Q&A and open it up obviously to the audience. With that, Wade, thank you, and please go ahead.
Thank you, Bill. Hey, good morning. Thanks for joining me today. I guess I should say welcome to Colorado. I feel like a Coloradan now. I've lived here about 15 years. It's just a beautiful place. Thank you to Credit Suisse for hosting the conference here and for inviting us. I'm gonna start with three numbers. See if you can guess what I'm talking about. They're actually percentages. 40%, 50%, 75%. Okay? 40%, the reduction in the oil price since it peaked last summer. 50%, the increase in drilling and completing a well since a little over a year ago. 75%, you know what that is, the decline in natural gas prices since the third quarter. It's a great way to start a speech, right?
Inspiring. It is inspiring because the inspiring thing to me is a couple of things. One is I think history tells us that one or all of those will recover. Also even if they don't, I think very, very inspiring, if you wanna use that word, is the fact that our plan, SM Energy's plan, for 2023 and beyond, even if none of that changes, generates a ton of free cash and returns a ton of cash, I would say, to shareholders, just like we committed to late last year and actually has some free cash beyond that to either deploy more to the shareholders, potentially to opportunistically add inventory, or to delever the balance sheet.
That's kind of my main theme today, and I'll kinda get into the story. I guess I've already been making forward-looking statements, so you should know I'm not a prophet, so you've been warned on forward-looking statements. Okay, who is SM Energy? I assume some of you in the room and especially those online may not know a lot about us or who we are. I'd like to just kinda summarize SM Energy as a premier operator delivering a sustainable return of capital, and we're empowered by a strong balance sheet and a world-class technical team that poises us to repeat that. Those are gonna be the topics of my presentation this morning. I'll pull out the main ideas of that, of that summary.
I'm gonna kind of reverse the order a little bit just because we just released year-end earnings last week with a lot of data. I'll start with sustainable return of capital and strong balance sheet, we'll move to premier operator of top-tier assets and talk about the assets, close with the world-class technical team. The assets, pretty simple. You can see here on this slide the great state of Texas. We have two assets. They're very much top-tier assets, one in the Midland Basin, one further south down in South Texas, which is the Austin Chalk Play. I'll start with sustainable. We released fourth quarter and 2022 full year earnings last week. It was a tremendous year.
Record free cash flow for SM Energy, $849 million. We used most of that to reduce debt, about $585 million of that, and then we also began our return of capital program toward the end of the year, returning $77 million through an increased fixed dividend and beginning our stock buyback program, which I'll move to next. For a few years now, we've been very intentional and very clear about our objectives and our goals for delevering the balance sheet and getting down to what we called one -in -one, and that was what we consider a strong balance sheet that we want to be at in the cyclical business that is the oil and gas business.
That's 1x below 1x debt to EBITDAX, probably more importantly, near $1 billion of absolute net debt. We got there a lot faster than we thought we would. As we were approaching it in September of last year, we were confident enough to announce I think what most believe was early, our return of capital program. We increased the fixed dividend to $0.60 per share, we announced a stock buyback program up to $500 million to be executed over the next couple of years. I'll just make a comment about that. We got started immediately. As you can see, we used $57 million to buy back 1.4 million shares toward the end of last year.
The idea there is just to be methodical, I think I've used that word, and to support the stock, you know, quarter by quarter. What you can also imagine is that when we're supporting the stock, we obviously have views on NAV, and in periods where we believe there's a bigger disconnect, we're probably gonna lean in a little bit more. That's probably all I can say about that, but that's gonna kind of be the method for executing that program. The balance sheet at the end of the year, we ended again with 0.6 x debt to EBITDAX, very, very low leverage, achieving our target.
The net debt of around $1.1 billion is where we ended up at the end of the year, then the structure of that debt is very strong as well. Nothing maturing until the middle of 2025, and then you know, that debt is kind of layered out pretty evenly over the following years through 2028. Undrawn revolver, lots of liquidity. It doesn't mature until 2027. Then we have coupons that are, you know, obviously very attractive compared to current market. Those actually are starting to look more like investment grade in our industry. We're very happy with where the balance sheet is. I'll close this section with a comment on ESG.
