Good morning and welcome to the SM Energy acquisition of Uinta Basin Assets investor call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Jennifer Samuels, VP Investor Relations and ESG Stewardship. Thank you. You may begin.
Good morning and thank you for joining us to learn more about today's announcement that SM Energy has entered an agreement to acquire 80% of the assets of XCL Resources. Please go to our website at SM Energy dot com to view the accompanying slide deck. Our President and CEO, Herb Vogel, and EVP and CFO, Wade Pursell, will give a brief overview of the slide presentation, and then we will move into the questions from our listeners. Before we get started, I will direct you to Slides 2 and 21, as well as the risk factors section of our most recently filed 10-K. In our discussion today, we will make forward-looking statements and refer to non-GAAP measures. These pages describe forward-looking statements and risks associated with forward-looking statements that could cause actual results to differ, as well as definitions of non-GAAP measures and discussion of forward-looking non-GAAP measures.
With that, I will turn it over to Herb to start our presentation. Herb.
Thanks, Jennifer. Good morning and thank you all for joining us. I'll start off by saying that we are truly excited to announce the transaction, which is summarized on slide 3. We have executed agreements to acquire 80% of XCL Resources for $2 billion net to SM, and Northern Oil and Gas is purchasing the remaining 20%. The assets are located in the core over-pressured oil window of the Uinta Basin in Utah. We have agreed to purchase these assets with cash while maintaining a strong balance sheet. We've been really patient and persistent in identifying the right transaction, and I'm very pleased to say that this checks all the boxes and meets all of SM's strategic objectives. Turning now to Slide 4, which describes how this value-driven acquisition meets all of SM Energy's strategic objectives.
I won't read the slide to you, but the key takeaways from today's call are that this acquisition adds substantial scale that increases SM Energy pro forma production to around 195,000 bbls equivalent per day by 2025, and will increase our projected oil production by approximately 45% versus a standalone case, resulting in an oil mix greater than 50%. We're adding more top-tier assets, including an estimated 390 net drilling locations normalized to 10,000-ft laterals, extending our inventory life by two years. We've identified development potential across as many as 17 benches within nearly 4,000 ft of hydrocarbon column, which ranks among the largest over-pressured hydrocarbon columns in U.S. producing basins. This significantly increases EBITDA while reducing our reinvestment ratio, driving greater capital efficiency and free cash flow generation for our stockholders.
We're able to conclude this deal with total debt at a manageable leverage level that we can pay down rapidly while simultaneously growing our return of capital, starting with an 11% increase in the quarterly dividend from $0.18-$0.20 cents per share and reloading our share repurchase authorization back up to $500 million. A really exciting benefit of this transaction is that our differential technical team has identified assets that immediately compete for capital with both our Midland Basin and South Texas assets while providing geologic upside and at a purchase price equal to a 2.9x EBITDA multiple. As indicated in the slide, after normalizing out the PDP, that amounts to approximately $1.4 million per undeveloped location. We believe this enables true value creation for our stockholders. Slide 5 summarizes the four key points and transaction highlights.
The following slides cover all these points in more detail, and I'll try to hit the highlights so that we have ample time for Q&A. Key point number one is about expanding our top-tier portfolio. Moving to Slide 6 to cover the significant oil production increase, margin expansion, and lower reinvestment ratio. The acquisition is highly accretive to all financial metrics, which is largely due to significant growth in oil production, a better operating margin, as well as comparable DC&E costs. These assets deliver high oil content at 88% per BOE. The oil is of high quality with an API gravity ranging between 36-43 degrees. We also understand that the waxy nature is in high demand by refiners and upper-end lubricant markets. LOE runs slightly less than the Midland Basin, largely due to less water handling.
