SM Energy Q1 2024 Prepared Remarks Earnings Call Transcript

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Provided by Quartr
May 1, 2024

Key Takeaways

  • Production and CapEx Guidance Update: Increased full-year 2024 production guidance by 2% to 156–164k BOE/d while lowering capital expenditure guidance by 2% to $1.14–1.18 billion.
  • Well Performance Outperformance: Q1 well results beat the high end of guidance with >30% higher cumulative oil production versus peers in South Texas and Howard County, driven by early completions and faster peak rates.
  • Operational Efficiencies and Cost Savings: Drilling and completion efficiencies (up to 85% faster completions) plus lower rig rates, diesel and sand transport are expected to boost 2024 free cash flow by ~15%.
  • Return of Capital to Shareholders: Returned 79% of Q1 free cash flow ($54 million) via dividends and share repurchases, with $182 million of buyback authorization remaining for 2024.
  • Gas Price Exposure Mitigation: Weak Waha pricing affects only ~7% of Q1 revenue and ~50% of Midland gas is basis-hedged, limiting potential impact to 3–4% of total revenue.
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Earnings Conference Call
SM Energy Q1 2024 Prepared Remarks
00:00 / 00:00

There are 3 speakers on the call.

Operator

Good afternoon, and welcome to SM Energy's First Quarter 2024 Results Webcast. 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 2 of the accompanying slide deck, Page 5 of the accompanying earnings release and the Risk Factors section of our most recently filed 10 ks, which describe risks associated with forward looking statements that could cause actual results to differ. We will also discuss non GAAP measures and metrics, definitions and reconciliations of non GAAP measures and metrics to the most directly comparable GAAP measures and discussion of forward looking non GAAP measures can be found in the back of the slide deck and earnings release. Today's prepared remarks will be given by our President and CEO, Herb Vogel and our CFO, Wade Purcell.

Operator

I will now turn the call over to Herb.

Speaker 1

Thank you, Jennifer. Good afternoon and thank you for your interest in SM Energy. 2024 is off to a very strong start as our focus on operational execution delivered excellent bottom line results. I'm pleased to headline this quarter's call by increasing our production guidance and lowering our capital expenditure guidance for full year 2024. As you'll hear in today's call, given our most recent outlook for well performance, development pace and costs, we have the confidence to up our guidance now.

Speaker 1

In the relatively short period since we delivered our 2024 operating plan at the end of February, we have made steady progress on each of our core objectives, meeting or exceeding expectations on what has been described as a straightforward 2024 operating plan. As a result, we'll keep our prepared remarks brief today and look forward to our live Q and A discussion tomorrow. Turning to Slide 5 and our core objectives for 2024. Our first core objective for 2024 is to focus on operational execution to deliver low breakeven, high return wells. Here, we delivered better than expected well performance in the Q1, beating the high end of our guidance.

Speaker 1

Outperformance is attributable mostly to South Texas from 2 sources. We were able to complete 14 wells on average about 2 weeks early, thereby accelerating the start of their production and performance of new wells reached peak rates earlier than anticipated. In turn, higher production drove better bottom line results for earnings, EBITDAX and free cash flow. Core objective number 2 for 2024 is to maintain an attractive return of capital to stockholders through dividends and share repurchases. In the Q1, we returned about $54,000,000 or 79 percent of free cash flow, and we expect to fulfill the share repurchase authorization we have for 2024.

Speaker 1

Core objective number 3 is to maintain and expand our high quality asset portfolio. In the Q1, we entered into an agreement that provides the option to increase our South Texas Austin Chalk position by 8,000 net acres through a drill to earn arrangement. This acreage is to the west of our current acreage position in a high oil and NGL content area with favorable rock properties. Before I turn the call over to Wade, let's review a few slides that underscore our operational focus. Turning to Slide 6.

Speaker 1

This updated slide is intended to reiterate the superior performance of SM Wells in both our areas of operations versus peer averages for each area. As highlighted by the quotation from Zach at JP Morgan, we strive to increase returns by optimizing well performance through the use of an enormous amount of data, sophisticated data analytics and enhanced completion designs with individualized horizontal and vertical well spacing. SM Howard County wells average more than 30% better cumulative oil production through 2 years compared with the average peer well, And our South Texas Austin Chalk wells also average more than 30% better cumulative oil production through 15 months compared with the average peer well. As we have mentioned many times, the incremental return for the additional capital we put into these wells for our completion designs is very attractive. You can now see firsthand the immensely positive production response we have from our optimized development.

