Hi. Good morning, everyone, and thanks for joining us today on day one of the Natural Resource Conference. I'm Jack Girasole from the E&P research team here at J.P. Morgan. Up next, we have SM Energy, an E&P focused on developing assets across four U.S. shale basins, the Permian, DJ, South Texas, and Uinta. We're very excited to be hosting SM's president and CEO, Beth McDonald. Beth joined SM as Executive Vice President and COO in September 2024, was named president in September 2025, and appointed CEO in January 2026. Beth, thank you so much for joining us today.
Thank you so much for having me.
Yeah. Maybe to start off, for those in the room who don't know you, can you tell us a little bit about your background? You started as a field engineer. How did that shape the way you lead today, and what drew you to SM?
Yeah. Thank you for that, and thank you all for joining us today. I started as a field engineer with my love for geoscience and engineering and problem-solving, and started as an ops engineer, did time in drilling and completions, and then really found myself in reservoir, really more in the strategic perspective. I joined Pioneer in 2005, working exploration projects in deep water at the time, Gulf of Mexico and Northern Africa, which is kind of crazy when you think about a company like Pioneer Natural Resources, you think Midland Basin. I like to say that I had a tremendous opportunity at Pioneer. 20 years with the company, worked several different basins, primarily South Texas. I led our South Texas asset team. I ran the Pioneer Water Management team, and then stayed until the end at Exxon, when Exxon took over.
I was leading multiple teams at Pioneer, really primarily focused on the pure play Permian that we ended up being. I think that the thing that attracted me to SM was its technical focus. If you look at the track record of SM for much of the last 10-15 years, SM has really been pushing the limits. They did that in Howard County in the Midland Basin, made tremendous wells in the Wolfcamp A and in the Dean. Some of the best wells in the basin came from SM Energy. In South Texas, the Austin Chalk was really a differentiator. In 2024, we stepped into the Uinta Basin and made a difference in an underappreciated basin, and continue to see the high margins that came from that.
Finally, I'll just say a little more about SM is that the people are really part of the difference, and that's what attracted me there. The technical focus, and you have heard in the past when Herb would talk about returns-based technical focus, but we really punch above our weight. We tremendously desire being curious and asking what if, and making a difference in the industry, even at our size.
You've stepped into the CEO seat at a pretty notable moment, the largest merger in SM's history, volatile price environment, and a new board. What's been the mandate on day one, and what's surprised you the most since?
I would say you'll continue to hear me talk about integrate, execute, and bolster. Those are our three strategic priorities going into the year. Integration is going really well. We have had tremendous velocity going into the year. We have increased our target from $200 million-$300 million to $375 million on our synergies, and we continue to deliver across the board. You see many of that coming across our cost of capital, which is really, I would say, probably our most. I wouldn't call it surprise. I think it's a lot of hard work from our dedicated team to make these things happen. What I would say is the sheer amount that we're seeing come to fruition in just the first 100 days of this transaction, I think, is really more of the surprise.
The fact that our team accelerated many of our goals throughout the year to the first half of the year and have been able to deliver on that's really the surprise point when it comes to the overall transaction. We're really excited about the value that we're creating through the merger.
Yeah. Speaking of value, the E&P sector is crowded with a lot of companies who make similar claims. Maybe can you make the case why SM specifically deserves a place in an institutional portfolio? What is genuinely differentiated with SM Energy?
Yeah. I think several things. After the Civitas merger, it brought us into four premier basins, the rock quality is very similar. We were just talking about this in one of my last meetings, actually if you look across the board and you take into time depositional history, you know that from South Texas, Permian Basin, up through the DJ, even into Canada, that was a primary depositional environment called the Western Interior Seaway. At the time, it really created these premier basins in which SM is part of. Not only do we have the differential technical team, we now have a portfolio of four basins with differential rock. We have the ability to have the scale now to create the synergies from a procurement perspective. We have the technical team to do it.
Now with the tailwind of commodity prices that we've seen versus where we came into the year, we've been able to meet those strategic priorities even faster. We talk about a lot our flywheel, what that is we've doubled the size of the company. We have line of sight to a low one times leverage position. We have a new return on capital framework where we're focused 80% on the balance sheet, 20% on share buybacks. As that leverage goes down, more goes to share buybacks. We throw off more free cash flow next year as our one-time costs roll off, we continue to see value creation from the merger.
