Good afternoon. This is Pat Lytle, Senior Vice President of Finance. Welcome to SM Energy's First Quarter 2025 Financial and Operating 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 5 of the accompanying earnings release, and the risk factors section of our most recently filed 10-K, 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 both the earnings release and slide deck.
Today's prepared remarks will be given by our President and Chief Executive Officer, Herb Vogel, our Chief Operating Officer, Beth McDonald, and our Chief Financial Officer, Wade Pursell. I will now turn the call over to Herb.
Thank you, Pat, and good afternoon, everyone. While 2025 is off to an excellent start with our top-tier assets generating excellent returns during the first quarter, at oil prices averaging over $71 per barrel and gas prices over $3.65 per million BTU, we recognize that the industry is facing headwinds for likely the remainder of the year and into 2026. Fortunately, through the past several quarters, we maintained our consistent hedging program tied to our leverage and took action early to mitigate tariff-related inflation risks this year. As we look forward to the remainder of the year with the prospect of oil prices averaging from $55-$65 per barrel, we are taking action in specific areas to optimize our spend. Before we elaborate more on that, let me turn to Slide 5 and discuss progress toward our priorities in 2025.
The successful integration of our newly acquired Uinta-based assets has strengthened SM as the Uinta assets drove first-quarter performance with production, including oil production, at the high end of our guidance range. We now have three top-tier assets and a strong balance sheet, which positions us very well for a more uncertain near-term future. Our three core objectives were established to support long-term profitability and value creation. As you all know, our portfolio is made up of three core areas, each of which holds long-duration drilling inventory of low break-even assets that endure through commodity price cycles. Our strategy to focus on top-tier assets supports our priorities of paying our fixed dividend, reducing leverage, and returning cash to stockholders through our stock repurchase program once our leverage target of around one times is achieved.
During the first quarter, we successfully integrated our new Uinta-based assets upon taking over operatorship on January 1, following expiration of a transition services agreement with the previous operator. We welcomed 83 new employees from XCL and Altamont to SM Energy in January with very positive and seamless onboarding. Our focus on successful integration of our Uinta assets resulted in excellent operational results for the quarter, once again demonstrating a production margin nearly equal to the production margin of our Midland-based assets. Our team is now focused on evaluating opportunities to enhance the program and evaluate upside opportunities, which Beth will speak to shortly. Related to our second core objective, we generated free cash flow during the quarter, which we used to return capital to stockholders through our fixed quarterly dividend payment of $0.20 per share and to reduce debt. Wade will speak more to that later on the call.
Slide 6 summarizes why you should consider investing in SM Energy and what differentiates us from peers. We start with a long track record of innovation and improving capital efficiency. With our differential geoscience and technical focus, we continue to build on a long-duration, high-return, and resilient inventory. Coupled with prudent financial management and a strong balance sheet, we are delivering a sustainable return-to-capital program composed of fixed dividends and opportunistic stock buybacks. Finally, as a premier operator, we are a demonstrated leader in stewardship that you can be proud of owning. Now, back to the macro environment. As a 117-year-old company, navigating through commodity price cycles is not new to us, and as in previous cycles, we are positioning the company to not only endure but to take advantage of the opportunities that will undoubtedly arise in a below-mid-cycle pricing environment.
As part of this, we have reviewed our 2025 operating plan and evaluated options that we can pursue under various price and cost outcomes. Our 2025 plan was developed to optimize the allocation of capital across our three core assets, with a plan already in place to slow the pace of development throughout 2025. As things turned out, this approach is now proving to be quite fortuitous. We began the year running nine drilling rigs, and we're down to seven drilling rigs at the end of the first quarter. As we evaluate different future macro environments, we are considering various commodity price levels, the duration of those prices resulting from potential geopolitical decisions, likely future oil field service availability and costs, and other factors.
Wade will speak further to our thoughts in a bit, but even on a $55 oil price and $3.50 gas price scenario for the rest of 2025, we achieve our goal of near one times levered by the end of the year. If prices were to fall further, we have evaluated our options and have a plan. I'll sum up here by saying that we are well positioned to weather a lower oil price environment due to our increased scale, low break-even program, and excellent balance sheet with ample liquidity. As always, we remain committed to a multi-year plan to maximize free cash flow to support debt reduction to our target leverage level and deliver on our stockholder return commitments. We are very fortunate at times like these that for many years we invested in people and technologies to differentiate us.
