I'm glad to see the diehards here on day three of the three-day conference after lunch. Most people look like they're awake here, so. Very happy to have SM Energy Chief Operating Officer Beth McDonald and soon-to-be CEO, and Wade Pursell, our CFO, and then Pat Lytle, who's VP of Finance and works in the IR group as well. Thank you, guys, for joining us. I wanted to start with Beth. You've been with the company a little over a year now, I guess, right around a year, after a very long tenure with Pioneer. I'm assuming you had a lot of choices after the Pioneer tenure there. I guess, what attracted you to SM, if you could talk about that?
Yeah, of course. Thanks for having us, and I appreciate you guys coming to this. It's a real privilege to be part of this conference. I just want to kind of hit on a few things as to why I came to SM. It's really the what and the culture, but really all of that's associated with the people. The great talent that we have at SM Energy really attracted me to it. There's a really storied past of that. If you look back on a couple of decades ago when we entered into Howard County, many people were asking, "Why is SM kind of pushing the limits of the Permian Basin?" It was the what-if thinking.
Kind of the professional curiosity behind SM has stood out to me from that track record, and then applying that in the Austin Chalk as well as in the Uinta now. That professional curiosity, but it really came back to the culture of SM. We operate with a high integrity, and what we would consider our number one principle is servant leadership. It is thinking about the team before thinking about ourselves, and really empowering the team to be differential. Wade, you were just saying, the older you get, and the more you've been around, the more that's important to you. Making sure you're working with the best people in the business is something I wanted to do continuing forward. I appreciate that.
Any changes that you would want to make under your guide now that you've been with the company for a year? I'm sure there's mentioned the things that attracted you to the company. Anything obvious that you think could be changed within the company to make it better?
SM's been around for 117 years, right? We've been really resilient through different market dynamics, and you've seen us thrive through those changes. We're not going to change our strategy. That's probably one of the reasons why I was hired, is because the strategy has been based on pure fundamentals on value creation, and really driving that through innovative thinking and a sustainable, repeatable return to capital program to our shareholders. There's nothing really there to change. What I would say is that this latest transaction that we had has been really transformational for SM Energy. We feel like it's a pivotal moment for us in time where we're going to show our technical prowess on a larger footprint, and we're excited about what that brings.
You guys probably saw, not only did we have a great Q3, it was a little bit overshadowed in the midst of a merger agreement that we signed with Civitas Resources, but in conjunction with this conference, we released more information that we're hopeful that you saw those additional details as it relates to our divestiture target. Our management team and our board of directors, we named those in there. Finally, details around the synergies. I think that's one of the truly transformational things that you'll see that come out of this, that a $200-$300 million synergy target translates to $1 billion-$1.5 billion in NPV, which is up to 30% of our market cap right now. That's just from synergies alone.
If you look to the value creation that we can really push and drive through this transaction, we see there being tremendous upside to NAV.
What do you think it was about the stock didn't react well to the announcement, and you've since come out and provided some more information, but the stock still has underperformed the group some. What do you think the market's missing about this?
I'll start and then pass it to Wade. I think we see that the market is missing the true value and the upside of that value versus where we're trading, right? You can see on our slide eight in the new updated deck is a valuation that's put out by Embarras. In that valuation, you can see that our upside to where we're trading is 120% plus, and our peer group is trading with only 3% upside to that. We really think that going into this transaction and closing on it, and our ability to execute, which we've done before with Uinta, will truly show that value creation.
Yeah, no, I agree. The other thing I just mentioned is on the balance sheet, right? I mean, it's going to be a much larger company. This is a very accretive transaction, over double the size of the company, the production level, all those things you can look at. It's going to generate a ton of free cash flow. I mean, if you just look at pro forma 2025, just consensus, you're looking at around $1.5 billion this year of free cash flow between the two companies. You couple that with the divestiture plan, and you get a pretty quick delevering of, frankly, a balance sheet that begins pretty darn strong, right, in the mid-ones area, a ton of liquidity, pro forma maturity profile that's really staggered nicely through the years, a lot of opportunities to get some interest savings there along the way, obviously.
You're going to get back to a level where I think you'll see kind of a move back to pretty significant returns of capital profile as we move along, obviously depending on oil price and how that plays out next year. I would add that to what Beth said.
I don't know how much you're going to say on this. I'm going to try anyway.