Speaker 1

I also like to point out that cumulative SM oil production through 20 months normalized for lateral length is almost identical for each area. The Austin Chalk is very much on par with Howard County, which is reflected in their respective returns. Turning to Slide 7. This is a new slide demonstrating efficiencies we are gaining in drilling and completion efforts that translate into cost savings. On the left, you can see improvement in feet drilled per day in both Midland Basin and South Texas operations, amounting to 10% 20% improvements realized in the Q1 2024 versus 2022 respectively.

Speaker 1

This is driven by optimization of drilling parameters, rig equipment and downhole equipment within our target zones. On the right side of the slide, you can see improvements in feet completed per day in both Midland Basin and South Texas operations amounting to 85% 30% respectively over the same time period. This is driven by better efficiency of simulfrac and zipper fleets by achieving an increased number of pumping hours per day. Turning to Slide 8, we are seeing some exciting preliminary results from 4 new pads located in the northern high oil content area of our South Texas position. These pads include 11 wells that reached peak IP30 in the past several days.

Speaker 1

We are testing several potential optimizations with these pads and results are exceeding our expectations. These pads contributed to the production outperformance in the quarter. Looking at the map on the left, 3 Briscoe C pads located at the East include 8 wells. These pads co developed 7 Austin Chalk Wells and 1 Eagle Ford well. These wells performed favorably with an average peak IP30 of just over 2,000 BOE per day per well with 49% oil and 77% liquids.

Speaker 1

Certain of these wells test different completion designs and the pad group includes the first fully bounded Lower Austin Chalk bench well. Based on initial results, the Eagle Ford well, which tests a new completion design is among the best drilled to date into that interval in the high oil content area. To the west of that is 1 pad with 3 wells co developing 2 benches in the Austin Chalk. These wells were drilled off Azimuth to test optimal well orientation for the localized geology in this area. TAD was very successful, averaging a peak IP30 of nearly 2,000 BOE per day per well with 46% oil and 70% liquids.

Speaker 1

On this pad, you may note from state data that there's actually a 4th well. While we had the rig on location, we also conducted a separate short lateral exploratory test of an interval shallower than the Austin Chalk and we are currently evaluating the results. Overall, the new Briscoe C wells are outperforming expectations by 5% to 10%. As I mentioned earlier, these pads were turned in line ahead of schedule and reached peak rates earlier than expected. Turning to Slide 9.

Speaker 1

Here we summarize the acreage positions we have added over the past year or so that add up to about 37,800 net acres in our core areas. Our team is doing really great work through our geoscience, engineering and land disciplines to add core inventory. Quoting Tim at KeyBanc SM's ability to replace core inventory without diluting shareholders or stretching the balance sheet is noteworthy. At Klondike, we have drilled the 1st pad. This includes 4 wells, one of which included science work where we acquired core and log data to evaluate in place oil volumes across multiple formations of interest.

Speaker 1

Completion activity commenced here this week. On our new position in South Texas located in the very oily Northwestern area, we got started right away. We reached total depth on the first earn in well in only 5.5 days, released the rig after less than 7.5 days and are now drilling ahead in the lateral section of the second earn in well on this new acreage. We look forward to sharing results from each of these new areas later this year. Slide 10.

Speaker 1

We say that our high standards for safety and stewardship are integral to being a premier operator. We recently took our Board of Directors on a field tour to see firsthand what we are doing with respect to safety protocols, air and water stewardship and to see the technological advancements we have implemented to support both capital efficiencies and stewardship. I will also point out on the right hand side of the slide that we received our CDP score for supplier engagement, which is an A-. This signifies our leadership and stewardship and best practices in engaging our supply chain. In short, I'm very pleased with operational performance year to date.

Speaker 1

Well productivity outperformance plus cost savings from optimized drilling and completions mean higher return wells and supported our updated guidance to higher production and lower capital costs. We are also getting off to a good start on our new acreage positions and excited to share those results later this year. We are well positioned for an excellent 2024. I will now turn the call over to Wade to provide more detail on our financial results. Wade?

