Just start up. So it's my pleasure to have SM Energy up here. SM is focused in both the Permian Basin on the Midland Side, as well as the Eagle Ford Shale. It's my pleasure to introduce Wade Pursell, the CFO, who has been here many times. We welcome him back, and I will pass the baton to Wade, who's gonna walk through a presentation, then we'll follow up with some questions.
Thank you, Gregg. Good morning, everyone, and I trust you all had a wonderful Thanksgiving. I know I'm very thankful to be in this beautiful, sunny, warm Florida climate. Thank you, Gregg. Thank you to BAML for inviting us. And thank you all for being here this morning and showing an interest in SM Energy. I'll take you through that. I always like to start with this slide. I always like to summarize it as I'm not a prophet, but I probably will make some forward-looking statements, so just, I guess, take that with a grain of salt. That is kind of culturally, I will say, how we look at the future. We look at it very humbly, and I would advise you all to do the same. So just two words for you today.
If you come out of this meeting remembering two words, if somebody says, "What's SM Energy all about?" Say sustainable and repeatable. Sustainable and repeatable. So why do I say that? Well, sustainable. Think of that as the execution side of our business. Critical, critical. That's the delivering the results annually, quarterly, monthly, daily, hourly. Execution. That's the premier operator of top-tier assets, delivering a sustainable return of capital. The inventory is really top tier, and we say premier operator top-tier assets, and it's got a lot of legs, 10-13 years, but that's not eternal. So repeatable, very important. And the repeatable is having the world-class technical team and the strong balance sheet that empowers our ability to repeat that success by adding inventory life.
The company's been around since 1908, so we've definitely demonstrated repeatability through the years, decades, and, yes, century. So that'll be the outline that I'll go through real quick. I'll kinda talk about premier operator and top-tier assets. I'll give you an update on the return of capital, look at the strong balance sheet, a couple of words about the world-class technical team and inventory, and then I'll close it there. So where are the assets? One word, Texas. Midland Basin, 111,000 net acres. That number has actually grown this year by 35%. Not a small number. It's grown by 35%. And then down south in South Texas, where the Austin Chalk is the big story.
In the Midland Basin, we're running four rigs, one to two completion crews, and we're running a couple of rigs in South Texas, zero to one completion crews. So premier operator of top-tier assets. Show you a couple of slides, giving you some nice third-party evidence of that. In this chart, I'll point you to the chart on the left. This is some data from a research analyst at TD Cowen, and what he did was he just put together some history looking at production per foot, production by foot, and then looking at it by year. And you can see, SM Energy is number one, numero uno, as he calls it, compared to the other peers in the area. And then the chart on the right looks at oil EURs.
This is from Enverus, and you can see we're number one in the category of highest oil EURs in the basin as well. It's not just about oil EURs for the sake of high oil EURs, it's also capital efficient, which is important. The chart on the left shows that, again, Enverus data, where they look at the lowest capital per EUR, and we're in the top four in that category as well. On the completion side, very efficient, very capital efficient. This is some Rystad data, I believe, and you can see we rank number two in amount of proppant pumped every day. Very, very speedy, very efficient pumping proppant as well. This is an interesting slide.
So, this is some data put together, I believe, by J.P. Morgan, showing our cumulative production by year, and this is really in response to some data, some reports you may have seen earlier this year about how in the Midland Basin, how even in Howard County, you're seeing degradation from year to year, and that is happening with some operators. I would say the operators that have chosen to drill the best stuff first. What this shows you is, that's not the case for us. If you look, every line on this chart is a different year, and you don't see consistent degradation. You see a pretty tight band and kind of a bouncing back and forth. The current year is actually the highest line on that chart. And why is that? Well, it's because we've been saying this all along.
Since the beginning, we co-develop multiple zones throughout. Very, very focused on individual DSUs, very focused on the returns of every single well. So it may be boring, but you get the same similar results every year, and you're gonna continue to see similar results every year as we move along. So a quick chart on the Midland Basin, just updating real quick, and then I'll do one on South Texas. In Midland Basin, one more performance chart. This actually shows, and this is more Enverus data.
They've actually looked at every well in Howard County since the beginning of 2021 through, I believe, July of this year, and looked at the average production performance by well, and you see the average for us is 34% better than the average of all the other operators in Howard County combined. So great, great, great performance over a long period of time here. I did mention earlier that we've grown the acreage inventory this year by adding 20,000 net acres. It's the biggest example up in North Martin and Dawson County. This is a very nice bolt-on acquisition for us, which will be, we've got a rig there now, and we'll be spending, I believe, four wells focused on the Dean in December.
