SM Energy Co (SM) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to SM Energy's First Quarter 2021 Financial and Operating Results Question-and-Answer Session. (Operator Instructions)

At this time, I would like to turn the call over to Jennifer Samuels, Vice President of Investor Relations. Please go ahead.

Thank you, Shallon. Good morning, everyone, and thank you for joining us. Before we get started, our discussion today may include forward-looking statements. I direct you to Slide 2 of the accompanying slide deck, Page 4 of the accompanying earnings release and the Risk Factors section of our most recently filed 10-K and 10-Q which describe risks associated with forward-looking statements that could cause actual results to differ. The first quarter 10-Q was filed this morning.

We may also discuss non-GAAP measures. Please see Slides 22 through 24 of the accompanying slide deck and Pages 11 through 14 of the accompanying 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.

Here to answer your questions today are President and CEO, Herb Vogel; and CFO, Wade Pursell. I will now turn the call back to the operator to take the first question. Shallon?

(Operator Instructions) Your first question comes from Michael Scialla from Stifel.

Wade, you had mentioned in your prepared remarks that some completions planned for 2022 could be pulled into '21. Just want to see how many you were thinking and what kind of impact that may have on your '21 CapEx?

Yes, Mike, this is Herb. Yes, it's pretty straightforward. We said in February that we had a number of completions that were just on the other side of the year. And now we've got it on this side of the year. So the CapEx spend is the same. It's just when we turn those in line. We made the assumption before that they start just near the other side of the year. Now we've accelerated them some into this year. But the CapEx spend was there. So it really doesn't change the CapEx.

Okay. Good to hear. And I guess, a bit of a housekeeping item on the EBITDAX. It was started there was about $21 million of other operating income. I just want to see if you could give us any color on what all was built into that?

Mike, it's Wade. Yes, there's several items in that line, and they actually go both directions. You notice it's a net number. We do have the -- there's a -- and I mentioned it in the prepared remarks, there is a gain in there from our power hedge, I'll call it, on the cost side. We're not going to quantify that, but that's in there, and there are several other items in there. And as I mentioned, we're still working out details. So it's probably all I should say right now.

Okay. And just 1 last one for me. Just your thoughts on NGL markets. Do you see any more upside? Or any thoughts on trying to hedge NGL prices here?

Yes. Mike, NGLs have been pretty strong, and it's really the propane exports and the international [heart] being open on that end of things. So we're really sticking with our routine hedging program. Now we've targeted a total percentage level of lower than we were before because our leverage is lower. But yes, we do see strengthening on NGLs and don't know how that will continue in the future. But we're not really changing our hedging program in response to short-term prices.

Your next question comes from the line of Gail Nicholson from Stephens.

Can you just talk about your thoughts on inflation kind of in the back half of the year. And what is your current contracts in regards to the completion services and the decision to do the 50 net completions in the second quarter?

Yes. Gail, thanks for the question there. On the inflation side of things, we've long thought, and I think everybody knows that it's driven by activity. And if activity increases, you'll see inflation coming some number of months later. In our case, we have a lot of the key costs locked in. So the rig costs, the sand costs are locked in for a certain period of time. Some of the other services are a little bit shorter term.

So whenever we're running our budget and then our revised plans, if there's things like weather events, we just optimize free cash flow. And that includes the details of the contracts we have in place. So if there is inflation, you'll see it coming based on activity. And that's pretty much the way I'd leave it. And we do everything we can to insulate ourselves against that by locking in with contractors that we've used for a long time.

Great. And then pricing in South Texas on the oil side was really strong this quarter. Was that all driven by the storm? I know there was a renegotiation of a contract there. Just trying to understand how we should think about South Texas oil pricing on a go-forward basis?

Gail, yes, that is the same thing we talked about fourth quarter. So there's a big element of better realizations on the oil side because of the contract that expired in beginning of October for us. That was a big uptick. And then the rest is really just what current prices are at. There's nothing really different there, but you should look at it in the forward similar to what it's been.

And to mention, on the inflation side, some services we see going up slightly, but some we see still dropping. So for example, on OCTG and diesel, there's inflation and in some other service areas like chemicals and even tank batteries, we see deflation. So we've seen a combination in the first quarter.

Great. And then just on the activity set in the second half of the year, should we assume that's more on a completion standpoint in a [TIL] aspect more 4Q weighted than 3Q weighted at this point in time?

Gail, can you repeat that? I couldn't quite catch the end of that one.

Sorry. From a completion activity set in the second half of the year, should we assume that's more 4Q weighted than 3Q weighted at this point in time?

