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SM Energy Co  (NYSE:SM)
Q4 2019 Earnings Conference Call
Feb. 21, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy's 2018 Results and 2019 Operating Plan Q&A Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you. Jennifer Samuels, Vice President of Investor Relations, you may begin your conference.

Jennifer Samuels -- Vice President of Investor Relations

Thank you, Jody. Good morning, everyone and thank you for joining us. As usual, before we start, I would like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday. The presentation posted to our website for this call and the Risk Factors section of our Form 10-K that was just filed.

We will also discuss certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are described in our press release for this call.

Here today with me to answer your questions are Jay Ottoson, President and Chief Executive Officer; Wade Pursell, Executive Vice President and Chief Financial Officer; Herb Vogel, Executive Vice President, Operations. And with that, I'll turn it back to the operator to open it up for questions.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from the line of Michael Scialla of Stifel. Please go ahead, your line is open.

Michael Scialla -- Stifel, Nicolaus & Company -- Analyst

Good morning, everybody.

Jennifer Samuels -- Vice President of Investor Relations

Hi, Mike.

Jay Ottoson -- President and Chief Executive Officer

Good morning.

Michael Scialla -- Stifel, Nicolaus & Company -- Analyst

When you mentioned in both the prepared remarks and in the release that one of the goals here is to reach free cash flow in the second half of '19 and sustainable free cash flow and growth beyond that. Just wondering, how you're looking at -- you cut spending for 2019 versus '18. What do you thinking beyond '19 in terms of what kind of spending it would take to sustain that growth in free cash flow and maybe what kind of growth, you're looking for?

Wade Pursell -- Executive Vice President and Chief Financial Officer

Yeah, Mike, it's Wade. It's -- from a CapEx standpoint, it's a similar level in the out years and I think, I mentioned growth being like high single-digit percentage annual growth is the goal. And then again yeah, continue to generate free cash flow.

Michael Scialla -- Stifel, Nicolaus & Company -- Analyst

Okay. And looking at 2019 specifically -- that looks like the first quarter CapEx is higher than the rest of the year. Just wondering, I know, you're adding a sixth rig, but I'm looking at your slide 29, it looks like completions are actually lower in the first quarter. Just wondering what's driving the bump in the CapEx there?

Herb Vogel -- Executive Vice President, Operations

Yeah, Mike, this is, Herb. So it's really, the way to look at it is really the first half is about 60% of our CapEx and the second half is about 40%, which is about the same as last year. So it's quarter-to-quarter, it just depends on how many completions we actually put in the ground in the first quarter in the pace. If you look at last-year, our pace was more rapid than we had budgeted. This year, hopefully you know, we've increased pace in the budget quite a bit, we'll see where we actually come-in on that one. But the split quarter-over-quarter, it's going to -- it's really, I'd look as first-half 60% and second-half 40%.

Michael Scialla -- Stifel, Nicolaus & Company -- Analyst

Okay. And then last one from me. I just wanted to ask about the Chalk, looks like it pretty interesting well, that you have there. How are you thinking about that, I know, it's been viewed traditionally as more of kind of a conventional or a play that relies on sweet spots, at least relative to the Eagle Ford, any thoughts, I know, you discussed results on one well so far. But maybe what drove you to that particular location and how widespread do you think the play could be?

Herb Vogel -- Executive Vice President, Operations

Right. Well, on Austin Chalk, actually we're pretty happy with what we've seen and we actually have more data than just that one well. We have partial penetrations. And I think, I showed three of those on the map and then we have one that's almost entirely in the Chalk, for the Northwest. And then this was our first really where we dedicated and got a lot of data and we were really happy to see you know, yields of two times to six times, the Lower and Upper Eagle Ford and the NGL yield of 20% to 30% higher.

So what we're really looking at is, how do we integrate our development between Lower, Upper and Austin Chalk going forward, and we haven't mapped pretty well, we have lot of penetrations in the Chalk. So we're looking at is, having quite a bit upside, but we're not going to accounted all in there yet, because we want to get more wells and this next well, which will be a longer lateral, we want to see how that does. So that's really the color on the Austin Chalk.

Michael Scialla -- Stifel, Nicolaus & Company -- Analyst

Great, thanks for that.

Operator

Your next question comes from the line of Oliver Huang of Tudor, Pickering. Please go ahead, your line is open.

