SM Energy Company (NYSE:SM) Q4 2024 Earnings Call Transcript

SM Energy Company (NYSE:SM) Q4 2024 Earnings Call Transcript February 19, 2025

SM Energy Company misses on earnings expectations. Reported EPS is $1.91 EPS, expectations were $2.

Jennifer Martin Samuels: Good afternoon. And welcome to SM Energy’s webcast covering 2024 Results and our 2025 operating plan. 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 8 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 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; our COO, Beth McDonald; and our CFO, Wade Pursell. I will now turn the call over to Herb.

Herb Vogel: Thank you, Jennifer. Good afternoon, everyone. And thank you for your interest in SM Energy. We’ll start on Slide 5. 2024 was an outstanding year for our company, so we have a lot to cover today. We exceeded expectations in delivering on our three strategic objectives and we ended the year a notably larger operator with the addition of Uinta Basin assets. Execution in 2024 supported record oil production, record year end net proved reserves and the highest level of dividends paid to stockholders. We are starting 2025 well positioned with greater scale, a strong balance sheet and an expanded SM Energy team capable of an even better 2025. We are excited about our plans for 2025 and we’ll spend most of the time today looking ahead.

I’d like to start with some big picture thoughts perhaps helpful to the generalist investors listening in. I don’t think there is any dispute that energy and electricity demand are growing substantially for the foreseeable future, whether it’d be to support better health and prosperity in developing nations or the burgeoning needs of technology here at home. Access to reliable and affordable energy is a growing necessity. The latest EIA International Energy Outlook forecasts primary energy’s demand to increase by up to 50% by 2050 and electricity demand to grow even more. More recently, we’ve seen even higher projections from Wall Street. Producers of energy in North America are well positioned to responsibly support this huge growth with ample natural resources plus a broad and collective effort to identify and employ technological advancements that ensure energy is produced in the safest and cleanest manner.

At SM Energy, we set top tier targets every year for safety and emissions, seeking to remain leaders among our peers in responsibly producing energy, while at the same time, optimizing our operations plan for long term sustainable profitability. We differentiate ourselves by focusing on high quality, low breakeven assets and employing our differential team of geoscientists, engineers and data analysts to optimize well performance and expand our portfolio organically. Energy is an exciting place to invest, delivers among the highest yields across sectors and in a current environment of uncertainty, offers comparatively lower risk, given strong balance sheets, and pervasive capital discipline. We hope you like our story. To sum it up again, it is quite simple.

We are a premier operator of top tier assets. That means we have a truly differential technical team capable of; first, identifying where the most economic hydrocarbons can be produced; second, optimizing field developments to maximize financial returns; and third, operating our developments in a safe, cost effective and environmentally sound manner. This differential capability that we have clearly demonstrated was not built overnight. Rather, it is the result of sustained focus and investment in people and leadership development over many years. If you invest in SM Energy, you are investing in a company that can create opportunities and expand inventory over the long term, not a company that just acquires production. Turning to Slide 6 and looking forward now, our 2025 strategy and operational plan is intended to support long term profitability and value creation by focusing on operational execution, returning capital stockholders and expanding our portfolio of top tier economic drilling inventory.

Q&A Session

With those objectives in mind, I’ll turn the call over to Beth to give you an update on our regional operations and introduce you to our 2025 operational plan. Beth?

Beth McDonald: Thank you, Herb. We have an exciting year unfolding in 2025 with the addition of the Utah assets we expect to generate, and I’ll use round numbers, more than 20% production growth and more than 30% oil production growth year-over-year. We expect to realize this step change in scale while maintaining our high caliber operational execution. First and foremost, we are diligently working through integration of our new Utah asset, which is no small task, while welcoming our 83 new employees from XCL and Altamont to the SM team. You cannot put this effort into a spreadsheet but our comprehensive efforts to integrate all aspects of the business in a timely manner are a testament to our people and being a premier operator.