No, I would not assume that. It's going to be a little more in 3Q than 4Q.

(Operator Instructions) Your next question comes from Karl Blunden from Goldman Sachs.

I noticed, obviously, the pull forward in some CapEx. I was wondering, is there any change in your CapEx by geography or location that you're pursuing at this point? And if the Austin Chalk results are strong, could you shift that over time?

Karl, thanks for the question. No, there's really no material change in the balance of where we're spending the capital. So no, that's the same. And Austin Chalk, we're happy with what we're seeing, and we're going to continue on the program. And as you know, we upped the counts on drill and completes in the Austin Chalk this year.

Got you. Is there anything changing that with what you're seeing in the A&D market, it certainly seems to be more active recently? Is there -- are there opportunities for you to do some tuck-ins or potentially sell some acreage that could improve your liquidity as you're looking at some of these stub bond maturities?

Karl, you're right, the A&D activity has picked up very recently. We do see some continuing there. It's something really makes sense. We look at it, but we are really focused on generating the free cash flow and reducing our absolute debt and improving the leverage metrics. It would have to be really compelling for us to consider something like that. And I think expectations on the sell side are still quite high. So -- but we obviously look at everything we can.

Got you. That's helpful. And then I guess the last one for me just on managing the balance sheet. You've sketched out a part the free cash flow and with the hedges, there's quite a good deal of visibility into that. And so the balance sheet doesn't look problematic in any way when you take a look at the maturities. But is there opportunity to be a bit more proactive around that and extending maturities given how strong the debt markets have been recently?

Yes. Good question. I guess the first thing I'd say is I'd kind of repeat what you just said. We certainly don't have to, and we certainly have nothing planned. But it is -- if you follow us in the past, you know that we try -- we do try to be opportunistic when the capital markets provide those opportunities for managing risk on the balance sheet, risk to the downside, I would say.

So we're pleased that the bonds are trading better, and the rating agencies have made some moves recently, which I think have helped and will help. So we'll continue to watch that, but certainly don't need to, but it's something we'll keep our eye on.

We have a follow-up from Michael Scialla from Stifel.

Yes. Just wanted to follow-up on the Austin Chalk. You said you're pretty pleased with some of these new wells, but don't have 30-day rates there yet. Just wondering when you think you would have that data? And would you anticipate releasing that on the second quarter call? Or is that something you could potentially release interim during the quarter?

Michael, this is Herb. Yes, we're happy with the way the Austin Chalk program is going, and we like having more and more data coming in. And I'd say we'd certainly have them at the second quarter call. And I don't know whether we'd do anything earlier than that. But we do have quite a few more on right now and early days on them, but it's coming in as we thought they would, so.

Okay. Sounds good. Lastly, I just want to get your thoughts on any potential impact on your cash flows if, say, the Biden administration is successful in removing the intangible drilling credits for oil and gas companies?

Yes. That's -- Mike, that's a good question. I mean I think there's clearly potential for a big impact on the industry, I would say, overall. We've run numbers, we've run kind of worst case what we think and kind of a base case of what we think, but none of us know, obviously, exactly what's going to happen.

I guess, I would say, from a standpoint of what we've laid out as far as our objectives and the delevering and the getting below 2x next year and generating enough free cash flow that covers all the maturities through '24, things like that. All the cases that we put in do not change those outcomes.

And especially when you think in terms of '21 and '22, the impact on our cash would not be significant. But again, there's a lot of different assumptions flying around there. But in general, I guess, that would be my comment.

Okay. That's helpful. And anything that you could do to shield any current tax liabilities at this point? I think you guys do not, if I'm not mistaken, do not have much in the way of NOLs left, but anything else you could do there?

Yes. I mean our tax department works really hard on that, and they're doing that right now under different what if scenarios. I don't have any silver bullets to lay out to you this morning, though.

Your next question comes from the line of Steve Dechert from KeyBanc.

Just want to see what the thought process was behind drilling the 3 gas wells and the 3 NGL wells versus more oilier wells in New South Texas wells you reported last night.

Yes. You're talking about -- Steve, sorry, this is Herb. You're talking about the JV wells down there. So those were -- we entered into JV in the fourth quarter. There were 6 DUCs down in the south end and 3 Eagle Ford and 3 Austin Chalk wells. So the economics look robust. The JV partner was interested, and we proceeded to complete those and turn them in line. So that's really a pretty simple story there.

Okay. I guess, I meant were you just testing different areas? I guess, was there a certain reason behind drilling the NGL wells and gas wells versus just more oil wells?

