Everybody, we are fortunate to have SM Energy, a long-time attendee, Wade Pursell, the CFO. You've been to every one I've been to, I think.
You're going to give that statistic to you guys last year?
I did. I did. It was out of 35 or 34 companies, four—well, I just covered that number, so it was five were back 10 years later. SM was.
One of those five?
It was one of those. I could figure out what happened to the rest between M&A and bankruptcy. Anyway, so you're still here. You're a little different than you were last time you were here.
We are different.
I will turn it over to you to tell the story. Just obviously, Permian, South Texas was always the story, and then you added Uinta last year. And we'll turn it over to you just to run through some stuff.
I'll just.
What's up in the Q&A?
Yeah, I'll just—I’ll kind of jump around and just be part of the presentation, hit some highlights. It’s good to be with you all today. I'm here with Pat Lytle, our SVP of Finance. Yeah, it's been an honor to be at this conference so many years. We have been around a while. Believe it or not, we've been around since 1908. I don't know if you know that. I joined the company in 2008.
Does anyone know what SM stands for?
Saint Mary.
St. Oh, it's funny. It's looking for the crowd.
I don't know. I gave them both. Saint Mary?
That's the.
Company was formed in St. Mary Parish, Louisiana. Frankly, we got tired of answering questions about, "Are you a church? Are you a school?" We shortened it, made it easier for investors. Got the same ticker symbol, SM. Yeah, I joined in 2008 as CFO. What I like to say is I missed the whole first century, but I've been here for all of the second century so far. That's some quick history. As far as who we are now, I would say that those of you that have listened to the story before or know us really well know that we continue to say that and really strive to be a premier operator of top-tier assets, premier operator of top-tier assets. I'll talk about those assets in a second.
We also say that empowered by a world-class technical team, I think that's a differentiating part of who we are, especially versus companies our size. Empowered by that technical team and a strong balance sheet, we are empowered to repeat the success. All that means is replace inventory, add inventory as we move along. I said premier operator. There is one slide in the deck that I'll point you to. I think it's slide 11. It's just an example of that, making top-tier assets better. We really focus on that with every well. I think that slide 11, I kind of like because it looks back three years in the Midland Basin and in South Texas and shows drilling faster, completing faster, and the result is obviously lowering the cost. That is a 10% level in Midland Basin and 19% level in South Texas.
That's just an example, a very high-level example. The top-tier assets now are three. There are two in Texas, these two, Midland Basin and South Texas, and then the third, which we added since we were here last year, actually right after we were here last year, and that is an asset we're very excited about, and that's the Uinta Basin. I mentioned the technical team. I'll just say a word. The technical team was instrumental in all three of those in very similar ways. The Midland Basin, we've been in the Midland Basin for almost 20 years, but we went really large back in 2016 with an acquisition in Howard County. If you go back to 2016 and look at any Permian Basin maps, you will see Howard County outside the line. Our technical team decided, determined that that was not the case.
The technical team was proven right over the years, and that asset is a wonderful asset and has been proven one of the best in the country. We define best as low-break, even low-price assets, and that asset, as well as the other two assets, generate really good returns at oil prices way below where we are currently, down below $50. That was that asset. The one in South Texas is 155,000 contiguous acres that we've been in for almost 20 years there as well. That was an Eagle Ford story for a long time, a great asset, produced a lot of gas, a lot of wet gas.
I don't know, around 2018 and 2019, the technical team determined that the Austin Chalk interval, which is above the Eagle Ford, through a lot of testing, a lot of examining core data, you can imagine every well that was drilled in the Eagle Ford had to go through the Austin Chalk. So they had a lot of data to study and determined that, wow, this Austin Chalk can be a really, really great asset. We started testing it, and they were absolutely right. I mean, it's a top-tier asset. The last time we announced locations, it's up to like 465 locations. We've drilled. We're now well over 100, but still, obviously, a lot of great inventory to go there. Finally, the Uinta Basin. I'll jump on a slide for that one if I can, if I can get back to it.