Before I turn to the 2025 plan, let’s look at year end reserves on Slide 7. Our record year end estimated net proved reserves total 678 million barrels of oil equivalent, reserves grew 12% from year end 2023 and oil reserves grew 29%. This chart demonstrates our track record in replacing and growing reserves over time, noting that we produce 222 million barrels of oil equivalent for the years 2021 through 2024. Year-end 2024 reserves were estimated at SEC prices as shown, which resulted in a standardized measure value of $7.3 billion and a pretax PV-10 value of $8.4 billion. Turning to Slide 8 and inventory. As a reminder, since inventory data across the sector is not standardized or necessarily comparable, our inventory is composed of nearly 90% 3P reserves and all wells within our 3P reserves estimate our economic have an area specific type curve, defined lateral length, specific well spacing and an assigned spot on the latest development schedule.

Simply put, we have a long duration, high quality, low breakeven inventory setting SM apart from many of our SMID cap peers. With the addition of the Utah acquisition, we have a higher pace of drilling yet continue to have approximately 10 plus years inventory with an impressive projected average return over that time period. As Herb and Wade have emphasized in prior years, our operational plan is the first year of a three year plan intended to optimize free cash flow over time. As previously discussed, with the addition of Utah, we will not retain last year’s steep growth trajectory from the previous operator and instead, we will seek to optimize the allocation of capital across our three core assets. On Slide 9, the 2025 capital program is expected to approximate $1.3 billion, excluding acquisitions and before certain non-operated activity that is yet to be confirmed and approved.

High level, we expect to allocate drilling and completion capital, approximately 35% to 40% to Midland, 35% to 40% to Utah, where we have margins that are very comparable and 25% to South Texas. D, C and E makes up about 90% of the budget with the remainder for facilities, land and other. In 2025, we expect to drill approximately 105 net wells and complete approximately 150 net wells. Facilities capital will contribute to continuing to expand oil handling capacity in South Texas. On Slide 10, activity by area is generally expected to be as follows. In Utah, we will pursue a combination of delineation and development in order to demonstrate the value of our new asset. Our focus is on creating value in the Lower Cube and advancing our understanding of the Upper and Deep Cubes.

We expect to drill approximately 35 net wells and complete approximately 50 net wells. The rig count will decrease from three at the beginning of the year to two at year end while running one frac crew. In Midland, we will continue delineation work around our Sweetie Peck extension in the Woodford-Barnett and up in Klondike while progressing our established development program. In Sweetie Peck, our subsurface understanding and operational execution continue to excel. Our Woodford-Barnett wells are outperforming our peers in the area and we will continue to drive value for the company through this delineation. The plan is to run four rigs through the summer and two rigs at year end with one frac crew. As a result, we expect to drill approximately 40 net wells and complete approximately 60 net wells.

South Texas will be a continuation of our Austin Chalk development plan with one to two rigs and a partial frac crew. We have very strong returns from our recent Austin Chalk laterals and we’ll continue to further our executional efficiencies and our off azimuth wells. Here we expect to drill approximately 30 net wells and complete approximately 40 net wells. 2025 capital expenditures are in line with 2024 at $1.3 billion, yet include a 10% increase in the number of net completions and an approximate 20% increase in production. Now turning to Slide 11. The key to optimizing free cash flow is capital efficiency. The 2025 plan is designed to maximize returns from all three of our assets with focused drilling execution and streamlined frac operations for further efficiency.

Here we highlight capital efficiencies realized at our Texas operations. Looking at progress from 2022 through 2024, we see that in Midland the team has improved drilling footage per day by 20% and nearly doubled efficiencies and completions. Our execution teams are currently drilling four mile laterals in Sweetie Peck. As a reminder, SM was the first operator in the Midland Basin to drill and complete a four mile lateral, and our drilling team finished the first well and its development faster than planned. This exceptional execution continues to drive capital efficiency in our Midland asset. Same story in South Texas where we improved drilling by 27% and completion efficiency by 18%. We continue to utilize a combination of our subsurface understanding on operational excellence to drive step changes in our performance.