Probably not much the way you worded that.
You mentioned the divestiture program target. Anything you can say about which assets? I mean, it looks like the DJ is a place you haven't operated before, but it's a big chunk of Civitas as well. I guess leaves sort of the question, what do you do with the DJ? Do you sell part of it? Do you monetize all of it? What are your thoughts there?
Yeah. We're in the process of looking at that pro forma combined portfolio, and how we think about it is a ranking of how we go through that. Let me just talk you through it a little bit. From a perspective, we start with commodity mix, right? We think about where we are in the cycle for gas and oil for those commodities. We look at the asset base, how much is PDP asset, how much is upside in inventory. We look at that inventory and say, how much is competitive for capital over the next two- to three-year timeframe, where we really do our capital allocation and maximize free cash flow in that timeframe. We add on our synergies and what we bring to those assets to create that value.
We compare that value to what we think we can get in the market, and where there's a large arbitrage and we're able to bring that money forward, those assets will end up being at the top.
How are your thoughts, or what are your thoughts on the Colorado political environment? Obviously, not the easiest place to operate.
Yeah. I would say we've talked a lot about that. We're Denver-based. We're very familiar with the politics. We're familiar with Civitas. We have friends over there, right? We've talked to them about any of the kind of risks or concerns that they have. They just plan ahead. They've done actually very well. If you look at the latest Embarras report on the DJ Basin, you will see that permitting times have come down 50% over the last couple of years. We also looked at Civitas versus the other players in the basin, take OXY and Chevron, for instance, and looked at the permitting times that they had between when they filed and when they received it, and they're one of the best. It is predictable, I would say, and we just know that we plan ahead and we're able to execute on that.
In your press release, you laid out what the management team's going to look like, and like we were, I guess, hoping and expecting, your legacy management team is going to run the company essentially. How about sort of that middle-level management and below? Because G&A is a big part of your synergy targets. How do you manage that?
Yeah. I think it's probably pretty obvious to you guys we don't have DJ presence, right? We're going to need that institutional knowledge that their team brings from an execution perspective to make sure that we continue forward with the pro forma company with them leading that asset. When we look at the rest of the leadership team as we're going through that process right now and the integration, we see that they have great talent, and we're hopeful that we can get the best of both and combine together to really put together the best people, the best practices, and have the best outcome.
I guess thinking on that along those lines, can you talk about with XCL, I thought you were going to eliminate a lot of the positions there, and you did not. You actually brought a lot of people in-house, which is a little bit unusual, but maybe talk about how that has worked out for you.
Yeah, I would love to talk about that. You guys have seen our strong execution in the Uinta Basin, and we realized that much of that was around keeping the institutional knowledge there and their operational efficiency and the innovations that they brought to the board. We actually, and you've probably heard me on the call say that we realized synergies in Texas from the operational innovations that happen in the Uinta, which is hard for people to kind of get their minds around, but think remote frac, think we're looking for potential sand mines in and around Texas that we can operate ourselves after having done that in the Uinta. Blake McKenna, who is now named to be the future COO, was the COO of XCL. We had him come over and run our Texas operations and really change the game there.
We did also see the benefit of bringing the synergies from SM, from a geoscience and technical perspective to the Uinta Basin and combining that with the operational innovation. We saw a step change there in our Uinta performance. We just know that Blake bringing that to this larger portfolio combined with our deep kind of Midland Basin experience that we have will just be exceptional going forward.
It's interesting, Blake moving from the Uinta to Texas and made improvements in Texas. Did he have much background in Texas, or just other things that translated to the operations?
No, actually it was all operational focused on best practices and innovatively thinking differently. Like we have done typically on the SM side in the subsurface, the XCL team really pushed forward with that on the surface. What if we can frac two to three miles away? What if we owned our own sand mine? What if we put a conveyor belt to eliminate truck traffic? All of those questions combined with the geoscience side that SM really brought was differential for us. Now we think this is just a true kind of benefit from adding that scale and seeing his direct leadership to pushing forward through some of those synergies that we saw there.
On the XCL acquisition and the comment about bringing in their personnel, those were primarily field personnel, not G&A.
Right, right.
Yeah.
Beth, you mentioned upfront one of the things that attracted you to SM was the people, and one of the hallmarks of SM has been the ability to identify value where the rest of the industry kind of missed it. Do you see that kind of opportunity within anything that Civitas owns?
