Tenable Q2 2024 Prepared Remarks Earnings Call Transcript

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August 7, 2024

There are 3 speakers on the call.

Operator

Good afternoon, and welcome to SM Energy's Second Quarter 2024 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 6 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.

Operator

Today's prepared remarks will be given by our President and CEO, Herb Vogel and our CFO, Wade Purcell. I will now turn the call over to Harp.

Speaker 1

Thank you, Jennifer. Good afternoon and thank you for your interest in SM Energy. We had a terrific second quarter and have enjoyed excellent operational performance year to date. We have also successfully been expanding our top tier portfolio while managing a very strong balance sheet. Turning to Slide 4.

Speaker 1

Every quarter, I speak to progress we are making on our core objectives for the year. I'll start with our objective to expand our high quality portfolio with low breakevens. Today, we announced that we are exercising our option to acquire 26,100 net acres adjacent to the XCL acquisition in Utah, commonly referred to as the Altamont acquisition for approximately $70,000,000 Combined with the XCL acquisition, we are adding 63,300 net acres in the core over pressured oil window of the Uinta Basin, including approximately 44,000 BOE per day of high oil content production and initial estimate of 4 65 net locations. Assuming PDP valued at $35,000 per BOE per day, we paid around $1,250,000 per location based on our preliminary counts, including Altamont. This is highly accretive to financial metrics, including NAV.

Speaker 1

2nd, production performance exceeded the midpoint of guidance by about 2,500 BOE per day with higher oil content, successfully demonstrating our core objective to focus on operational execution. In addition, we turned in line our first Woodford Barnett test wells in the Midland Basin and are very pleased with early results and the potential to add more than 20,000 prospective net acres in this deeper formation. More about that in a minute. The 3rd core objective is return of capital. We repurchased more than 1,000,000 shares in the 2nd quarter and in combination with our sustainable dividend returned approximately $72,000,000 to stockholders.

Speaker 1

Our Board authorized an 11% increase in the quarterly dividend to $0.20 per share and reloaded the share repurchase authorization to $500,000,000 through 20.27. So we are positioned to continue our return of capital program in the coming years. It was a very successful quarter, and I'd like to thank everyone on the SM Energy team for a lot of hard work and outstanding results. Let's look at some detail behind these highlights. Turning to Slide 5.

Speaker 1

Starting with expanding our high quality portfolio, we have added significant scale over the past year plus. Summing the Swetitec Extension, Klondike, South Texas drill to earn extension, XCL and Altamon acquisitions, we have added more than 90,000 net acres. That's nearly 40% growth in core acreage and added preliminarily 465 drilling locations from XCL and Altamont alone, and this is just the beginning. The bottom of the chart includes a time line for your reference. The Uinta acquisitions have an effective date of May 1, and pending approvals, we anticipate closing October 1.

Speaker 1

Turning now to Slide 6 and the Uinta Basin. We have a very high bar in evaluating acquisitions to ensure value creation and the Uinta acquisitions met all of our strategic objectives listed here on the left side. These top tier assets immediately compete for capital, extend our high quality inventory by 3 plus years, including our preliminary estimates for Altamont will increase 2025 oil production an estimated 45% versus a standalone scenario and are accretive to all key financial metrics at a purchase price of less than 3 times the projected 2025 adjusted EBITDAX contribution. Continuing with more about the Uinta on Slide 7. We showed this slide when we announced the XUL acquisition and I'm showing it again to reiterate the quality of the assets and the upside potential of the XCL acquisition that is expected by our differential geosciences and engineering team.

Speaker 1

These charts show comparisons of Uinta upper and lower cube cumulative oil production performance based on normalized lateral lengths. The left graph compares average oil production from both cubes in the Uinta to SM's average cumulative well performance in Midland and South Texas, demonstrating the competitive performance of Uinta that translates into competitive returns. The right side graph compares cumulative oil performance of both Uinta Cubes to top basins in the industry. Again, this highlights the quality of the Uinta, including the prospectivity of the upper cube. We did our homework and look forward to demonstrating this value as we develop this asset.

Speaker 1

And Tim Rezvan did some further research into the results in the area and agrees as quoted here, We believe there are sufficient data points to acknowledge that the Uinta is a prolific stacked pay oil play. We come away impressed by the overall rock quality of the Uinta. Let me just say, we agree. Moving on to the Midland Basin on Slide 8. We have been tight lipped about our activity in the Greater Swetipek area for some time as we added acreage.

