SM Energy Co (SM) (Q1 2024) Earnings Call Transcript Highlights: Strategic Moves and Financial ...

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Sat, May 4, 2024, 1:09 AM 4 min read

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Release Date: May 03, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

SM Energy Co (NYSE:SM) is actively pursuing operational efficiencies, including increased substitution of natural gas for diesel, which also reduces emissions.
The company is experiencing significant free cash flow, allowing for potential accelerated share buybacks beyond the current authorization.
SM Energy Co (NYSE:SM) is leveraging existing central production facilities, which avoids the need for capital into new facilities and enhances cost efficiency.
The company is seeing productivity from its Klondike acreage with promising initial drilling results and further development planned.
SM Energy Co (NYSE:SM) is benefiting from reduced service costs due to lower rig and frac-spread counts, allowing for rebidding of services at potentially lower rates.

Negative Points

There is uncertainty about future buyback programs after the current authorization is completed, as indicated by the CFO with no guarantees of continuation.
Production is expected to be flat in the third quarter, which may concern investors looking for growth.
The company faces risks associated with the execution of its drill-to-earn agreement in South Texas, with specific deal terms remaining confidential.
While operational efficiencies are being pursued, the full impact and sustainability of these efficiencies remain to be seen as they are still being integrated.
There is a dependency on commodity prices for the financial strategy, which could pose a risk if there is a downturn in market conditions.

Q & A Highlights

Q: Can you discuss the pace of the buyback program and the potential for accelerating the buybacks given the current commodity prices and free cash flow? A: Wade Pursell, CFO of SM Energy, noted that while the guidance assumes a ratable pace for buybacks, the actual pace could accelerate if commodity prices remain high, generating more free cash flow. He also mentioned that the board might consider continuing the buyback program after the current authorization is completed, though no guarantees were made.

Q: What are the production expectations for the upcoming quarters, particularly the third and fourth quarters? A: Wade Pursell explained that production is expected to be flattish in Q3 with a step-up in Q4, potentially exiting the year with oil production in the mid-70s. This follows an acceleration in production that was higher than previously guided for Q2.

Q: Could you provide details on the developments at the Klondike acreage, including the science work and expected results? A: Herb Vogel, CEO of SM Energy, shared excitement about the Klondike acreage, mentioning that four wells are currently being completed. He highlighted extensive scientific studies conducted, including a vertical pilot hole for better assessment of the intervals. Results from these efforts are expected to be shared in the third quarter.

Q: What is the strategy behind the South Texas drill-to-earn program? A: Herb Vogel explained that the drill-to-earn program involves drilling wells to earn a 50% working interest in approximately 16,000 acres. He noted that the specifics of the agreement are confidential but confirmed that the arrangement was included in the year's budget planning.

Q: Can you discuss the operational efficiencies achieved in Q1 and how they are incorporated into future plans? A: Herb Vogel detailed various efficiency improvements, including increased substitution of natural gas for diesel in operations and the use of existing production facilities to avoid new capital expenditures. These efficiencies are already factored into the guidance, reflecting the company's confidence in sustaining these improvements.

Q: What are the implications of the stacked pay opportunities at the Briscoe pad, and how might this influence the location count and resource estimation? A: Wade Pursell addressed the potential of the Briscoe pad, noting that while the test results are promising, they do not represent a significant departure from previous operations. The wells demonstrated high productivity and oil richness, which are encouraging for the economic viability of the area.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.

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