This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Ladies and gentlemen, thank you for standing by, and welcome to SM Energy's first quarter 2021 financial and operating .
spk08: If you have a question, please press star 1 on your telephone keypad.
spk09: At this time, I would like to turn the call over to Jennifer Samuels, Vice President of Investor Relations. Please go ahead.
spk00: Thank you, Shalon. Good morning, everyone, and thank you for joining us. Before we get started, our discussion today may include forward-looking statements. I direct you to slide two of the accompanying slide deck, page four of the accompanying earnings release, and the risk factors section of our most recently filed 10-K and 10-Q, which describe risks associated with forward-looking statements that could cause actual results to differ. The first quarter 10-Q was filed this morning. We may also discuss non-GAAP measures. Please see slides 22 through 24 of the accompanying slide deck and pages 11 through 14 of the accompanying 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. Here to answer your questions today are President and CEO Herb Vogel and CFO Wade Purcell. I will now turn the call back to the operator to take the first question. Shallan?
spk09: As a reminder, if you have a question, please press Star 1 on your telephone keypads. One moment for your first question. Okay, your first question comes from Michael Goliath from CECL.
spk01: Michael Goliath Yeah, hi, good morning, guys. Wade, you had mentioned in your prepared remarks that some completions planned for 2022 could be pulled into 21. Just want to see how many you were thinking and what kind of impact that may have on your 21 CapEx.
spk02: Yeah, Mike, this is Herb. Yeah, it's pretty straightforward. You know, we said in February that we had a number of completions that were just completed. on the other side of the year, and now we've got it on this side of the year. So the capex spend is the same. It's just when we turn those in line, we made the assumption before that they'd start just near the other side of the year. Now we've accelerated them some into this year, but the capex spend was there, so it really doesn't change the capex.
spk01: Okay, good to hear. And I guess a bit of a housekeeping item on the EBITDAX, I noticed there was about $21 million of other operating income. I just wanted to see if you could give us any color on what all was built into that.
spk05: Hey, Mike, it's Wade. Yeah, there's several items in that line, and they actually go both directions. You notice it's a net number. We do have the – there's a – and I mentioned it in the prepared remarks. There is a gain in there from our power hedge, I'll call it, on the cost side. We're not going to quantify that, but that's in there, and there's several other items in there. And as I mentioned, we're still working out details, so that's probably all I should say right now.
spk06: Okay.
spk01: Okay. And just one last one for me. Just your thoughts on NGL markets. Do you see any more upside or any thoughts on trying to hedge NGL prices here?
spk02: Yeah, Mike, you know, NGL has been pretty strong, and it's really the propane exports and the international art being open on that end of things. So we're really sticking with our – routine hedging program. Now, we targeted a total percentage level lower than we were before because our leverage is lower. But, yeah, we do see strengthening on NGLs and don't know how that will continue in the future, but we're not really changing our hedging program in response to short-term prices.
spk01: Okay. Thank you, guys.
spk09: Thank you. Your next question comes from the line of Gail Nicholson from Stevens.
spk07: Sorry, good morning. Can you just talk about your thoughts on inflation kind of in the back half of the year? And what is your current contract in regards to the completion services and the decision to do the 50 net completions in the second quarter?
spk02: Yeah, Gail, thanks for the question there. On the inflation side of things, you know, we've long thought, and I think everybody knows that it's driven by activity. And if activity increases, you'll see inflation coming some number of months later. In our case, we have a lot of the key costs locked in, so the rig costs, the sand costs. are locked in for a certain period of time. Some of the other services are a little bit shorter term. So whenever we're running our budget and then our revised plans, if there's things like weather events, we just optimize pre-capture. And that includes the details of the contracts we have in place. So if there is inflation, you'll see it coming based on activity. And that's pretty much the way I'd leave it. And we do everything we can to insulate ourselves against that by locking in with contractors that we've used for a long time.
spk07: Great. And then pricing in South Texas on the oil side was really strong this quarter. Was that all driven by the storm? I know there was a renegotiation of a contract there. Just trying to understand how we should think about
spk02: south texas oil pricing on a go-forward basis uh kayla yeah that is same thing we talked about fourth quarter so there's a big element of better realizations on the oil side because of the uh contract that expired in uh beginning of october for us that was a big uptick and uh then uh the the rest is really just uh what current prices are are asked there's there's Nothing really different there, but you should look at it in the forward similar to what it's been. Oh, and I should mention on the inflation side, some services we see going up slightly, but some we see still dropping. So, for example, on OCTG and diesel, there's inflation, and in some other service areas like chemicals and even tank batteries, we see deflation. So we've seen a combination in the first quarter.
spk07: Great. And then just from the activity set in the second half of the year, should we assume that's more on a completion standpoint in a TIL aspect, more four-key weighted than three-key weighted at this point in time?
spk02: Gail, can you repeat that? I couldn't quite catch the end of that one.
spk07: Sorry. From a completion activity set in the second half of the year, should we assume that's more four-key weighted than three-key weighted at this point in time?