Bear with me for a second. Oops. Yeah, there it is. UNTA Basin. The team identified this—I mean, it's not an unknown basin, obviously, in Utah—but identified an opportunity and did a lot of work on the basin and got really excited about it because it has a lot of characteristics that we love. Multiple intervals, potentially 17 intervals, believe it or not, 4,000 feet of stacked pay, very oily, like over 90% oil. Just a wonderful area for us to exploit and drill wells and improve upon those wells. We were able to get it at what we believe was a very good price, not as well understood, I guess I would say, as maybe the Permian Basin, for example, and other areas. Things have gone very well there.
I guess what I would say is the integration has been very successful, and we're kind of in stabilization mode, I think we call it. We're integrated. We're running the things since January 1. If you followed our first quarter results, you saw that we actually had a very good quarter in the Uinta and actually exceeded our expectations. Nice to get started that way. We're getting some good press already from Inverse, who's been doing more studying of the basin and actually announced that they added a bunch of locations, over 150 locations, in what we call the upper cube. That's important because I mentioned the 17 intervals. It's really broken up into three kind of defined cubes, sections, and that's the upper cube, the lower cube, and the deep cube. I know. I wish the lower was something middle, but it's hard to remember that.
The lower cube in the middle is where most of the work has been done, and we put the most value on that section. It has proven to be exactly what we hoped it would be. That is where we are spending 90% of our dollars this year. We know there is upside, though, in the upper cube and hopefully in the deep cube as well. That is why it is important that Inverse added all these locations in the upper cube, showing that there is more value, more locations. I think I mentioned those locations they added, defining them as top tier because they are sub-$50 break-even. About a third of those are ours. That is really important. We are very excited about the Uinta. That is kind of the three assets. I guess the only other thing I will mention, I talked about the technical team. I mentioned the balance sheet.
Balance sheet's in very strong shape. We were happy to be able to use it for this acquisition, all cash acquisition. Now we're kind of in debt repayment mode, 1.3 levered, as of the last reporting date. If you look at that on a pro forma basis, it's 1.1 times. Very strong balance sheet, lots of liquidity. The revolver, $3 billion borrowing base, $2 billion of commitments. What's important there is the banks just redetermined the revolver in the spring redetermination and kept the same levels despite the fact that they've lowered the commodity prices, obviously. I believe the oil price they used was in the $57-$58 area going down to $52. That was a nice positive affirmation of the value of the underlying assets.
The maturity schedule, you could take out the next maturity, the 26s, with free cash flow, reducing absolute debt levels, getting debt back down to one times or below is our target for a strong balance sheet. We tell the equity investors that it's at that point that we would resume share buybacks, return to capital program. With that, I'll stop talking and start taking a few questions.
You gave me a debt teaser there at the end, so I'll keep going with it. On 26s, is the goal to pay them down completely, or is there some element of refinancing of that?
I think the base case would be to take them out completely and do some absolute debt reduction. I mean, you then have the 27s, which are at a similar level, and you have the 28s at a similar level. As we move along, we'll be following the market and seeing if there's an opportunistic way to maybe do some form of refi that is coupled with absolute debt reduction as well.
You held on to your last 25s. You're a pretty low coupon. That when we reached for higher, it was an asset, right? So will you probably proceed the same way with this, or do you think it's more likely you refinance these earlier?
I think your base case assumption should be that we would do it a similar way and just generate some free cash, pile up some cash, and then at some point take them out.
I think you have this target of one times. You're at 1.3 today, but that's not pro forma first. You're at 1.1, really pro forma. When do you think you get to your one times target? I imagine that's a next.
Tell me the oil price. Yeah. When we came into this year and announced our plan, if you assume like a $70 oil price or something close to that, you get there pretty quickly, like middle or second half of this year. At current prices, that moves to the right somewhat, obviously, but not too far. We just kind of bounce along just above one times, frankly, at a $60 oil price. If you just assume current prices, yeah, we get there not long after.