You just talked about being a multi-basin operator. We've heard some investors argue that maybe four basins is too many basins, just given it can create complexity, dilutes focus, and makes it a little bit harder to model. You've seen large single-basin operators up close. How do you respond to this view?
Yeah. I love this question because basin diversification is actually a strength. Coming from Pioneer, you're very efficient when you're in one basin, but you're actually pretty limited, too, so there's concentration risk. If you can think about capital allocation is always kind of similar. Where am I putting my money when I look at the capital program from a drilling and completion perspective? It's in the best return wells, right? Well, if you're in one basin, you might not be able to do that because you have multiple rigs on top of frac fleets, you have supply constraints from a water perspective, and you have water takeaway constraints if they're all on top of each other. When you have a diversified portfolio, you don't have that concentration risk. Your capital allocation is still the same.
You're going to put it on the highest return projects that you can, the most capitally efficient incremental dollar. Now you have the diversification. You also don't have large basis blowouts that impact your entire financial position, and one winter storm won't take out a lot of your production. We see the diversification as a strength. The other thing that I think is important to keep in mind, just like I talked about the rock quality of being very similar across multiple basins, that we see as a strength, and they're not very far from each other. If you think about it, SM's position now in the Southern Midland Basin is only a couple of hours away from our South Texas position. Utilizing efficiency in our vendors, in our equipment, and how we operate is easy to do across multiple basins.
We see that as a strength. Having come from a pure play, I think that we'll start to see more and more companies start to diversify over time as we move through the industry.
Got it. You became a four-basin operator with Civitas. Maybe just kind of looking back, can you walk us through the strategic rationale behind that deal? What did SM buy that it couldn't have built organically, and where does integration stand today?
Yeah, I think two things. When we went into this merger, we saw double-digit free cash flow accretion of $60. Now we're in a fundamentally different commodity price environment, the accretive metrics that we're going to see are going to be better. The other thing it gave us was the scale in the premier basins that I've already talked about. The scale really drives us to see those synergies that we're delivering today. Finally, just the synergies, right? That's a tremendous opportunity. When you look across the board at all of the categories in which we're meeting and ultimately will exceed the goal there, we will create about $2 billion in NPV that neither company could do on its own. Just from the synergies alone, we're creating that valuation.
Additionally, I think it's important that we keep in mind not only were the accretion metrics there when we did the deal, but also our ability to double the size of the portfolio at the same M&A metrics is just not out there. Doing it with this opportunity, SM really saw that a strength for us. Our ability to double the portfolio with our talented technical team, both on the operations side as well as the subsurface side, and deliver value from that, we saw as a tremendous opportunity. Now you're seeing it roll through Q1, you'll continue to see it through the remainder of the year as we execute.
Yeah. SM's technical team has a track record of being ahead of the market. I think some examples of this are being a first mover in Howard County then drilling the first four-mile laterals in the Uinta and Midland, I believe Civitas was also similar in that case.
Yep.
Yeah.
Yep.
What's the team working on today that maybe the market fully hasn't appreciated yet, and where do you see are the biggest needle movers in terms of the technical team?
Yeah, I think all those things are spot on. We did a lot of kind of digging in that. I asked the DJ team, we knew that the DJ team from Civitas was a strength. We knew that their execution team had done things that were differential. U-turn J wells, candy cane wells, whatever you want to call them, they were doing differential things in the DJ, as well as lowering our costs there. What we saw was that, yes, they did the first four-miler in Colorado, we did the first four-miler in Utah, and we did the first four-miler in the Midland Basin. We actually did the first four-miler in the Austin Chalk in South Texas. Add them to all four of our basins, we have the records there.
I think what that says to our team is it shows the mentality of what if or why not, right? We have this curiosity component to continue to push the limits of what we're doing, and we, as a leadership team, allow our team to do that because we've seen differential movement in our capital efficiency numbers because of that. That's on the execution side. On the subsurface side, SM continues to provide additional incremental inventory opportunities organically, and we've done that and we've proven that over time. Start back to Howard County, just like you mentioned, some of the best wells. In South Texas, our Austin Chalk position, it was actually bought and purchased for the Eagle Ford position. The Eagle Ford is still there. It is still attractive to us, but the Austin Chalk creates better returns right now.