They have enabled us to identify top-tier assets, grow inventory, and strategically develop and produce our reserves to generate top-tier returns. I will now turn the call over to Beth for a deeper dive into our Uinta Basin integration efforts, as well as an update on all our operations, including some exciting milestones, technology evolution, and results achieved in the first quarter. Beth?
Thank you, Herb. First quarter Uinta Basin results are a testament to the amazing integration efforts that continue here at SM Energy. As Herb previously mentioned, first quarter production margin for the Uinta Basin came in at $40.93, nearly equal to our Midland Basin production margin. This further demonstrates the quality of our top-tier Uinta Basin assets and the efforts by our team to generate efficiencies and refine costs. Though we are already very pleased with these results, our teams continue to look at maximizing marketing optionality, working with all of our purchasers to optimize rail car routes while continuing to move as much product as possible to Salt Lake City refineries. Moving to Slide 7, we were excited to see the April 16 research report from Enverus, in which they announced they underwrote 152 sub-$50 per barrel break-even locations across the Uinta Basin Douglas Creek zone in the Upper Cube.
38% or 57% of those locations are SM Energy's. The industry recognition is a direct result of the excellent work that continues to be done by our geoscience and reservoir engineering teams to continue to gain confidence in our inventory and the 4,000 feet of stack pay in the Uinta Basin that we've been talking about. To quote Enverus, those recent buyers may be onto something. We think it's safe to say that we are onto something and will continue to prove it in the months to come. On the right side of the slide, you'll see the familiar graph that we've shown before. This reiterates the Upper Cube wells more than compete with average Midland Basin and South Texas Gulf Coast wells based on cumulative oil production. Slide 8 shows our most recent IP30 results in the Uinta Basin and South Texas Austin Chalk.
As always, we release all well results that have reached IP30 rates. While these particular Uinta Basin results appear slightly lower than our fourth quarter well results, it's important to remember that the lower cube consists of seven different benches and over 1,300 feet of vertical section, resulting in slight variations in productivity and oil mix across our acreage. Through our ongoing delineation of the field, we will continue to learn what is driving these changes and will incorporate our learnings into our optimization of the development plan and our future design. We are highly encouraged by these results and will continue to release new well results as they become available. While I mentioned some great results in our newly integrated Uinta Basin assets, it's important to remember that the first fully designed, permitted, drilled, and completed SM Energy development will not be online until early 2026.
We are excited to announce those results as they become available next year. On the right side of the slide, we are showing some excellent Austin Chalk well results. These wells straddle our northwestern oil area and the southeastern liquids-rich gas area. These wells reached an average IP30 rate of 1,061 barrels of oil equivalent per day at 78% liquids and laterals averaging nearly 12,000 feet. The Austin Chalk continues to deliver great well productivity across our acreage. Slide 9 depicts our continued stellar performance of our Texas assets. The average cumulative oil production outperforms our peers in both Howard County and the Austin Chalk by 32% and 42%, respectively. These two core areas continue to deliver great returns and contribute to sustainable and repeatable free cash flow generation.
As discussed in February, we will release updated results for both our Klondike and Woodford Barnett areas once new wells are online. Moving to Slide 10, our teams continue to drive efficiencies across all three of our core basins, looking for ways to innovate by redefining previous records in our operational execution. Beginning with the Uinta Basin, we successfully drilled three-mile lateral wells and will continue to test longer laterals to drive capital efficiency. Our completions team completed record footage in March, and we had record oil takeaway in the first quarter. In the Permian Basin, our teams are focused on driving efficiencies through design enhancements. We are realizing savings in wellbore design changes that focus on less hydraulic horsepower requirements for the same pump rates. Additionally, we are working on completion fluids optimization to enhance productivity.