We have that rig locked up for six months, and we'll be deciding as we move into 2024 and set the plan, if we'd like to extend that or what to do going forward. But very excited about some new acreage there. And then recently announced in the third quarter, the asset exchange in Sweetie Peck, basically just, we do a lot of these as you move through time, and you just don't hear about them. You heard about this one because there were some cash components that needed to be explained in our guidance. But we basically took these nine DUCs from 42% working interest up to 100%. That should really benefit first quarter production as we move into 2024. In South Texas, more of the same.
The Austin Chalk continues to prove that it's just a world-class asset. We said very early on that we felt like we had at least 400 locations here, and we believe even strongly, even stronger, that fact now. Last quarter, we announced, I think... Well, this is 30 wells this year that have reached their peak IP30. Very similar returns to the ones before that. I think we're up close to 100 now, 98 wells in the Austin Chalk. You can see the stats on these averaging 1,900 barrels a day. Great wells. As you can also see in the map, that they're pretty spread out through the acreage.
The acreage is very different, characteristic, commodity mix-wise, as you go from west to south to east, and up in the west-north, it's oilier, and that's what we've color-coded that as green. So if you look at the chart on the right, you see the cum production plot of those wells, and then as you move to the east, they're more liquids rich, and you can see how those plot out. The important point of that chart to the right is that, obviously, the oil wells are higher price. They benefit from the higher oil price, but the liquids-rich gas wells benefit from the higher rate. So at the end of the day, the returns are actually pretty similar, pretty similar. One last slide on premier operator.
We've always said you can't be a premier operator unless you're a top-tier ESG performer. This is a recent example of our operations surveillance room, which we were able to open in the third quarter. This is just a great example of collaboration among the different technical disciplines in the company, from production operations to advanced analytics, to IT, to facilities, to office management. This 24/7, 365 monitoring, you can imagine the benefit of this, the efficiencies we gain, first of all, on the cost side, of being able to early detect things, monitor things real-time, but then also respond quickly to issues, and that includes ESG-type issues. So very excited about this.
And another example, I think, of being a premier operator. Okay, so that premier operator of top-tier assets, generating the sustainable return of capital. You know, we announced a dividend increase in the third quarter, increased it 20% to $0.18. That'll begin in the first quarter of 2024. And we've just continued to move along on our stock buyback that we began a little over a year ago. We committed to $500 million. We've done it in a very methodical fashion. We're already over halfway completed with that. We've reduced the share count by 6%, and we'll just continue on that path and probably finish sometime in 2024. But that's been very important to us and been very well received.
So I think this is a good slide that kinda shows what's been going on and maybe with what... If you're thinking about how we're gonna allocate capital in the future, we, we're generating a lot of free cash flow, which is fantastic. And you're gonna see us very focused on really generally three buckets, and that is driving lower leverage, maintaining lower leverage, and then returning a sustainable yield to the shareholders, and then opportunistically replenishing inventory. And that's never gonna be the exact same as you move along year to year to year, but it is going to be a balance.
What you see here is, in 2022, we were really focused on driving that lower leverage down to the level that we felt would be a strong, sustainable level. So you see the blue slice, most of our capital, 55%, or most of our free cash flow, was allocated to leverage reduction, and we got that to a place that we're really comfortable with, and you saw, you know, kind of a swing over to returning capital to shareholders this year. But I think you'll see that balanced approach going forward. You'll always see us focused on maintaining that lower leverage, but then you'll see us returning a predictable yield to shareholders and then opportunistically adding inventory when we can. That's the balance sheet.
You're probably all very familiar with it. 0.7x debt to EBITDA, $1.2 billion of net debt. I really like those goalposts of one and one, just kind of as guides, being below one times, being near $1 billion of net debt. Our absolute debt is higher. We have a lot of cash on the balance sheet, $400 million. I think in a normal world, we probably would have taken those 25 outs by now and had absolute debt down at that level. This is not a very normal world, where I'm investing cash at a rate similar to the coupon on my long-term unsecured debt. That doesn't feel very normal, but it gives us flexibility to be patient, and we'll take those out sometime as we move into probably later 2024.