I like the placement of this slide, kind of at the end of the sustainable section, also kind of a segue to the premier operator section, which I'm about to go to, because we've always said that you cannot call yourself a premier operator unless you're a leader in ESG stewardship, and SM Energy continues to be that. Our 2022 performance was also very positive in the ESG area, improving in flaring statistics, improving in greenhouse gas intensity, that's Scope one and Scope two, and maintaining that really, really good methane intensity results. You look at any outside Surveys, we always are toward the top of that list compared to our peers, particularly peers anywhere near our size. Premier operative top-tier assets. I'll talk about the assets.
I mentioned that there's just two, one in the Midland Basin and then one in South Texas, which has become the Austin Chalk story. Starting with the Midland Basin, this is just a fantastic asset. I think anyone would agree. 82,000 net acres, primarily in Howard County, but also in Martin County, Midland County, Upton counties. We are currently running three rigs, one completion crew. That's been a pretty steady pace for us. We announced last week that the 2023 plan has us drilling 40-45 wells and completing 50 wells. I'll talk a little bit about some well results just to demonstrate how good this asset really is.
The chart on the left looks at our wells versus a list of other peers in Howard County. This is specific to Howard County. You can see the list of those peers at the bottom of the slide if you choose to read them. You can see many of those companies are much, much larger than SM Energy, but the results really speak for themselves. That's a cumulative production plot over 20 months. 31% outperformance over the average of the peers is really telling, I think. The chart on the right is an internal comparison for us to show progression. Each line is a year. You have 2020, 2021, 2022.
First, I will point to you that the gray line moving up to the black line shows you the significant improvement, in our cumulative production plot, and this in, going from, 2020 - 2021. That was a lot of the work that we were doing and we talked about last year, with optimization and completion designs. Then the green line is 2022. I think it's really important to look at it and to see that upward trajectory. We talked about this last year too, but I think a lot of folks forget there's a lot of offset activity last year. I think 20% of our wells that came on in 2021, were shut in for periods for offset activity.
Now you're starting to see what those wells really look like, though, and they're moving up toward the 21 line. One more chart on the Midland Basin. EUR is obviously very important. This is actually third-party data, looking at EUR performance for us versus again, peers in Howard County. Again, you can see the list of those in the chart at the bottom or in the list at the bottom. Again, a lot of those are larger than us. What you see is. This is adjusted for lateral feet. What you see is SM ranks number one in EUR performance. I think this is over the last two years.
Okay, turning to the other asset in South Texas. Historically, if you followed us through the years over the last decade or so, you know this was an Eagle Ford story, which was a great asset for us, a gassy, a wet gassy asset that we drilled, you know, probably just a ton of wells in over the years. 1 million wells, I think, is probably the number. Recently the story has become the interval that lies just above the Eagle Ford, and that's the Austin Chalk. This has become a great story for us. Austin Chalk, much oilier, generates very, very low breakeven results, quick payback. Returns are very similar to the Midland Basin asset, which is very exciting.
I'll say some things about that in the next couple of slides. This slide, you know, we're up to like 68 wells now. All 68 wells in the Austin Chalk that have now reached their IP30 are included in that chart on the right. You can just see the average production. On the left, we've shown you some recent wells. These are 14 wells in the liquids-rich area, and I'll talk about that in a second. You can see the kind of the way the commodity mix is unique here versus the other part of the play, which I'll mention on the next slide.
Here you see 30% oil, 64% liquids. Look how the BOE numbers are just really large. 2,500 BOE a day. These are great wells. I mentioned the map, and what we've done now to help folks is we've kind of separated the map into two distinct areas. The north, the northern version, being the oilier, part of the play, and then the southern version, southern and east version being what we call the liquids-rich gas area. The big point to this slide, and you see we've drilled wells all over the play, those 68 wells are well represented all across the play. That's what the color sticks are.
The big point here is in the oilier area, which you can assume high, higher oil content, higher returns, good, they do. They generate great returns. Again, similar to the Midland Basin. The liquids-rich gas area, lower oil, but much higher BOEs. The returns are actually similar, just with a different commodity mix. You can really see some of the difference in the total BOEs in the chart on the left, where you see the liquids-rich gas area plotted in the cube plot on the blue, being above the oilier green line. Returns are great. Assets are really good. How long do they last, right? Inventory is obviously a really big valuation question, right? If nothing else.
I'll start with proved reserves since we released these last week. I'll talk broader about inventory. Proved reserves we announced last week. Great year for proved reserves for the company, 537 million BOE. That's near very close to our record in 2014. The reason I think that's an important comparison is the fact that that's virtually the same as our record in 2014. If I go back to 2014, I see that I was drilling, using 15 drilling rigs that year versus this year, only five drilling rigs. Plus you're kind of hampered by the five-year rule now versus then. That should really show you the improvement and the increase in the value of these assets today versus back in 2014.
