Please ensure Javascript is enabled for purposes of website accessibility

SM Energy (SM) Q1 2021 Earnings Call Transcript

By Motley Fool Transcribing - Apr 30, 2021 at 10:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

SM earnings call for the period ending March 31, 2021.

Logo of jester cap with thought bubble.

Image source: The Motley Fool.

SM Energy (SM -4.76%)
Q1 2021 Earnings Call
Apr 30, 2021, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Jennifer Samuels, vice president of investor relations. Please go ahead.

Jennifer Samuels -- Vice President of Investor Relations

Thank you, Shallon. Good morning, everyone, and thank you for joining us. Before we get started, our discussion today may include forward-looking statements. I direct you to Slide 2 of the accompanying slide deck, Page 4 of the accompanying earnings release, and the risk factors section of our most recently filed 10-K and 10-Q, which describe risks associated with forward-looking statements that could cause actual results to differ.

The first-quarter 10-Q was filed this morning. We may also discuss non-GAAP measures. Please see Slides 22 through 24 of the accompanying slide deck and Pages 11 through 14 of the accompanying 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. Here to answer your questions today are president and CEO, Herb Vogel; and CFO, Wade Pursell.

I will now turn the call back to the operator to take the first question. Shallon?

Questions & Answers:


Operator

[Operator instructions] Your first question comes from Michael Scialla from Stifel.

Michael Scialla -- Stifel Financial Corp. -- Analyst

Yeah. Hi, good morning, guys. Wade, you had mentioned in your prepared remarks that some completions planned for 2022 could be pulled into '21. Just want to see how many you were thinking and what kind of impact that may have on your '21 capex?

Herb Vogel -- President and Chief Executive Officer

Yeah, Mike. This is Herb. Yeah, it's pretty straightforward. You know, we said in February that we had a number of completions that were just on the other side of the year and now we've got it on this side of the year.

So the capex spend is the same, it's just when we turn those in line. We made the assumption before that they start just near the other side of the year. Now we've accelerated them some into this year, but the capex spend was there. So it really doesn't change the capex.

Michael Scialla -- Stifel Financial Corp. -- Analyst

OK. Good to hear. And I guess, a bit of a housekeeping item. On the EBITDAX, there was about $21 million of other operating income.

I just want to see if you could give us any color on what all was built into that?

Wade Pursell -- Chief Financial Officer

Hey, Mike, it's Wade. Yeah, there's several items in that line and they actually go both directions. You notice it's a net number. We do have the -- there's a -- and I mentioned it in the prepared remarks, there is a gain in there from our power hedge, I'll call it, on the cost side.

We're not going to quantify that, but that's in there and there are several other items in there. And as I mentioned, we're still working out details, so it's probably all I should say right now.

Michael Scialla -- Stifel Financial Corp. -- Analyst

OK. And just one last one for me. Just your thoughts on NGL markets, do you see any more upside? Or any thoughts on trying to hedge NGL prices here?

Herb Vogel -- President and Chief Executive Officer

Yeah. Mike, you know, NGLs have been pretty strong and it's really the propane exports and the international art being open on that end of things. So we're really sticking with our routine hedging program. Now we've targeted a total percentage level of lower than we were before because our leverage is lower.

But yeah, we do see strengthening on NGLs and don't know how that'll continue in the future, but we're not really changing our hedging program in response to short-term prices.

Michael Scialla -- Stifel Financial Corp. -- Analyst

OK. Thank you, guys.

Operator

Thank you. Your next question comes from the line of Gail Nicholson from Stephens.

Gail Nicholson -- Stephens Inc. -- Analyst

Yup. Sorry. Good morning. Can you just talk about your thoughts on inflation kind of in the back half of the year? And what is your current contracts in regards to the completion services and the decision to do the 50 net completions in the second quarter?

Herb Vogel -- President and Chief Executive Officer

Yeah. Gail, thanks -- thanks for the question there. On the inflation side of things, you know, we've long thought and I think everybody knows that it's driven by activity, and if activity increases, you'll see inflation coming some number of months later. In our case, we have a lot of the key costs locked in.

So the rig costs, the sand costs are locked in for a certain period of time. Some of the other services are a little bit shorter-term. So whenever we're running our budget and then our revised plans, if there's things like weather events, we just optimize free cash flow and that includes the details of the contracts we have in place. So if there is inflation, you'll see it coming based on activity and that's pretty much the way I'd leave it.

And we do everything we can to insulate ourselves against that by locking in with contractors that we've used for a long time.

