Q4 2023 SM Energy Co Earnings Call

Participants

Jennifer Samuels; VP, IR; SM Energy Co

Herb Vogel; President & CEO; SM Energy Co

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

Tim Rezvan; Analyst; KeyBanc Capital Markets Inc.

Leo Mariani; Analyst; Roth MKM

Zach Parham; Analyst; JPMorgan Chase & Co.

Oliver Huang; Analyst; Tudor Pickering Holt & Co.

Nicholas Pope; Analyst; Seaport Global Securities LLC

Presentation

Operator

Greetings, and welcome to SM Energy's Fourth Quarter 2023 financial and operating results Q&A at this time, all participants are in a listen only mode. A 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. Please note this conference is being recorded. I will now turn the conference over to Jennifer Samuels, Vice President, Investor Relations and ESG stewardship. Thank you. You may begin.

Jennifer Samuels

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 this morning to answer your questions. Today, we have our President and CEO, Herb Vogel, and CFO, Wade Pursell. So 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 seven 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 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.
Also look for our 2023 10-K, which was filed this morning. And with that, I will turn it over to Herb for brief opening commentary. Herb?

Herb Vogel

Thank you, Jennifer. Good morning, and thank you for joining us. While we're waiting for people to join the call.
Let me start by reiterating a few key messages. Our excellent 2023 operating financial results were driven by our very high quality asset base, best-in-class operational performance that is supported by differential technological expertise and a track record of success and our strong balance sheet and low leverage that enabled significant growth and return of capital to stockholders as we look through 2024, we are excited about our capital program, which we expect to deliver more on each of these strategic objectives as we lean activity towards the Midland Basin, where we will generate higher oil volumes and delineate and develop our new acreage positions to organically grow inventory and create value.
In short, the operational focus in 2024 is more oil growth, less gas growth, significant capital efficiency improvement with a 10% increase in capital against a nearly 30% increase in turn-in-lines weighted to oil. So let me say that against a 10% increase in capital against a nearly 30% increase in turn-in-lines weighted to oil. But that I will turn it back to the operator to start taking your questions.

Question and Answer Session

Operator

(Operator Instructions) Tim Rezvan, KeyBanc Capital Markets.

Tim Rezvan

Good morning, folks, and thank you for taking my questions. I'd like to start on them on the acreage map you put out with that the stealth play location. And I was wondering if you could comment on what initial zones you're targeting in that western Sweetie Peck area. And then as you look at the math, it seems to be filling opportunities that are in that position built out. Are you still sort of looking to add to understand how to think about that over the next couple of years?

Herb Vogel

Yeah, Tim, great question. We are really pleased. We added those 9,100 acres there, and we have this track record of our geoscience team being able to identify intervals that I kind of are overlooked a little bit by others in that area. We have some confidence from some data we have from some offset wells. So we're not disclosing specifically which intervals we're chasing there, but we are planning to put a rig out there this year, and we'll be hopefully showing some results there later in the year. But you're right, it's easy for us from an efficiency standpoint because it's pretty contiguous with our Sweetie Peck position. So we really like like what we got there if we could add more, we would add more. It's obviously I'm going to be price here in the future than it was when we picked up the acreage.

Tim Rezvan

That's fair. And then I guess I'll pivot My follow up to the other emerging area and northern part, Dawson. Can you just talk about as you sort of the early stages of development, I believe, Herb, this was the Dean was sort of the primary target here. Does that sort of remain the case? Is that what this was underwritten on? And can you talk about other areas that you may be targeting with sort of initial development?

Herb Vogel

Tim, that's right. When we announced the acquisition in June last year, we talked about two intervals are one was the dean and then the other, the Middle Spraberry sand, you're probably aware, there's another operator just to the northwest plain Middle Spraberry sand pretty heavily. So we'll be looking at both those intervals. We're starting with the Dean. I think we talked about eight to nine wells on three pads and you'll start seeing some results from pipe 3Q because we'll wait till we get past 30-day IPs. But yes, we're excited about it. And you're aware our best wells and some of the best wells in the Permian overall are in the dean and -- so we're really looking forward to the results there.

Operator

Leo Mariani, Roth MKM.

Leo Mariani

I wanted to maybe just stay a little bit with some of the new acreage here. I'm just curious as to kind of why you decided to disclose the 9,100 acres in terms of where that is here today? And also, I was hoping you could provide a little bit more color on how you guys managed to add additional acreage off on the '23 drilling program? Any color message will be great.

Herb Vogel

Thanks, Neil. Yes, pretty straightforward. On 9,100, it becomes public when we file in the leases that was already coming out there for people who were looking at the core houses so that that became public was not public is exactly what we're targeting drilling. So we did want to disclose. So was everybody on a level playing field that it's really an opt-in and crane counties there on the Austin Chalk, the A. grade, you picked that up. It's we've had such great success with our delineating and then developing and now really staggering between two landing zones. That's where we really optimize. And so we've got confidence to increase the inventory. We kind of always held that back, knowing it was the potential there. And so we feel good about those additional 65 locations. So it's just turned out to be a great value add that was purely organic and no additional lease acquisition costs.

