Greetings. Welcome to SM Energy's third quarter 2023 financial and operating results Q&A. At this time, all participants are in listen-only mode. A question-and-answer session will follow the formal presentation. If anyone today would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this call is being recorded. At this time, I'll turn the conference over to Jennifer Martin Samuels, Vice President, Investor Relations and ESG Stewardship. Jennifer, you may begin.
Thank you. Good morning, everyone. We are speaking to you today from a particularly beautiful day in Colorado, land of prime-time events. So let's get started on our event today. In today's call, we may reference the earnings release, IR presentation or prepared remarks, all of which are posted to our website. To answer your questions today, we have our President and CEO, Herb Vogel, and CFO, Wade Pursell. Before we get started, I need to remind you that our discussion today may include forward-looking statements and discussion of non-GAAP measures. I direct you to slide two of the accompanying slide deck, page 6 of the accompanying earnings release, and the Risk Factors section of our most recently filed 10-K, which describe risks associated with forward-looking statements that could cause actual results to differ.
Please see the slide deck appendix and earnings release for definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures and discussion of forward-looking non-GAAP measures. Also, look for our third quarter 10-Q filed this morning. With that, I will turn it over to Herb for a brief opening commentary. Herb?
Thank you, Jen. Good morning, and thank you for joining us. Let me start by reiterating a few key messages this quarter. Our return on capital program continues to be well received. We have repurchased approximately 6% of shares based on shares outstanding as of September 2022. We've increased the dividend twice, most recently a 20% increase, while at the same time, we have maintained net debt to Adjusted EBITDA at 0.7x and increased our Midland acres position by 35%. Execution has been outstanding in 2023, underscored by several third-party charts we presented in the slide deck, and we are excited to get out and demonstrate the value of our new assets with the fourth added rig in Midland.
As you can see, we have increased the number of expected fourth quarter completions in Midland from 6 to 11 and will have added benefit in the first quarter from the higher working interest in wells gained through the asset exchange that we just reported, setting up for a more oily first quarter and stronger oil trajectory in 2024. As we close 2023, SM Energy is very well positioned to deliver on a continuation of our core strategic objectives in 2024. With that, I'll turn it back to Rob to start taking your questions. Rob?
Thank you. If you'd like to ask a question at this time, please press star one on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you.
Thank you. Our first question today is from the line of Gabe Daoud with Cowen. Please proceed with your question.
Hey, thanks. Morning, everyone. It's Gabe from Cowen. Guys, I was hoping we could maybe start with 4Q. Looks like oil expected to decline quarter-over-quarter, but Midland wells have actually increased relative to your prior outlook. So just curious if you can maybe give us a bit more color on what's going on there.
Yeah, Gabe, this is Herb. So yeah, we're really not really focused on that quarterly cadence. Bringing on a large new pad earlier or later by a month can have an impact on quarterly rates, but it's really not material at all from a valuation or cash flow perspective. So we're not really focused on that.
Okay. Okay, got it. Got it. So just timing related to a large pad. Okay, and then as a follow-up, was hoping we could maybe get some more color on the asset exchange and specifically how the 9 DUCs and the increase in working interest there set you up for a strong 1Q. Any way that you can maybe quantify oil volumes for 1Q?
So, Gabe, first of all, I'm just really excited we were able to do that asset exchange. So getting a substantial increase in wells we've already drilled in our Working Interest through an exchange was just great value for us, and it really goosed what we'll be able to produce in first quarter. But we haven't put any numbers out there yet for 2024. But you can see how it positions us well for a for an only first quarter. You know, how oily it is will depend, you know, on exactly how early they come on in the in the first quarter, but it's just just in the right direction for what we're trying to do strategically.
Okay, understood. Thanks, Herb. I'll hop back in. Thanks, guys.
Thanks.
Our next question is from the line of Zach Parham with JP Morgan. Please proceed with your questions.
Good morning. Wade, maybe one for you on the buyback. It stepped up pretty significantly this quarter. Just any thoughts on the future pace of buybacks? And I'm also wondering if you plan to ask the board to increase the size of the authorization, because if you ran at the 3Q pace for another couple of quarters, you know, you would finish up that authorization. So just curious on that as well.
Yeah, thanks, Zach. Good, good questions. And we spoke about this in the prepared remarks and I gave some nice pie charts on our capital allocation. You're right, we do have a-- we do still have a ways to go on our authorization. I think we still have another $237 million to go on that. So, you know, all I can say is we really-- I think we've been showing and we talked about it in our prepared remarks, that we clearly prioritize return to stockholders within our capital allocation. And there's no reason to believe that that would, that would change. So I guess that's all I can say on that.