We are encouraged by what we are seeing today and plan to share results in our mid-year update. As mentioned previously, SM has drilled an additional three four-mile laterals in the Midland Basin, driving incremental economics and strong well returns. In South Texas, our team realized cost efficiencies by utilizing our existing infrastructure to fuel our completion operations. We achieved these savings by tying into high-pressure gas lift lines to provide natural gas as fuel to power our E fleet. Our completed cost per foot decreased over 30% since 2022, and our teams delivered records on drilling footage and drill-out costs in the first quarter. As a top-tier operator, generating capital and cost efficiencies is always at the forefront of our minds, and our teams are empowered to challenge the status quo to achieve improvements in all aspects of our business. This point segues nicely to Slide 11.
Artificial intelligence, or AI, is getting a lot of airtime these days, so we want to take the opportunity to reflect on SM Energy's technology evolution. Technology is part of SM Energy's DNA. As far back as 2015, SM Energy invested in foundational systems that have led to incredible advancements and enabled differential outcomes. Over the last decade, we built a stellar advanced analytics and emerging technology team that tackles many strategically aligned projects, including but not limited to implementing the following: machine learning algorithms, which help in quick evaluations for acquisitions and aids in completion design and well spacing. The use of this technology allows us to continue to pursue exploitation ideas at scale to advance our understanding and potential future growth plays. The computer vision is used to identify geophysical attributes and formations to allow for faster and more in-depth interpretations.
Robotic processing automation reduces risk and increases efficiencies of our back-office processes. Finally, we have enabled company-wide generative AI with custom solutions in development. We believe that employee empowerment to learn and implement new technologies leads to innovation, which drives differential performance. With that, I will turn the call over to Wade to talk about the financial highlights of the first quarter. Wade.
Thank you, Beth. Good afternoon, everyone. Huge shout-out to the SM team for successfully integrating our Uinta Basin assets, driving strong financial results from oilier production than expected at the high end of our guidance range. I'll discuss our first quarter results and then speak to our very strong balance sheet and wrap up by reviewing guidance for the remainder of the year. First, 1 Q results on Slide 12. As I noted, strong production from our Uinta Basin assets drove volumes to the top end of guidance, including oil production at 53% of total production. Production volumes, combined with strong benchmark commodity prices, supported adjusted EBITDA and adjusted EPS that were notable beats to consensus.
On the operating cost side, higher first quarter 2025 lease operating expenses reflect acceleration of certain workover activity in the Uinta Basin and South Texas, as well as the increased cost of fuel gas used in our Uinta Basin operations due to higher natural gas prices. The latter is offset in production revenue as the fuel gas was produced from our own wells. Transportation expense was nearly 8% below the midpoint of our guidance as our Uinta Basin transportation cost declined substantially from the fourth quarter of 2024. Transportation expense for our Uinta Basin assets will fluctuate based on how many barrels are trucked to Salt Lake City refineries versus the number of barrels put on rail to downstream markets. Our oil and gas marketing team is quite focused on continuing to refine where we sell our production to drive an even higher operating margin.
Stay tuned as we continue to optimize oil sales from our Uinta Basin assets. Bottom line, we realized a strong production margin in the first quarter, and I'd like to reiterate the comparability of the Uinta economics to our core Midland Basin. As you can reference on Slide 19 in the appendix, the Uinta Basin production margin is right on top of the Permian Basin production margin again in the first quarter. Turning to capital, first quarter CapEx came in approximately $10 million high to the midpoint of guidance, but for good reason. During the quarter, we accelerated approximately $15 million in CapEx for certain production equipment in Texas, which allows for certainty in timing of related turning lines and is beneficial should steel prices increase as a result of tariffs. Additionally, we recorded $5 million of CapEx related to highly economic non-operated projects in the Midland Basin.
In turn, solid adjusted free cash flow for the quarter funded our fixed quarterly dividend of $0.20 per share, an annualized yield of 3.5%, as well as the final cash settlement of our Uinta-based acquisition and provided for the repayment of a portion of the outstanding balance under our credit facility, which is a great segue to my second topic, the balance sheet on Slide 13. This slide shows the strength of our balance sheet and our substantial available liquidity. We exited the quarter with a ratio of net debt to adjusted EBITDA at 1.3 times and $2 billion of liquidity. This leverage ratio only includes Uinta EBITDA since the October 1 close date. Pro forma, if we include an estimate of XCL EBITDA in the trailing 12-month number for the full 12 months, the leverage ratio would be 1.1 times.