Put all those together, and we will be able to deliver strong margin per BOE. Drill, complete, and equip costs in total are similar to Midland and the South Texas Austin Chalk in the low $800 per lateral foot range. While EBITDA grows, our projected reinvestment rate also decreases, driving even greater free cash flow generation. As you'd expect, as a result of all that I just mentioned, the economics of Uinta development are comparable to the Midland Basin. Turning now to Slide 7, which highlights Uinta upper and lower cube oil well production performance. On the top, we compare Uinta performance from both the lower and upper cube sections to SM average wells in other basins that we show you regularly. In the lower chart, we compare the average cums from top basins in the industry, and again, you can see how well Uinta oil production performance compares.
These charts all show oil curves normalized to 10,000-ft laterals. Peers in the Uinta Basin have highlighted the comparability of economics to the best basins, and we have to say that we concur with them. Turning to Slide 8 and the quality of SM Energy's undeveloped drilling inventory after this transaction closes. We start by highlighting that this transaction, together with others over the past year, adds more than 75,000 net acres to our portfolio. Our team has initially identified around 390 locations net to SM from the XCL assets. These high-quality, low-breakeven locations just in the lower and upper cubes, combined with SM's existing inventory, support average returns around 70% and add around two years to our existing inventory. These assets have further upside as do our recent acquisitions in Klondike, near Sweetie Peck, and in the Austin Chalk.
Key point number two is about significant resource upside driven by SM Energy technical expertise, and I'll briefly touch on this in the next three slides. Slide 9 drills into more detail about the XCL Uinta Basin asset and how it plays to our core technical strength in the company, our ability to optimize development of stacked pay in unconventional resource plays. Here you can see that there are independent upper and lower cubes, which have been shown to be amenable to co-development. We also see upside potential in the six deeper horizons shown. The reservoir pressure map is shown because many of you know that better well- performance is achieved by over-pressured plays.
The takeaway message from this slide: we see nearly 4,000 ft of stacked pay across as many as 17 benches in the core of the core over-pressured oil window of the Uinta that underpins further potential upside. We value the acquisition on the lower and upper cubes only. Slide 10 compares the Uinta to other top resource plays in the U.S. What stands out immediately is simply how much oil is in place relative to other top basins. Stacked pay like this leads to excellent economics and the well performance that I showed you earlier in Slide 7. The bullets on this slide are simply to share with you some key characteristics of this basin and the delineation and de-risking that has already taken place.
Slide 11 is the logical follow-on to the previous slide, showing the oil EUR per 1,000 ft in well-known intervals across some of the best resource plays in the U.S. We also show the oil percentage of the production in each of those plays so that you can see that the Uinta has the highest oil percentage of all. We point out in the bullets on the right that when looking at well economics, the Uinta is advantaged with lower DC&E costs than the highest oil EUR play. I'll now turn it to Wade to speak to key points number three and four, which are return of capital and maintaining a strong balance sheet. Wade.
Thanks, Herb. Good morning, everyone. So our third key message point is increase in free cash flow and return of capital. That's on Slide 12. This transaction is accretive to all key financial metrics, including NAV. Illustrated here at current commodity prices, $78 oil and $3.25 gas flat, we would expect to see significant growth in EBITDA and free cash flow and, in turn, the ability to reduce net leverage below 1x as soon as the middle of next year, 2025. This is a perfect segue to key point number four, which is on Slide 13. Again, we're using all cash to complete the transaction while maintaining a strong balance sheet. Slide 13 summarizes our financing and liquidity. We intend to finance the transaction by employing cash on hand plus debt, including our revolving line of credit and a $1.2 billion, 364-day senior unsecured bridge facility.
Given the free cash flow generation, this accretive acquisition is the right size for us to purchase with cash while being able to return net leverage to sub-1x quickly and to increase shareholder returns. I'll now turn it back to Herb, skipping ahead to Slide 15 to summarize and conclude. Herb.
