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spk06: 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 Sanuels, Vice President, Investor Relations, and ESG Stewardship. Thank you. You may begin.
spk02: 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-GAP 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-GAP measures. Please see the slide deck appendix and earnings release for definitions and reconciliations of non-GAP measures to the most directly comparable GAP measures and discussion of forward-looking non-GAP 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?
spk09: 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 and Financial Results were driven by our very high-quality asset base, -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 -in-lines weighted to oil. So let me say that again. It's a 10% increase in capital against a nearly 30% increase in -in-lines weighted to oil. With that, I will turn it back to the operator to start taking your questions.
spk06: 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 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.
spk07: 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. As you look at the map, there seems to be filling opportunities. Is that position built out? Are you still looking to add? I'm trying to understand how to think about that over the next couple of years.
spk09: Yeah, Tim, great question. We are really pleased. We have this track record of our geoscience team being able to identify intervals that are overlooked a little bit by others. In that area, we have some confidence from some data we have from some offset wells. 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. You're right, it's easy for us from an efficiency standpoint because it's pretty contiguous with our Sweetie Peck position. 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,
spk07: that's fair. Then I guess I'll pivot with my follow-up to the other emerging area at Northern Parton Dawson. Can you just talk about as you sort of view early stages of development, I believe Herb, the dean was sort of the primary target here. Does that sort of remain the case? Is that what this was underwritten on? Can you talk about other areas that you may be targeting with initial development?
spk09: 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. 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. You'll start seeing some results, probably three cube because we'll wait until we get past 30-day IPs. We're excited about it. You're aware our best wells and some of the best wells in the Permian overall are in the dean. We're really looking forward to the results there. Thank you for the call.
spk06: Thank you. Our next question has come from the line of Leo Mariani with Roth MKM. Please proceed with your questions.
spk08: I wanted to maybe just stay a little bit with some of the new acreage here. Just curious as to why you decided to disclose the 9100 acres in terms of where that is here today. 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.
spk09: Yeah. Hey, thanks, Leo. Yeah, it's pretty straightforward on the 9100 acres. It becomes public when we file in the leases. It was already coming out there for people who were looking at the courthouses. That became public. What's not public is exactly what we're targeting drilling. We did want to disclose to everybody on the playing field that it's really in Upton and Crane counties there. On the Austin shock, 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. We've got confidence to increase the inventory. We always held that back knowing it was the potential there. We feel good about those additional 65 locations. It just turned out to be a great value add that was purely organic and no additional lease acquisition cost.
spk08: Okay, that's helpful. I was hoping you could maybe address first quarter production. Obviously, it's down a little bit for your guidance. You guys did mention weather in your press release, which is certainly plaguing the industry. I was hoping you could maybe quantify that. Is there a BOE per day impact on the weather side? 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. Is there any kind of color around? You've got the slightly weaker first quarter production to be helpful.
spk09: Yeah, Leo, if you guys were really tracking 2023, we had 92 net tills and there were only 11 net in the fourth quarter. That's obviously going to have an impact on the first quarter. If you were really watching when we turned the wells in line on the fourth quarter, you'd see why that impact was in the first quarter. Then there was a little bit of not a major impact, but there was a weather impact. That was partly weather itself, but then also some gas plant weather impacts on the third party downstream for us. That's really what drives it. 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. I hope people are taking that strategic perspective of how much we produced in 2020, 2021, 2022 to 2023 was a 5% BOE growth. Then now we're looking at .5% BOE growth and 6% oil growth into 2024. 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.
spk06: Thank you. Our next questions come from the line of Zach Parham with JP Morgan. Please proceed with your questions.
spk04: 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?
spk05: Good morning, Zach. It's Wade. The question is yet nothing really tangible to report there. As we were moving into 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, which we did. Good cash position, lower leverage below a billion dollars, net debt. As we move into this year, we're still very committed, obviously, to the stock buyback program, completing the commitment of over 200 million. 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. We will continue that as we move into 2024.
spk04: Thanks, Wade. Then my follow-up, just on the M&A that we've seen in the industry over the last months, I think there's a broad agreement that larger scale attracts a larger investor base for E&Ps. How do you see SM fitting in going forward? Do you see yourself as more likely to get larger through acquisitions or potentially combine with a larger operator, or do you think you have the needed scale to attract more investors?
spk09: Yeah, Zach, it's obviously a topical question, the recent consolidation in the industry. 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 to which side of a transaction we wind up on, but we do focus on our area where we're really strong. It's got to be comparable inventory to ours in terms of quality. We don't want to combine where we have delayed development. We basically want to 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. 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. Then we have that track record, had a lot of discipline in what we've done with our capital. We sit on 10 plus years of inventory, so we don't have to really pay to get something to just move along. That's our perspective on it. If the right deal comes along, we'd be there.
spk04: Thanks, Ed. You bet.
spk06: Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next questions come from the line of Oliver Wong with TPH. Please proceed with your questions.
spk01: Good morning, all, and thanks for taking my questions. I think just 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, 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 speak to how that capital might around from an interval targeting basis for 2024?
spk09: Yeah, Oliver, the Leonard, we had a total of six wells. Some offset operators also had some wells in there. When we looked at the results, we recognized that it was more capital efficient to put a few more wells into the middle spray which underlies that interval. That seems to be the right way to go about this. The fraction will grow into the overlying interval, and that's how we would see some of the Leonard well being produced as a more capital efficient way. 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. 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. Our perspective is to co-develop the shallower horizons, come back to the Wolf Camp D at a later date, put it into the facilities that would have already been 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. That's just a capital efficiency 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.
spk01: That's helpful color. Maybe just to follow up to the comments earlier on the often chalk, just wondering how does the stagger, 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? Are the incremental 65 or so locations primarily coming from that liquids rich window or is it pretty radically spread out across the entire footprint?
spk09: That's all about. Let me get into that a little on the often chalk. From our first often 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're really figuring out where is that secondary often chalk zone that optimizes the capital efficiency and the base of the value of each DSU. We worked two different intervals besides the best interval that we had already identified. 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 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 have there Oliver.
spk01: Thanks appreciate the colors. You bet.
spk06: Thank you. Our next question is come from the line of Nicholas Pope with Seaport Research. Please proceed with your questions.
spk03: 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.
spk09: 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 what where the best landing zones are and which intervals we can go for because there can be more than the two that mentioned up in that area I'm not going to get into what other intervals might be there but there 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 a relatively low cost data when you look at it especially compared to some other locations.
spk03: And how much well control do you have in that area on your acreage right now is there any what what production?
spk09: There's actually quite quite a bit when we acquired the acreage we had 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.
spk03: Got it that's very helpful. Shift into the balance sheet curious with the with the notes in 25 and 26 obviously the 25 is going to come to it some concurrent at some point in the next year any thoughts about what the plans are for those 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?
spk05: Yeah great great question I mean the the 25s as you say are are coming the closest to the mature in the middle mid-2025 you know it's a rare it's a rare time where the cash that we have on the balance sheet it's you know 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 being flexible with the balance sheet and and hanging on to our liquidity we'll pay those off obviously before they mature I don't 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 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 I you know our our our bonds are are certainly trading better than they were so you know there's there's a we'll watch that as we always do and try to be opportunistic and you know you could see us thinking of a scenario where we might you know do a new bond that takes out the 26s early but you know we'll just be watching all of that as we move through the year
spk03: got
spk05: it
spk03: that's all I had I appreciate the time
spk05: you
spk06: 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 her vocal for any closing remarks
spk09: hey thanks darryl 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
spk06: 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
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