, Mike, it's that we built the plan with a, you know, desire for sustaining free cash flow, and, you know, through the years here with efficient operations in the areas. That's all I would add.

Michael Scialla (Managing Director)

Okay. I guess I was just trying to think of is one area sort of looked at as more of a free cash flow generator or cash cow while you're trying to grow any of the areas? It looks like Uinta maybe has some ability to grow. Is that a fair assumption?

Beth McDonald (President and CEO)

Say, you know, when you look at the combined portfolio, we've known that Uinta and South Texas both are growth areas for us. We have multi-stack pay there with great returns. I think as we look at the combined portfolio and the strengthened position that we have in the Permian Basin, we'll continue to evaluate that with our technical teams to see how we can continue to grow that area, because it has such great returns and great margins as well.

Michael Scialla (Managing Director)

Appreciate that. Wanted to ask about the decision to increase the dividend. You know, your stock flagged over the past year, and it's one of the cheapest in the sector on the EBITDA multiple. Just your thoughts around that decision. Was there pressure from investors? You feel like you need to increase the dividend to be competitive with the rest of the group? I just wanted to get some more color on that.

Wade Pursell (EVP and CFO)

Yeah. I would say it was not due to pressure from investors. I would say it was more due to our confidence in the combined company going forward, strength of the balance sheet, quality of the assets, visibility. You know, we set that fixed dividend back in late 2022, at a level that we felt comfortable with, but we expressed the desire as things develop and the company grows to increase it over time, modestly, and I think this is the third time we've done that now. It was really nothing more than that. It was just to express our confidence in the company going forward.

Michael Scialla (Managing Director)

Got it. Thanks, Wade. Thanks, Beth.

Wade Pursell (EVP and CFO)

You bet.

Beth McDonald (President and CEO)

Thanks, Mike.

Operator (participant)

The next question comes from the line of Kevin MacCurdy with Pickering Energy Partners. Please proceed.

Kevin MacCurdy (Director of Research)

Hey, good morning.

Wade Pursell (EVP and CFO)

Hey, Kevin.

Kevin MacCurdy (Director of Research)

It looks like the biggest difference between maybe the combined companies last year and your pro forma plan is in the DJ. Maybe you could talk about what you saw in the DJ and what, you know, what Civitas was doing and how you wanted to approach that plan differently, you know, this year in 2026.

Beth McDonald (President and CEO)

We really like the DJ program that we have. Let's start there, that it's great returns, and it's very capitally efficient when you're looking at new wells going forward. One of the things that slowing down enables us to do is strengthen our position as far as optionality and flexibility to where we go within the basin in order to maximize free cash flow and optimize really the plan and what the returns are coming out of there. Slowing down a little bit gives us the ability to take time, since our technical teams haven't worked that. We're basically integrating with the broader Civitas technical team, looking at the broader portfolio. Slowing down a little bit allows us to optimize and strengthen our position there.

Kevin MacCurdy (Director of Research)

Great. As a follow-up, and apologize if this is already addressed on the call. You know, if I look at slide 19, it appears that, you know, you're turning in line more wells than you're drilling in 2026. I just want to kind of confirm that this is like, you know, are you drawing down DUCs in 2026? If so, is that, you know, happening in the first part of the year versus the second part of the year? Is that kind of, you know, I assume that's not sustainable in 2027, but maybe if you just kind of address that and unpack that a little bit?

Beth McDonald (President and CEO)

Yeah, I'll just start that. Our capital allocation and our plan was really built on maximizing free cash flow. As a result, we have the options to basically slow down and do that. Our DUCs count really is related to the timing of our active development. You know, we don't manage to that. We have a level that, and a balance, that just really depends on the pad size, how many rigs we're running, and the activity levels that we're carrying. The DUCs count is really just an artifact or an output of that planned activity slowdown, right? We remain focused on capital efficiency and basically going in there with the fleet right after the rigs are finished, to in order to build a plan and deliver results that are maximizing free cash flow.

Kevin MacCurdy (Director of Research)

Thank you. Appreciate you taking my question.

Beth McDonald (President and CEO)

Thanks, Kevin.

Wade Pursell (EVP and CFO)

Thanks, Kevin.

Operator (participant)

Thank you. There are no further questions at this time. I'd like to hand the call back to Beth McDonald for closing remarks.

Beth McDonald (President and CEO)

Thanks, Joe. Thank you all for your time today and your questions. You know, as we close, I want to reiterate our three strategic priorities of integrate, execute, and bolster. First, integrate. The Civitas integration is progressing well, and we are really pleased and proud with the strong performance of our team. We've already actioned $185 million of our $200 million-$300 million target, which represents under $1 billion of present value or nearly 20% of our market cap. For execute, we're focused on execution across our scaled, strengthened portfolio to maximize free cash flow and deliver differential stockholder value. Bolster, we recently announced our $950 million divestiture that will strengthen our balance sheet and accelerates return to capital to stockholders under our new return to capital program.

We look forward to seeing many of you guys in the coming weeks. Have a great day.

Operator (participant)

Thank you. This concludes today's conference. You may disconnect your lines at this time and enjoy the rest of your day.