Thanks, Wade. This transaction meets all of SM's strategic objectives. It expands our top-tier portfolio with similar quality assets that compete for capital and provide extended runway. It applies our differential of technical expertise to drive organic value creation through further resource upside potential. It's accretive to all key financial metrics, and we're able to use cash, protecting shareholders from dilution while also increasing return of capital to shareholders and maintaining our strong balance sheet. I hope you're all as excited about this as I am, and I'll now turn it back to Daryl to take the first question.
Thank you. We will now be conducting a question- and- answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. We ask that you please limit yourself to one question and one follow-up question. One moment, please, while we poll for your questions. Our first questions come from the line of Zach Parham with JP Morgan. Please proceed with your questions.
Thanks for taking my question. First, just wanted to ask a little bit about the expected production profile on the XCL assets and your legacy assets in 2025. I see the pro forma guidance of about 100,000 bbls a day of oil. You acquired 38,000 a day with the deal. Assuming you're holding XCL flat, that would indicate around a 10% decline in your legacy oil volumes. Is my math right there? Could you just give us a little color about how you think about oil from here?
Zach, this is Herb. Yeah, that's a rough number for 2025. And so as we get into this on what the rig program looks like through 2025, we'll sort that out. And really, when we get into the full budget for 2025, we'll really line that out of how many rigs, how many fracs are running in each of the areas. We know at the start that we'll be running nine rigs in the fourth quarter between the three rigs that are currently there and the six rigs that we have. And then as some of those rig contracts expire, we'll roll off and sort out the full program for 2025 and beyond. We do anticipate the total rig count being lower than what it is at day one after close here.
Exciting thing is the optionality between the basins. The returns are so similar.
Got it. Thanks. That makes sense. And then just another question on Uinta. Can you give us a little more color on your takeaway portfolio and your expected realizations for Uinta oil and kind of how that compares to the legacy portfolio?
Yeah, Zach, I'll direct you to the appendix in the slide deck, and it does a real nice job of side by side putting the three basins together. And you'll see the margin at the bottom and then the total. It's Slide 20. But you can see that the cash production margin per BOE in the Midland Basin is $47.90 or $80. $23 in South Texas and the Uinta is over $50. So altogether for the company, that's over $37. And that's at the price deck shown there.
Got it. Thanks, Herb. Thanks, Wade.
Yep. Thanks, Zach.
Thank you. Our next questions come from the line of Oliver Huang with TPH & Co. Please proceed with your questions.
Good morning, all, and thanks for taking my questions. Maybe just to start off on the inventory side, I know you all mentioned 17 benches potentially in the prepared remarks. But as you kind of think about the acquired assets and the inventory that you all have underwritten with the deal this morning, are you able to kind of speak to the density that you all are planning to drill down the entire vertical stack? It looks like you all are probably underwriting something closer to 18-20 based on some simple acreage math, but also maybe just any sort of color in terms of how much or what the split of locations for the Uteland Butte is versus some of the other zones that might be a little bit more secondary in nature.
Yeah, Oliver, I think you probably want to check your math because there's quite a bit of undeveloped acreage here. And remember that the 37,000 is the 80% that we have, which is a portion that XCL's net, and then there's a gross number overall. So you just have to go through your math there. The Uteland Butte is where the most PDPs are, and there's about a quarter of the existing PDPs are in the Uteland Butte. But already drilled, and this is not going into some of the deep, but just in the upper and lower cube, you have 10 of those benches that have test wells, at least 1 in, and several that have probably six that have over 10 wells each in them. So it is quite de-risked when you look at it. And that's only on the XCL acreage.
If you go off to neighboring acreage, there's even more. So the amount of de-risking that's been done and the continuity of the play with the rock that we're talking about here really shows what a high-quality basin this is. I didn't mention earlier, but also just the quality of the oil. There's no sulfur in this oil, and it's really low in terms of metals. So it's a really attractive oil. It is waxy, and that actually is, as you look forward with lubricant markets, that is an attractive aspect of it also. So from a strategic perspective, that's a great fit.