$12 billion PV-10, that obviously has some higher prices in it with using the SEC kind of looking backwards price. Reserve replacement 205%, really a good results of the year. Looking at inventory, I guess the numbers that you should just try to remember is 10-13+ years of inventory. And it's important to know how we calculate inventory. We use a price deck of 65% and 3.25% to calculate that inventory, and it generates returns over 60%. And you should know that we this is a very engineered inventory, individually modeled, not just sticks on a map. 80% of the inventory is actually in 3P reserves. That's important. That means they're very economic. That means, you know, geologic certainty.
They have a place in a plan, they have a type curve, just very specific, versus, you know, some broad brush assumptions like some others might make. Looking at inventory, a quick slide on each asset, just some highlights in the Midland Basin. I love this slide. It's a good visual. I think a lot of us know it, we have to be reminded. In the old days, if you said net acres of 82,000, you might have thought, "That's not that big," till you multiply it by eight, right? I mean, potentially eight different zones here in our position.
Historically, you've seen the biggest results for us from the A, the Wolfcamp A, Wolfcamp B, Lower Spraberry, these other intervals we're very excited about. We've been testing and we'll continue to test in 23. I think we said some specifics regarding the Leonard, the Dean, and the Wolfcamp D, getting into further delineation there. I won't read through the slides. You can look at the specifics for the 2023 plan there at your leisure. Turning to South Texas, a comment on inventory. Really like this slide. We've updated it. It has all 68 wells that are producing in it now. We're still very confident in our early assessment that there are 400 locations in our Austin Chalk position. This is called a P10, P90 ratio.
I think it's pretty telling, because you should know that the lower the number, the better. Obviously, what this shows you is volatility, variability, between well results in the play. Anything I'm told anything in the two, three area is fantastic. I mean, you can see our Permian assets to the far left, which has over 500 wells in it now. You can see those numbers have two handles. Over the far right, you have Austin Chalk, the older Austin Chalk, for those of us that remember the Austin Chalk of the 1990s or the early 2000s, the one that always disappointed us, right? You'd get excited, but then the declines would come, or you'd have a well that was good, then a well that was bad. So high variability.
You see that in the numbers on the blue charts. The yellowish green, whatever that color is, in the middle, those are our 68 wells so far that have IP30s in the Austin Chalk. You can see they look much closer to the Permian than they do the old Austin Chalk for sure. Still very excited about this about this asset and the running room we have in it and the returns that it's gonna continue to generate, we think, similar to the Midland Basin. Clear top-tier assets. Just a comment that we noted last Friday from a research firm talking about the highest quality inventory, deepest inventory, especially in mid-cap coverage. I said I'd close with repeatable.
Remember I said, empowered by strong balance sheet and world-class technical team, poised to repeat this success. I've talked about the strong balance sheet. Just a couple of words about the world-class technical team. In fact, just one slide. We could talk a lot more, but I think this is a very differentiating area for SM Energy, especially for a company our size, is having the technical team that we have. I'll just give one example because it's a big example, and it's the two top-tier assets that I've been talking about. I'll start with Howard County.
If I took you back to, you know, to 2015, and we could probably go back and find them, but if you had maps of the Midland Basin, you would see Howard County distinctly outside of the line, right? That's what most people thought. Our team, and we've been in the Midland Basin for about a decade by this point, had been working that area hard and studying it and was reaching conclusions that this is going to be part of the best part of the Midland Basin. We were able to lean into that and feel confident in that assessment, made the acquisitions, and now you can see how busy Howard County is.
We've got lots of friends around us, it has proven to be, one of, the best parts of the basin. That's, that's that. You know, jump ahead a couple of years to 2018. If I told you that, you know what? The Eagle Ford's been great, but there's this interval on top of it called the Austin Chalk that we think is gonna be similar to the Midland Basin, probably would have thought I'd been at the bar before I walked in the door, right? I mean, most people thought of the old Austin Chalk when you said that. This team had been studying the Austin Chalk, in a huge way.