Definitely. We see that within the Permian Basin specifically, we're testing additional targets. We've talked a little bit about the Woodford. We're testing different landing zones within the Woodford Barnett section, and we see applicability to apply that to the broader portfolio. Additionally, Civitas has done a great job in the Wolf Camp D and landing and pushing costs down, drilling and completion costs there. We see applicability to apply what they've done as a best practice to our acreage on the Wolf Camp D. I just think that there will be differential inventory adds than we have today, both standalone.
Is that Wolf Camp D gassier, or is that still primarily oil?
It's shallower than the Woodford, but it is gassier than the Wolf Camp A and B.
Okay. Okay. We'll stop, see if the audience has anything, and keep going. We've got a bunch of questions, but if anybody wants to interject, feel free. One of the things I haven't asked, the past couple of companies are actually just one, but I'll ask you. Everybody seems to be focused on AI now, and you've got to have a data center angle to your story, but has AI been applicable to anything you're doing in terms of making things run more smoothly and saving you on any of your costs?
For sure. I think when you go back and you look at historical performance, you've seen us put in there multivariate analysis and machine learning in our slides in the past. Of course, that's part of the spectrum of AI, right? You go to predictive analytics and how are we using that? We're actually using a very large kind of middle platform that would be pretty famous if I told you the name of it. We're utilizing that in our production operations. We have seen increases on our PDP through gas lift optimization. What we're doing is building this large model, and basically within that model, it will tell us different injection rates that we should try that it learns on itself after we ran step rate tests. Through that machine learning, the engineers have honed in on the best practices moving forward.
We have tied our compression to a machine learning model that then feeds into the injection rates that go into the wells that we then see translate to incremental barrels on the production side, on the PDP production. This is happening in the Midland Basin. We will apply it beyond that, and having Civitas' wells come into the mix really excites us about our ability to offset some of that decline through these predictive analytic tools.
Great. I guess I wanted to ask, you do have the ability to kind of flex between you're primarily an oil company, but you do have some gas assets that, especially in South Texas, you haven't really been spending money on. I guess gas is up, oil maybe. Excuse me. Some people are a little bit more cautious about. Any thoughts on the macro and how that might influence your 2026 program?
I would just say that going back to Beth's answer on the divestiture candidates, we love all of our assets, and there's a lot of good options. Part of what will factor into that is what someone's willing to pay for something versus how much it's worth to us. The commodity mix, and as you say, the gas market would certainly play into that.
Yeah. I think too that when you look at the gas price, we have the Austin Chalk there. We have a lot of liquids associated with that. It creates tremendous returns, right? Along with the gas price and the gas associated with that. What I would say is that we get the question probably from many of you guys, because I recognize a lot of you, is when do you pivot to Eagle Ford dry gas, right? That is when we think we see a sustained price of at least $4 through shoulder months, right? We have spikes of it, but then it kind of falls back down. We've heard the quote that oil's one headline away from going up, and gas is one headline away from going down.
Sounds like Herb said that.
I got a quote who quoted that, but yeah, I think that we see the flexibility and the optionality that South Texas gives us from a gas perspective. We continue to run kind of the full-on returns model and see what competes for capital right now. It still is our oil-rich assets that have the highest margin, and that continues to be where we put our capital.
Are you given any formal guidance for the merger? Any thoughts on what would be, excuse me, sort of sustaining capital for the combined company?
Yeah, I've got a number here for you, Mike. Let me find that.
A broad high level.
A little early. I mean, I think the only thing we have said that we'll repeat is that if you look at consensus, if you think of the two companies put together, you should probably be expecting an activity level less than that and a capital number less than that, especially if we stay in and around this commodity price.
Right.
Excuse me. Any thoughts on the merger ability to close? I'm getting choked up over it, so.
It's not a great time. It is an emotional time.
The ability to close the deal with some of the issues that the government's had here recently.
We don't see any risk to that as it relates to timing. That's why we've said Q1, but we really don't see any risk once we file the S-4 and HSR and then have our shareholder vote. We think everything will clear in Q1. It's better now that it's open again.
So.
It helps.
Jared to the rescue. Thank you.
Oh, thanks.