Okay, perfect. That's helpful color. And maybe just as a follow-up, just kind of looking at the Uinta asset in itself, I know you all provide some color around expected Q3 volumes. Just any color on the expected PDP decline on the Uinta asset specifically. It just looks like there's been a decent amount of growth from an XCL perspective over the past couple of years there.
Well, yeah, Oliver, so clearly they've ramped up the rig count, and for the last two years, the production rate has increased significantly. So you'd expect a somewhat faster decline than our existing assets that have had the same rig count for five plus years until we started delineating in Klondike. So yeah, you would expect a little bit steeper PDP count. But the other aspect is there's a lot of work in progress right now, and those will be brought on, and that will mitigate that decline when you look at 2025 and beyond.
Okay, perfect. Thanks for the time.
You bet.
Thank you. Our next questions come from the line of Neil Dingmann with Truist Securities. Please proceed with your questions.
Morning, all. Congrats on the deal. Just maybe a follow-up first on takeaway. I know you have some opportunities for some exciting growth in the new play, and I'm just wondering, could you talk about when it comes to gathering and takeaway and refining all that stuff in the area, is there ample takeaway to accompany any sort of growth that you all may or may not have in the coming years in the new play?
Yeah, Neil, there is. We looked at that real closely between the trucking, the Salt Lake refineries, and there's five of those, and then the primarily Price River terminals, which is an ETC-operated asset, and they've increased the capacity, and I expect them to continue to increase it as the upstream requires. So we don't see an issue on the takeaway side at all.
Okay. And then just one last one. You guys have done. I looked at your old slide. Prior to even this deal, the operational efficiencies continue to sort of speak for themselves. Will you include those in sort of? I know you've talked about the synergies. There's a lot of other potential savings. But I just look at even the efficiencies and things you all might with the three rigs and various other areas. Is that something that once you get your hands behind this, you'll give us a better update on at that time? Or when can we have an idea of kind of operationally, maybe what type of upside you might see in addition to the synergies, G&A, all that sort of thing?
Yeah. So there are a lot of dimensions of potential upside here, and we have not baked them into the acquisition cost at all. So if you just look through the areas that XCL was pursuing, it's a long list, and we've got high confidence that a lot of those will come to pass. So there's the cost side. There are the DUCs getting to market side that we see some opportunities. And then the big one, of course, is the inventory upside as we go forward and de-risk like we've done before in Howard County first, and then again demonstrating the repeatability, the Austin Chalk over on the Western Eagle Ford play.
So no, we haven't baked it in here, but we're confident that our team's going to be able to really get after this asset, which has kind of been an overlooked basin, and we like that, that it's been overlooked.
Thank you for the time. I appreciate it.
You bet.
Thank you. Our next questions come from the line of Tim Rezvan with KeyBanc Capital Markets. Please proceed with your questions.
Good morning, folks, and thank you for taking my question. I wanted to go back on the topic of takeaway again because I believe people that haven't been doing the work on the basin, there's a sort of a stigma around the wide oil diffs there. So can you correct my opinion on this or inform us? Is there 50,000 a day of railcar takeaway capacity now? Does XCL have any of that? And then when you think about now being a third public operator entering into that, do you have sort of larger plans to kind of lower the DUCs that are there now?
So Tim, yeah, I understand why the question. So the Price River terminal has a capacity of 75,000 bbls a day, and XCL has a large portion of that, and then the rest is Ovintiv. And then there's another rail terminal that some of the other operators go through. So there's capacity. And then ETC, we work with them really closely in South Texas and also in the Permian. And if there was a need, the ability to expand the terminal is not a long lead type of thing compared to running a long-haul pipeline through Appalachia or something like that, right? So it's easier that way.
And the diffs are larger, but what really surprised us when we first started looking at this asset starting almost three months ago, which is really that Slide 20 shows that, yeah, there's a big diff, but on a per BOE basis, because of that high, high oil percentage, it winds up being better than the Permian. And that was when I first looked at this, I was like, "Now, how can that be?" And you look at the numbers, and it's really the high oil percentage drives that really great per BOE number.
