SM Energy Company (NYSE:SM) Q1 2024 Summary Earnings Conference Call May 2, 2024 5:00 PM ET
Company Participants
Jennifer Martin Samuels – Vice President of Investor Relations and ESG Stewardship
Herb Vogel – President and Chief Executive Officer
Wade Pursell – Executive Vice President and Chief Financial Officer
Conference Call Participants
Jennifer Martin Samuels
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-K, 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 Pursell.
I will now turn the call over to Herb.
Herb Vogel
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.
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&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 first quarter, beating the high end of our guidance. Outperformance is attributable mostly to South Texas from two sources. We were able to complete 14 wells on average about two 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 two for 2024 is to maintain an attractive return of capital to stockholders through dividends and share repurchases. In the first quarter, we returned about $54 million, or 79% of free cash flow, and we expect to fulfill the share repurchase authorization we have for 2024.
Core objective number three is to maintain, and expand, our high-quality asset portfolio. In the first quarter, 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. 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 two 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 first-hand the immensely positive production response we have from our optimized development. 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 a 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% and 20% improvements realized in the first quarter 2024 versus 2022, respectively. 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% and 30%, respectively, over the same time period. This is driven by better efficiency of simul-frac 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 four new pads located in the northern high oil content area of our South Texas position. These pads include 11 wells that reached peak IP 30 in the past several days. 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, three Briscoe C pads located to the east include eight wells. These pads co-develop seven Austin Chalk wells and one Eagle Ford well. These wells performed favorably with an average peak IP30 of just over 2,000 Boe/d per well with 49% oil and 77% liquids. 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 one pad with three wells co-developing two benches in the Austin Chalk. These wells were drilled off-azimuth to test optimal well orientation for the localized geology in this area. The pad was very successful averaging a peak IP 30 of nearly 2,000 Boe/d per well with 46% oil and 70% liquids. On this pad, you may note from state data that there is actually a fourth 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. 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 geo-science, 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 first pad. This includes four 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. 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 five and half days, released the rig after less than seven and half 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. 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, stewardship, and best practices in engaging our supply chain.
In short, I am very pleased with operational performance year-to-date. 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?
Wade Pursell
Thanks Herb. Good afternoon. I’ll begin with Slide 11 and the bottom line. Higher production performance, specifically higher liquids production, drove better bottom-line results including adjusted EPS of $1.41 per share, adjusted EBITDAX of $409 million, and adjusted free cash flow of $68 million – all of which beat street consensus.
Next on Slide 12 and a comment on return of capital, 79% of free cash flow was returned to stockholders. We returned $21 million through our sustainable dividend and $33 million through share repurchases. Since inception of the program, we have repurchased around 9 million shares, or about 7% of shares outstanding, and returned approximately $429 million to stockholders. We have about $182 million in share repurchase authorization remaining in 2024, and I would assume a generally ratable repurchase rate over the next three quarters.
Turning to Slide 13 and the balance sheet. 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 are very pleased to be able to positively update guidance with the first quarter results, given confidence in production performance and capital cost savings.
First, production: We have increased production guidance 2% at the mid-point to a range of 57 to 60 MMBoe, or 156 to 164 MBoe/d, to reflect the performance of new wells and the better completion cadence that benefited the first quarter.
Second, CapEx. We lowered capital expenditure guidance 2% to a range of $1.14 billion to $1.18 billion. While first quarter capital was on track with guidance of around $300 million, 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 costs, and sand transportation. We are 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 mid-point 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 two thru four 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. The expectation now is for second quarter production to be a bigger step up, around 7% sequentially, to a range of 14.1 to 14.3 MMBoe at about 44% oil. Third quarter is expected to be flattish to slightly up compared with the second quarter, with another step up in the fourth 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 first quarter oil and gas revenue, and approximately 50% of Midland gas is hedged to basis, so exposure to weak regional pricing is mitigated to affecting only about 3% to 4% of total revenue.
Capital expenditure guidance for the second quarter is $315 million to $325 million. This includes an expected 31 net wells to be drilled and 38 net wells completed. Third quarter capital expenditure cadence is relatively flat, with a step down in the fourth quarter.
So, in summary, we are 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 will now turn the call back to Herb.
Herb Vogel
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&A call tomorrow morning.
Question-and-Answer Session
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