I'm going to pause again while I'm taking a drink here to see if anybody wants to ask anything. I guess maybe for Wade on the balance sheet, you got some debt coming due here, and Civitas has some debt coming due, I guess, with the combined. It's what, north of $800 million. Thoughts on how you handle those maturities?
Yeah. Yeah. No, those are, as I mentioned earlier, you kind of look at the pro forma maturity stack. They really do kind of fit hand in glove, and you do not have any year where there is a tall wall, thankfully. You have some every year, including the next year, as you just pointed out. As I mentioned, there is just a lot of combined liquidity. By the time we close, the expectation is they will be out of their revolver. We are out of ours now, building cash. Kind of the base case thinking right now is just to use cash and free cash flow to take those out. We will be watching the bond market closely and looking for refi opportunities that could potentially play into some of the other maturities as they become more callable.
I think several of them are callable at par right now, which are the ones you just mentioned, but we'll just kind of move forward and watch the market for opportunities. You could just think of a base case of us taking those out with free cash flow and existing cash and liquidity.
Yeah. Just to add on to that, we announced the at least $1 billion divestiture target that'll accelerate that.
Right. That'd be probably call number one on the potentially.
Exactly. Exactly. My comments were irrespective of that. That would obviously accelerate a lot more reduction.
Beth mentioned the third quarter results were pretty strong, kind of got lost in the shuffle with the acquisition news hitting at the same time. You did have some, especially on the cost side, I thought some pretty impressive numbers there. Could you talk about some of the things that drove costs down for the quarter?
Yeah. I mean, if you look across the board, I think some of the timing of workovers, right, was part of it, and fundamental changes in how we operate our business. You heard me kind of talk about the additional barrels that we got from the prod AI project that we have, but just driving costs down, looking at chemicals across the board. We really went to more fundamentals in the business of looking at chemical costs, looking at the workovers, making sure we were getting the returns where we wanted them. Additionally, we've just really done a great job across the board aligning on transportation. You've seen that within the Uinta Basin as well. Overall, we really saw costs coming down and continuing to drive that capital efficient program, and now more so to a larger portfolio.
You didn't really talk about any delineation wells yet for the quarter. Obviously, again, the big news was the acquisition, but it seems like you've been working on a lot of these areas where you're sort of pushing the boundaries on the various plays. Any news we can anticipate or even general comments on how that delineation work's going?
I think a couple of things. We have some encouraging results on our next Barnett Woodford well, and we'll be happy to share that with you guys as soon as we can. Encourage there, continue to drill the Woodford section and getting faster and better at doing so. You have heard me say that on the past quarterly calls, we were able to bring that down by five days and accelerate really our learnings there. When you kind of go beyond that, the upper cube, we've talked about that quite a bit. We would like to share some answers there, as well as the Uinta SM designed and completed basically cube development that we're putting into place, and that comes out in 2026. It is probably around mid-year of 2026 when those results will come out.
I guess with the.
I'm very excited about that.
The latter part there on the Uinta Basin, your first SM design wells.
Yep.
You kind of hit it from a productivity standpoint, or I think you were referring to it, but how about on the cost side? Is there going to be expect? I mean, XCL was pretty darn efficient. I think that's something that really surprised you guys when you bought it. Should we anticipate any sort of continued cost savings there? Anything you can.
Yeah. I would say we pointed to some of those cost savings as far as the remote frac and our ability to keep the frac fleet in one place and then put it right next to the sand mine to eliminate the trucking. That has definitely saved us. The other thing I will say is that we're putting in our completion design, and if you look historically across all of our assets, you'll see that we do a little bit wider spacing with larger fracs, and we see that the incremental return that we have on that additional completion capital has been significantly higher than kind of a through belt wellbore return, right? We are talking a two plus on those kind of incremental returns.
That is why we go to that model, and we really look at that entire cube, and you'll see that is where the differential technology is applied. Yes, overall, we continue to drive costs down, but we do so from a value-driven perspective. You'll see our completion costs go up a little bit, but we're getting the benefit on the side of productivity.
You mentioned that one pad. How long do you keep operations going there? I mean, you got this huge stack pay that you could presume sit there for a while. Is that a?
Yeah. Months. The months that the frac fleet will stay next to the sand mine. We're actually testing now an umbilical line that goes further. Our ability to stay there for longer is a test that we're doing right now.
The umbilical, it's like casing that essentially takes the frac fluids and prop it to the next location.