And lower cost.
Lower costs.
Sure. Okay. That's very helpful. And then, Herb, just as my follow-up, if we step back a bit, you all have been extremely patient since the pandemic on large acquisitions. There's been speculation, I know you can't address about you may be looking at other publics. This seems to be a real sort of value play, a little bit of a contrarian kind of acquisition. Ultimately, what got you comfortable with this versus buying something that the investment community was more familiar with in one of your core Texas plays?
Yeah, Tim, it's a really great question. And I think you're aware of this, but we look at a lot, right? We're in most data rooms and consistently near our operations, but then we look across all the areas we have operated. You know we've been in the Bakken, the Powder, the Arkoma, Anadarko, Haynesville. We've been everywhere, and we've exited to highest quality. And so we had that really high bar. Every time we said it had to be competitive with our existing inventory, put it as a real high bar. And we were really pleasantly surprised with the Uinta and how it could make that. And we've been active in a lot of other potential acquisitions. But what we found is we really had to maintain our discipline, and we did maintain discipline so that we wouldn't overpay for something.
So I'm really pleased with this one because we're getting at a 2.9x multiple, and that is a great price. And then the upside with this quality and the low breakevens of $43-$57 is just great. So just everything came together where our balance sheet was in shape. We could reach for this. It was beneficial to bring Northern in. We've worked with them before. We like the way they think about things. They're thoughtful, and they ask good questions, and we find them a really great partner. So it all came together on this one. But I will say the bottom line is why this one, well, we maintained discipline on the others' potential opportunities, and this is the one where everything really came together at the right time.
Okay. I appreciate the comments. Thank you.
You bet.
Thank you. As a reminder, if you would like to ask a question, please press star one on your telephone keypad. Our next questions come from the line of Michael Scialla with Stephens. Please proceed with your questions.
Good morning. Yeah, just wanted to ask about it looks like this is just strictly asset acquisition. Are any of the XCL people coming over with the deal at all, or do you plan to just go it alone here?
Mike, this is Herb. Great question. Yeah, it is an asset acquisition, but we do anticipate making offers and taking everything that XCL has learned, and it'll be at their option on how many want to come over. But no, we certainly want to take all the expertise, all the learnings they've had over the years they've been operating in the Uinta. So we would intend to do that.
Makes sense. I know XCL was in the process of trying to do an acquisition of Altamont Energy. Did that get done, or what's the status of that deal, and does it have any impact on this transaction?
Yeah, I believe they have entered into an agreement with Altamont, and it's pending FTC approval. We would have the option to step into that acquisition at our option. That's kind of the plan on that one. Of course, there's not near that much production there. There's quite a bit of acreage, but not much production from that Altamont asset.
Got it. If I could sneak in one more, I'm just wondering if you plan to add any hedges with this, or did XCL have any hedges that will come over with the assets?
Yeah, Wade can answer that.
Mike, we won't be bringing over any hedges from XCL, but it does impact our hedging strategy. I mean, our hedging strategy is consistent. Right now, we're at a point where we're hedging around 30% of oil and gas as we enter into a year. What we've decided here is to hedge about 50% of the oil that's coming on from this acquisition over a period of this year and 2025, just during that period where it's so critical for us to get that reduction. So you can imagine what that'll look like on a pro forma basis. And I can tell you we've already kind of started, and we'll just kind of layer that in as we move forward.
Sounds good. Thanks, guys.
You bet.
Bye.
Thank you. We have reached the end of our question- and- answer session. I would now like to turn the floor back over to CEO Herb Vogel for any closing remarks.
Thanks, Daryl. Thank you all for joining. I just wanted to note how very excited we are about this great opportunity, and I hope you join me in seeing that also. Take care.
Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect at this time. Enjoy the rest of your day.