Once you do get there, what do you do in this environment? You buy back more shares?
Yeah. That would be our base plan. Everything always competes with other opportunities. The base plan would be to resume the share buyback program, which we have $500 million authorization for. We'll see what the landscape looks like at that time.
I'll give you the standard credit question about corporate cash flow breakevens. What's the number you provide today, and do you provide it unhedged?
Yeah. It is a great question. On a corporate basis, if you just look at this year, I can tell you that you can run an oil price down into the $40s and still generate free cash sufficient to pay the dividend and not really get into the revolver. That obviously has some hedges. As you move into the—I do not want to dodge the question, but if you move into the next years, which already have some hedges, but if you try to look at it unhedged, you really have to start making some assumptions with what would happen to cost. If you take oil down to $50, I think all of us believe there would be a pretty significant pullback in activity. History tells us you get some pretty good deflation. You have to start playing with those scenarios to really get a good break-even. It's down in that area, though.
I have enjoyed having to do that analysis twice already and saying that possibly for the third time. I have no idea what you feel—everything keeps moving. And your maintenance CapEx, just as you think of it today, how do you define that in terms of a?
Yeah. I mean, we haven't given a true maintenance CapEx number, but I mean, it's kind of what level are you maintaining is part of that question. We're in this mode of reducing activity since the acquisition last October. We came in, closed the acquisition October 1. That added three rigs. We had nine rigs at the time. The plan was and is to slowly reduce that down to six by the time we get toward the end of this year. What's a maintenance level, I guess you could ask, at that point in time? We've said that that program, that activity level gives us, we think, the optimal level for us of generating free cash at a level of production that is flattish to slight growth. You could start assuming that that number is pretty close to a maintenance level once you get to that level.
By the way, what do you estimate per rig right now? What do you per rig? What's a good number right now?
I don't have a capital number for you on that. Again, by the time you get to that point, you need to make an assumption.
I appreciate that.
For the market.
I think you are ramping into the second half of this year in production. Were you talking about flat from exit or flat on average?
Yeah. So what we've said is that was the recount. So from a production standpoint, production will grow Q1 to Q2, and it will grow Q2 to Q3, and then decline in the fourth quarter somewhat.
The six rigs will keep the.
That's just a function of the actual wells that we're drilling is higher in the first half of the year, front-loaded.
You touched a bit about cost coming down. What are your observations of productivity today in terms of how much you can get there without just cost savings? Where are you seeing? How is that enhancing your economics? Are you seeing material improvements today?
You're talking about just efficiency of the operations?
Yeah. Just what you're seeing.
It's hard to peg a number to that, but that's something the team works on every single well, trying new things. On the XCL side, they were a great operator, first of all. A lot of great innovation that we've enjoyed learning about and will apply where we can. We obviously believe that we bring a lot to the table from an operatorship and maybe doing things differently, maybe larger completions, longer laterals, maybe different spacing. We're applying a lot of that right now. You won't really see the outcomes of those wells until later this year or early next year. Looking forward to seeing those results and maybe trying to quantify some of the efficiencies there.
Otherwise, it's just kind of business as usual, trying to be more efficient with every well and do things faster the way I showed the chart on the improvements they've made the last three years. On the deflation side, I do not have anything quantitative to report at this point, but activity is starting to fall. We know that story. If activity continues to fall, then costs fall right after, so.
Are you up for writing an estimate on that because you haven't been at the table negotiating this thing yet, or?
Oh, there's a lot of discussions going on, but I haven't heard anything quantitative yet.
When you developed this budget this year, you talked about a $55-$65 oil price, and I believe that was at $3.50 gas. When you talk about your inventory of 10 plus, you use $70 and $3.50. How does that inventory change as you get closer to $55? How do you think about it?
It's a great question. We use $70 and $350 for inventory because that's what we believe is the mid-cycle price. That's the way we calculate it. We haven't calculated it. All I can tell you is that inventory is 10-plus years. When we say economic, I think we say the average IRR of that inventory at $70 and $350 is like 65%. You could imagine going down in price, you're just losing some of that. You'd have to start making cost assumptions also in that inventory, which would offset it. I guess that's all I'd say.