Oliver Huang -- Tudor, Pickering, Holt -- Analyst

Good morning, everybody.

Jennifer Samuels -- Vice President of Investor Relations

Hi, Oliver.

Oliver Huang -- Tudor, Pickering, Holt -- Analyst

Last night stack references 12 years to 16 years of economic drilling inventory, at current activity and cost levels in the Permian, with 50% of your acreage prospective for four zones to five zones and two to three in the another half. Could you all walk us through that comment from an aerial perspective. And also if there is any sort of risking factored into your locational count?

Herb Vogel -- Executive Vice President, Operations

Okay, Oliver. This is, Herb. So let me go over that. So the number overall is real similar to what we showed last year, where it's just one year less of completion. But it's -- we look at the traditional three Lower, Spraberry Wolfcamp A and Wolfcamp B, then there's been considerable offset activity in the Middle Spraberry and Wolfcamp D, primarily on the west side.

So there's also Dean. So when we say five, it's generally the three plus Middle Spraberry and Wolfcamp D in some of the areas, mainly on the west side. And then you move east and you go to areas where there's two to three. And that's really the basis for those aerial distributions that we've got there. And then the risking side, these are showing, basically certain spacing levels, which we don't risk, because of how much well control we have around us. If you looked at, how much drilling has been done in Howard County in 2017, 2018, it's really quite well derisked. There's a little, we obviously have wider spacing in the intervals that have less data like the Middle Spraberry and the Wolfcamp D. Does that help out Oliver?

Oliver Huang -- Tudor, Pickering, Holt -- Analyst

Yes, that's perfect. And for my follow-up, I was just wondering, if you all have a blended ROR for your remaining inventory, I call it 55 WTI and 275 Henry Hub or whatever deck you have readily available in the Permian and also what that number might be in the Eagle Ford?

Jay Ottoson -- President and Chief Executive Officer

Yes, so we really do it like for the program overall. For 2019 our returns are over 40% on that price deck. And the Permian would be slightly higher than the Eagle Ford, but that's really the outlook.

Oliver Huang -- Tudor, Pickering, Holt -- Analyst

And does the longer-term inventory that you all have mapped out change drastically from what you all are drilling in 2019?

Jay Ottoson -- President and Chief Executive Officer

No, I mean, the mix will change. You know, we don't have much in '19 in the way of Middle Spraberry or Wolfcamp B or Dean. But we'll have more of that later as time goes on. And returns-wise, the methodology, we are totally returns-focused and we're only designing DSUs with where that last well in the spacing decisions is 25% return or better. And that's really what we're focused on. So you will see our spacing, a little bit wider than some of the peers, because we don't go to that NPV10 type of methodology. We really want that 25% return on the last well-drilled.

Oliver Huang -- Tudor, Pickering, Holt -- Analyst

Okay, perfect. Thank you very much.

Operator

(Operator Instructions) Your next question comes from the line of Paul Grigel of Macquarie. Please go ahead, your line is open.

Paul Grigel -- Macquarie -- Analyst

Hi, maybe following up first on kind of into 2020. On Slide 29, you guys show DUCs building into year-end with a Lower Eagle Ford count. Should we view that as a bit of a tailwind into 2020 to helping that spending level or is that just a timing-related issue on pads?

Herb Vogel -- Executive Vice President, Operations

Yeah, -- I mean, I remember the DUC count from year-end '18, going into year-end '19, it's just slightly lower, it's actually quite similar. It's just (ph) timing.

Paul Grigel -- Macquarie -- Analyst

Okay. And then you guys mentioned 43% to 44% oil mix throughout the year, how should we be thinking about that given more of the focuses in the higher oil cut of Howard County throughout the year versus kind of increasing throughout the year, maybe the cadence there?

Herb Vogel -- Executive Vice President, Operations

Yes, it's pretty straightforward, we lose a little bit of oil from the condensate in the Eagle Ford, where it drops about 200,000 barrels from '18 to '19 and that's just because of where we're drilling in the Eagle Ford. So that's one component of the change. The other is the Permian program overall, goes from 79% oil in 2018 to 78% oil in '19 and all of that is just a little bit of where we're drilling, but primarily it's just a normal slight GOR increase that you get as time goes on with the wells. But that's really the story there.

Paul Grigel -- Macquarie -- Analyst

Okay and then lastly, you guys make a reference to the PDP decline rate of the Permian program. Do you happen to have the Eagle Ford program, PDP decline or maybe?