If you imagine all those wells being drilled in the Eagle Ford, those million wells that I've been talking about, every single one of them had to go through the Austin Chalk to get there. Enormous amount of data to study. They got very positive on the Austin Chalk. We were able to start testing and now proving again that they were right. Very exciting. I say all of that just to say that team continues to work on things that you probably have no idea they're working on in-basin, some out-of-basin, but at the right time, right place. The good news is I told you the 10 - 13 years of inventory, we don't need to do anything.
However, at the right time, the right deal, hopefully, you'll see more repeated economic inventory delivered by this technical team. That's it. I'll say it one more time in case you've forgotten it. Premier operator, top-tier assets, delivering sustainable return of capital, empowered by the strong balance sheet and the world-class technical team, poised to repeat all of that success. That is who SM Energy is. Thanks for your time.
Great. Thanks for that overview, Wade. Appreciate it. Maybe we'll start kind of where one of the first things you mentioned was the balance sheet, obviously in much better shape today. You mentioned the one-in-one framework, low leverage, no maturities, I think you mentioned, till 2025. Just kind of thinking about, we'll touch on cash returns after, but even after returning a substantial amount to shareholders, what to do with that cash on top of the free cash flow that you're gonna be generating over the next years?
Yeah. Great question. Love that question. It's a fun question. I, you know, look, I think I'll start with the balance sheet. If you would've listened to this late last year, you probably would've assumed that we would've taken some of the cash that we're building in free cash and just gone ahead and taken out the 2025s cause they're, you know, they're getting at a pretty reasonable. I think They're not down to par. They will be by the middle of the year, but we could take them out. What's happened is obviously the things have changed in the bond market. There's a lot of uncertainty going into this year with the economy and kinda where things are gonna land.
Frankly, and that coupon is very, very strong, so we've decided to be patient on that. It's not till mid-2025. It's amazing how much we're earning on the cash now too. You know, all of that aside, it feels right to be conservative right now. Having cash is not a bad thing. Just kind of monitor where we're going from here. Deliver on our return of capital program. See what happens with commodities here. I mean, we don't know. Gas did, you know, came down pretty hard. Where's that gonna land? More importantly, where's oil price heading?
So for all of those reasons, it makes sense to, you know, to have a lot of dry powder, to be patient with the balance sheet at this point, and to look for opportunities, whether that's to. I'll just get to your next question. Whether that's to be more aggressive on the return of capital program, or, you know, depending on our view of NAV and how the stock's trading and those kind of things, and what other opportunities look like. We look at everything. I'm sure that's one of your next questions.
Yeah.
We look at everything.
Yeah.
We're very patient, though. We don't need to do anything. It's a pretty high bar because it has to stack up with the assets we have. For that reason, we're probably more patient. I believe with our, with our technical ability to hopefully, see something that others don't see, I mean, that's been the story, so far, that being prepared for that makes a lot of sense.
Yeah
with the balance sheet, so.
Fair. Maybe on the cash return piece of it, on sort of the methodology, you mentioned the increase to the dividend and obviously the buyback program. Should we think about it as sort of a formulaic or consistent quarter-to-quarter type of framework for the buyback, or is it more of an opportunistic framework that allows you to be a little bit more nimble?
Yeah. I would say it's a little of both. I mean, I think, you know. Look, there's two things at work here, right? There's what I know that or what I can forecast and see with respect to SM Energy, things we can control. I can typically, you know, imagine the value of the stock versus what I think it's worth. That's one area. I think that tells me I wanna try to be opportunistic here and there. On the methodical time, I think it's important to be humble about the macro, right? We don't know where the macro's going. everything that you know about things you can control can be totally overwhelmed by the macro.
I think, it's a combination of both of those, is the best way I can say it.
Okay. I think you mentioned one of the big objectives for 2023 is to continue to build the inventory, right?
Mm-hmm.
You showed a lot about the Austin Chalk and some new, or emerging zones.
Mm-hmm
in the Midland. Could you just kinda talk through the plan there? What could be what you're testing, what you're looking at for this year, and maybe what could be the upside to your inventory? You don't have to put numbers around it, but.
Yeah
just kinda how you're thinking about that plan.
Yeah. No. I, you know, without getting too specific, clearly, organically growing inventory is outstanding when we can do that. We've actually been doing a pretty incredible job of that, frankly, the last several years, including in the Permian. Not just The Austin Chalk's the obvious example. In adding intervals and adding, you know, more sticks within intervals, in the Permian has been really impressive the last few years. That will continue. It's a high bar to say that you can just do that and replace everything, but that's been what's happening. You know, and I mentioned the areas that we'll be testing, in, you know, the Leonard, the Dean, the D.