You can see the maturity stack, they're staggered out nicely. And we'll just move to the right. The rating agencies have been very helpful lately. All three of them have been upgrading the debt this year. A lot of liquidity, of course, with the $400 million of cash and the undrawn revolver, over $1.6 billion of liquidity. Strong balance sheet, also world-class technical team. I think this is an area that SM probably punches above its weight. That was pointed out in this recent research piece by J.P. Morgan, with a technical team that looks more like a large cap, to be honest, especially in the geoscience area.
And this is a focus of SM, having technical expertise in geo area, also the engineering area, also the production area, has allowed us in the past to put us in the basins that we're in and the top-tier assets that we're in. Whether it was Howard County back in 2016, when we made that large acquisition, which was considered kind of off the map by all the experts, all the way to the Austin Chalk, which has been another fantastic top-tier asset, that there was a lot of skepticism, probably still is some, just based on the history of the old Austin Chalk, your grandfather's Austin Chalk, which is obviously very different than this Austin Chalk.
So we believe that that team, trust the team, trust the process, will be able to, repeat that success as we move forward. Fortunately, we don't have to do anything too soon. The inventory we have now is 10-13 years of life at the current pace. Very high quality inventory. That inventory generates over 60% returns at $65 and $3.25 gas, I believe. So a very high quality, very engineered inventory, by, by location. Most of it's in our 3P reserve deck. So that's where I'll end it. I'll just, you know... Again, the two words you need to remember are sustainable and repeatable.
Sustainable is all about great execution, premier operator, top-tier assets, sustainable return of capital, and then the ability to repeat that success due to the technical expertise, the world-class technical team, and the strong balance sheet. That's all I got, Gregg.
So thank you for that overview. Very helpful to set the table for this discussion, and answer a number of questions we had to begin with. But you talked about the cash balance, keeping that in place for... How do you see implementing, how do you talk about your shareholder strategy, your shareholder return strategy? You pointed out the dividends and share buyback.
Mm-hmm.
But how do you think about that today, and going forward, and versus M&A or, or growth?
Yeah. Great question, and I think that the slide we've added to the deck is helpful to show kind of how we've been allocating capital, how we've been allocating free cash flow. When we look ahead, the current plan shows us generating, continuing to generate a lot of free cash flow. So there will be a balance between, as I mentioned, always prioritizing the balance sheet and the leverage levels. And at these leverage levels, we generate a lot of free cash, obviously in excess of that. We've established, you know, first and foremost, for the shareholders, a fixed dividend. We think that's really, really important, something you can count on, and something that's sustainable. We put...
I'll remind you that a year ago, when we established it, we said we were establishing at a level that we were very comfortable with, even at lower commodity prices. We pretty much run everything at $60 and $3, and we established it at a level that we thought we'd be able to grow, hopefully, as we move forward, if the commodity price dictates free cash flow generation, and that's what we were able to do this year, 20% increase to that. So that's kind of our, that's kind of our foundation for the shareholders, is that fixed dividend.
And then as we move along, and look at our plan and look at the free cash flow we're gonna generate, beyond, beyond the low leverage area, beyond the inventory opportunities, those we can never predict exactly when those are going to happen. Fortunately, we've been able to do some of that this year in a modest way, you know, in the $90 million area, but then that leaves a lot of free cash flow left over. So that's where we'll look at, you know, stock buybacks periodically, is probably our primary way of using excess free cash flow to return to shareholders beyond those areas.
And then reinvesting in the business more than you planned, how does that change? What-
Yeah.
What are the drivers of that?
Yeah. So, you know, we're very disciplined about adding inventory, whether it's through A&D or whether it's potentially through M&A. We absolutely get the benefits of scale. I say that more from an investment standpoint. Operationally, you saw the third-party evidence that we really are, you know, kind of a premier operator. So there's... We're getting the benefits of scale enough on the operation side, but we get the investability multiples, how the stocks trade, those things. So we look hard at M&A, but it is a very disciplined approach. It's the same that we've been repeating for the past years.
You know, the assets have to, they have to make sense. They have to be of similar quality to our assets. There has to be some industrial logic, putting the companies together, synergies, et cetera, and assets together. Has to be accretive, of course, and it can't be a big step backwards on the strength of the balance sheet. So given those criteria, you know, we try to stay very disciplined to those criteria. I-
Well, you have a large cash balance. Clearly, you could buy something with that. Yet you're being disciplined.
Mm-hmm.
And then you have this inventory that earns 65% returns that-
Right.
Right? So I appreciate the industry is being disciplined.
Yeah.
