SM Energy Company (NYSE:SM) Q1 2024 Earnings Call Transcript

SM Energy Company (NYSE:SM) Q1 2024 Earnings Call Transcript May 3, 2024

SM Energy Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings, and welcome to the SM Energy’s First Quarter 2024 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. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jennifer Samuels, Vice President of Investor Relations and ESG Stewardship. Thank you. You may begin.

Jennifer Samuels: Thank you, Maria. Good morning everyone. In today’s call, we may reference the earnings release IR presentation or prepared remarks. All 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 5 of the accompanying earnings release, and the Risk Factors section of our most recently filed 10-K, which described 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.

Got that out of the way. Also, look for our first quarter 10-Q filed this morning. And with that, I will turn it over to Herb for just a brief opening comment. Herb?

Herbert Vogel: Thanks Jennifer and good morning. Thanks for joining us. We’re obviously very excited about how 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. Maria?

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Zach Parham with JPMorgan. Please proceed with your question.

Zach Parham: Thanks for taking my questions. Just wanted to ask on the buyback first. You talked about in the prepared remarks a ratable pace for the buyback for the remainder of the year, that would imply around $60 million in buybacks per quarter. At 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 and finishing off that buyback authorization. How do you think about using that excess cash, could further accelerating that buyback make sense? Just trying to get a sense of what happens with that cash?

Wade Pursell: Yes. Good question, Zach. This is Wade. Good morning. Yes, we just — 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, we opportunistically repurchased during the open windows and you could see under your 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 opportunity set is before us. So, that could happen. And 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 a new buyback. But certainly no guarantees of that at this point.

Zach Parham: Thanks Wade. And then just a 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. Is 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?

Wade Pursell: Yes, I think that’s reasonable, mid-70s-ish given what we said. What we said about the third quarter being flattish, I mean 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 second quarter.

Zach Parham: Thanks Wade. Appreciate the color.

Operator: Our next question comes from Gabe Daoud with TD Cowen. Please proceed with your question.

Gabe Daoud: Thanks. Hey good morning guys. Thanks for time. Maybe I was hoping if we could start at 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 can maybe talk a little bit about some of the Science work there, some of the Deans 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.

Herbert Vogel: Yes, Gabe, this is Herb. Yes, we’re quite excited about the Klondike acreage, and we’ve already drilled a four-well pad and completing it 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 high-end logs through that interval, so we could assess all the intervals that are potentially prospective up there. But we’re focused now on the development of those — initially the Dean and those eight to nine wells this year and the first four will be online during the second quarter. So, it looks like a great play for us. And you know we have quite wells offsetting it to the southeast plus the wells we — that came with the acquisition in Reliance — from Reliance.

Gabe Daoud: Yes. No, that’s right. Thanks. That’s helpful. I guess as a quick follow-up to that, just taking to Klondike, 20,000 net acres. If you were to progress towards a true development program, is there any type of infrastructure spend that we should be thinking about there?

Herbert Vogel: 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 in getting the gas lines built to the scale, which is a lot of the midstream. And then — but otherwise, it’s just pretty much normal equipment out there.

Gabe Daoud: Okay, great. And then just the last one, the South Texas drill-to-earn any additional color you can provide on that?

Herbert Vogel: Yes. A lot of people wonder how does the drill-to-earn works if they’re not familiar with it? And generally, drill-to-earn is where you agree to drill a well or wells and return for acreage. In this case, we’re going to operate and drill wells to gain a 50% working interest in around a 16,000 acre block, so that will get us about 8,000 net acres. The other details around that drill-to-earn really are kept confidential between us and the company that farmed out to us.

Gabe Daoud: 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 Gabe’s question on Klondike. We did analysis of the area. And I know you all have talked about the Middle Spraberry and the Dean. The Wolfcamp A looks extremely strong with sort of offset results. And so I was curious kind of among these three initial wells being completed, excluding the Science well. Can you talk about what intervals you’re targeting? And kind of maybe why you haven’t talked about the Wolfcamp A as a primary target on that acreage?