Herb Vogel -- Executive Vice President, Operations

It's in there, it's in there also. So, you'll see that on the -- see the Eagle Ford (Multiple Speakers), I think, it's 29% the first-year and the second year, I've got -- I put it on the remarks yesterday.

Paul Grigel -- Macquarie -- Analyst

Okay, thanks so much.

Operator

Your next question comes from the line of Michael McAllister of MUFG. Please go ahead, your line is open.

Michael McAllister -- MUFG -- Analyst

Hi, good morning, everyone.

Jennifer Samuels -- Vice President of Investor Relations

Good morning.

Michael McAllister -- MUFG -- Analyst

With the program set up the way it is and going into 2020 and keeping things the way you kind of are leaning where free cash flow should be hopefully more beneficial or higher. Is it time to harvest the free cash flow and to pay down debt or is it time to just grow the EBITDA, so that the metric looks better?

Jay Ottoson -- President and Chief Executive Officer

Yes, And that's a good question. From a use of free cash flow standpoint, I think, in the near-term. You'll see us reduce debt, while -- our goal is to get leverage down into the two times area. So get it -- that's a pretty important goal for us. So you'll see us using the free cash flow to get down to that level first.

Michael McAllister -- MUFG -- Analyst

But on an absolute basis, not just increasing the denominator?

Jay Ottoson -- President and Chief Executive Officer

No, it'll be both. Yeah we'll be reducing absolute debt and growing cash flow at the same time. So obviously (Multiple Speakers)

Michael McAllister -- MUFG -- Analyst

Yes, the combination, but I just wanted to know it on the absolute level. So let's say, we're getting into an environment where the oil price goes up higher and you are as efficient as you were in 2018. Would you -- you could accelerate that by increasing CapEx and increasing activities to get the 2020 to hopefully get to a bigger base. How do you balance that with the idea that you've -- is, I guess, what I'm asking is -- is the Permian at a point, where it can be harvesting or do you have to grow it to a little bit of a bigger size and want to get it to there?

Jay Ottoson -- President and Chief Executive Officer

I think, absolute debt reduction would be the goal first and versus the temptation of accelerating and out-spending a little bit more. We want to maintain the levels of that spend that we're forecasting right now and get absolute debt reduction lower. So we're going to use whatever free cash flow and if it's more because of a higher commodity price, then that would be great.

Michael McAllister -- MUFG -- Analyst

All right, great, thank you very much.

Operator

Your next question comes from the line of a Stark Remeny of RBC. Please go ahead, your line is open.

Stark Remeny -- RBC -- Analyst

Hi guys, thanks for taking my questions. I was just hoping you might be able to provide some clarity around your natural gas processing force majeure in the Permian. When do you expect a final resolution and do you have any commentary on when you -- or what the level of impact is factored into the first quarter guide?

Herb Vogel -- Executive Vice President, Operations

Yes, Stark, this is Herb. So, the force majeure of event we mentioned in the fourth quarter, they were two different plants. One of those plants is back online. The other plant, we've been told by the management of the company that they expect to have the plant back online by the end of February, and usually there is some flexibility around that, sometimes can take a little bit longer, but just through middle of February, we basically see about a 200,000 barrel equivalent impact from that plant alone that shut-in. And then, if they come online, then obviously -- we've modeled no more shut-ins from that plant after the end of February.

Stark Remeny -- RBC -- Analyst

Okay, perfect. And then I guess just on the Eagle Ford, can you give any color on what you've seen on JV activity and then how should we think about activity beyond that say 2019?

Herb Vogel -- Executive Vice President, Operations

Okay. So let me go first on the JV. So initially, we did quite a bit of data gathering and we're real pleased we did our first permanent fiber optic installation, we got a lot of data that really helped us optimize the completion design together with the JV partner. We also started putting the wider spaced wells in. So as we get into middle of 2019, we expect to see results from those wider spaced wells and that extends on into late 2019 with more wells.

So we view it as quite beneficial. We are looking at the data. There's a lot of data analytics going into that. Looking forward, we'll see where things go on, whether we do more JV activity or not, when we see a lot of value and we can ascribe that then we would consider doing more. But right now, we don't have that factored in, other than the straight JV we've gotten in 2019 that we know the terms of.

Stark Remeny -- RBC -- Analyst

Okay, thank you very much.