Right. We have that now, but it's jointed, right? This is more of an umbilical where it would stay there for longer. It reduces your hydraulic horsepower charges, bringing those costs down and allows you to go longer on the remote frac and not move your fleet. We're testing that now. That's the next kind of differential piece to the equation.
What are the potential savings with that?
You don't have to mob, demob, right? Additionally, you can go further. Again, you don't have to use the trucks because you're eliminating truck traffic by keeping the frac fleet right next to the sand mine and then pumping further and eliminating the mob, demob, and downtime associated with moving a frac fleet.
Do you think you're talking like $50 a foot per change or something like that, or?
We haven't quantified it yet.
Okay. Okay.
We're in the point of testing it, but that's really the next kind of differential change.
Gotcha. Anybody else? Anything? I was going to ask about you did some small acquisitions here recently. CapEx increased a little bit for that. I think it was primarily stuff that you'd already had an interest in. Maybe just talk about the decision to sounds like capital well spent, but.
Yeah. It is in the Uinta and DSUs that we were already planned on kind of getting those in the frac fleet. What happened was we go out and we ask the mineral owners and the working interest owners if they are willing to sell to us just to increase our profile as part of these high return wells. We did that. We were successful on two different units that we were drilling on and completing on, and you will see additional capital that we are completing and finishing those wells in the fourth quarter. All that incremental was just buying additional interest in the wells that we already had planned.
Great.
Yeah.
I think I've gone through my list of questions. What didn't we cover?
Anything?
I don't know what it would be. I think we covered it pretty well, Mike.
Your power agreement that you're going to have, I guess we didn't touch on that, but if you got one, you want to divulge it now. Now's the time.
Not yet.
Yeah. Just want to talk about just like differentials. I know as soon as you got into the Uinta, the differentials were a little wider, and they've been improving. Can you just talk about the differentials between your three assets?
Yeah. If you—what page is that?
13 of the earnings stack.
Thirteen of the earnings stack will have the realized prices for every single asset. When you look at Uinta, I think we continually—and we focus on the margin there, right? If you look at third quarter, it was fantastic for Uinta despite the drop in the price of oil, right? Still extremely impressive there due to the oil content. We were driving more barrels to Salt Lake City as much as we could, and then additionally to Price River. We have just been able to optimize the marketing there on the back end from a realization of who our buyers are, and the buyer market has expanded since we kind of stepped into the Uinta. We are really able to drive value that. I mean, basically in the Permian, it is no cost of transport, right?
We're really always looking for the right realizations and the people to partner with on the back end to give us the best margin. I don't know if that's kind of the—
I guess in the Uinta, how much of your oil goes to the local refinery and how much is—
About 15%-20% that go to the local sand—I mean, to the local refineries.
Is there anything happening on the transportation side that can help you with the costs there?
We have looked at much of capturing the value chain, and we are trying to do that as much as possible. You probably also saw the news about the FTC releasing the in-basin rail, right, which will eliminate some of the trucks. We are happy for the infrastructure to be built into Duchesne because we think that is just in general better for the entire Uinta. It is a little bit further from us. We will have to see how that kind of plays into the broader marketing picture and if that helps us on a margin basis. We continue to look for the best combination and ultimately the best buyers on the back end because it commands a premium on the back end. The waxy crude, it is a great feedstock for the refineries. As a result, because it is pretty clean feedstock, it commands that premium.
It is really a combination of the transport side and the realized price on the back end.
Does the transport have any impact on your—or as you think, contemplate what you want to spend in the Uinta, are you bottlenecked at all, do you feel like, or could you grow it if you wanted to grow the Uinta, say, oil prices move the other direction and you really want to lean on oil, you're capable of doing that?
Yeah, we can. We can. Recently, PRT announced an expansion with Four Point coming to the table, and we know that Four Point is, to some extent, kind of increasing their production. Everything that they have is going to Salt Lake City right now, and nothing is going to PRT, but we know that they're expanding the terminal. We see that as an advantage straight away. There's going to be more capacity there than what both of us actually use, at least to start. We know that contractually too, if we show them a growth profile, that they'll build it. They'll build it out. We were excited to hear that news as it continues to grow. Just give us more space.
Great. We'll leave it there. Beth.
Okay.
Wait. Thank you very much.
Thanks, Mike.
Thanks, Mike.
Thanks, everybody.
Thank you.