Q1 2024 SM Energy Co Earnings Call

Participants

Jennifer Samuels; Investor Relations; SM Energy Co

Herb Vogel; President & Chief Executive Officer; SM Energy Co

A. Wade Pursell; Chief Financial Officer, Executive Vice President; SM Energy Co

Zach Parham; Analyst; JPMorgan Chase & Co.

Tim Rezvan; Analyst; KeyBanc Capital Markets Inc.

Oliver Huang; Analyst; Tudor, Pickering, Holt & Co. Securities, Inc.

Presentation

Operator

No in I mean AND Great. Yes. Okay. Yes, or are you or are or the? So. So yes, a a the Greetings and welcome to the SM Energy's first quarter 2020 for financial and operating results. Q&a. At this time, all participants are in a listen only. A brief 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. As a reminder, this conference is being recorded. Is now my pleasure to introduce your host, Jennifer Senior Vice President, Investor Relations and ESG stewardship. Thank you. You may begin.

Jennifer Samuels

Thank you, Maria, and good morning, everyone. In today's call, we may reference the earnings release, IR presentation or prepared remarks of which are posted to our website. Thank you for joining us to answer your questions. Today, we have our President and CEO, Herb Vogel, and CFO, Wade Pursell. 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 2 of the accompanying slide deck, Page five of the accompanying earnings release and the Risk Factors section of our most recently filed 10 K, which describe risk 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 cut that out of the way. Also, look forward look for our first quarter 10 Q filed this morning. And with that, I will turn it over to her for just a brief opening comment further. But

Herb Vogel

Thanks, Jennifer, and good morning. Thanks for joining us were obviously very excited about 2024 is shaping up for SM Energy. So let's go ahead and get started. I'll turn the call back to Maria to start taking your questions for you.

Question and Answer Session

Operator

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 questions. Our first question comes from Zack arm with JP. Morgan. Please proceed with your question.

Zach Parham

Thanks for taking my questions. I just wanted to ask on the buyback First, you've talked about in the prepared remarks ratable pace through the buyback for the remainder of the year. That would imply roughly $60 million in buybacks per quarter. The current commodity prices, it seems like you'll have a significant amount of free cash flow that will allow you to build a lot of cash even after paying the base dividend finishing off that buyback authorization. How do you think about using that excess cash could could further accelerating that buybacks make sense? Just to get a sense of what happens with that cash?

A. Wade Pursell

Yes, good questions at this is Wes and good morning. Yes, we just looked at the guidance on assuming ratable buybacks. I think it's just the best way to model it right now. Obviously, things never happen that ratably, right? And as we go through the quarters, which we opportunistically repurchased during the open windows and you could see a bigger scenario with higher commodity prices that's generating more free cash flow, you could see us buying back at a little bit more accelerated pace than that, given what the operator REDUCE-IT is before us. So that could happen. And, you know, many people have asked what are you going to do when you get through the commitment and the Board will consider that. And I can imagine it being possible that we would continue on with it with a new buyback, but certainly no guarantees of that at this point.

Zach Parham

Just to follow up in the prepared remarks, you mentioned flattish production in 3Q and then kind of another step up in 4Q. That seems to indicate you would exit the year with oil in the upper 70s that a fair number. Just trying to get a little bit more color on what that trajectory of volumes would look like through the back half of the year?

A. Wade Pursell

Yes. I think that's reasonable. Mid 70s is given given what we said, what we said about the third quarter being flattish. I mean that it will be up. I think what's changed a little bit is the second quarter is obviously with acceleration higher than it was before in our guidance. So you're I think you're reading that pretty well, but you can assume the third quarter is up somewhat over the with the second quarter.

Zach Parham

Thanks. We appreciate the color there.

Thanks. Good morning, guys. Thanks for the time. Maybe I was hoping if we could start to Klondike. You mentioned you did some signs there during the quarter. And maybe starting to complete those eight to nine wells where I think results should be ready by the third quarter call. But just curious if you could maybe talk a little bit about some of the science work there, some of the deals in the area look quite prolific on oil productivity per foot basis. So just trying to get a sense if we could assume or expect similar results out of your program.

Herb Vogel

Yes, Gabe, this is Herb. Yes, we're quite excited about Klondike acreage, and we've already drilled four well pad and completing your right now. I will say on the science side, we did take a vertical pilot hole down quite deep and did a lot of sidewall cores and the high end logs through that interval. So we could assess all the intervals that are potentially perspective out there. But we're focused now on the development of those initially, the dean and those eight nine wells this year, and the first four will be online during the second quarter. So it looks like a great, great play for us. And you know, we have quite a few wells offsetting into the Southeast plus the wells. We that came with the acquisition of Reliance from airlines, Jeff military.
Hopefully that's helpful. I guess as a quick follow-up to that, just sticking to Klondike 20,000 net acres, if you were to progress towards its through development program, is there any type of infrastructure spend that we should be thinking about it there, but there is quite a bit of infrastructure there, but mainly it's the getting the gathering lines in place. So we don't have to truck as much and getting the gas lines built to the scale, which is a lot of the midstream. And and then But otherwise, it's just pretty much normal equipment up there. Okay.

Okay, great. And just the last one, the South Texas drill to earn any additional color you can provide on that. Thanks, guys.

Herb Vogel

Yes, a lot of people are wondering, you know, how does the drill to earn works that they're not familiar with it and generally drilled or and is where you have agreed to drill a well or wells in return for acreage. In this case, we're going to operate and drill wells to gain of 50% working interest in around 16,000 acre block. So that will get us about 8,000 net acres. The other details around that drilled are really are kept confidential between us and the company that farmed out to us.

Okay. Okay. Got it. Thanks, guys.

