SM Energy (SM) Q1 2022 Earnings Call Transcript

SM Energy (SM 0.10%)
Q1 2022 Earnings Call
Apr 29, 2022, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Jennifer Samuels

Welcome to SM Energy's first quarter 2022 results webcast. We are off to a great start this year. Before we get started on our prepared remarks, I'll remind you that our discussion today will 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.

We will also be discussing non-GAAP measures. Definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures and the discussion of forward-looking non-GAAP measures can be found in the back of the slide deck and earnings release. Today's prepared remarks will be given by our president and CEO, Herb Vogel, and our CFO, Wade Pursell. With that, I'll now turn the call over to Herb.

Herb Vogel -- President and Chief Executive Officer

Thank you, Jennifer. Good afternoon, and thank you for your interest in SM Energy. It's only been two months since our last call, and we have made substantial progress on our key objectives for 2022. Starting on Slide 3.

The inflection point of reducing net debt to EBITDAX to one time and absolute debt to $1 billion is fast approaching. We are very pleased to announce the redemption of the $447 million of principal outstanding 10% senior notes in June. The combination of this redemption and the $105 million principal outstanding 5% senior notes redeemed in February reduced absolute debt by $550 million since year-end 2021. It's really exciting to have clear visibility to this inflection point as we transfer that enterprise value to the equity holder and position the company to generate even stronger growth in free cash flow and grow shareholder value.

A second objective for 2022 is to demonstrate the value of our Austin Chalk position through increased investment. This goes hand-in-hand with our long-term strategy of maintaining a top-tier portfolio of high-quality assets and ranking among the best operators. We put together a few slides to emphasize these qualities as well as our confidence in the Austin Chalk as new wells continue to demonstrate strong, repeatable, and predictable performance. And our third objective is to demonstrate measurable top-tier ESG stewardship.

Since our last call, the importance of energy security and affordability have come into focus globally, along with the realization that oil and natural gas production is needed in the coming decades. Global climate change objectives will be best tackled by a combination of efforts on several fronts that include innovation and new technologies. At SM, while we report very low methane emissions, we are continuing to pursue better technologies to identify and reduce carbon emissions. Most recently, this includes controlled testing to evaluate five different technologies to best pinpoint the location of and quantify methane emissions from our operations, which will in turn enable our team to more quickly respond and mitigate.

We'll share more about this in coming months. Turning to Slide 4. We took a large peer group, including 24 companies, both SMID, and large cap, and looked at the value of proved reserves. Using the SEC defined and comparable standardized measure of discounted future net cash flows for oil and gas, well known as SMOG, for value and total proved reserves, SM ranks among the top two companies for the value of each barrel and equivalent barrel.

Turning to the next slide. We look at third-party data provided by Enverus Intelligence Research. In the top chart, they ranked 23 areas of operations to determine which basins have the lowest average well breakevens. SM operates in the West Austin Chalk No.

1, and the Midland Basin, No. 4 on the chart. Our high-value assets indicated on the previous slide are supported by operating in the best geology. As an aside, I really need to hand it to our geosciences team for having a track record of knowing what geologic attributes lead to commercial success in unconventional resource plays.

The lower chart looks at inventory life and inventory quality. While certain large-cap peers have longer inventory life, comparison of SM to similar-sized peers shows that SM has the longest inventory life among the group with a breakeven oil price at or below $40, nine years with breakeven below $40. I will add that this is recent data and reflects an increase on our Austin Chalk inventory as evaluated by Enverus. When looking at this figure, remember that low breakeven prices mean, not only that our portfolio is resilient to a downturn in commodity prices, but it also means more free cash flow generation per BOE relative to peers during periods of high prices.

Turning to Slide 6. We also like to give credit to our team for their relentless effort to drive capital efficiency, which has included drilling long laterals. The top chart also uses the Enverus data and compares well costs across a broad peer group on wells drilled since 2017. Here, SM is the No.

2 lowest cost drilling and completions operator, and this peer group includes larger-cap peers. The bottom chart compares average lateral length, where SM ranks No. 1. Perhaps these two figures dispel in part the notion that only large-cap peers can achieve outstanding capital efficiency.

Turning to Slide 7. Great assets and capital efficiency position SM to deliver among the highest projected 2023 free cash flow yield relative to our peers. On Slide 8, in addition, our high reserve value per BOE supports a standardized measure of proved reserves calculation that exceeds our current enterprise value, and the standardized measure calculation was run at $66 oil. I would suggest that we have substantial unrecognized value beyond just proved reserves.

With that overview, I'll pass it to Wade to talk about the quarter. Wade?