Gail Nicholson -- Stephens Inc. -- Analyst

Great. And then pricing in South Texas on the oil side was really strong this quarter, was that all driven by the storm? I know there was a renegotiation of a contract there. Just trying to understand how we should think about South Texas oil pricing on a go-forward basis.

Herb Vogel -- President and Chief Executive Officer

Gail, yeah. That is -- same thing we talked about fourth quarter. So there's a big element of better realizations on the oil side because of the contract that expired in beginning of October for us. That was a big uptick and then the rest is really just what current prices are at.

There's nothing really different there, but you should look at it in forward similar to what it's been.

Gail Nicholson -- Stephens Inc. -- Analyst

OK. Great. And then --

Herb Vogel -- President and Chief Executive Officer

And I should mention on the inflation side, some services we see going up slightly, but some we see still dropping. So for example, on OCTG and diesel, there's inflation and in some other service areas like chemicals and even tank batteries, we see deflation. So we've seen a combination in the first quarter.

Gail Nicholson -- Stephens Inc. -- Analyst

Great. And then just on the activity set in the second half of the year, should we assume that's more on a completion standpoint in a TIL aspect more 4Q weighted than 3Q weighted at this point in time?

Herb Vogel -- President and Chief Executive Officer

Gail, can you repeat that? I couldn't quite catch the end of that one.

Gail Nicholson -- Stephens Inc. -- Analyst

Sorry. From a completion activity set in the second half of the year, should we assume that's more 4Q weighted than 3Q weighted at this point in time?

Herb Vogel -- President and Chief Executive Officer

No, I would not assume that. It's going to be a little more in 3Q than 4Q.

Gail Nicholson -- Stephens Inc. -- Analyst

OK. Great. Thank you.

Operator

[Operator instructions] Your next question comes from Karl Blunden from Goldman Sachs.

Karl Blunden -- Goldman Sachs -- Analyst

Hi, good morning. Thanks for the time. You know, I noticed, obviously, the pull forward in some capex. I was wondering, is there any change in your capex by geography or location that you're pursuing at this point? And if the Austin Chalk results are strong, could you shift that over time?

Herb Vogel -- President and Chief Executive Officer

Uh, Karl, thanks for the question. No, there's really no material change in the balance of where we're spending the capital at all. So, no, that's the same and Austin Chalk, we're happy with what we're seeing and we're going to continue on the program. And as you know, we upped the counts on drill and completes in the Austin Chalk this year.

Karl Blunden -- Goldman Sachs -- Analyst

Gotcha. Is there anything changing that with what you're seeing in the A&D market? It certainly seems to be more active recently, is there -- are there opportunities for you to do some tuck-ins or potentially sell some acreage that could improve your liquidity as you're looking at some of these stub bond maturities?

Herb Vogel -- President and Chief Executive Officer

Um, Karl, you're right, the A&D activity has picked up very recently. We do see some continuing there. You know, it's something really makes sense. We look at it, but we are really focused on generating that free cash flow and reducing our absolute debt, and improving the leverage metrics.

It would have to be really compelling for us to consider something like that. And I think expectations on the sell side are still quite high, so -- but we obviously, look at everything we can.

Karl Blunden -- Goldman Sachs -- Analyst

Gotcha. That's helpful. And then I guess the last one for me just on managing the balance sheet. You know, you've sketched out a part the free cash flow and with the hedges, there's quite a good deal of visibility into that.

And so the balance sheet doesn't look problematic in any way when you take a look at the maturities. But is there opportunity to be a bit more proactive around that and extending maturities given how strong the debt markets have been recently?

Wade Pursell -- Chief Financial Officer

Yeah. Good question. I -- you know, I guess the first thing I'd say is, I'd kind of repeat what you just said. We certainly don't have to and we certainly have nothing planned.

But it is -- if you follow us in the past, you know that we try -- we do try to be opportunistic when the capital markets provide those opportunities for managing risk on the balance sheet, risk to the downside, I would say. So, you know, we're pleased that the bonds are trading better and the rating agencies have made some moves recently, which I think have helped and will help. So we'll continue to watch that, but certainly don't need to. But it's something we'll keep our eye on.

Karl Blunden -- Goldman Sachs -- Analyst

Yeah. Something for the agencies. Thanks so much for the time. I appreciate it.

Wade Pursell -- Chief Financial Officer

You bet.

Operator

OK. We have a follow-up from Michael Scialla from Stifel.