That's what's getting our capital. If we shift to the Midland Basin, you'll hear us, and we have talked about for a while, the Woodford and Barnett shales. I think the industry is catching up to the narrative that we had two years ago on our slides as it relates to the Woodford and Barnett shales. Now you're seeing the ability to execute that more efficiently through Managed Pressure Drilling and landing zone optimization. Now it's carrying a weightier narrative as it relates to the Permian Basin. Finally, if you look at the Uinta and DJ, our Rockies position, we continue to optimize there. We have more locations in the upper cube as well as the deep cube, which we're not counting as part of our inventory.
I think it's something that you will see us continue to add over time as we further delineate that part of our portfolio. We have additional acreage to the north in Uinta that we have no locations on. We own it right now. It has vertical production on it. We're drilling a pilot hole to understand that, and you'll see more inventory being added to that. There's tremendous opportunity, both from a subsurface perspective on the acreage we already own to add organically to our inventory number. Not only is there value created from the actual accretion numbers, the free cash flow, the synergies and everything that we're doing, but technically, we're adding additional value to our portfolio through what we do every day.
Yeah. I think, the Permian Basin obviously gets a lot of focus from investors, but I think you guys have done a really good job also stressing how the Uinta and the DJ fit within your portfolio. Maybe starting with the Uinta, that's an asset that actually generated the highest cash margin in the portfolio-
I believe. I think around $40 per BOE in the first quarter. You drilled your first 4-mile lateral in the basin. Maybe just walk us through that basin. How does it fit within your portfolio, and how does the extended lateral program, what does that mean for economics in the inventory runway?
Yeah. It means it's more capitally efficient. When you look at the 4-mile laterals that we've recently drilled there, the first ones, we actually have the measured depth and the TVD records in Utah. We're getting more capitally efficient, and I like to speak to the uniqueness of Uinta, and that it's hard-pressed to find the same thing that we're doing there in other places other than the Permian Basin. For the Uinta, we have a simul frac fleet that is run on our own residue gas. It's an e-fleet run on our own residue gas using our sand from our sand mine, and it's a remote frac situation, which means we only move the frac fleet two times a year. We remote frac 2-3 miles away so that we can see that efficiency and that uptime in what we're doing.
That's actually not done very often in very many parts of the U.S. It's done in a few parts in the Permian Basin. When you think about our ability to do that, really driving down costs, increasing our capital efficiency in Uinta is just another reason why we love that basin so much.
Yeah, maybe just quickly on the DJ, it's a newer basin for you. How does that fit into the portfolio, and what are some key learnings that you've had or surprises that you didn't know maybe before you got your hands on the asset?
Yeah, a few things. In the DJ Basin, let's just start with the fundamentals of the basin. Again, it's a great rock, and it's produced in many basins in the same depositional environment. It is a high-margin play. It has low costs. People equate to drilling in the DJ Basin to cutting powder. As a Denver company, we love that we now have the DJ Basin. The other thing I would say is that we slowed the DJ Basin down in order to be able to operate it more capitally efficient, and you saw that on our first quarter call. The other things I would tell you is that the DJ Basin is an environmental leader, and we have tankless facilities. What does that mean? Less facility costs.
We're looking at those tankless facilities that use three-phase flow meters and asking ourselves, how do we apply these same learnings here with less facility costs, less environmental impact from a pad design, and how do we save costs in other basins? I think that's one thing that we've learned from the DJ Basin, along with the drilling and completion learnings and best practices that I mentioned before as far as the Uinta and DJs that they had done.
Got it. I think if you, following SM Energy, it's pretty clear what your framework is for this year. It's integrate, execute, bolster. Can you maybe just quickly touch upon those three frameworks and just how you're tracking along the three and maybe where you see the greatest value coming at the end of the year?
Yeah. Integrate, execute, bolster. I talked a little bit about each one. I'll go into a little more detail. From an integration perspective, let's talk about people, because one of my focal points this year is to create a united culture that brings people and data together and enables our team to execute on the value mission. We've been able to do that. Within 90 days, all of our teams are together in the same buildings by function, and all of our data is coming through the same platform. That's something that couldn't be done previously, and we saw that as an opportunity, bringing the Civitas assets in to a 100-year-old company that had already established itself from an infrastructure perspective. That's from an integration perspective as the people and the culture and the data, those really drive the rest of the synergies.
