SM Energy Company

Greetings. Welcome to SM Energy's fourth quarter 2023 financial and operating results Q&A. 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, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Jennifer Samuels, Vice President, Investor Relations and ESG Stewardship. Thank you. You may begin.

In today's call, we may reference the earnings release, IR presentation, or prepared marks, all of which are posted to our website. Thank you for joining us this morning. To answer your questions today, we have our President and CEO, Herb Vogel, and CFO, Wade Purcell. 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 two of the accompanying slide deck, page seven of the accompanying earnings release, and the risk factor 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. Also, look for our 2023 10-K, which was filed this morning. And with that, I will turn it over to Herb for brief opening commentary. Herb?

Thank you, Jennifer. Good morning, and thank you for joining us. While we're waiting for people to join the call, let me start by reiterating a few key messages. Our excellent 2023 operating financial results were driven by our very high-quality asset base, best-in-class operational performance that is supported by differential technological expertise and a track record of success, and our strong balance sheet and low leverage that enabled significant growth and return of capital to stockholders. As we look through 2024, we are excited about our capital program, which we expect to deliver more on each of these strategic objectives as we lean activity towards the Midland Basin, where we will generate higher oil volumes and delineate and develop our new acreage positions to organically grow inventory and create value. In short, the operational focus in 2024 is more oil growth, less gas growth, significant capital efficiency improvement with a 10% increase in capital against a nearly 30% increase in turn in lines weighted to oil. So let me say that again. It's a 10% increase in capital against a nearly 30% increase in turn in lines weighted to oil. With that, I will turn it back to the operator to start taking your questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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 key. One moment, please, while we poll for your questions. Our first questions come from the line of Tim Resman with KeyBank Capital Markets. Please proceed with your questions.

Good morning, folks, and thank you for taking my questions. I'd like to start on the acreage map you put out with the stealth play location. I was wondering if you could comment on what initial zones you're targeting in that western Sweetie Peck area. And as you look at the map, there seems to be fill-in opportunities. Is that position built out? Are you still sort of looking to add? I'm trying to understand how to think about that over the next couple of years.

Yeah, Tim, great question. We are really pleased we added those 9,100 acres there. And we have this track record of our geoscience team being able to identify intervals that kind of are overlooked a little bit by others. In that area, we have some confidence from some data we have from some offset wells. So we're not disclosing specifically which intervals we're chasing there, but we are planning to put a rig out there this year, and we'll be hopefully showing some results there later in the year. But you're right, it's easy for us from an efficiency standpoint because it's pretty contiguous with our SWDIPAC position. So we really like what we got there. If we could add more, we would add more. It's obviously going to be pricier in the future than it was when we picked up the acreage. Okay.

That's fair. And then I guess I'll pivot with my follow-up to the other emerging area, that northern part in Dawson. Can you just talk about, you know, as you sort of early stages of development, you know, I believe, Herb, this was, you know, the dean was sort of the primary target here. Does that sort of remain the case? Is that what this was underwritten on? And can you talk about other areas that you may be targeting with sort of initial developments?

Kim, that's right. When we announced the acquisition in June last year, we talked about two intervals. One was the Dean and then the other was the Middle Sprayberry Sand. You're probably aware there's another operator just to the northwest playing the Middle Sprayberry Sand pretty heavily. So we'll be looking at both those intervals. We're starting with the Dean. I think we talked about eight to nine wells on three pads. And you'll start seeing some results probably at because we'll wait until we get past 30-day IPs. But yeah, we're excited about it. And you're aware our best wells and some of the best wells in the Permian overall are in the Dean. And so we're really looking forward to the results there. Okay, thank you for the call.

Thank you. Our next questions come from the line of Leo Mariani with Roth MKM. Please proceed with your questions.

I wanted to maybe just stay a little bit with some of the new acreage here. Just curious as to kind of why you decided to disclose the 91,900 acres in terms of where that is here today. And also, I was hoping you could provide a little bit more color on how you guys managed to add additional acreage from the 23 drilling program. Any color on those things would be great.

Yeah, hey, thanks, Leo. pretty straightforward on the 9,100 acres. It becomes public when we file in the leases. It was already coming out there for people who were looking at the courthouses. So that became public. What's not public is exactly what we're targeting drilling. So we did want to disclose, so it was everybody on 11 playing field that it's really in Upton and Crane counties there. On the Austin chalk, it's great you picked that up. We've had such great success with delineating and then developing and now really staggering between two landing zones. That's where we've really optimized. And so we've got confidence to increase the inventory. We kind of always held that back, knowing it was the potential there. And so we feel good about those additional 65 locations. So it's just turned out to be a great value add that was purely organic and no additional lease acquisition cost.

