First Financial Bankshares Q2 2023 Prepared Remarks Earnings Call Transcript

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August 2, 2023

There are 3 speakers on the call.

Operator

Good afternoon, and welcome to SM Energy's Second Quarter 2023 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 ks, 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 Bogle and our CFO, Wade Purcell.

Operator

I will now turn the call over to Herb.

Speaker 1

Thank you, Jennifer. Good afternoon and thank you for your interest in SM Energy. I will start on Slide 4. As you'll see, Q2 performance was excellent and built upon a very strong Q1. I believe that SM is well positioned to meet or exceed our strategic objectives for the year, let me step through the progress we have made against each of these.

Speaker 1

The first objective is to deliver increased return of capital to stockholders. In the Q2, we opportunistically repurchased 2,600,000 shares of stock, having now repurchased 5,300,000 shares since the program's inception in September 2022. Adding together share repurchases and our sustainable dividend, Return of capital was $87,000,000 in the quarter or 92% of adjusted free cash flow and return of capital has totaled $221,000,000 since September. The second objective is to focus on operational execution. Strong well performance, particularly in South Texas and completion of this year's expansion of our South Texas oil handling facilities demonstrate our success in this area.

Speaker 1

As a result, we have increased production guidance for the year by 1,000,000 barrels equivalent, while at the same time lowered capital expenditure guidance by $50,000,000 driven largely by deflation in diesel and steel. Our commitment to being a premier operator includes top tier ESG performance And we were recently recognized by basin wide independent methane emissions for not only ranking in the top 10, but actually ranking number 2 among Permian Basin operators for lowest methane intensity. In addition, we were ranked 6th out of 41 operators by Rystad for all around ESG metrics. Finally, in the ESG area, we received the Denver Mile High United Way Community Champion Award for engaging year round to inspire employees to give, volunteer, advocate and lead. The third objective is to replace and build inventory during 2023.

Speaker 1

In the Q2, we added around 22,800 net acres in the Midland Basin, bringing our Midland Basin position to around 111,000 net acres, Up from approximately 82,000 at the start of the year. Identifying and executing these transactions employees the expertise of our geosciences, engineering and land teams, enabling organic growth, which as many of you know is an area where we have developed a very strong track record over the past several years. In turn, we expect to add a rig to the new acreage in the 4th quarter, setting us up to deliver both oil production growth and inventory expansion in 2024. I'm very pleased with our performance in the first half of twenty twenty three. As you know, we issued a release in late June in conjunction with the JPMorgan Conference indicating that second quarter results were exceeding expectations.

Speaker 1

We enjoyed a lot of positive follow-up from the investment community along with a more than 25% increase in the stock price And the full second quarter results came in even stronger than we expected, even exceeding what we announced in the 3rd week of June. I'll now turn it over to Wade to speak to the drivers of those results and our expectations for more

Speaker 2

of the same. Wade? Thanks Herb. Good afternoon everyone. I'll start with my favorite slide, which is 5.

Speaker 2

I would just begin by saying that during the Q2, all of the strengths of SM were on full display. I'll look at those 2nd quarter results first and then turn to guidance for the remainder of the year. As a reminder, and as we'd like to say, SM Energy is 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're poised to repeat this success. So looking first at Slide 6, as a premier operator of top tier assets, execution in the second quarter was fantastic, Resulting in production of 14,100,000 BOE or 154,400 BOE per day, Exceeding our initial guidance midpoint by 5% and delivering higher oil production. Capital efficiency and cost savings led to CapEx coming in 12 Percent below our initial forecast and key bottom line results included GAAP net income of $1.25 per diluted share, Adjusted EBITDAX of $390,000,000 cash flow from operations adjusted for working capital changes of $362,000,000 and adjusted free cash flow of $95,000,000 I believe all of these be consensus expectations.

Speaker 2

Turning to Slide 7. This slide gives the results by line item, which are generally as expected, although LOE came in a little better than projected. This predominantly reflects the timing of workovers. We expect LOE per BOE to increase towards the high $5 range in the second half of the year, including work over timing and higher water handling costs with more oil wells coming online. Moving to Slide 8 and delivering a sustainable return of capital.

Speaker 2

During the Q2, we repurchased more shares in a quarter than we have done since 2006. While the stock was trading in the mid-twenty dollars range, we admittedly leaned in a little more purchasing 2,600,000 shares at an average price of $26.95 per share and as an aside, we believe where the stock is currently trading is very attractive as well. We also returned capital to shareholders to the quarterly dividend of $0.15 per share. Turning now to slide 9 and the final part of who we are, which is empowered by a strong balance sheet and world class technical team were poised to repeat this success. As we announced in June, we added 22,800 net acres in separate transactions for what we believe are top tier assets in the Midland Basin.