When you look at your inventory, you've got to replace it every year. Obviously, the Uinta has a lot of upside opportunity. Do you think it's likely that you replace your inventory this year? How much do you have to replace? How much can you replace organically, and how much inorganically, maybe even just through leasing?
Yeah. I mean, that is always our goal every year. It's hard to predict within a year what's going to happen. Last year was obviously a great year. This year, there's a lot of upside, and hopefully, we'll be able to add some in the Uinta, as you say, and in other areas. I don't have a forecast for you at this point, but that's always an objective.
I've always got to ask. Look, the marketing constraints in terms of moving oil and gas, a lot of people focused on Permian. What's your personal view there as to what's happening in the basics today and how it's going to move?
I think we're in pretty good shape compared to some periods in the past. We're not overly concerned. We feel like we're going to be able to get what we're forecasting out. We continue to hedge. We continue to hedge the basis. We hedge Waha quite often. There's big asymmetrical risk to Waha, as we know. It's kind of insurance to get a lot of that hedged. We feel good there. In the Uinta, which is a popular question, we feel very good about our ability to get our product out that we have forecasted. I think we even have some cushion if it ends up being higher. The first quarter, the question about how much can you go to the refinery, obviously, that's going to be much better on the margin versus getting trained out on rail.
I think what we've told folks is we feel very confident in being able to get 15%-20% of our production to the refineries, the five refineries in Salt Lake City, with the rest of it going out. If you look at the first quarter, we actually beat that assumption in the first quarter, closer to 25%, I believe. Can't count on that in the future. We didn't change our guidance in the future, but that's something to watch.
How's your thing with the rail costs, the incremental rail costs to get it out of basin?
In the appendix, you can look at the transportation cost and see exactly what it is there by barrel. And it was lower in the first quarter, which tells you that we're able to get more to the refinery.
This is a bigger picture question. Everyone looks at the Permian as the last big basin, and it's going to grow for some time. Not at a huge rate, but at a rate and then plateaus maybe in 2030. Obviously, who knows then. It also speaks to the other basins saying there isn't growth. Obviously, you've just entered the Uinta, and maybe that's an exception. Can you tell us what you think about, one, that statement, which I think is hard to refute, and two, what you think about the other basins in terms of the ability to grow?
Yeah. Great question. Very big picture question. Whatever I say, you can take it with a grain of salt. I'm not sure I know that much more about that kind of question. I would say that I've seen similar data that you're quoting, and it is, yeah, it's irrefutable. I would also say I love the words that a lot of people love to repeat, "Never bet against the Permian." It continues to be the gift that keeps on giving. We love the Permian Basin, and we've done some things around the fringes, adding organically over the last year or two. We'll continue to work that. It's obviously a very competitive basin, which is a lot of the reason that we ended up entering the Uinta last year.
I love to say that we would have loved that kind of acquisition in the Permian, but that would not have been realistic from a price standpoint. We are very driven by return of capital and what you are getting versus what you pay. Again, we could not be more excited about the Uinta Basin and the ability to add more inventory there. The Permian, it still has some legs, but it is a very competitive basin. It is the biggest difference for us.
You transitioned to the M&A question. What is the opportunity set? Is adding UNT mostly small leasehold additions, or is there actually something to acquire there?
We look at all possibilities. I would not say there are not possibilities in both regards. It is hard to predict things like M&A, but I can tell you that we continue to look at all possibilities the way we have been the last several years. We get the thesis for being larger, the thesis for the valuation. We get all that. It is worth working really hard. Our criteria is the same. I mean, we do not believe in doing it just to do it. The assets have to make sense. It has to be accretive. Cannot send the balance sheet the other direction. I mean, those are kind of the big three for us. We will continue to look at all possibilities.