Okay, that's helpful. And then I was hoping you could maybe address, you know, first quarter production. Obviously, it's down a little bit, you know, per your guidance. You guys did mention, you know, weather and your press release, which has certainly plagued the industry. I was hoping you could kind of maybe quantify that. Is there like a BOE per day impact on the weather side? And then I'm also assuming that perhaps maybe there's fewer tills this quarter and the program is maybe a little bit weighted to subsequent quarters on tills. So any kind of color around you got the slightly weaker first quarter production would be helpful.

Yeah, Leo, if you guys were really tracking 2023, we had 92 net tills, and there were only 11 net in the fourth quarter. So that's obviously going to have an impact on the first quarter. So if you were really watching when we turned the wells in line on the fourth quarter, you'd see why that impact was there in the first quarter. Then there was a little bit of not a major impact, but there was a weather impact that was significant. partly weather itself, but then also some gas plant weather impacts on the third party downstream for us. But that's really what drives it. And if you see what we project for 2024, you see it starts from a low and then we gradually work our way up through the year. And I hope people are taking that strategic perspective of how much we produced in 2020, 2021, 22. 22 to 23 was a 5% BOE growth. And then now we're looking at, you know, 3.5% BOE growth and 6% oil growth into 24. So I think really more focus on what are we doing overall annually and why that is beneficial for stockholders is really more important than the quarterly cadence. Understood. Thanks, guys.

Thank you. Our next question has come from the line of Zach Parham with J.P. Morgan. Please proceed with your question.

Good morning. My first question is just on the buyback, which slowed a little bit this quarter despite some pretty robust free cash flow generation. Can you just give us any detail on why you slowed down with the buyback pace this quarter and maybe just detail how you're thinking about utilizing the buyback in 2024?

Yeah, good morning, Zach. It's Wade. Good question. Nothing really tangible to report there. As we were moving into You know, looking at 2024 and putting our plan together and a lot of uncertainty, economics and commodity prices, it just felt really good to end the year with a really strong balance sheet, you know, which we did. Good cash position, you know, lower leverage, below a billion dollars net debt. You know, as we move into this year, we're still very committed, obviously, to the stock buyback program, completing the commitment of over $200 million. And I should just say, I don't think it'll surprise you that we still believe the current stock price is undervalued and the buybacks are very attractive. And we will continue that as we move into 2024.

Thanks, Wade. And then my follow-up, just on the M&A that we've seen in the industry over the last several months, I think there's a broad agreement that larger scale attracts a larger market. investor base for EMTs. You know, how do you see FM fitting in going forward? Do you see yourself as more likely to get larger through acquisitions or potentially combined with a larger operator? Or do you think you have the needed scale to to attract more investors?

Yeah, Zach, you know, it's obviously a topical question given the recent consolidation in the industry. You know, we've been there saying for a long time that we truly believe in consolidation. We see the merits of consolidation and we're agnostic as which side of a transaction we wind up on. But we do focus on kind of our area where we're really strong. So it's got to be comparable sort of inventory to ours in terms of quality that we don't want to combine where we have delayed development. We basically won't have a good balance sheet coming out of any sort of transaction. It's got to have industrial logic too, that if it's just two disparate companies getting together per scale, that's probably not going to move the needle for us. So that's how we look at it from a consolidation standpoint. There's clear benefits, and we'll see what comes along. In terms of growing the company, We've been really persistent and patient about it. We have a lot of confidence in our technical team. They continue to identify organic opportunities, and we wind up delivering on them. And then we have that track record, had a lot of discipline in what we've done with our capital, and we sit on 10-plus years of inventory, so we don't have to really overpay to get something to just move along. So that's kind of our perspective on it. But if the right deal comes along, we'd be there.

Thanks, Rick. You bet.

Thank you. As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Our next questions come from the line of Oliver Wong with TPH. Please proceed with your questions.

good morning all and thanks for taking my questions i think just kind of to start out in the midland i know last year you all had a few leonard and woodford wells that you all were testing it doesn't sound like those or not woodford uh wolf camp d wells that you all were testing it doesn't sound like those will be part of the plan for 2024 but is there any way that you all could kind of speak to how that capital might shift around from an interval targeting basis for 2024

Yeah, Oliver, this is Herb. Yeah, the Leonard, you know, we had a total of six wells. Some offset operators also had some wells in there. And when we looked at the results, we recognized that it was more capital efficient to put a little fewer, a few more wells into the middle spray barrier, which underlies that interval. So that seems to be the right way to go about this. So the fraction will grow into the overlying interval, and that's how we would see some of the Leonard oil being produced as a more capital efficient way. And that's just what you do in the normal course of development optimization. In the case of the Wolf Camp D, it's a completely isolated interval. So what we've really done is delineated the Wolf Camp D so we have a good sense of how much inventory is available there. It is a deeper interval. It's slightly gassier. So our perspective is to co-develop the shallower horizons come back to the wolf cam d at a later date put it into the facilities that would have already been put in put on so the capex that was spent for the facilities for the co-development and then come back in once there's latent capacity and flow the wolf camp d into there so that's another just a capital efficiency uh move rather than trying to co-develop all of the intervals when there's no need with the Wolf Camp D having so much separation from the Wolf Camp B above.