Speaker 1

Now that production data is public, we are pleased to report today early data related to our first Woodford Barnett test wells in the area that just reached peak IP30. Our first two tests have impressive results with 110,200 foot lateral reaching peak IP30 averaging 16.22 BOE per day and a shorter 5,900 foot lateral reaching peak IP30 averaging 8.30 BOE per day. The graph on the left compares these initial results based on normalized lateral lengths to peer wells in the same formation. These initial results compare favorably to peers in the area. Based on our 2 new wells and existing peer wells in the surrounding acreage, we have confidence in the prospectivity of the Woodford Barnett and believe our greater Sweetypeck position may have more than 20,000 net acres perspective in this formation.

Speaker 1

Moving now to Slide 9. Again, we update the slide that compares the performance of SM wells in both Midland Basin and the high liquids area of the South Texas Austin Chalk to our peers, looking at cumulative oil production normalized to 10,000 foot laterals. This underscores the superior performance of SM Energy Wells. SM average well performance in Midland remains about 30% better than the peer average. As a reminder, we co developed, so the SM averages include multiple zones, same for our Austin Chalk well performance, which is 35% better on average.

Speaker 1

And as we have pointed out, the oil cumulative curves for Midland and Austin Chalk are similar, leading to comparable returns. Turning specifically to the Austin Chalk in Slide 10, new Briscoe C wells continue very strong performance including fully bounded tests at 625 foot spacing. Outperformance and positive spacing tests in the Austin Chalk continue to provide upside and we look forward to results in the new drill to earn acreage to the West expected in the Q4. The quotation here from Enverus emphasizes the upside potential from successful spacing tests saying SM's Briscoe C spacing pilot in the Austin Chalk is performing in line with conservatively spaced offsets and could add over 60 locations to our existing inventory. In summary, the combination of outstanding performance year to date, the pending close of the Uinta acquisition that adds substantial scale in terms of production, inventory and cash flow, as well as continued strong performance and expansion of our assets in Midland and South Texas, we are positioned for enhanced scale, a great second half of twenty twenty four and an exciting 2025.

Speaker 1

We are truly hitting on all cylinders. I'll now turn it over to Wade to discuss financial results and recent financing activity. Wade?

Speaker 2

Thank you, Herb. Good afternoon. I'll certainly echo that it has been a terrific year and the SM team has done a great job on a number of fronts. I'll start on Slide 12. In regards to the Q2 financial results, we beat guidance and consensus expectations driven by higher than projected production volumes, which as Herb mentioned came in about 2,500 BOE per day above the midpoint.

Speaker 2

Importantly, this included over 4,000 barrels per day more oil production than the midpoint of guidance. This was driven by continued strong performance from base production in the Midland Basin and new South Texas wells that came on with higher than expected oil content. 2nd quarter results were pretty straightforward, so there's not much need to go into detail by line item. Capital was slightly above guidance, which was a result of taking advantage of favorable terms on a bulk repurchase of pipe that had not been considered in 2nd quarter guidance. This added around $12,000,000 whereas otherwise we would have come in below guidance.

Speaker 2

Bottom line adjusted EBITDAX was $486,000,000 adjusted free cash flow was $98,000,000 and return of capital was $72,000,000 an excellent quarter. Moving to Slide 13, summarizing the return of capital program. We have repurchased 8% of shares outstanding since inception. We repurchased more than 1,000,000 shares in the 2nd quarter, repurchased 1,800,000 shares year to date and repurchased 10,100,000 shares since inception of the program. Including return of capital through dividends, we returned to stockholders approximately $72,000,000 or 73 percent of adjusted free cash flow in the 2nd quarter, dollars 125,000,000 or 75 percent of adjusted free cash flow year to date and $500,000,000 or 54 percent of adjusted free cash flow inception to date.

Speaker 2

Confidence in our expanded portfolio supported a further increase in the sustainable quarterly dividend to $0.20 per share and reloading the repurchase share authorization to $500,000,000 Over the course of the next several months, we intend to direct a greater portion of adjusted free cash flow to debt reduction, transferring that enterprise value to the equity holder before resuming our recent pace of share buybacks. Turning now to Slide 14. In regards to the balance sheet, let's look at that as of quarter end and then consider subsequent events. At 2nd quarter end, the cash balance was $488,000,000 and there was 0 drawn on the revolver. The cash balance excludes restricted cash of $102,000,000 placed in escrow required for the XCL acquisition.