Operator

Our next question comes from Tim Rezvan with KeyBanc Capital Markets. Please proceed with your question.

Tim Rezvan

Good morning, folks. Thanks for taking the question. I want to follow up on Dave's question on Klondike. We did analysis of the area and I know you all have talked about the Middle Spraberry, Dean, on the Wolfcamp A. looks extremely strong with sort of offset results. And I'm just curious, kind of among these three initial wells being completed, excluding the science 12, can you talk about what intervals you're targeting and kind of maybe why you have been talking about the Wolfcamp A. is a primary target for that acreage certain, but what I want to correct you on that. They were there before producers. I just wondered when we took a pilot hole down first than we plugged back and drill the lateral. So there are four wells there, just one of them. We have that okay, vertical that we just gather data on.

Herb Vogel

So it's great to hear that there's prospectivity in the Wolfcamp A., I would say we are not counting that if we're surprised in the thermal maturity is higher for some reason there than we expected to be. That'd be great news. But we're really counting on us being more have migrated oil play, which I've talked about before, which is oil comes from the deeper in the basin and migrates into the sandstone examples. And that's why they are so prolific.

Tim Rezvan

Okay. And then are these initial four wells team holding or? Y

Herb Vogel

Yes, they are. They're all being wells.

Tim Rezvan

Okay. That's great. Appreciate that. And then a follow-up. I think the comments on the Briscoe pad and the stacked pay opportunities are a pretty interesting some some other public companies are talking about that. I know it's early days for from one pad, but a big marketplace debate was on the validity of your claims that you had 300 locations there. And I guess just to help kind of frame the resource, if this stack pay proves to be something you can replicate that 300 location count kind of move up dramatically. And just trying to understand sort of what the significance of this test that you do in that you disclosed. Thank you.

A. Wade Pursell

Yes, Tim, I would I would say it's not that much of a big increment and test. The only difference is really that lower wells are fully bounded versus in our other places. They've been have founded, but we've had fully bounded in the upper interval several other pads. The thing to note as these are space is about 625 feet. And we've done that before. These have a growth between two different subtle differences in a landing zone in the upper Austin Chalk or the middle Austin Chalk and Upper interval that we've developed. So it's it's it's just really exciting because of how productive they are, how oily they are and how NGL rich they are. And those wells on that one pad are between 11,614 thousand 500 feet long. So we didn't have difficulty executing there. And the other three are between 11,914 thousand feet. So they're long laterals to and that just really helps the economics also. And there are oil-rich. So really excited about it on on that area. And you can see the strength of the wells and just how they started. But it's not like they're a really big step in any way other than the founding of the lower Austin Chalk wells.

Tim Rezvan

I appreciate the color. Thank you. You bet.

Operator

As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next question comes from Oliver home with Tudor, Pickering, Holt & Co., please proceed with your question.

Oliver Huang

Good morning all and thanks for taking my questions. Just wanted to start on the efficiency is certainly good to see it continue to capture. There was just kind of wondering what your kind of achieved in Q1. Is it something that's already been baked in for new plant activity starting in Q2 when you're kind of providing the quarter ahead of full-year outlooks? Or is there kind of a wait and see aspect is to it since kind of only a quarter before kind of thinking that fully on that incrementally a Class one page that we saw?

Herb Vogel

Although we know when we change guidance, that means we've got a lot of confidence that it's appropriate to include it. So we're continually working new aspects of efficiencies. And and we have quite a laundry list that our team to running through right now that looks quite attractive, but we're not counting ones. Yes, we see them working. So the big ticket items for us right now are the increased substitution of natural gas or diesel and pressure pumping operations, those DGB.s car fleets that we're employing. And Wade mentioned those on the prepared remarks, and that has the added benefit of reduced. We're seeing quite a bit in the way of efficiency gains in drilling. So this translates to a number of the we drilled per day. They're really it's more advanced and reliable downhole equipment. So you don't have to trip the bit as much. And we're using rotary steerable assembly so we can keep the bid on bottom longer. That helps also and on the efficiency of a cost efficient side, a big one is using existing central production facilities that now are sitting there with some latent capacity and that avoids the need for capital into new facilities. And we knew all along about what's going to happen, and we're just starting to see it really happen a pretty significant way now.
And then we're also bundling some services between South Texas and Permian. So we've got the benefits of the scale of a full operation between the two areas. That helps then you know how activity as reduced. So rig counts are down, frac-spread counts are down. So we're actively rebidding services and seeing discounts that way. And I can't tell you when that will stop or how much more we'll get there, but that obviously the computer. So that unless that's a list of things that I'd say we're highly confident and not a list of things that we're still pursuing.

Oliver Huang

Okay. That's super helpful. And maybe for follow-up. And then you mentioned earlier, some of the details are confidential on Agile there. But I just wanted to clarify, are you all responsible for 100% of the DMC for that 50% working interest that you kind of referenced? And is there any sort of details in terms of how many wells you're planning to do on that acreage this year? And if that's already embedded within the full year? Well count out in the South Texas region? Yes. Okay.

Herb Vogel

You got two questions there that we can't reveal that are developed details on the deal. But I'd say I know is the simple answer to your first question there. We're not saying everything for fit for the 50%. And then the second question was have we baked in? Yes, we knew the deal was far enough along when we set the budget in February that we integrated that into our plans for the year. The three wells that we'll drill there this year.

Oliver Huang

Awesome. Thanks for the time, guys. So you do it.

Operator

There are no further questions at this time. I would now like to turn the floor back over to Volker for closing comments.

Herb Vogel

Thanks, Maria, and thank you for joining us, and we look forward to seeing a number you at upcoming events. This concludes today's teleconference. You may disconnect your lines at this time. You for your participation.