spk02: No, I would not assume that. It's It's going to be a little more in 3Q than 4Q.
spk07: Okay, great. Thank you.
spk09: As a reminder, if you have a question, please press star 1 on your telephone keypad. Your next question comes from Carl Blondin from Goldman Sachs.
spk06: Hi, Ewan. Thanks for the time. I noticed, obviously, the pull forward and some capbacks. I was wondering, is there any change in – Your capex by geography or location that you're pursuing at this point, if the Austin truck results are strong, could you shift that over time?
spk02: Carl, thanks for the question. No, there's really no material change in the balance of where we're spending the capital. at all uh so no that's that's the same and austin chalk we're we're happy with what we're seeing and we're going to continue on the program and as you know we we upped the counts on drills and completes in the austin chalk this year gotcha um is there anything um
spk06: changing with what you're seeing in the A&D market? It certainly seems to be more active recently. Are there opportunities for you to do some tuck-ins or potentially sell some acreage that could improve your liquidity as you're looking at some of these stub bond maturities?
spk02: Carl, you're right. AMD activity has picked up very recently. We do see some continuing there. You know, if something really makes sense, we look at it, but we are really focused on generating that free cash flow and reducing our absolute debt and improving the leverage metrics. it would have to be really compelling for us to consider something like that. And I think expectations on the sales are still quite high. But we obviously look at everything we can.
spk06: Gotcha. That's helpful. And then I guess the last one for me is just on managing the balance sheet. You know, you sketched out a part, the free cash flow, And with the hedges, there's quite a good deal of visibility into that. And so the balance sheet doesn't look problematic in any way when you take a look at the maturities. But is there opportunity to be a bit more proactive around that and extending maturities given how strong the debt markets have been recently?
spk05: Yeah, good question. I guess the first thing I'd say is I'd kind of repeat what you just said. We certainly don't have to, and we certainly have nothing planned. But it is, you know, if you follow us in the past, you know that we do try to be opportunistic when the capital markets provide those opportunities for managing risk on the balance sheet, risk to the downside, I would say. So, you know, we're pleased that the bonds are trading better, and the rating agencies have, you know, have made some moves recently, which I think have helped and will help. So we'll continue to watch that, but certainly don't need to. But it's, you know, it's something we'll keep our eye on.
spk06: Certainly good to see it from the agencies. Thanks very much for the time. Appreciate it.
spk09: Okay. We have a follow-up from Michael Scala from Stiefel.
spk01: Yeah, I just wanted to follow up on the Austin Chalk. You said you're pretty pleased with some of these new wells, but don't have 30-day rates there yet. Just wondering when you think you would have that data, and would you anticipate releasing that on the second quarter call, or is that something you could potentially release interim during the quarter?
spk02: Michael, this is Herb. You know, yes, we're happy with the way the Austin Chalk Program is going, and we like having more and more data coming in. And I'd say, you know, we'd certainly have them at the second quarter call. I don't know whether we'd do anything earlier than that, but we do have quite a few more on right now and early days on them. But it's coming in as we thought they would.
spk01: Okay, sounds good. Lastly, just want to get your thoughts on any potential impact on your cash flows if, say, the Biden administration is successful in removing the intangible drilling credits for oil and gas companies.
spk05: Yeah, Mike, that's a good question. I mean, I think there's clearly potential for a big impact on the industry, I would say. Overall, we've run numbers. We've run kind of worst case what we think and kind of a base case of what we think, but none of us know obviously exactly what's going to happen. I guess I would say from a standpoint of what we've laid out as far as our objectives and the de-levering and the getting below two times next year and generating enough free cash flow that covers all the maturities through 24, things like that, all the cases that we put in do not change those outcomes. And especially when you think in terms of 21 and 22, the impact on our cash would not be significant. But, again, there's a lot of different assumptions flying around there. But in general, I guess that would be my comment.
spk01: Okay. That's helpful. Anything that you could do to shield any current tax liabilities at this point? I think you guys – Do not, if I'm not mistaken, do not have much in the way of NOLs left, but anything else you could do there?
spk05: Yeah, I mean, our tax department works really hard on that, and they're doing that right now under different what-if scenarios. I don't have any silver bullets to lay out to you this morning, though. Okay.
spk01: Thanks, guys. You bet. Okay.
spk09: Our next question comes from the line of Steve Deckert from KeyBank.
spk03: Hey, guys. Just wanted to see what the thought process was behind drilling the three gas wells and the three NGL wells versus more oilier wells in these new South Texas wells you reported last night.
spk02: Oh, yeah, you're talking about, Steve, sorry, you're talking about the JV wells down there? So those were, we entered into JV in the fourth quarter. There were six ducts down on the south end and three Eagle Fern, three Austin Chalk wells. So, you know, the economics looked robust. The JV partner was interested, and we proceeded to complete those and turn them in line. So that's really a pretty simple story there.
spk03: Okay. I guess I meant were you just testing different areas? I guess was there a certain reason behind drilling the NGL wells and gas wells versus just more all-oil wells?