Michael Scialla -- Stifel Financial Corp. -- Analyst

Yeah. Just wanted to follow-up on the Austin Chalk. You said you're pretty pleased with some of these new wells, but don't have 30-day rates there yet. Just wondering, when you think you would have that data and would you anticipate releasing that on the second-quarter call? Or is that something you could potentially release interim during the quarter?

Herb Vogel -- President and Chief Executive Officer

Uh, Michael, this is Herb. You know, yes, we're happy with the way the Austin Chalk program is going and we like having more and more data coming in. And I'd say, you know, we'd certainly have them at the second-quarter call. I don't know whether we'd do anything earlier than that, but we do have quite a few more on right now and early days on them.

But it's coming in as we thought they would, so.

Michael Scialla -- Stifel Financial Corp. -- Analyst

OK. Sounds good. Lastly, I just want to get your thoughts on any potential impact on your cash flows, if say, the Biden administration is successful in removing the intangible drilling credits for oil and gas companies?

Wade Pursell -- Chief Financial Officer

Yeah. That's -- Mike, that's a good question. I mean I think there's clearly potential for a big impact on the industry, I would say, overall. You know, we've run numbers, we've run kind of worst case, what we think and kind of a base case of what we think, but none of us know, obviously, exactly what's going to happen.

I guess, I would say, from a standpoint of what we've laid out as far as our objectives and the delevering, and the getting below 2 times next year and generating enough free cash flow that covers all the maturities through '24, things like that. The -- all the cases that we've put in do not change those outcomes. And especially, when you think in terms of '21 and '22, the impact on our cash would not be significant. But again, there's a lot of different assumptions flying around there.

But in general, I guess, that would be my comment.

Michael Scialla -- Stifel Financial Corp. -- Analyst

OK. That's helpful. And anything that you could do to shield any current tax liabilities at this point? I think you guys do not, if I'm not mistaken, do not have much in the way of NOLs left, but anything else you could do there?

Wade Pursell -- Chief Financial Officer

Yeah. I mean our tax department works really hard on that and they're doing that right now under different what-if scenarios. I don't have any silver bullets to lay out to you this morning, though.

Michael Scialla -- Stifel Financial Corp. -- Analyst

OK. Thanks, guys.

Wade Pursell -- Chief Financial Officer

You bet.

Operator

OK. Your next question comes from the line of Steve Dechert from KeyBanc.

Steve Dechert -- KeyBanc Capital Markets -- Analyst

Hey, guys. Just want to see what the thought process was behind drilling the three gas wells and the three NGL wells versus more oilier wells in New South Texas wells you reported last night.

Herb Vogel -- President and Chief Executive Officer

Oh, yeah. You're talking about -- Steve, sorry, this is Herb. You're talking about the JV wells down there? So those were -- we entered into JV in the fourth quarter. There were six DUCs down in the south end and three Eagle Ford and three Austin Chalk wells.

So the economics look robust. The JV partner was interested and we proceeded to complete those and turn them in line. So that's really a pretty simple story there.

Steve Dechert -- KeyBanc Capital Markets -- Analyst

OK. The uh -- I guess, I meant, were you just testing different areas? I guess, was there a certain reason behind drilling the NGL wells and gas wells versus just more oil wells?

Herb Vogel -- President and Chief Executive Officer

Well, those were really part of our delineation program. If you look at our map, you'll see we're looking at all different areas of the field and basically identifying the productivity of the Austin Chalk through a broad area. And that's what increases our confidence in the ultimate inventory that we can deliver from the Austin Chalk. So that's really what that was attributed to, and in that case, we staggered them with the Eagle Ford wells.

Steve Dechert -- KeyBanc Capital Markets -- Analyst

Got it. OK. Thanks and just one more question. Could you quantify the production downtime in the first quarter? I know you guys gave the number of days, but in terms of the actual production, is that something you can give?

Herb Vogel -- President and Chief Executive Officer

No. You know, when we released in February, that was right in the middle of the event, so we didn't really do it that way. So obviously, we did have some impact on the first quarter and it was really 14 days of production that were impacted to some degree. That's what it came down to and then there was a knock-on effect on the logistics side for really our frack spreads.

We didn't have much downtime on rigs, but we did have downtime on frack spreads. Bringing things back and including even getting people to work the facilities, you know, there were a lot of people impacted in Texas, the individuals. And they have to go tend to things at home, too, and that made it a little bit more difficult to get people called out to facilities. But, no, it's -- we're just looking at it, but we maintain guidance for the year and 2022 looks the same.

ESG, performance-wise, we're doing great, so those -- I don't really see that -- anything there really.