Obviously, after Liberation Day and the OPEC Surewar, the re-rack, the M&A market had to reset. I am curious where you think that is. We saw a stop-for-stop deal for royalty companies yesterday. That is right. Someone has tried to buy a Canadian company, whether that happens or not. That is at a corporate level. What about on the asset level?
Yeah. I think it's a, as you would imagine, I think it's a little challenging right now because of that. You can imagine the bid-ask depending on your commodity price deck. Uncertainty is never great for that. It does not mean things cannot get done. I think it's definitely thrown some general pause for uncertainty, I would say. It does not mean people are not working, but it just makes it a little bit more challenging.
Do you have any questions from the crowd?
I'll take one.
Go for it.
You're kind of coming into the situation where you acquired the Uinta asset last year, and it had a growth trajectory that was already baked into its program. That's what you're running up this year. That's why we're seeing this sort of uneven cadence in oil growth as we roll through 2024 or 2025. Production increases through 3Q, declines through 4Q. I guess first question operationally, the market really doesn't like this sort of choppy production cadence. Why not sort of decelerate as you get into the second half of the year to provide more of a linear trajectory for oil growth, which a lot of the simpletons are used to because we can think in linear terms?
Yeah. That is kind of what we are attempting to do. I mean, we are getting down to the six rigs, which is probably two rigs in each basin, and you need to get down to two rigs. If you look at the activity, the number of wells we are bringing online, it is very front-loaded in the first half of the year. The idea is to get to a level as we exit that is going to be very—I know it is never fun getting there for analysts and investors watching the quarter-to-quarter cadence. The idea is to get to a level that is very stable moving into next year, kind of a flattish production trajectory with slight growth, maybe.
As we're in 2026, you talked about getting down from nine rigs to six rigs. If you were to apply some kind of capital number per rig line called $150 million, perhaps you're saving $450 million next year as you're running three fewer rigs in 2026, and you're holding that production number flat. Is that maintenance level that you're getting towards to in 2026?
I'm not going to affirm that number, but that is the idea of getting to that maintenance type level in 2026. And I think we'll be able to see what that is.
At maintenance level, are you holding oil flats or BOEs?
We focus on BOEs. Production is an outfit. I mean, we're not tied into an oil number trying to manage the oil number. It's really more about free cash flow generation and returns with an overall production level. I wouldn't say an oil number yet at this point.
Kind of going back to your comment on M&A, our understanding of the Uinta Basin, it's a pretty captive market given that a lot of the oil goes to the local refineries. There's been perhaps some language from the states suggesting that we don't want our oil industry to be too concentrated. What's your understanding of that statement? Do you think there's room for SM to become larger in the Uinta Basin?
Hard to say. It's a great question. We know what the FTC has said in the past in the basin for all the reasons you just said. It does look very different now than it did not too long ago, though. I mean, I just gave you percentages. So much of the oil is now being railed out of the state that it looks very different. Administration's changed. It's an unknown. I mean, it's an unknown at this point. We're not counting on the ability to get bigger there. I do think things are evolving and hopefully loosening up.
I'm with one last question. That's a bigger picture question, but it would.
Bigger picture than the last one.
A little less big. More of an administration. Obviously, we have a pro-fossil fuel administration. Have you seen that show up in the business in any way?
We haven't. All I can speak to is our business and the areas that we operate, not really on federal acreage. It has had no impact on us. The bigger impact on us has obviously been the decline in the oil price.
I knew that was a separate item, obviously. Obviously, I think all the ESG efforts, gas capture, methane capture, things that all these firms are working on for yourself, that's still part of the mantra, right? Nothing's really changed.
That's who we are. I mean, it's been in our DNA, certainly since I've been at the company and before. That's still who we are. You may not see as many slides now because people do not need to see them as much, but it's still very much who we are.
Look, we have one minute left. We'll let you off the hook.
Thank you.
Thank you very much, Wade. It's always insightful. I'm glad to have you. Let's have a round of applause for Wade. Thank you.
Thank you.