But at some point, one would say, logically, "Hey, I could, rather than keep that cash, I should grow more.
Mm-hmm.
Yet, we all know what's happened in the last few years, so I would be shocked if you grew materially. But what, when do you say, look, the M&A picture is, I can't buy things the way I want to?
Right.
I have this inventory. We should increase our spending and grow more.
Yeah.
Is that something you even think about? Is it just there's no way, who say, to consider the sectors, people are being very disciplined. Help me think through that.
Yeah, I would say we think about everything. I will remind you that the acquisition we made this year, we decided to put a rig on that acreage, and it's coming on right now without a reduction. So it's going to result in some growth next year, modest growth. We think that's the right place. We focus most on, you know, putting a capital program together that maximizes free cash flow and returns. The question of growth, we don't believe we would get paid that much to grow, and inventory has a defined amount of life.
While we think 10-13 years is fantastic, and it is, we haven't been compelled to accelerate that beyond what we're doing. But it's, you know, it's a valid question. It's a valid question, so.
I think you said right now, I think on your earnings call, you said you're growing... I think it's low single digits oil next year. That's the-
Yeah.
You're planning on growing low single-digit oil next year.
When?
I think next year. I think you said that on your earnings call. Low single-digit oil growth next year. Do you expect to have low single-digit oil growth next year?
Yeah, that's, that's kind of where we are right now. We're still putting the plan together, but it is kind of a mid, a mid-single digit growth.
You mentioned consolidation, scale, and your multiple is you're trading at discount to some of the larger guys out there. Clearly, there's been a lot of consolidation this year.
Mm-hmm.
You've done some things, but not to the scale that others have.
Yeah.
Does what's happened in the last year change your outlook a little bit? Is or is it still the same? And what I mean by that is, are you more likely to sell yourself? Are you more likely to do a larger deal?
Mm-hmm.
Anything you could add there would be interesting to me.
I would say no. I would say no real change. I mean, I think the staying discipline is really important, and trusting the process, trusting the technical team, executing on what we have, delivering results along the way, and looking at all of those opportunities, being, we like to say, being very persistent, but patient. And there, there's zero doubt in my mind that that will pay off, so.
I think with this, the obligatory question, inflation, deflation, what are you seeing?
Yeah.
Could you tell us a little bit about that?
Yeah, I mean, that's a great question right now. We're looking at that very closely. I think we mentioned on the call, and it holds true, that we've seen some deflation in recent months. We've seen deflation in steel and in diesel. The last rig contract that we brought on for this new acreage was at a rate lower than the previous rates. Haven't really seen much in the completion side, but monitoring that really closely as we move into next year. I think consensus is 5% deflation. I think we're all trying to get our arms around that right now. It's just gonna depend on activity.
Is activity really going to increase here? I think the jury is definitely out on that, given the pullback in commodities. If that doesn't happen, hard for me to imagine not seeing some deflation. So we're continuing to monitor, but that's kind of what we've seen so far.
You say you haven't seen much on the completion side. That's different than what I'm hearing from some other operators.
Okay.
What is it about your contracts or your relationship with your providers that-
Well, we just haven't locked in any deflated rates that I can report at this point. We've been setting up the plan and getting access to all of our providers, but I can't report yet any deflation in those rates.
No one's saying significant. I'm just hearing on the margin, but-
Yeah
... people are contracting lower, but it all depends on how they're approaching it and if they're running a fleet consistently, I think. So, your inventory, you talked quite a bit about it. You've done a nice job adding in South Texas and then some opportunities to M&A. It—when you think about that 10-13 years-
Mm-hmm.
How could that expand organically? And then, you know, what's the risk that 10-13 years is overstated? How do you get confidence that your engineers are giving you the information that you need to be confident in that number?
Yeah, I mean, it's, you know, I can't point you to specific... Again, we're talking about the future, but I know how the team operates, and the ability to identify bolt-on, whether it's exchanges, whether it's modest-sized acquisitions like the one we did this year, or whether it's something larger, like the Austin Chalk was organic, and that was really, really large. The faith we have in this team, based on the past, is still holds very true for the future. And I, you know, whether we have the ability to organically replace what we're producing every year or what we're drilling every year, that's never gonna be a perfect line.
And along the way, I think we'll do something larger, but it'll come, you know, at the right time with the right discipline.
... The Austin Chalk, you mentioned earlier, you said you had identified 400 locations early on.
Mm-hmm.