spk02: Well, those were really part of our delineation program. If you look at our map, you'll see we're looking at all different areas of the field and basically identifying the productivity of the Austin Chalk through a broad area. And that's what increases our confidence in the ultimate inventory that we can deliver from the Austin Chalk. So that's really what that was attributed to. And in that case, we staggered them with Eagleford Wells.
spk03: Got it. Okay, thanks. And just one more question. Could you quantify the production downtime in the first quarter? I know you guys gave the number of days, but in terms of the actual production, is that something you can give?
spk02: No, you know, when we released in February, that was right in the middle of the event. So we didn't really do it that way. So obviously we did have some impact on the first quarter, and it was really 14 days of production that were impacted to some degree. That's what it came down to. And then, you know, there was a knock-on effect on the logistics side for really our frack spreads. We didn't have much downtime on rigs, but we did have downtime on frack spreads and bringing things back, including even getting people to work the facilities. There were a lot of people impacted in Texas, the individuals. And they have to go tend to things at home, too. And that made it a little bit more difficult to get people called out to facilities. But, no, we're just looking at it that we maintain guidance for the year. And, you know, 2022 looks the same. ESG performance-wise, we're doing great. So those, you know, I don't really see that, anything there really.
spk03: Okay, thanks.
spk09: Okay. Your next question comes from the line of Scott Aronoff, RBC Capital Markets.
spk04: Yeah, hey, just a little bit of a follow-on to that question. And, you know, obviously it was, you know, pretty rough during that winter season we've heard from. you know, a few other companies that, you know, talked about, you know, having, you know, crews out there in 24-7 and, you know, keeping things up in line and seeing a lot better, you know, uptime than originally expected. Is there any kind of learnings you all have taken from that event? So, you know, if something similar happens, you know, the outcome might be, you know, less impactful? Or is there something unique about it? You know, your operations may be relative to some of the others, and I guess in particular, more so it felt like in the Permian.
spk02: Yeah, Scott, it was pretty straightforward for us. You know, the electric utilities had brownouts and blackouts. And in our case where we've got ESPs and pump tracks that are electrically driven, when they did those rolling brownouts and the blackouts, it shut down all our pumps. and that prevented us from producing, and that's on the West Texas side. On the South Texas side, it was more on the gas gathering side. They had electric-driven compressors in some cases, actually at the plants more than anything, and so then the plants went down. So that's really what impacted us the most from a production standpoint. So, you know, what could we do differently? It's really making sure that we've got the prioritization from the power companies that they recognize. When they cut the power to us, that will impact their gas supply, which affects their ability to generate power in the CCGTs. So that's really what it came down to. From a fundamental standpoint, we use instrument air, and there's a lot of details behind, so that minimizes our risk of downtime from cold weather just on its own. But there's still things that happen, like starting up a compressor again when you've got heavy oil in there and it cools down, it's harder to start them up. So those are relatively minor, though. The key thing is the power shutdowns. Okay.
spk04: And with respect to, you know, the pull forward of, you know, a handful of the wells in 2022, or I'm sorry, from 2022 to 2021, you know, it doesn't sound like there's a capital impact to that. Is there any kind of a, you know, pull forward of production or is it at the end of the day pretty immaterial given, you know, the timeframes that you're shifting here?
spk02: Yeah, it's relatively immaterial. 2022 is pretty much as it was. It's just, you know, moving around some completion timings is really what it is. Fewer in the very start of the year and more in the second quarter, but not materially impacting 2022.
spk04: Okay. And then with respect to your, obviously, guidance this year that hasn't changed and, you know, and we all know, you know, first quarter was pretty rough for everybody and You know, 2Q, it looks like things are starting to get back to normalize, but maybe a little bit of, you know, delayed completion stuff getting impacted to that. But, you know, when you look at the balance of making, you know, when you look at your guidance in the back half of this year and the second half, I mean, do you feel pretty confident yet that, you know, in your targets, is there enough, I guess, cushion in there? Or should we think about you all tending maybe to the lower half at this point of the production range?
spk02: Yes, Scott. When I look at it, it looks very, very similar in terms of what we can do in 2021 and 2022. It moves 100,000 barrels here or there per quarter, but it's not that material and well within our ability to forecast.
spk04: Okay. Yeah, I guess the point I was making, is there sort of a quarter or two in the back half of the year where you kind of make up for some of the stuff you all lost in the front half of the year?
spk02: No, not really. It's not like there's all of a sudden a big silver bullet quarter that secures what happened in the first quarter. It just kind of comes along as the completions come online. All right.
spk04: Fair enough. Thank you.
spk09: Thank you. I would now like to hand the call back over to Herb Vogel, CEO, for closing remarks.
spk02: Okay, well, thank you all for your interest in SM Energy, and thank you to all our employees, particularly for outstanding ESG performance during 2020 and through the events in 2021. Thanks again.
spk09: This concludes today's conference. You may now disconnect.
Disclaimer