Leo Mariani

That's helpful. And then I was hoping you could maybe address your first quarter production. Obviously, it's down a little bit. You don't crater guidance. You guys did mention weather in your press release, which is certainly plague the industry. I was hoping you could kind of maybe quantify that. Is there like a BOE per day impact on the weather side? And then I'm also assuming that perhaps maybe there's fewer tills this quarter and the program is maybe a little bit weighted to subsequent quarters until. So any kind of color around you've got the slightly weaker first quarter production be helpful.

Herb Vogel

Yeah, Leo, if you guys were really tracking 2023, we had 92 net tills and they're only in 11 net in Q4. So that's obviously going to have an impact on the first quarter. So if you were really watching what we turn the wells in line in the fourth quarter, you'd see why that impact was in the first quarter than there was a little bit is not a major impact, but there was a weather impact that was partly weather itself, but then also some gas plant weather impacts on the third party downstream for us, but that's really what drives it.
And if you see what we project for 2024, you see it starts from a low and then we gradually work our way up through the year. And I hope people are taking that strategic perspective of how much we produced in 2020, 2021, '22, '22 to '23 was a 5% BOE growth. And then now we're looking at it 3.5% BOE growth and 6% oil growth into '24. So I think really more focused on what are we doing overall annually and why that is beneficial for stockholders is really more important than the quarterly cadence.

Operator

Zach Parham, JPMorgan.

Zach Parham

My first question's just on the buyback, which slowed a little bit this quarter. Despite some pretty robust free cash flow generation. Can you just give us any detail on why you slowed down the buyback pace this quarter? And maybe just detail how you're thinking about utilizing the buyback 2024?

A. Wade Pursell

Yes, morning Zach. It's Wade. Nothing really tangible to report there yet as we were as we were moving into looking at 2024 and putting our plan together and a lot of uncertainty, economics and commodity prices, it just felt really good at the end of the year with a really strong balance sheet, which we did good cash position, lower leverage, below $1 billion net debt. And yes, as we move into this year, we're still very committed, obviously, to the stock buyback program, completing the commitment of over $200 million. And I should just say I don't think it will surprise you that we still believe that the current stock price is undervalued and the buybacks are very attractive. And we will we will continue that as we move into 2024.

Zach Parham

Thanks, Wade. And then my follow up, just on the M&A that we've seen in the industry over the last several months. I think there's a broad agreement that that larger scale attracts a larger investor base for E & P's, how do you see FM fitting in going forward? Do you see yourself as more likely to get larger through acquisitions or potentially combined with a larger operator? Or do you think you have the needed scale to attract more interest?

Herb Vogel

Yes, that you know, it's obviously a topical question given the recent consolidation in the industry and we've been there saying for a long time that we truly believe in consolidation, we see the merits of consolidation and we're agnostic as to which side of a transaction we wind up on, but we do focus on kind of our area where we're really strong. So that's got to be comparable sort of inventory to us in terms of quality that we don't want to combine where we have got delayed development.
We want or don't want to basically want to have a good balance sheet coming out of any sort of transaction. It's got to have industrial logic to that, you know, if it's just two disparate companies getting together for scale, that's probably not going to move the needle for us. And so that's how we look at it from a consolidation standpoint, there's clear benefits, and we'll see what comes along in terms of growing the Company.
We've been really persistent and patient about it. We have a lot of competence, our technical team, they continue to identify organic opportunities and we wind up delivering on them. And we have that track record. Got a lot, had a lot of discipline in what we've done with our capital and we sit on 10-plus years of inventory. So we don't have to really overpay to get something to just move along. So that and that's kind of our perspective on it, but if the right deal comes along, we'd be there.

Operator

(Operator Instructions) Oliver Huang, TPH.

Oliver Huang

Good morning all and thanks for taking my questions. I think just kind of to start out in the Midland. I know last year you all had a few Leonard and Woodford wells that you all were testing it doesn't sound like those who are not Woodford -- Wolfcamp D wells that you all were testing. It doesn't sound like those will be part of the plan for 2024. But is there any way that you all could kind of speak to how that capital might shift around from an interval targeting basis for 2024?

Herb Vogel

Yes, Oliver, this is Herb. We had a total of six wells. Some other offset operators also had some wells in there. And when we looked at the results, we recognize that it was more capital efficient to split a little a few or a few more wells into the Middle Spraberry, which underlies that interval. So that's that seems to be the right way to go about this. So the fracs will grow into the overlying interval. And that's that's how we would see some of the Leonard oil being produced as a more capital-efficient way.
And that's just you know what you do in the normal course of development optimization. In the case of the Wolfcamp D, you know, it's a completely isolated interval. So what we've really done is delineated. The Wolfcamp D is we have a good sense of how much inventory is available there. It is a deeper interval. It's slightly gassier. So though our perspective is to about the shallower horizons come back to the Wolfcamp D at a later date, put it into the facilities that would have already been put into put on.
So the CapEx that was spent on the facilities for the co-development and then come back in once there's latent capacity and flow the Wolfcamp D into there. So that's another just a capital efficiency move rather than trying to co-develop all of the intervals when there's no need with the Wolfcamp D having so much separation from the Wolfcamp, the above.

Oliver Huang

That's helpful color. And maybe just to kind of follow-up to the comments earlier on the Austin Chalk. Just wondering how does the stagger the two landing zones compare to the development that you all have carried out in the area last couple of years in South Texas? And are the incremental 65 or so locations primarily coming from that liquids-rich window? Or is it pretty ratably spread out across the entire footprint data as a hologram.

Herb Vogel

Let me get into that a little bit on the Austin Chalk. So what from our first Austin Chalk dedicated well, five years ago, we were really working on interval selection. We've really improved on what the best variable was. And then last year and part of the year before, we're really figuring out where is that secondary Austin Chalk zone that optimizes the capital efficiency in the at the value of each DSU. And so we worked between two different intervals besides the best interval that we had already identified.
So what you're seeing now is we've locked in, which is the best way to do that on the stagger. And then in some cases, there's also Eagleford so you can have as many as three landing zones depending on the thickness, we have a bias towards more of the liquids rich oily area.
So you'll see great returns. You'll see maybe a few a little bit lower BOEs in some cases because we'll be in the higher liquids area. But in terms of the returns, they're going to be stronger with the low commodity price environment we're looking forward to in 2024. I think that to get us to the questions you have there.

Operator

Nicholas Pope, Seaport Research.

Nicholas Pope

Good morning, everyone. And I was curious on the Klondyke area. You mentioned you drilled the science Well, you're running 3D seismic. I guess what information at this point are? Are you expecting to get from that from that from that science and how that I think you mentioned you added inventory in Klondyke in the presentation Transcrypt. And I was curious how that might shift with some of the data you get from the science and from the wells it the drilled.

Herb Vogel

Okay. Yes, Nick, a couple of things there. So first of all, you are aware that we have quite a few tools that really help us optimize and get the returns that you're seeing in our wells. So the purpose of the core is really to assess what all intervals we can land in and which is the optimal landing zone, even within there's differences of 10 to 20 feet and where you land can make a difference in the value of the well. So the core is one part, then the logs.
So then we have the ability to correlate the corridor, the logs and apply it to a broader area. When we look at the logs and understand what where the best landing zones are and which intervals we can go for because it can be more than the two that I mentioned up in that area. I'm not going to get into what other intervals might be there. But there there's always the possibility of more intervals and you want to be aware of what those are when you're laying out your development plans in terms of the 3D seismic you're aware and I've talked about this before that as you go to the north there, this is more of a it's the sand play.
So this is migrating to oil that's there. So you want to have a real good handle on the thickness of the sand intervals that you're targeting and that determines what the economics will be. So that's another development optimization effort on our part. And it's a relatively low cost data when you look at it, especially compared to some other innovations and how much well control do you have in that area on your acreage right now there and what production?
As Ralph, there's actually quite quite a bit when we acquired the acreage where there were quite a few vertical wells and there were several horizontal wells also. I think if you looked at the inverse data, those wells were around 58 barrels of oil per foot. So that's quite good. And then there's more offset wells in the Dean. I think we're going to be able to optimize from there just based on what we know from all of the new wells we have over in North Martin, which are 10 miles away.

Nicholas Pope

Got it. That's very helpful. From shifting to the balance sheet, curious with the with the notes in [25] and [26]. Obviously, the 25 is going to come to it concurrent at some point in the next year. Any thoughts about and what the plans are for those those two nodes, if you might accelerate and them at some point, how do you think about that relative to kind of the opportunity set?

A. Wade Pursell

Yes. Great question. I mean, the 25s, as you say, are coming out of closes to build mature in the middle mid, mid 2025. It's a rare. It's a rare time where the where the cash that we have on the balance sheet, that's now that you could assume that we would pay these off with cash is earning interest pretty darn close to the coupon. So we're obviously just being being flexible with the balance sheet and hanging onto our liquidity. We'll pay those off obviously before they mature.
I can't tell you when that will be, but it will be certainly be before. Then at some point, the 26s, yes, there are they're kind of coming on the radar screen as well. All of our bonds have nice flexibility within for calling early, and they're already callable with some premium, but they'll be callable at par, I think, beginning in the back half of this year.
Bond market certainly strengthened. I mean, I yes, there are our bonds are certainly trading better than they were. So there's a I will watch that closely as we always do and tried to be opportunistic. And you could see us thinking of a scenario where we might do a new bond that takes out the 26s early. But we'll just be watching all of that as we move through the year.

Operator

Thank you. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Herb Vogel for any closing remarks.

Jennifer Samuels

Thanks, Daryl. So we are well positioned to continue the trajectory to build value and deliver returns going forward. Thank you for your interest, and we look forward to seeing a number of you at upcoming events.

Operator

Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time and enjoy the rest of your day.