On Slide 12, we are highlighting our sand mine in our Utah asset. The mine adds significant value to our operation and provides low cost local sand to enhance our returns. In 2024, the mine produced over half million tons of sand to use in our operations. We shut down for several weeks during the height of the winter season as planned but our completions crews have been so efficient that we are restarting our mining operations early. We are very excited about this operation and the value it’s providing our team. Moving to Slide 13. Optimizing capital efficiency means achieving high return wells with superior well performance. Here, we have updated our standard productivity slides for the Midland Basin and Austin Chalk comparing well performance to regional peers, reflecting 30% and 40% superior performance respectively in each area.

Before I turn the call over to Wade, I will run through some new well results and updated performance graphs since we last reported. On Slide 14, we have peak IP30 rates for 18 new wells in Utah, including both the Upper and Lower Cube zones. These very oily wells continue to show strong returns and value creation for SM in the Uinta Basin. Of course, new wells to date were drilled by the previous operator with a different development strategy. The SM team is actively employing our geotechnical work to enhance the program going forward, similar to our efforts to optimize performance in Howard County and the Austin Chalk. As we look into the future, our initial designs will modify wells per section, increase average lateral lengths and bolster our completion design all while focusing on strong operational execution.

Slide 15 updates our previously shown slide that compares the Uinta Basin Upper and Lower Cube oil production performance normalized to 10,000 feet to SM Midland Basin and Austin Chalk on the left side and compares the Upper and Lower Cubes to other key industry basins on the right side. Both continuing to demonstrate the competitive performance of Utah Wells and our excitement for the Utah assets. Moving to Klondike on Slide 16. We have peak IP30 rates for six new wells that average 829 barrels of oil equivalent per day with very high oil content. We have completed eight wells to date in the area, all in the Dean. Wells to date have shown a broad range of results due to expected variations in water cut. The last two wells saw significantly stronger results as we shifted focus on geologic area and certain completion techniques.

These last two wells achieved an impressive average peak IP30 rate of 1,312 barrels of oil equivalent per day. We will apply the newer methodology going forward and look forward to the results from the next six wells to be completed later this summer. Turning to Slide 17 and updating the performance graph of our Woodford-Barnett wells located in the Sweetie Peck extension area. Our first two test wells continue to outperform peer tests on average by around 50% normalized to 10,000 feet, lending to upside value from perspective development of the Woodford-Barnett on this approximate 20,000 net acre position. And finally, turning to Slide 18 and the new wells in South Texas. We have 21 new robust wells that have reached peak IP30 rates in the Austin Chalk.

The strong performance of these wells continues to deliver high returns across our entire acreage position. Our recent development includes five pads comprising 21 wells. Specifically, on the left side of the map, you will notice two brisco pads that incorporate six new Austin Chalk wells. Overall, the six wells located in the oily area have exhibited strong performance with an average peak IP30 rate of over 1,000 barrels of oil equivalent per day per well with 49% oil and 75% liquids. In the liquids rich area, we have seen impressive outcomes from three pads that include 15 Austin Chalk wells. These wells have achieved an average peak IP30 rate of 2,352 barrels of oil equivalent per day with 26% oil and 61% liquids. These wells have an expected payout of one and a half years.

Overall, the Austin Chalk wells are exceeding our expectations and are delivering excellent returns. The chart on the right highlights the strong cumulative production curve averages for both areas, underscoring the success of our initiatives and the repeatable performance of our new wells. The team is very active on several fronts. Overall, we are well positioned to execute an exciting program that will support a step change in scale. And with that, I will turn the call over to Wade to talk about the financial highlights of 2024 and put some numbers around the 2025 plan. Wade?

Wade Pursell: Thank you, Beth. Good afternoon, everyone. I’ll start on Slide 19. Highlights for 2024 are many, but I’ll just summarize with record daily oil production, which was up 23% year-over-year and a 12% increase in total production that resulted in $2 billion in adjusted EBITDAX, $485 million in adjusted free cash flow and an increase in our sustainable annual fixed dividend to $0.80 per share, which was also a record. Looking ahead to 2025 and turning to Slide 20, we ran our 2025 budget at $70 WTI, $3.25 gas and $27 NGLs. The drilling program Beth just described is expected to deliver a year-over-year increase in free cash flow of more than 40%. This level of free cash flow equates to a free cash flow yield to current market capitalization of approximately 15%.