Steve Dechert -- KeyBanc Capital Markets -- Analyst

OK. Thanks.

Operator

Your next question comes from the line of Scott Hanold of RBC Capital Markets.

Scott Hanold -- RBC Capital Markets -- Analyst

Yeah. Hey, just a little bit of a follow-on to that question. And you know, obviously, it was pretty rough during that winter season. We've heard from a few other companies that talked about having crews out there 24/7 and keeping things up in line and seeing a lot better uptime than originally expected.

Is there any kind of learnings you all have taken from that event? So something similar happens, the outcome might be less impactful? Or is there something unique about, you know, just your operations maybe relative to some of the others? And I guess, in particular, more so it felt like in the Permian?

Herb Vogel -- President and Chief Executive Officer

Uh, yeah, Scott. It was pretty straightforward for us. You know, the electric utilities had brownouts and blackouts. And in our case, where we've got ESPs and pump tracks electrically driven.

When they did those rolling brownouts and the blackout, it shut down all our pumps and that prevented us from producing and that's on the West Texas side. On the South Texas side, it was more on the gas gathering side. They had electric-driven compressors in some cases for -- actually at the plants more than anything and so then the plants went down. So that's really what impacted us the most from a production standpoint.

So, you know, what could we do differently? It's really making sure that we've got the prioritization from power companies that they recognize when they cut the power to us, that will impact their gas supply which affect their ability to generate power in the CCGTs. So that's really what it came down to. From a fundamental standpoint, we use instrument air and there's a lot of details behind. So that minimizes our risk of downtime from cold weather just on its own, but there's still things that happen like starting up a compressor again when you got heavy oil in there and it cools down, it's harder to start them up.

So those are relatively minor though. The key thing is the power cut, the shut -- shutdowns.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. And with respect to the pull forward of a handful of the wells in 2022 or I'm sorry, from 2020 to 2021. You know, it doesn't sound like there's a capital impact to that. Is there any kind of a pull forward of production? Or is it, at the end of the day, pretty immaterial given the time frames that you're shifting here?

Herb Vogel -- President and Chief Executive Officer

Yeah, it's relatively immaterial, 2022 is pretty much as it was. It's just moving around some completion timing. It's just really what it is, fewer in the very start of the year and more in the second quarter, but not materially impacting 2022.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. And then with respect to your, obviously, guidance this year, that hasn't changed and you know -- and we all know first quarter is pretty rough for everybody. And 2Q looks like things are starting to get back to normalized, but a little bit -- maybe a little bit of a delayed completion stuff getting impacted to that. But you know, when you look at the balance of making -- you know, when you look at your guidance in the back half of this year and the second half.

I mean do you feel pretty confident yet that in your targets? Is there enough, I guess, cushion in there? Or should we think about you all tending maybe to the lower half at this point of the production range?

Herb Vogel -- President and Chief Executive Officer

Yeah, Scott. When I look at it, it looks very, very similar to, in terms of what we can do in 2021 and 2022. It's, uh -- it moves 100,000 barrels here, there per quarter, but it's not that material and well within our ability to forecast.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. Yeah, I guess my -- the point I was making, like it's -- is there sort of a quarter or two in the back half of the year where you kind of make up for some of the stuff you all lost in the front half of the year?

Herb Vogel -- President and Chief Executive Officer

Uh, you know, I've had -- no, not really. It's not like there's often the big silver bullet quarter that cures what happened in the first quarter. It just kind of comes along as the completions come online.

Scott Hanold -- RBC Capital Markets -- Analyst

All right. Fair enough. Thank you.

Operator

Thank you. I would now like to hand the call back over to Herb Vogel, CEO, for closing remarks.

Herb Vogel -- President and Chief Executive Officer

OK. Well, thank you all for your interest in SM Energy. And thank you to all our employees, particularly, for outstanding ESG performance during 2020 and through the events in 2021. Thanks again.

Operator

[Operator signoff]

Duration: 22 minutes

Call participants:

Jennifer Samuels -- Vice President of Investor Relations

Michael Scialla -- Stifel Financial Corp. -- Analyst

Herb Vogel -- President and Chief Executive Officer

Wade Pursell -- Chief Financial Officer

Gail Nicholson -- Stephens Inc. -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

Steve Dechert -- KeyBanc Capital Markets -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

More SM analysis

All earnings call transcripts

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

SM Energy Company Stock Quote
SM Energy Company
SM
$34.19 (-4.76%) $-1.71

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 07/01/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.