Speaker 2

The larger transaction of 20,000 Acres in North Martin and Dawson Counties closed for $90,600,000 Even after these acquisitions and increased return of capital in the quarter, the balance sheet remains strong at just 0.7 times levered with lots of liquidity, a cash position of nearly $400,000,000 and a very healthy and well spaced maturity schedule, I will point out that our net debt of $1,200,000,000 is after acquisition and leasehold cost of more than $100,000,000 this year and return of capital since inception of the program last September of $221,000,000 We're often asked about the allocation of free cash flow, which is clearly a balance and we are well positioned as we consider returning capital to stockholders, Reinvesting to maintain and build our high quality portfolio and further reducing debt. Now I'll turn to guidance on Slide 10. As recently announced, we increased full year production guidance by 1,000,000 Boe to reflect better performance in South Texas and additional volumes from our North Martin and Dawson Counties acquisition. This includes a slight uptick in the oil production percentage as well. We reduced full year capital guidance by $50,000,000 to incorporate deflation realized in steel and diesel costs as well as a flattening of rig rates versus our February assumptions, we also reduced full year LOE expense per BOE by $0.50 and are keeping LOE guidance at $5.25 to $5.50 per BOE for the year.

Speaker 2

Slide 11 drills down on guidance and provides you some specifics for the Q3 and capital activity by area. Given Synergies of the recent 20,000 Net Acre acquisition, we plan to

Speaker 1

add a rig in the

Speaker 2

Q4, which will stop elsewhere in Rockstar and move to the acquired acreage. However, the added rig is not expected to add production this year, but will contribute in 2024. In general, we reaffirm the $1,050,000,000 CapEx for the year and expect the capital cadence for Q3 and Q4 To be flattish, despite adding a rig in the 4th quarter. Second half of twenty twenty three capital activity is weighed toward our Midland Basin operations and our recent acquisition leading to stronger oil production for 2024. Production cadence is also expected to be flattish at around 14,000,000 BOE in each of the 3rd and 4th quarters, which points to the higher side of the full year guidance range, with the oil percentage peaking around 44% in the quarter and around 43% in the 4th quarter.

Speaker 2

I'll just close by repeating all of the strengths of SM's sustainable and repeatable business model we're on full display in the Q2. I will now turn it back to Herb to walk you through a few highlights from the field. Herb?

Speaker 1

Thank you, Wade. Skipping to Slide 13 in the Midland Basin, here we have mapped our 20,000 net acre acquisition located in Dawson and North Martin Counties, which closed at the end of June. As previously reported, based on extensive geologic data and demonstrated economics from nearby wells, we intend to target the Dean and Middle Spraberry sand intervals. Production from the area is about 12.50 BOE per day and is 90% oil. We estimate that new wells will breakeven on average at less than $50 per barrel oil, assuming $2.50 per Mcf gas and a 10% discount rate.

Speaker 1

We will update inventory to reflect this acquisition at year end. Year to date, we have also acquired leasehold positions covering another 9,100 net acres in the Midland Basin located in an area that we have not yet disclosed. Skipping to Slide 15 to look at Midland Basin well performance and regional breakeven cost benchmarks. We have updated the chart on the left, which now includes more operators, demonstrating our superior well performance in Howard County. The chart represents wells completed between January 2021 April 2023.

Speaker 1

The lower black line represents the average cumulative oil performance from a peer group of 17 operators in Howard County during the period and the upper blue line is the average of SM wells. The SM average outperforms the peers assuming normalized lateral lengths producing 31% more oil as updated through the 1st 25 months on production. The chart on the right we have shown before, which shows FM as the lowest Breakeven cost to operate among 11 Midland Basin peers. This is essentially the result of our exceptional well performance shown on the left combined with capital efficient operations, having among the lowest breakeven assets in the Midland Basin underlies our sustainable profitability and underpins our top tier assets label. Moving on to our South Texas Austin Chalk on Slide 16, which is updated for 2nd quarter performance.

Speaker 1

The 10 most recent wells to reach IP30 had an average 30 day peak production rate of 2,330 BOE per day, Producing an average 42% oil and 71% liquids. These wells are located across our position as you can see by the blue stars. SM has completed 85 wells in the Austin Chalk that have reached IP30 as of July 2023. The chart on the right is with more time on previously reported wells and the 10 new wells. Here you see the continued and consistent excellent performance and on Slide 18, a reminder of the predictability and repeatability of the Austin Chalk Wells in our area.

Speaker 1

Let's take a minute to look back at the positive evolution of our South Texas asset over the past few years. In the Q2 of 2019, so 4 years ago, Oil made up only 4.9 percent of South Texas production. Transportation expense was $8.46 per BOE And our cash production margin was $5.59 per BOE. Fast forward to today and South Texas production is 23% oil and Austin Chalk LOE and transportation charges are cut in half from the Q2 of 2019. As a reminder, our legacy transportation contract expired at the end of June this year and that is expected to reduce costs even further by about $0.35 per Mcf.

Speaker 1

The tremendous improvement in our South Texas economics is attributable to the incredible success of the organically identified and developed liquids rich Austin shock and improved midstream costs. Moving to Slide 22, I hope you caught last week's press release indicating that all of our updated ESG materials were posted to our website. Again, we have included responses to the CDP, TCFD and SASV Frameworks. We also provide summary pages of key metrics for each of E, S and G, which have been expanded this year. I will wrap up by reiterating our theme.

Speaker 1

SM Energy presents a sustainable and repeatable business model that is characterized by outstanding operations, A strong balance sheet, growing return of capital to stockholders and strategic inventory growth. Thank you for your interest in SM Energy and I look forward to our Q and A call tomorrow.

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