So that's, you know, that's part of the plan. There'll be other things that we're testing around the fringes. Then beyond that, it's really just looking at everything. It's looking at everything and not putting a date on it, not saying our goal is to do something. Cause that is not the case at all. Our goal is to continue to look and be very disciplined and look for the right opportunity and look for the areas where we think we can do something different or we know something that like has happened in the past, so.
Yeah. It's been a part of the strategy in the past, particularly in building out your Permian business.
Exactly.
If you can just maybe just we'll touch on that more specifically, kind of how you're thinking about approaching potential acquisitions, what you look at, what sort of metrics internally, you think about in approaching those.
Yeah
Without, again, giving out too much.
Yeah, no. It's something we focus on a lot. I mean, we've got a, you know, a big team that a technical team and a BD team that we look at M&A, we look at asset packages, and look at assets that might be packages all the time. you know, The criteria is pretty. It's not that shocking, right? I mean, it has to be assets that compete with our assets. It has to be something that's not going to push us back on leverage. We've done a lot of work there and don't wanna undo that. It needs to be free cash flow accretive.
You know, if you're talking about M&A, all of those criteria, they kinda have to be met. We just firmly believe there has to be some industrial logic to it too. It's not just, it's not just all of that math without industrial logic. So that's, you know, that's the methodology we go through, we do full pro forma. We put it in as if it's a new, you know, as if it's now part of our assets. We look at the, you know, the DPI return waterfalls. Where do those assets fit with these? When would they be drilled in the plan? Just do a full analysis. It sounds simple, and it's really not. Where do you look on a per-share basis before? Where do you look on a per-share basis after? By the way, that has to compete with buying back the stock.
Right.
How does it look before? How does it look after?
Yeah. That's very helpful. The last one for me is, you showed some good slides on Howard County well performance versus your peers. I'm just wondering if there's anything you can share, what's driving that relative to your peers. You know, you mentioned SM being a good operator, but any in particular that, maybe without sharing trade secrets, but kinda what's driving that, and do you expect that to continue?
No. You know, a couple things. I mean, it seems like it's different examples every year. I mean, we really do truly have people that are premier operators, right? I mean, it's continuing to work and improve the asset. Whether that's completion design and optimization there, that's always being worked. Whether it's landing zone has been a huge deal for us and doing that properly, hitting. All that goes into data, right?
Right.
Technical analysis. They just do a tremendous job of that and, the efficiency of those programs. I will caution you know, look at these slides. I thought you were going to a place. You know, you gotta be careful. We've seen this happen a couple of times recently with state data.
Mm-hmm.
versus, you know, what you see on these slides, right? State data can be. Well, it's not deceiving. It's just incomplete a lot of times. In Howard County, for example, you know, I mentioned. Well, that one slide showed it. You know, we had 20% of our new wells last year were impacted, were shut in by offset operators. I mean, if you look at a map, you know, there's colors everywhere, right? It's a crowded area now.
Yeah.
For all the right reasons. With that comes some of that. You don't really see that in the data, so you have to understand that's not the rock. That's not the type curve. You know, that's. There's a different reason for it. Similar in South Texas, where we've had some issues where we've had to choke back because high-class problem, too much oil for the system. Again, so I'm just. This is just a cautionary tale to state data. Just make sure you know the whole story before making a conclusion on the type curve or the asset.
Right. Okay. I'd love to open it up for any questions from the audience. We've got a mic going around. Any questions for Wade while we have him here?
Can you show that slide again with the net present or the value of the total assets? I think it was like $12 billion.
The reserves?
Yeah. I think it was like slide 14 or something like that.
Yes. Sure. Okay. Thanks for asking. Yeah, that's a big PV-10. $12 billion. Again, I wanted to caveat that. That is using rearward prices. I don't have the number for you today, but it's still a really big number. A very big number.
Okay. When you're considering acquisitions, would you add other basins or would you perform continuously?
Yeah. Yeah. Good question. The question was: When considering acquisitions, would we consider other basins versus in-basin? The way you asked it, I can say yes. Would we consider? Yes. Would we prefer, do we lean in more and really desire? The basins we're in, we love, we know them, and there's typically more things we can do with those, so those are gonna be our preference. But we look outside as well.
All right. Any other questions? All right. If not, please join me in thanking Wade and SM Energy.
Thank you.
Thanks, Wade.