As far as the pace by quarter, you know, we've said that we're gonna be methodical and some quarters lean in more. That's really all I can say at this point. We'll continue that strategy on the current authorization, and then when we get to the end of it, we'll consider what to do from there, so.
Got it. Thanks for that color. And then also just had a question on the tax credit that was mentioned in the prepared remarks y'all posted on the website. Maybe could you give investors some detail on why exactly you received that tax credit? And maybe, you know, talk about if there's potential that the credit could increase in size over time.
Yeah, great, great. Appreciate you asking that. You know, we as we said in the remarks, I mean, and as we've been saying for years, that being a premier operator is constantly pushing the envelope with innovation and technology. And a lot of what we do just kind of hits right down the fairway of what the R&D tax credit provides for. So we did a lot of work, and the teams did a ton of work qualifying for that credit and quantifying the amounts that we believe fit those criteria. And went back several years, and that's the reason for the size of it. You might ask, somebody might ask why now?
You know, we haven't been a cash taxpayer until recently, and that's obviously part of it, because it is a ton of work to quantify these amounts and build the position to take the credits. But that's the primary point. Your question about will it continue? It absolutely should. We continue to do similar things operationally, so we kind of set up the processes and the procedures to hopefully continue to quantify those R&D tax credits going forward.
So beyond the amount that we disclosed, I think $77 million, as far as the amount from the past that we're able to use in the coming years, significantly offsetting, you know, cash taxes in the next few years. So thanks for asking.
Great. Thanks for the color.
Sure.
Our next question is from the line of Oliver Huang with TPH. Please proceed with your question.
Good morning, Herb and Wade, and thanks for taking my questions. Just one on the extra rig that got added in the Midland in early October on a six-month contract. Anything you all are kind of able to offer up in terms of the thought process on what would dictate keeping that rig on for the remainder of next year? Or is it pretty firm at this point in terms of just once Q2 kind of rolls around, y'all are gonna go back to that three Midland rig program y'all have been running. And also, is this gonna necessitate the need for bringing on a spot crew to help get these wells done in that Klondike area?
Oliver, this is Herb. Yeah, thanks for asking the question. Yeah, you're right that fourth rig has a six-month term, and it's got a excellent rate. We haven't decided whether to extend it or not yet. We haven't set our budget for 2024 yet. It's certainly possible that we could extend it, and we haven't made the decision yet. In terms of the completions crew, it's a pretty rigorous scheduling process we undergo really, well, almost continuously, but for 2024 right now. So we'll determine what the schedule will be for the frac spreads. You're probably aware we're running simul-frac crews, and that's led to some of those great numbers that we showed in the deck, in terms of execution.
So it'll just be part of our schedule, whether we have to pick up a spot crew or not. We don't do that very often. We really drive for those capital efficiencies, but I never rule it out because sometimes, there's one freed up from another operator, really cheap for a pad, and we'll take advantage of those situations.
Okay. That's helpful color. And maybe just a follow-up to Zach's earlier question on the tax credit. Any sort of updates with respect to how that might impact cash taxes for next year? I think previously you all kind of talked about that $60 million or so run rate. Just wanted to see if we could get maybe an update there.
Sure. No, thanks for asking that. That's a good point. So next year, if you think in terms of $60 million, I think that's what we've talked about and kind of what our model shows right now. The tax credit will enable us to offset 75% of that, so the number will be more like $15 million next year. There is a limitation each year that you can only offset up to 75% of your cash tax liability. So that'll be the result next year. And it'll be frankly similar, I think, in 2025.
Awesome. Thanks for the color, guys.
You bet. Thanks, Oliver.
Thank you. Our next question is from the line of Tim Rezvan with KeyBanc Capital Markets. Please proceed with your questions.
Good morning, everybody, and thank you for taking my question. Wade, I wanted to dig back in on the repurchases a little bit, following up on Zach's question. If you look at your history, you know, you all did about 2.6 million shares in the second quarter at about $27, and you did about the same amount this quarter at a higher price. So I know you can't show your cards too much, but is it safe to say that you and the board see shares extremely undervalued at that $40 level, and that we would assume, you know, you all would continue leaning in if the share price stays here?
I think you can—I think generally you can assume that. Yeah, I mean, that... We clearly have a view on what we think the stock price is worth, our own internal NAV. And the fact that we leaned in, as you said, this quarter at prices averaging around $40, I think confirms our belief that it—our—that it's undervalued. Yeah.