I’ll now share a few details. Production is forecast to average 200,000 to 215,000 BOE per day, up approximately 20% over the 2024 average. Oil production is estimated to be 51% to 52% of that total or 102,000 to 112,000 barrels per day, up more than 30% from the 2024 average. Capital will be front end loaded as we work through the plans initiated by the Uinta Basin asset seller, resulting in a production cadence that inclines over the first three quarters. Production costs will include LOE in a range between $5.30 and $5.50 per BOE, which includes workovers and transportation of $4.10 to $4.40 per BOE, which now includes rail costs for the majority of our Uinta Basin oil. G&A for the full year is expected to approximate $160 million, which includes $25 million of non-cash expenses as well as about $7 million in 1 time cost associated with the integration efforts in the Uinta Basin.

Looking at just the first quarter 2025 expectations, the capital program is very active as we plan to drill approximately 40 net wells and complete approximately 45 net wells. This level of activity is around one third of the full year program, putting total capital expenditures between $425 million to $435 million. Production is expected to range between 191,000 to 198,000 BOE per day at 52% to 53% oil and LOE will be a little higher than the full year average at $5.45 to $5.55 due to costs associated with generators, on location in Midland and increased workover expense. G&A is expected to be in the $40 million to $42 million range and includes $3 million to $4 million of the 1 time charges related to the Uinta basin integration efforts. I’ll now turn to Slide 21, which summarizes our current hedge positions.

As a reminder, our philosophy is to align hedge volumes with leverage to protect cash flows and downside commodity risk. We are targeting around 30% to 35% of oil and gas volumes hedged to WTI and Henry Hub benchmark prices respectively. Slide 22 summarizes our strong balance sheet. We ended 2024 with a ratio of net debt to adjusted EBITDAX at 1.4 times and $1.9 billion of liquidity. Pro forma, if we include an estimate of XCL EBITDAX in the trailing 12 month number, the leverage ratio would be less than 1.2 times. We target leverage of 1 times net debt to adjusted EBITDAX or roughly $2.3 billion of absolute debt at current commodity prices. During the fourth quarter, we reduced the balance on our revolver by $121.5 million from $190 million to $68.5 million.

And it is our intention to generally prioritize debt reduction to target leverage levels before directing free cash flow towards additional share buybacks. We’re very much on track in meeting our leverage target in a short timeframe following our $2 billion Uinta Basin acquisition. At our current price deck, we expect to meet this target in the second half of this year. I’m now on Slide 23. Return of capital to stockholders is one of our three top objectives for 2025. Since the inception of our program in late 2022, we have returned more than $540 million, returning more than 40% of free cash flow to stockholders. In 2025, we will have our $0.80 per share annual dividend in place and seek to reinitiate share repurchases with our $500 million authorization as just described.

Moving to Slide 24. We’d like to emphasize the importance of stewardship as a key component of being a premier operator. Here, we highlight our top priority safety with a beautiful drawing by Eisley Swarts, daughter of one of our geologists at SM, and the winner of our annual Safety Calendar Contest. And on the right side, we note our recognition in leadership development with two awards from the prestigious Brandon Hall Group. So in closing, on Slide 25, I will reiterate that 2024 was an outstanding year. Thank you to all of our amazing employees for delivering such exceptional results. And welcome to our new team members from XCL and Altamont. We are poised for an even better 2025. It is a great time to be a part of the energy sector and a pivotal year for our company.

In 2025, we will integrate our Uinta Vasin expansion, significantly increasing our operational scale. We expect to maintain a strong balance sheet and deliver return of capital to our stockholders by reducing debt and transferring that enterprise value to our stockholders, sustaining our recently increased fixed dividend and repurchasing shares under our $500 million authorization at the appropriate time. Thank you for joining us today. And we look forward to our live call tomorrow morning.

End of Q&A: