SM Energy Company (NYSE:SM) Q4 2023 Earnings Call Transcript

SM Energy Company (NYSE:SM) Q4 2023 Earnings Call Transcript February 21, 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: Good afternoon, and welcome to SM Energy’s Fourth Quarter and Full Year 2023 Results Webcast. Before we get started on our prepared remarks, I’ll remind you that our discussion today will include forward-looking statements. I direct you to Slide 2 of the accompanying slide deck, Page 7 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.

Herbert Vogel: Good afternoon and thank you for your interest in SM Energy. We are very pleased to report our excellent 2023 financial and operating results. We measured up very well against each of our 2023 objectives! Today, we will spend more time looking forward, into our plans for 2024. We are well positioned to slightly increase activity and deliver an attractive return of capital to our stockholders, initiate development of properties acquired in 2023 and maintain our low leverage. Turning to slides 4 and 5 and starting with key 2023 results. How did we measure up against our stated strategic objectives? We met or exceeded each objective as I will step through now. Our first objective was to deliver increased return of capital to our stockholders.

We generated substantial free cash flow of $509 million and returned $300 million to our stockholders. This is an approximate 7% yield for stockholders and return of approximately 60% of the free cash flow we generated. This included the repurchase of 6.9 million shares at an average price of $32.89, for $228 million, and fixed dividends paid of $72 million. Notably, this is four times the $77 million returned to stockholders in 2022, and we reinvested in our portfolio, transacting approximately $125 million in prospective leasehold positions. In addition, we set a company record for proved reserves, ending the year with 605 MMBoe, up almost 13% from yearend 2022, despite a reduced SEC pricing environment. At the same time, we improved our balance sheet, reducing net debt by $171 million to $969 million, which met our objective of less than $1 billion net debt.

Our allocation of free cash flow is intended to drive long term, sustainable profitability, and share price appreciation. Our second objective was to focus on operational execution, including excellent safety and environmental stewardship. If we measure operational execution by production performance, production came in about 3.5% ahead of the mid-point of early-year guidance, and production was up approximately 5% year-over-year, consistent with mid-single digit growth discussed last June. Increased production guidance over the course of 2023 was driven by well performance from our Austin Chalk program, which exceeded expectations, while operating efficiencies served to accelerate drill and completion times for certain wells in the Midland Basin.

As we have emphasized in the past, our differential application of technology supports completion designs that optimize well performance to peer leading outcomes. If we measure operational execution by well performance compared to peers, as shown on slide 6, in both the Midland Basin and Austin Chalk, SM wells sizably outperform our regional peers. These charts show normalized cumulative oil production per 10,000 feet of lateral. If you look closely, you may be surprised to see that cumulative oil production from an average west condensate area Austin Chalk well is almost the same, around 230, 000 to 240, 000 barrels of oil after 20 months of production, as an average Howard County well. That leads to simply excellent economics in both plays and we’re always working to get even better.

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Q&A Session

Turning to slide 7. In regards to safety and stewardship, we had another excellent year, thanks to the focused efforts of our operating teams. Artwork on this slide is courtesy of Aiden Sosa, who is the son of one of our operations specialists in South Texas. In an effort to engage SM families with our safety culture, annually we hold a drawing contest for our safety calendar and Aiden was one of our winners. For 2023, we highlight a truly superior total recordable incident rate, or TRIR, safety metric of 0.20 reportable injuries per 200, 000 man-hours worked, which comprises both employees and contractors, and a spill rate of 0.006 barrels spilled per thousand barrels produced. Just excellent work but will never be an area for complacency.

To top it off, CDP scores were posted a few weeks ago and SM received a leadership level score of A minus. For a company in our industry, that is simply a stellar outcome. We truly believe that safety and environmental stewardship are an integral part of operational excellence. Turning to slide 8. Our third objective was to focus on replacing and building our top tier inventory. Creating value by finding and developing reserves is our focus, and as many of you know, an area where we have a strong track record. In 2023, we acquired 29, 700 net acres, net of divestitures, in the Midland Basin, increasing our leasehold position by 37% in that basin. This includes the 20, 700 acres we refer to as Klondike, located in North Martin and Dawson counties, as well as what is often referred to as our new stealth acreage, which I can tell you now, and as you can see on the map, is located just west of our existing Sweetie Peck position in Upton and Crane Counties.

This grass roots expansion is the result of collaboration between our geosciences, reservoir engineering, data analytics and land teams. They are working non-stop to identify, find and transact on assets that we expect to grow our top tier inventory. In this case, we have confidence from detailed evaluation of offset well performance and subsurface data, indicating extension of certain intervals into our buy areas. I’ll talk more about our plans here in a few minutes. Given the outstanding performance in all these dimensions in 2023, I’d like to say, thank you for your commitment to excellence to each of our 544 employees for a job really well done. Turning to slide 9. Let me just summarize our strategic objectives for 2024 before Wade covers the specifics of our plan.

We are really well positioned coming into the year with a low breakeven cost portfolio, low leverage, ability to increase oil directed activity given the current commodity price outlook and finally, the upside value proposition presented through recently acquired acreage. Our 2024 strategic objectives are to, first, to execute operationally to deliver low breakeven, high-return wells through the implementation of new technologies to drive efficiencies and continue leadership in ESG stewardship. Second, to return capital to stockholders through share repurchases and dividends, while transferring value to stockholders through reduced debt, and third, maintain and expand our portfolio quality and depth by employing advanced analytics and technical innovation.

Now let me turn the call over to Wade to speak to the 2024 plan. Wade?

Wade Pursell: Thanks Herb. Good afternoon. As a reminder, we are a premier operator of top tier assets delivering a sustainable return of capital. Empowered by our strong balance sheet and world class technical team, we are poised to repeat this success. We certainly demonstrated that in 2023 with solid operational execution, driving results that exceeded street expectations. Those results are actually quite straightforward, so let’s spend some time looking forward into 2024. The 2024 plan is designed to support each of the three strategic objectives that Herb just outlined. As we have discussed over the years, our methodology is to develop a multiyear plan that optimizes free cash flow through the most capital efficient development program.

This generally results in flat to low single digit production growth. Starting with slide 10. The 2024 capital program increases activity over 2023, which reflects our counter-cyclical approach in a deflationary environment. We expect the program to deliver an attractive free cash flow yield, while enabling the team to initiate delineation and development of properties acquired in 2023. Total capital expenditures are expected to range between $1.16 billion and $1.2 billion. Key inputs include. First, activity level. The Company expects to drill and complete 115-120 total net wells with roughly 60% in the Midland Basin and 40% in South Texas. We plan to retain the 4th rig in Midland for the majority of the year. Second, cost. The cost of increased activity is expected to be largely offset by realizing certain efficiency gains, which include running a simul-frac fleet for the entire year in Midland and drilling 25-30, 15,000 foot laterals, as well as recognizing around 10% on average year-over-year deflation.