Operator

Your next question comes from the line of Michael Scialla of Stifel. Please go ahead, your line is open.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Yes, just maybe to follow-up on the Eagle Ford, outside of the JV, it looks like you're doing some drilling this year. You mentioned the Chalk already, but are those other wells primarily Galvan Ranch or are you going to be drilling some SM only wells?

Jay Ottoson -- President and Chief Executive Officer

Are you telling, drilling or completing?

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Well both.

Herb Vogel -- Executive Vice President, Operations

Oh, OK. Well, there's a little bit of a difference there. But yeah, there is -- I'd say for our 100% well, there's more on Galvan Ranch than Briscoe Ranch -- the more of the Eagle Ford East than Eagle Ford North, although there are some Eagle Ford North ones.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

And are those Eagle Ford North wells primarily to save acreage? Or do you feel like you've learned enough from the JV now that -- that area competes?

Herb Vogel -- Executive Vice President, Operations

No, these are definitely for returns and they are high liquid content wells. So these are not about acreage saving that we have consolidation agreements out there, which allows us to drive for better returns.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Okay and you mentioned on the -- your spacing, you said 770 feet in the Midland with in-zone. I think, you had previously talked about testing as tight as 420. Is that an apples-to-apples comparison, and if so what drove the increase in spacing there?

Herb Vogel -- Executive Vice President, Operations

Yes. So for our 2019 program, the range is 420. So we have some 420s with in-zone and all the way up to 1,320 with in-zone. And so the 770 is just an average of the entire program and there's a number of areas where we're holding acreage and we're spacing wells at 660 to 880 where we do two well-pads to hold as much acreage as possible. And those are average in there. So just when you look at the entire program that 770 and that's with in-zone. They can actually be in some cases, you can almost not quite stacked but stacked over each other. But we're not counting it that way. We're counting it just with in-zone. That make sense.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Yes, so I guess the 770 is not necessarily what you anticipate to be your final development spacing?

Herb Vogel -- Executive Vice President, Operations

Absolutely not, no. No, it's very much we customize it by area and interval and we have so much data now that we can really hone in on that fundamental conclusion of getting those returns that greater than 25% for that last well-drilled. So it's really the returns side and that we're focused on.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Okay. And that 420 still look like a good estimate at least for the western acreage at this point?

Herb Vogel -- Executive Vice President, Operations

Yeah. Depending on where it is -- and one of two intervals, that looks like it can work. And we're obviously getting more and more data and we'll decide, OK, is that going to be 25% return, or do we want to go higher return, that's the sort of evaluation we'll do.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Okay and then just to add one more on your proved reserves, just some nice additions. You also had revisions of 69 million BOE, was that price related or any performance related revisions in there?

Herb Vogel -- Executive Vice President, Operations

So no, that's -- the lion's share of the revisions originates from that redesign of the development plan in the Eagle Ford. So when we widen the spacing, in our revised development plan, we eliminate some PUD locations and we deem that PUD removal a revision. And that's kind of what you've got in those 69 million barrels. Also, in some cases with the higher returns from those wider spaced wells, we'll actually move some of the existing PUDs out of the five-year horizon. So then, we call that because of five-year rule revision and that's in those 69 million barrels. So it's -- most of the revision is in the Eagle Ford and from related to the development plan. There are some smaller ones in the Permian -- but that's -- the key thing is really the development plan in the Eagle Ford.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Very good. Thanks, Herb.

Herb Vogel -- Executive Vice President, Operations

Okay.

Operator

And there are no further questions in the queue at this time. I turn the call back over to Jay Ottoson, President and Chief Executive Officer.

Jay Ottoson -- President and Chief Executive Officer

Well, I just want to thank you again for your interest in our company and I look forward to talking to you when we have our first quarter results. Thanks again.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 21 minutes

Call participants:

Jennifer Samuels -- Vice President of Investor Relations

Michael Scialla -- Stifel, Nicolaus & Company -- Analyst

Jay Ottoson -- President and Chief Executive Officer

Wade Pursell -- Executive Vice President and Chief Financial Officer

Herb Vogel -- Executive Vice President, Operations

Oliver Huang -- Tudor, Pickering, Holt -- Analyst

Paul Grigel -- Macquarie -- Analyst

Michael McAllister -- MUFG -- Analyst

Stark Remeny -- RBC -- Analyst

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

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