Okay, that's helpful, Culler. And maybe just to kind of follow up to the comments earlier on the Austin Chalk, just wondering how does the stagger of the two landing zones compare to the development that you all have carried out in the area the last couple of years in South Texas? And are the incremental 65 or so locations primarily coming from that liquids-rich window, or is it pretty ratably spread out across the entire footprint?

Okay, yeah, Oliver, let me get into that a little bit. On the Austin Chalk, so what, you know, from our first Austin Chalk dedicated well five years ago, we were really working on interval selection. We've really improved on what the best interval was. And then last year and a part of the year before we were really figuring out where is that secondary Austin shock zone that optimizes the capital efficiency and the, the, basically the value of each DSU. And so we, we worked between two different intervals besides the best interval that we had already identified. So what you're seeing now is we've locked in, which is the best way to do that on the stagger. And then, in some cases, there's also Eagleford, so you can have as many as three landing zones, depending on the thickness. We have a bias towards more the liquids-rich oily area, so you'll see great returns. You'll see maybe a few a little bit lower BOEs in some cases because we'll be in the higher liquids area, but in terms of the returns, they're going to be stronger. with the commodity price environment we're looking forward to in 2024. I think that gets to the questions you had there, Oliver.

Thanks, appreciate the colors. You bet.

Thank you. Our next question has come from the line of Nicholas Pope with Seaport Research. Please proceed with your questions.

Good morning, everyone. I was curious on the Klondike area, you mentioned, you know, drill the science well, you're running 3D seismic. I guess what information at this point are you expecting to get from that science and how that, I think you mentioned you added inventory in Klondike in the presentation transcript. And I was curious, how that might shift with some of the data you get from the science and from the wells that you're expecting to drill through the year.

Okay. Yeah. Nick, a couple things there. So, first of all, you're aware that we have quite a few tools that really help us optimize and get the returns that you're seeing in our wells. So, the purpose of the core is really to assess what all intervals we can land in. and which is the optimal landing zone, even within there's just differences of 10 to 20 feet and where you land can make a difference in the value of the well. So the core is one part, then the logs. So then we have the ability to correlate the core to the logs and apply it to a broader area when we look at the logs and understand where the best landing zones are. and which intervals we can go for, because there can be more than the two that are mentioned up in that area. I'm not going to get into what other intervals might be there, but there's always the possibility of more intervals, and you want to be aware of what those are when you're laying out your development plans. In terms of the 3D seismic, you're aware, and I've talked about this before, that as you go to the north there, this is more of a, it's the sand play, so this is migrated oil that's there, so you want to have a real good handle on the thickness of the sand intervals that you're targeting, and that determines what the economics will be. So that's another development optimization effort on our part. And it's relatively low-cost data when you look at it, especially compared to some other locations.

And how much well control do you have in that area on your acreage right now? What production?

There was actually quite a bit when we acquired the acreage. There were quite a few vertical wells, and there were several horizontal wells also. I think if you looked at Envers data, those wells were around 58 barrels of oil per foot, so that's quite good. And then there's more offset wells in the Dean. I think we're going to be able to optimize from there just based on what we know from all the Dean wells we have over in North Martin, which are 10 miles away.

Got it. That's very helpful. A shift into the balance sheet. Curious with the notes in 25 and 26. Obviously, the 25 is going to come current at some point in the next year. Any thoughts about what the plans are for those two notes? If you might accelerate calling them at some point, how do you all think about that relative to kind of the opportunities that you'll have?

Yeah, great question. I mean, the 25s, as you say, are coming the closest. They'll mature in the middle, mid-2025. You know, it's a rare time where the cash that we have on the balance sheet that you could assume that we would pay these off with cash is earning interest pretty darn close to the coupon. So we're obviously just being flexible with the balance sheet and hanging on to our liquidity. We'll pay those off. obviously, before they mature. I can't tell you when that'll be, but it'll certainly be before then at some point. And, you know, the 26s, you know, they're kind of coming on the radar screen as well. You know, all of our bonds have nice flexibility within them for calling early, and they're already callable with some premium, but they'll be callable at par, I think, beginning in the back half of this year. Bond markets certainly strengthened. I mean, you know, our Our bonds are certainly trading better than they were. We'll watch that closely, as we always do, and try to be opportunistic. You could see us thinking of a scenario where we might do a new bond that takes out the 26s early, but we'll just be watching all of that as we move through the year.

Got it. That's all I had. I appreciate the time.

You bet.

Thank you. We have reached the end of our question and answer session. I would now like to turn the floor back over to Herb Vogel for any closing remarks.

Hey, thanks, Daryl. So we are well positioned to continue this trajectory to build value and deliver returns going forward. Thank you for your interest, and we look forward to seeing a number of you at upcoming events.

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.