If you look at the cost of capital piece and our velocity to that, we sold our South Texas gassier assets that were not strategic for us for $950 million. We were able to pay down debt, $700 million of absolute debt. Basically through that, as well as our refinance of some of the high-yield notes that we inherited from Civitas, we've been able to just really knock it out of the park for our cost of capital, we believe that that, as well as focusing on our balance sheet, will continue to rerate the stock. If you look at execute, Q1 was just one data point. The proof that we have is to show the Street that we can continue to execute at scale, and doing that at double the size.
We believe that's one data point of many to come that we'll have throughout the year. Like I said, bolster was the strengthening of the balance sheet. All of those pieces, I think, are important parts that you'll continue to hear us update as we continue this flywheel of free cash flow generation back into our return on capital profile, especially as we pivot into 2027 when those one-time costs come and they roll off. We look to that one times low leverage area and our return on capital starting to shift more into share buybacks.
Yeah. You just talked about 1Q being one data point, but it was a pretty positive data point.
Yeah.
I believe 1Q oil was 5% ahead of guidance, and total production was 6% ahead of what you guided. Maybe just talking briefly about what were some of the main drivers of that outperformance and kind of the operational momentum you see. With the print, you also increased your second half run rate, which you guys have really pegged as what the company should look like on a go-forward basis. I think around 430,000 barrels per day equivalent. Just, yeah, thoughts on the execute and what's been driving that outperformance.
Yeah. Q1 was really an outperformance on production, our base production, as well as some of our new wells that we turned in line across all four basins. Our base production outperformed in all four basins. We had an outperformance in a couple different basins on our new wells, and so we were very encouraged by that. We increased the overall production for the year as Q1 kind of just flows through the calculations for the year, and that ends up bringing up the back end second half run rate to that 430,000 BOE per day. That's really where we start to see the most capitally efficient program going forward. That's why we started the year with the value versus volume, really focused on that free cash flow profile, strengthening our balance sheet by paying down debt, leaning into share buybacks.
Yeah. Maybe, with execution, you've talked about this flywheel.
The momentum that you have going to next year. Another thing you've talked about is buying back your own stock is really one of the best uses of capital that SM can make right now. With leverage declining, you have a buyback authorization in place, and free cash flow accelerating. Maybe paint the picture of what your return of capital looks like now versus what it could look like as you approach low one times leverage and maybe when that shift is going to start to happen.
Yeah, I think that's a perfect segue to how we're going to continue to create value through the merger. We started this year going into the year thinking that we could see commodity prices in the low fives, maybe even a four handle, right? It was pretty bearish going into the year. We created a plan that would focus on strengthening our balance sheet as well as returning capital through share buybacks. First thing that we did was we increased the base dividend. You saw us do that. That was confidence that the board and our management team had in our ability to create value from this merger.
Beyond that, we started the year in the high one times area, and then with the tailwind of the Iran war and the commodity price environment, we have line of sight to the low one times area. What does that look like? We had the 80/20 as we started the year. As we continue to drive down to that low one times area, that percentage changes. Obviously, we're still going to focus on debt because it's important. We have too much absolute debt. We want to get that down over time. We see where we are trading, and we see that as a tremendous opportunity and return on our capital, and we'll continue to lean in more. As we get down to that low one times area, you'll see that percentage increase. Is it going to be a shift right off the bat?
No, I think it's going to be a gradual increase into the share buybacks over time as we see our leverage come down.
Yeah. Obviously, the Civitas merger was a big catalyst in terms of this rate of change story. Maybe just a brief touch on your industry views on just consolidation in general, how Civy is going to play in this picture going forward.
Yeah, I think in general, overall public M&A has slowed down. We've seen some. You've seen us, you've seen Devon, Coterra. In general, what we're seeing hit the market are asset sales, including our South Texas gassy asset, right? I think what you'll continue to see is those asset sales happen. What the commodity price environment has given us maybe now over the last week is maybe the bid-ask spread is coming together and some of these deals actually move forward. What does this mean for SM? We're not going to be in the acquiring mode. We just doubled the size of the company. We have asked our technical team to go back to the acreage position that we have and really build that organic inventory from the acreage that we have. That's what we're focused on.
