SM Energy Company

Welcome to SM Energy's 2021 results and 2022 operating plan webcast. We have a lot of good news to cover today. Before we get started on our prepared remarks, I remind you that our discussion today will include forward-looking statements. I direct you to slide two of the accompanying slide deck, page eight 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. We will also be discussing non-GAAP measures. Please see slides 30 to 33 of the deck and pages 15 to 23 of the 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. Today's prepared remarks will be given by our President and CEO, Herb Vogel, and our CFO, Wade Purcell. I will now turn the call over to Herb.

Thank you, Jennifer. Good afternoon, and thank you for your interest in SM Energy. 2021 was an awesome year. It was an exceptional year for many reasons, and what makes today's discussion even more exciting is that 2022 looks to be even better. Our four key priorities in 2021 were to, first, generate free cash flow. Second, improve the balance sheet by reducing absolute debt and lowering our leverage. Third, maintain top-tier inventory. And fourth, demonstrate differential ESG performance. Turning to slide three, let's see how we did. Last year at this time, we estimated that our optimized 2021 operating plan could generate approximately $100 million in free cash flow based on then current strict prices. In 2021, we generated $378 million in free cash flow, exceeding expectations by nearly three times. We targeted leverage at less than two times EBITDAX by year-end 2022. Instead, we were at 1.47 times at year-end 2021, and we reduced net debt by more than $475 million. We not only maintained our high-quality drilling inventory of 13-plus years, but increased proved reserves by 22%, with the largest portion of proved reserve additions attributable to our success in the Austin Chalk. And our fourth priority, to demonstrate differential ESG performance was evidenced by meeting our internal targets for methane intensity, greenhouse gas intensity, and spill rates, all of which were tied to compensation. Exceeding all of our 2021 priorities results from the hard work, excellent ideas, and collaboration of the SM Energy team from all functional areas, and I thank each of our employees and contractors. Turning to slide four, key factors that led to our 2021 successes include outstanding well capital efficiency and discipline, a long-term plan designed to optimize sustainable free cash flow, and high-quality assets that support continued reserve growth. Turning to slide five, let's look at our updated balance sheet metrics. Including the redemption this month of all of the outstanding 5% senior notes due in 2024, SM has no maturities before 2025, and the majority of remaining outstanding debt is callable by the company or will be callable by mid-year. We will continue to apply free cash flow to the reduction of absolute debt, transferring that value to our equity holders. Net debt to adjusted EBITDAX was at 1.47 times at year-end 2021, and at current strip prices, we expect to be around one times sometime in the middle of the year. We have said before that we are targeting around one times debt to EBITDAX, assuming sustainable commodity prices, and around $1 billion in absolute debt as an inflection point at which time we will consider additional options to drive shareholder value. Turning now to slide six and proved reserve growth. This is a great story that really highlights the quality of our asset base and reflects the success of the Austin Chalk. 22% proved reserve growth includes 143 million barrels equivalent net reserve additions and performance revisions equating to 277% production replacement. Reserve additions include 83 million barrels equivalent from the Austin Chalk, plus another 46 million barrels equivalent from our Rockstar and Sweetie Peck assets in the Midland Basin. I'll also highlight a few metrics here. Our standardized measure of future net cash flows from approved reserves was $7 billion and approved pre-tax PV-10, $8 billion. It almost goes without saying that our enterprise value is less at approximately $6 billion and we have a whole lot of upside beyond proved reserves. Turning to slide seven in inventory. We have maintained our long runway, 13 plus years of inventory, replacing 2021 drilling, and continue to have one of the highest quality inventories among our peers. Based on internal calculations run at $55 oil, the average return exceeds 55%. Based on Enveris data, we have nine years of inventory at sub $50 oil and 250 gas which just speaks to the high quality and resiliency of our portfolio. I'll now hand the call over to Wade to talk about our 2022 plan and guidance. Wade?

Thank you, Herb, and good afternoon, everyone. I agree. 2021 was a tremendous year, and 2022 is shaping up to be even better. We generated $378 million of free cash flow in 2021, and in 2022, we should roughly double that. delivering a very attractive and competitive free cash flow yield. We expect to achieve this with a reinvestment rate of around 50%, generating low single-digit production growth. I'll reiterate that we reduced net debt by more than $475 million in 2021, and after year end, we redeemed the 5% 2024 senior notes. The majority of the remainder of our outstanding debt is callable, and the 10% second lien notes are callable mid-year 2022. The one and one inflection point, Herb mentioned, should be achieved late in 2022 or early 2023, depending on commodity prices. And as we have indicated, that would be the appropriate time, we believe, to consider a return of cash to shareholders. Regarding 2021 results, I think the numbers speak for themselves, so I'm going to use the remainder of my time today to look forward. We are very excited about the 2022 plan, where we have opted to increase the capital allocation to South Texas, to approximately 45%, which underscores our confidence in the Austin Shock and presents the opportunity to drive NAV growth. Let's go to slide nine. Our 2022 objectives are largely a continuation of what we pursued last year. Number one, build net asset value through establishment of a scaled up Austin Shock program. Two, grow free cash flow generation and reduce leverage and absolute debt to the targeted levels of around one times and $1 billion respectively. while maintaining a low single-digit production growth trajectory. Three, maintain top-tier inventory. And four, demonstrate differential ESG performance, including progress on near-term goals for flaring, scope one and two emissions, and methane emissions. Turning to slide 10 on the nuts and bolts of 2022 guidance, capital expenditures are expected to approximate $750 million, with D and C capital allocated about 45% again to South Texas and 55% to the Midland Basin. This will include drilling a total of 90 to 95 wells and completing 75 to 80 wells. Although I will note that capital costs also include about 50% of the capital for four pads with 20 wells in Midland that are scheduled to turn in line in early 2023. Well costs bake in around 15% inflation over 2021. Expanding the Austin Shock Program requires some additional investment, including $18 million for additional science and completion testing in order to optimize well design, very similar to what we've done in Midland, and an incremental $20 million for oil handling infrastructure and facilities to accommodate the higher oil volumes from the region. For the year, capital activity should be highest in the second and third quarters. Production is expected to range between 51 to 54 million BOE, or 140 to 148,000 BOE per day, with about 46 to 47% of that being oil. That results in low single-digit growth, as I mentioned earlier. The higher capital allocation of South Texas will result in increased NGLs and natural gas in the commodity mix, but very importantly, deliver the same great returns. LOE ticks up a little from 2021. including more workovers and inflation for certain components, partially offset by lower-cost Austin chalk. Transportation also ticks up slightly per unit due to increased South Texas gas volumes. In the first quarter of 2022, we expect capital to range between $180 to $190 million and production to range between 13.5 to 13.8 million BOE, or 150 to 153,000 BOE per day. with 46% oil. Looking beyond 2022, I would expect continuation of our sustainable long-term plan, that is modest reinvestment rate, significant free cash flow generation, nominal production growth, maintenance of a high-quality long-term inventory, and premier operatorship. On slide 11, we update our hedging summary. Consistent with our policy to align hedge volumes with debt levels, we have reduced hedge volumes to less than 50%. In addition, with leverage continuing to fall, you can expect a further reduced percentage in 2023, say 30 or 40%. Summing it up, the 2022 plan is a piece of a longer-term strategy to deliver value creation to shareholders. And in 2022, we have the opportunity to realize value creation to shareholders through both debt reduction and building the Austin Chalk, which could be sizable. With that, I will now turn it back to Herb to elaborate on the plan by region.