Well, those were really part of our delineation program. If you look at our map, you'll see we're looking at all different areas of the field and basically identifying the productivity of the Austin Chalk through a broad area. And that's what increases our confidence in the ultimate inventory that we can deliver from the Austin Chalk. So that's really what that was attributed to. And in that case, we staggered them with the Eagle Ford wells.

Got it. Okay. And just 1 more question. Could you quantify the production downtime in the first quarter? I know you guys gave the number of days, but in terms of the actual production, is that something you can give?

No. When we released in February, that was right in the middle of the event. So we didn't really do it that way. So obviously, we did have some impact on the first quarter, and it was really 14 days of production that were impacted to some degree. That's what it came down to. And then there was a knock-on effect on the logistics side for really our frac spreads. We didn't have much downtime on rigs. We did have downtime on frac spreads.

Bringing things back and including even getting people to work the facilities, there were a lot of people impacted in Texas, the individuals, and they have to go tend to things at home, too. And that made it a little bit more difficult to get people called out to facilities.

But no, it's -- we're just looking at it, but we maintain guidance for the year. And 2022 looks the same. ESG, performance-wise, we're doing great. So those -- I don't really see that -- anything there really.

Your next question comes from the line of Scott Hanold of RBC Capital Markets.

Just a little bit of a follow-on to that question. And obviously, it was pretty rough during that winter season. We've heard from a few other companies that talked about having crews out there 24/7 and keeping things up in line and seeing a lot better uptime than originally expected.

Is there any kind of learnings you all have taken from that event? So something similar happens, the outcome might be less impactful? Or is there something unique about just your operations maybe relative to some of the others? And I guess, in particular, more so it felt like in the Permian?

Yes, Scott. It was pretty straightforward for us. The electric utilities had brownouts and blackouts. And in our case, where we've got ESPs and pump tracks electrically driven. When they did those rolling brownouts and the blackout, it shut down all our pumps. And that prevented us from producing, and that's on the West Texas side.

On the South Texas side, it was more on the gas gathering side. They had electric-driven compressors in some cases for -- actually at the plants more than anything. And so then the plants went down. So that's really what impacted us the most from a production standpoint.

So what could we do differently? It's really making sure that we've got the prioritization from power companies that they recognize when they cut the power to us, that will impact their gas supply, which affect their ability to generate power in the CCGTs. So that's really what it came down to.

From a fundamental standpoint, we use instrument air, and there's a lot of details behind. So that minimizes our risk of downtime from cold weather just on its own. But there's still things that happen like starting up a compressor again when you got heavy oil in there and it cools down, it's harder to start them up. So those are relatively minor though. The key thing is the power cut, the shutdowns.

Okay. And with respect to the pull forward of a handful of the wells in 2022 -- or I'm sorry, from 2020 to 2021, it doesn't sound like there's a capital impact to that. Is there any kind of a pull forward of production? Or is it, at the end of the day, pretty immaterial given the time frames that you're shifting here?

Yes, it's relatively immaterial. 2022 is pretty much as it was. It's just moving around some completion timing, it's just really what it is, fewer in the very start of the year and more in the second quarter, but not materially impacting 2022.

Okay. And then with respect to your, obviously, guidance this year, that hasn't changed. And we all know first quarter is pretty rough for everybody. And 2Q looks like things are starting to get back to normalized, but a little bit -- maybe a little bit of a delayed completion stuff getting impacted to that. But when you look at the balance of making -- when you look at your guidance in the back half of this year and the second half, I mean do you feel pretty confident yet that in your targets? Is there enough, I guess, cushion in there? Or should we think about you all tending maybe to the lower half at this point of the production range?

Yes, Scott, when I look at it, it looks very, very similar to -- in terms of what we can do in 2021 and 2022. It moves 100,000 barrels here or there per quarter, but it's not that material and well within our ability to forecast.

Okay. Yes, I guess my -- the point I was making, like it is -- is there sort of a quarter or 2 in the back half of the year where you kind of make up for some of the stuff you all lost in the front half of the year?

I've had -- no, not really. It's not like there's often the big silver bullet quarter that cures what happened in the first quarter. It just kind of comes along as the completions come online.

I would now like to hand the call back over to Herb Vogel, CEO, for closing remarks.

Okay. Well, thank you all for your interest in SM Energy. And thank you to all our employees, particularly for outstanding ESG performance during 2020 and through the events in 2021. Thanks again.

This concludes today's conference. You may now disconnect.