Speaker 2

Thanks, Herb. Good afternoon. I'll begin with Slide 11 and the bottom line. Higher production performance, specifically higher liquids production grow better bottom line results, including adjusted EPS of $1.41 per share, adjusted EBITDAX of $409,000,000 and adjusted free cash flow of $68,000,000 all of which beat Street consensus. Next on Slide 12 and a comment on return of capital.

Speaker 2

79% of free cash flow was returned to stockholders. We returned $21,000,000 through our sustainable dividend and $33,000,000 through share repurchases. Since inception of the program, we've repurchased around 9,000,000 shares or about 7% of shares outstanding and returned approximately $429,000,000 to stockholders. We have about $182,000,000 in share repurchase authorization remaining in 2024, and I would assume a generally ratable repurchase rate over the next 3 quarters. Turning to Slide 13 and the balance sheet.

Speaker 2

We seek long term sustainable profitability in our uses of free cash flow. While we continue to expand our portfolio and provide a substantial return of capital to stockholders, we are maintaining very low leverage, currently at 0.6x leverage ratio. We continue to retain a sizable cash balance and expect to keep that flexibility a little longer since we are earning interest nearly commensurate with the coupon on our 2025s. Now turning to guidance on Slide 14, I would summarize our changes to guidance as more for less, increasing production while lowering costs. We're very pleased to be able to positively update guidance with the Q1 results, giving confidence in production performance and capital cost savings.

Speaker 2

First, production. We've increased production guidance 2% at the midpoint to a range of 57,000,000 to 60,000,000 BOE or 156 to 164,000 BOE per day to reflect the performance of new wells and the better completion cadence that benefited the Q1. 2nd CapEx, we lowered capital expenditure guidance 2% to a range of $1,140,000,000 to $1,180,000,000 While first quarter capital was on track with guidance of around $300,000,000 we completed 27 net wells in the quarter versus the expectation of 20 net wells. Looking forward, the reduction in capital expenditures guidance is due to both realizing capital efficiencies and cost savings. Capital efficiencies have come from faster drilling and more completion stages per day, as Herb described a few minutes ago, and cost savings are being realized from lower rig rates, diesel cost and sand transportation.

Speaker 2

We're also seeing high rates of substitution of lower cost gas for higher cost diesel, thanks to our upgraded frac fleets that use dynamic gas blending or DGB. In addition, we are lowering guidance for transportation expense by 9% at the midpoint to $2.10 to $2.20 per BOE as lower gas prices have reduced the cost for fuel gas. Bottom line, all else being equal, these changes are expected to increase projected 2024 full year free cash flow by around 15%. Lastly, I will make a few comments regarding quarters 2 through 4 that might be helpful in your modeling. Timing of production is slightly modified now that we are seeing acceleration in certain drilling and completion timing.

Speaker 2

The expectation now is for 2nd quarter production to be a bigger step up around 7% sequentially to a range of 14,100,000 to 14,300,000 BOE at about 44% oil. 3rd quarter is expected to be flattish to slightly up compared with the 2nd quarter with another step up in the 4th quarter. Futures pricing is indicating weak Waha regional pricing for the next two quarters, which affects only our Midland Basin natural gas production. For SM, it is important to note we are able to move our gas. Our Midland Basin gas accounted for only 7% of 1st quarter oil and gas revenue and approximately 50% of Midland Gas is hedged to basis.

Speaker 2

So exposure to weak regional pricing is mitigated to affecting only about 3% to 4% of our total revenue. Capital expenditure guidance for the 2nd quarter is $15,000,000 to $325,000,000 This includes an expected 31 net wells to be drilled and 38 net wells completed. 3rd quarter capital expenditure cadence is relatively flat with a step down in the 4th quarter. So in summary, we're very pleased with the more for less trajectory we are on this year and look forward to further communications and updates for you as we progress. I'll now turn the call back to Herb.

Speaker 1

Thank you, Wade, and let me thank all of you who have joined us for your interest in SM Energy. I look forward to our live Q and A call tomorrow morning.

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