The conference has grown. Why wouldn't, if your conference has grown, why wouldn't the number potentially go up in terms of having more locations than 400?
Oh, in the Austin Chalk?
Yeah.
I, you know, we haven't updated that number recently. I'm not saying it couldn't.
It's sort of a, maybe a, after the fourth quarter-
Mm-hmm.
Probably update that.
Yeah, we update it annually.
Looking out for any questions. I think, just hedge... Yeah.
Just playing on to that, the acres you acquired in Austin, where you said, you said you're gonna target the Dean. Maybe just some commentary around what gave you guys confidence to move up to that area. You know, any offset operators who've had activity or anything that you learned on the engineering side to gain more confidence to, you know, move that part of the base?
Mm-hmm.
Yeah, so.
Yeah, a lot of technical work. From an offset operator standpoint, I believe, get this wrong, is it EOG that's in the area? So there were some other real data from some wells that had been drilled that gave us some confidence. And you know, we know that whole area so well. We've mapped the whole area, you know, over the last decade. Just a ton of work, you know, that was done that gave us confidence in making the move up there, so.
Do you think there's more zones, more zones?
Hopefully. Hopefully, we're very excited about the Dean. You know, we typically don't give a lot of credit to other zones in coming up with how much we're willing to pay. I'm not gonna say that area is like the other areas that have a lot of stack pay. We don't think that, but we do think there's potential, but we're most excited about the Dean. Yeah.
You mentioned at some point, maybe you'd do something bigger on the M&A side, when it makes sense. When you look at the opportunity set out there versus, say, six months ago, do you think there's more opportunities for M&A or less? As maybe a-
More than when?
More than six months ago.
More than six months ago? I don't know.
It's been busy over here, and we wonder, like-
Then-
Can this keep going?
Yeah, I mean-
Um, and-
It's... That's hard to say. I'm certainly... there's no sense that, "Wow, we got to do something now because the opportunities are just gonna all go away." That is not, that is not the case at all. Whether there's more now than six months ago? Probably, there might be less, but would we have been willing to pay what it would have taken six months ago in the things that we looked at? Yeah, there's no, there's no regrets at all, and there will, there will continue to be opportunities.
There's one here, the purgatory hedging question.
Uh-huh.
What's your focus? Share with the crowd, your philosophy. Obviously, your leverage is down, so you don't have to hedge as much, but just talk to... Just tell us your philosophy.
Philosophy, yeah. Yeah, no, our philosophy hasn't changed. We absolutely are very disciplined about hedging, and we do it methodically. We're not agnostic to the price. We kind of have a. We know the prices in our plan. We know, you know, the prices that'll be assumed by the banks and the borrowing base, things like that. But we kind of strategically set percentages based on how much leverage we have, and as you say, with the lower leverage, we've kind of zeroed in on kind of a 25%-30% area for oil and gas as we enter a year, and that's exactly what we're doing. We don't hedge too far out unless we get a curve that's flipped up the other way, which is gas.
So we have been hedging more of gas, just starting to put in layers, when you get out in 2025, 'cause $4 seems like a really good number to me. On the oil side, really, really been focused on the upcoming year with starting to sliver some in 2025. Still just using swaps and costless collars exclusively, nothing too exotic.
So this is my last question, and this. The answer to this, I'm interested to see if you agree or have an answer to this. So look, there's a—we're gonna have Venture Global up here next. They have magnificent plans to grow their liquefaction capacity, and there could arguably be at some point in the second half of this decade, a larger call on natural gas, potentially coming from some other basins, and you're obviously in South Texas.
Yeah.
Do you, when you think about M&A, do you think, well, maybe everyone's valuing oil at a certain level, but they're underestimating potentially where gas can be?
Yeah.
And is that something that's floated around at the board level? Is it things that you guys are thinking about? It takes a forward-looking view on where gas could be, which historically, oil companies have not been as comfortable with that.
It's definitely something that we think about and include in our thinking. I'll take you back to my second slide, though. We're very humble about assuming any price in the future beyond kind of where it might be trading, especially when it comes to making acquisition decisions. We like having natural gas in our commodity mix, and we have a huge option on gas in South Texas. As far as adding inventory in the future, I'd be lying if I said oil was not our focus. It is our focus, but we don't ignore the potential for natural gas and natural gas liquids.
Great. Well, we're out of time. I'd like to thank our speaker and, and appreciate you coming here, Wade. Thanks a lot.
Thanks, Gregg. Thank you.