Speaker 2

Net debt was $1,100,000,000 and the net debt to adjusted EBITDAX ratio was 0.6 times. This strong balance sheet supported the all cash terms of the Uinta acquisition. In July, we completed very successful upsized bond offerings of $750,000,000 of 6.75 percent 5 year senior notes due 2029 and $750,000,000 of 7 percent 8 year senior notes due 2,032. The 2029 notes are subject to a special mandatory redemption contingent on consummation of the XCL acquisition by July 1, 2025. The $1,500,000,000 in proceeds will be used to fund the Uinta acquisition as well as the redemption of the $349,000,000 senior notes due 2025.

Speaker 2

Combination of cash on hand and the revolving credit facility will be used to fund the remaining portion of the Uinta acquisitions, which we anticipate to close October 1. Due to the highly cash flow accretive nature of the XCL transaction, based on our $78 oil and $3.25 gas commodity price deck at the time of the announcement, we expect to return to an approximate one times net debt adjusted EBITDAX level sometime mid-twenty 25. Even assuming a $60 oil $2 gas long term price deck, peak leverage remains in the 1.5 times area. Skipping ahead to Slide 16, in regards to guidance, let's also look at this pre and post transaction. For full year 2024 on a standalone basis, we are increasing oil production as a percent of total production given the strong performance in Midland and higher oil content we are seeing in South Texas.

Speaker 2

We have also adjusted cash taxes to approximately $30,000,000 net of refunds, reflecting a projected increase in book income. Other than increased oil percentage and cash taxes, our guidance remains unchanged. Last quarter, we increased full year guidance for production and decreased full year guidance capital expenditures. We're maintaining full year expected production at 57,000,000 to 60,000,000 BOE or 156,000 BOE per day, but increasing the oil percentage from 44% to 45%. Capital expenditures guidance remains at $1,140,000,000 to $1,180,000,000 and includes an updated estimate for net wells drilled and flowing completions to 123125, respectively.

Speaker 2

All other line items remain unchanged. 3rd quarter guidance includes production volumes of 15,000,000 to 15,400,000 BOE or 163,000 to 167,000 BOE per day at 45% to 46% oil. Capital expenditures are expected to range between $300,000,000 $310,000,000 and include drilling 33 net wells, of which 14 are planned for South Texas and 19 are planned for Midland, and turning in line approximately 39 net wells, of which 22 are planned for South Texas and 17 for Midland. I will also mention that LOE per BOE came in below the guidance range in the 2nd quarter, but we expect Q3 LOE to fall within the range due to higher expected water handling and generator costs. In regards to additional production and capital associated with the Uinta assets, this will affect Q4 results, assuming the proposed October 1 close date.

Speaker 2

In the Q4, the Uinta assets are expected to add approximately 44,000 BOE per day at 87% oil. Of note, at the time of the XCL acquisition announcement, we included September production in the numbers, so the total production contribution for 2024 is slightly different. Of course, the May 1 effective date is unchanged, so the benefit of the September production is simply recognized as a purchase price adjustment. We expect capital expenditures for Uinta to add $100,000,000 to $120,000,000 to the Q4. Looking ahead to 2025, in June, we presented a generalized scenario for capital allocation across the 3 assets, Uinta, Midland and South Texas.

Speaker 2

All of these areas offer very high returns and high quality, long duration inventory. As we work towards our detailed 2025 program, we have the luxury of allocating capital across 3 high return assets, and we seek to demonstrate the quality and value of the Uinta, while optimizing the capital efficiency and free cash flow of the combined program over a multiyear period. This entails rightsizing the rig to completion crew ratio for the combined program. We expect to reduce the combined rig count from currently 9 to 6 to 7 during 2025, while maintaining approximately 3 completion crews. We will be working through detailed pad by pad scenarios during our fall strategic planning process.

Speaker 2

It is an exciting time at SM and we're very well positioned to deliver around 45 percent oil production growth in 2025 as we roll together the highly accretive acquisitions and continue to see excellent results from our Midland and South Texas programs. We look forward to the live Q and A webcast and call tomorrow morning. Thank you.

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