Earlier this week, our lender group reiterated their confidence in our top-tier assets by reaffirming our borrowing base at $3 billion and commitments at $2 billion. As you probably know, we target leverage of one times net debt to adjusted EBITDA at mid-cycle commodity prices. During the first quarter, we reduced the balance on our revolver by $31 million from $69 million to $38 million, and it is our intention to generally prioritize debt reduction to target leverage levels before directing free cash flow towards additional share buybacks. We're very much on track to meet our leverage target in a short time frame following our $2 billion Uinta Basin acquisition. Even at a price deck of $55 oil and $3.50 gas for the remainder of the year, we near our one times leverage target by the end of the year.
Flipping to Slide 14, we layered on hedges during the quarter and subsequent to quarter end for a portion of our oil and gas production in 2025 and 2026 and a portion of gas production in 2027. We're now hedged at 34% of expected remaining 2025 oil production and 38% of expected remaining 2025 natural gas production. See the appendix for a full summary of our hedges. Thirdly and lastly, a few comments on guidance for the remainder of the year. I'm on Slide 15. Our 2025 plan, as described in February, results in 20% production growth and 30% oil production growth. With respect to full year 2025 guidance, we are maintaining our estimates as released in February with one exception, LOE guidance.
The increase in our LOE guidance to $5.90 per BOE for the full year is being driven by an expected increase in workover activity, expected higher water disposal costs due to impacts from completion activities on offset wells, and increased cost of fuel gas used in our Uinta Basin operations. As previously noted, the portion related to fuel gas is offset in production revenue. For those of you that model quarterly, we expect production to grow from Q1 to Q2 and again from Q2 to Q3 while flattening out for Q4. On the CapEx side, we reiterate our comments from February that capital will be front-end loaded with first half 2025 CapEx just over 60% of the total expected CapEx of $1.3 billion for the full year.
Summarizing second quarter guidance, production for the second quarter is expected to range from 197,000-203,000 BOE per day at approximately 54%-55% oil. LOE, including workover expense, is expected to be approximately $6.10 per BOE. CapEx, excluding acquisitions, is expected to range from $375 million-$385 million and is expected to include approximately 25 net drills and approximately 50 net completions. This range includes approximately $10 million of CapEx for highly economic non-operated projects in the Midland Basin. I will note that we have a number of completions scheduled near the end of the quarter, which could impact the actual number of wells brought online in the second quarter. One final note on guidance and planned activity. We're often asked at what oil price would we respond with a reduction in activity levels.
Our response to that begins with the reminder that we have been slowing activity already, going from nine rigs at the beginning of the year to seven now with a trajectory towards six. Also, our top-tier assets generate solid returns at prices well below these current levels, and we have a strong balance sheet. However, at some point, reducing activity would be warranted. We intentionally contract our services in a manner to retain flexibility should this circumstance arise. As an example, in 2020, when oil prices plummeted due to the global pandemic, we continued to drill wells under existing contracts but suspended completion activities, which is the majority of the well cost. The result was near-term addition to free cash flow, a build-up in DUCs, and then a resumption of completion activity later in a period of lower completion cost and improved oil prices.
Moving now to Slide 16, we'd like to emphasize the importance of stewardship as a key component of being a premier operator. We are proud of our continued progress as a leader in stewardship, as recognized by Rystad's recent ranking of SM Energy as a top three operator excelling in sustainability based on 2023 results. Among oil-focused operators, we were ranked number one. Finishing with Slide 17, as Herb said, the successful integration of our newly acquired Uinta Basin assets has strengthened SM. These assets drove strong first quarter performance with production, including oil production, at the high end of our guidance range. It is clear that we now have three top-tier assets.
These top-tier low-break-even assets, along with our strong balance sheet, our excellent team of professionals who regularly evaluate cost reduction and margin enhancement opportunities, and our flexibility when it comes to contracting services, all position us very well for any macro environment, including a lower commodity price environment should it persist. Thank you for listening today, and we look forward to answering your questions on the live Q&A webcast and call tomorrow morning.