What does the market and the asset do for SM? It allows us to look at the rest of our portfolio and understand where the market is as far as valuation for what those assets might go for. As we roll into our evaluation of here's where the synergies are coming out, here's how it rolls into our economics, here are where the different pieces of our portfolio land out. Let's understand where those asset sales are in the market, if there's an arb between those two, there's more value for selling that piece than SM keeping it, that's something that we'll continue to look at as we optimize our portfolio over the time.
Yeah. SM, with the deal, has already pretty much shown a strong track record in terms of that integration. You've increased your synergy capture to $375 million from the prior $200 million-$300 million range. With $300 million action today and 100% expected by the year-end 2026, it just, I think, shows some strong proof in what you guys are able to do on that integration front. Maybe update on how you've been able to increase the synergy targets so far, what buckets have you seen the greatest upside?
Yeah, I think just straight out the gate, we made a lot of very quick decisions to strengthen our balance sheet. When you look at our South Texas divestiture, that was a SM legacy, strategic part of our portfolio to divest. We knew that right out of the gate. We knew what we were getting with the Civitas transaction, and we said, "Let's go see what we can get on the market" during a time when there were very strong gas prices. We were able to do that. Our cost of capital decreased by eliminating $700 million in absolute debt. The other thing that we did on March 3rd was we refinanced our eight and three-eighths and pushed those out into six and five-eighths notes. We've been able to strengthen it there.
We exceeded that target right out of the gate within the first, call it, 60 days of basically the close of the transaction. Beyond that, if you look at our G&A, we got most of that done in the beginning. We have some that is still to come as far as vendor duplicity, and we have also firms that over time, we don't need two of the same firms. Those kind of public company transactions and synergies that you see over time, those will come with time. Finally, on the D&C, and probably most importantly D&C and ops, we're seeing completion optimization from the standpoint of now we have two data sets in a much larger Permian position. Our teams got together right away. They started to talk about how do we optimize this?
How do we save costs but increase or keep production flat at the same well performance? It was really more of a value-driven decision. If you guys kind of know on completion optimization, you can make a change today in an evaluation or a data set, and tomorrow you can implement it in the field. Those are some of the quick wins that we did that we saw on the synergy side right away. Another part of the quick wins that we had was the procurement leverage. Right after the deal, we met with several of our vendor partners. We saw, "Here's our plan." We were looking at 2026 and understanding what our activity levels would be. We sat down with them and made strategic decisions to lock in great pricing at scale and multiple basins with several vendor partners.
We were a little fortuitous on that, and it's great that we've been able to keep our costs low and our synergies high there. Additionally, I think there are more things to come, and so that's why we increased that target. It takes a little bit of time to implement a new facility design. What does that look like? It looks like a streamlined facility in the Permian Basin where you can harvest equipment from one location and use it in the next one so you don't have to continue to buy new tanks, right? That's just one example.
If you look at the water disposal and water supply infrastructure that we now have by having a larger footprint in the Permian Basin, we're able to get some of our costs down there from the supply side that goes into your completion cost and from the disposal side that runs through your OpEx. I think those kind of combinations, we continue to see opportunities that will start to get us closer and closer to that ultimate goal.
Great. I think we have just a little over one minute left here, so maybe just for one last question. What do you want investors who are meeting with SM for the first time at the conference to walk away with? What's, I guess, the key headline messaging that people should leave here with?
I think we have now a premier portfolio in four basins, four of the best basins in the United States. SM has doubled the size of its scale. It's given us the ability to deliver on synergies that is creating tremendous value, up to $2 billion, that we couldn't do without this merger. Additionally, what we have is a pivotal moment for investors to look at our stock and see the valuation that's going to come through this merger. We're coming into the year, we have the tailwind of commodity price. We just doubled our size. We have line of sight to low one times leverage, we're lowering our leverage there. We're generating more free cash flow.
We're going to lean more into the share buybacks, this is a time for people to really be part of that valuation and that story that's going to continue to generate more returns into the future. Now's the time.
Sounds like a great update and a lot to look forward to as we kind of head throughout the rest of the year. Well, thank you so much for your time.
Yeah. Thank you.
This is always great, and thank you everyone for joining.