Okay. Okay. That's helpful. And then I wanted my final question, maybe more for Herb on Klondike. You talked about the Dean in the Middle Sprayberry as your targets. I was under the impression that that was underwritten solely on the Dean. So I was wondering if you could refresh our memory on the intervals you used to underwrite the acquisition, and then maybe what you're gonna be targeting with that fourth rig on your first few wells up there.
Yeah, Tim. Yeah, we are very excited about Klondike. We look at some of the offset wells in that area and our experience in North [inaudible], and we're real pleased with the Dean wells. Middle Spraberry Sand is lesser a portion of the value up there, but it's still great value contributor. We are initially going to pad to exploit the Dean. So that's our plan there. But yeah, we are excited to get up there and show what the wells can do up there.
Okay, so those initial wells will be targeting the Dean?
Yeah, they will.
Okay. All right. Thank you, everybody.
Thanks, Tim.
Thank you. As a reminder, if you'd like to ask a question today, you may press star one from your telephone keypad. We'll pause a moment to assemble a queue. Thank you. Thank you. We have a follow-up from the line of Oliver Huang with TPH. Please proceed with your questions.
Yeah, just had one more follow-up, guys. Just with respect to lateral lengths, just kind of with the 9-15 thousand foot DUCs in Sweetie Peck, looks like you all are kind of extending laterals a little bit. I think you all did 15 of those longer laterals this year. But just wondering, any sort of trends that we should be kind of aware of as you're pulling together the 2024 plan in terms of this lateral length migrating higher in either of your two areas relative to this year?
Oliver, this is Herb. It's pretty straightforward. Just when we get into a year, we look at the pads that we're going to develop, and we look at the acreage position and how contiguous of acreages. In general, it's quite good for us. And you're probably aware, we hold the record in Texas for the longest lateral of anyone at 4 miles. So we can do that if we want to. So it's really an economic optimization question for us. And generally, 15,000-foot laterals will get a benefit in terms of rate of return, as you can expect. So we'll put 15,000-foot laterals in wherever it makes sense. How it turns out for the year on the average lateral length, you know, we've been bouncing in between the 11,000 and 12,000 on average.
I kinda anticipate that's sort of where things will be. So, but we, we don't have our 2024 program outlined with a planned lateral length yet. But in general, you can bet that we're gonna be optimizing the economics here.
Awesome. Thanks once again.
You bet.
Our next question is a follow-up from the line of Tim Rezvan with KeyBanc Capital Markets. Please proceed with your questions.
Thanks for letting me back, back in, folks. I wanted to circle back on the asset exchange a little more. Just trying to understand, essentially, you're adding 5.2 net wells, if we think about 58% working interest in, in nine wells. So trying to understand that the $50 million in CapEx, is that the completion costs for those wells, or is that... Are you kind of buying into the, the whole working interest, the whole, the whole D and C side? I'm just-- And then I guess as a follow-up, are there more opportunities like that, or was that really a unique kind of one-off event?
[inaudible] is the additional completion.
Yeah, so it's a great question, Tim. It's really, you know, they're DUCs now, so they've been drilled. We've spent the capital, and then for the fourth quarter, we'll be completing the wells. And so that's largely what that incremental CapEx is.
Essentially $9 million per well is the completion cost for the three miles?
No, because there's some additional where we had to basically cover the costs that we already had in the wells.
Okay.
I think there were third quarter costs associated with the completions that.
... as well as fourth quarter costs associated with the completions. So that $50 million is representative of the net completion cost added for the five net additional wells.
Yeah.
Okay. Okay, and then the second piece of the question, are there more opportunities? Like, I know ideally 100% working interest is where you want to be, but are there more meaningful opportunities like that, or was that sort of a unique one-off?
Tim, that's a great question. You know, you never can quite anticipate what happens. You'll see working interests change. The way to look at it is when we first acquired, for example, the Rockstar acreage, we were around a 60% working interest, and we worked our way up to an average of over 80% on that acreage. So there are opportunities that just arise all the time as operators adjust their, or non-operators adjust their interest in wells. So we're very opportunistic on that. We're in the land game daily, and we'll do what we can to increase working interests that generate quite high returns for us. So I'd look at it that way. It's very hard to predict.
You'd never put it in a plan, but when the opportunity comes in front of you, you grab it when it has as much value as, for example, this one did.
Okay. Okay, thanks again.
You bet.
Thank you. We've reached the end of the question and answer session, and I'll turn the call over to Herb Vogel for closing remarks.
Okay, thank you all for joining. We're very pleased with our performance in 2023, and we're well positioned to continue this trajectory to build value and deliver returns going forward. Thank you for your interest, and we look forward to seeing a number of you at upcoming events.
Thank you. This will conclude today's conference. You may now disconnect your lines at this time, and we thank you for your participation.