Wade Pursell -- Chief Financial Officer

Thank you, Herb, and good afternoon. So turning to Slide 9. As we make great strides toward the balance sheet inflection point, demonstrating the quality of our asset base and pursuing leadership in ESG, I think you can say we're doing all things we said we wanted to achieve only faster. Looking at Slide 10 now on the balance sheet for a little more detail.

During the first quarter, we redeemed the 2024s, ended the quarter with $420 million of cash and equivalents and reduced the leverage ratio to 1.05 times. Year to date, all three rating agencies have upgraded our ratings, and we have just announced redemption of the 10% senior secured notes. These two redemptions alone reduce interest expense more than $50 million annualized. Putting strip prices into our three-year plan delivers our goal of $1 billion of net debt sometime in the fourth quarter this year.

While meeting our leverage targets is fast approaching, I'll reiterate what we have said the last few quarters. At the time we achieve our leverage objectives, we will evaluate a number of factors to determine what makes the most sense in regards to return of capital in a manner that is sustainable and delivers long-term value to our shareholders. So turning to Slide 11. Production was at the high end of our guidance attributable to some particularly strong pads in the RockStar area.

I'll point out that NGL volumes were higher than certain Street estimates. As a reminder, we are processing ethane this year, thereby increasing the NGL volumes. Costs were on track and given the nice commodity price tailwind, we had tremendous results. We generated record-high quarterly EBITDAX of $525 million and generated $314 million of free cash flow.

While we originally projected that free cash flow would approximately double in 2022 versus 2021, at current commodity pricing, it would surpass that handily. Moving to Slide 12. We reiterate our original guidance for the year. All line items, including production and capital are unchanged.

For the second quarter, as planned, production volumes should see a small sequential drop. We are expecting the production mix to be about 45% oil and about 60% liquids, reflecting, again, the higher NGL volumes consistent with processing ethane. Scheduled for the second quarter, we plan to drill 27 net wells and complete 20 net wells, which again, as planned, increases drilling and completion activity from the first quarter and will translate into increasing production in the second half of the year. Capital expenditures guidance for the second quarter reflects some carryover from the first quarter, which is just timing as well as an effort to optimize activity in the second and third quarters to take advantage of current drilling and completion contract rates.

When we announced the plan, we indicated that capital would approximate a 50% reinvestment rate. However, the current outlook for commodity prices brings that reinvestment rate even lower. We are frequently asked about exposure to inflation particularly as it relates to capital expenditures. We baked in overall 15% inflation in 2022 versus 2021, and planned for an increasing trajectory in inflation through the year as a number of components are under contract through the second and third quarter.

In general, the components most exposed to inflation are labor, diesel, and steel, which combined represents around 20% of capital costs. That being said, we've seen a lot happen in the macro environment in the past 6 months, and it's impossible to say what the next six months will bring. We'll continue to monitor closely, both in terms of absolute inflation as well as potential impacts related to timing. Turning to Slide 13.

In regards to hedges, the strategy is unchanged. We've hedged about 50% of oil and natural gas production for 2022. That's less than 40% of 2022 total production, including NGLs. In 2023, we project to have met our leverage targets and consequently expect to hedge in the range of 30% to 35% of production.

So I would say, overall, we're on track with our plan to significantly reduce leverage and significantly grow free cash flow and actually at a somewhat accelerated pace in the current commodity price environment. So with that, I'll turn it back to Herb for a brief operations update. Herb?

Herb Vogel -- President and Chief Executive Officer

Thank you, Wade. Turning to the Midland Basin on Slide 14. We are right on track with our 2022 activity. We've updated the Miracle Max chart on Slide 15, where you can see outperformance continues to hold.

On the next slide, 16, we reiterate the performance of certain pads in North Martin, which specifically contributed to first quarter production reaching the high end of guidance. This slide was updated from last quarter to report the outstanding average cumulative production from those same three wells through 180 days. Skipping now to Slide 18 and South Texas. I'd like to share some analysis done by our team.

They looked at production data from thousands of old Austin Chalk horizontal wells completed between 1988 and 2010, primarily located in East Texas, which had a reputation for inconsistent results as demonstrated by the P10:P90 ratio of their EURs. A wide ratio of 41 is indicative of significant variation across the wells. We also ran a data set of 228 old vertical Austin Chalk wells drilled between 1981 and 2011, which resulted in a wide P10:P90 EUR ratio of 17. Applying P10:P90 analysis to our Permian program, which is highly predictable, and to our Austin Chalk program to date, here, we see the excellent consistency of outstanding unconventional resource plays with P10:P90 ratios around two that supports our confidence in the Austin Chalk.

We have elaborated in the past that the West Austin Chalk is a different animal as also recognized by the Enverus data shown previously on Slide 5. There's a large amount of hydrocarbon in place. It is more liquids rich than the underlying Eagle Ford. And in our area, higher permeability leads to highly productive and economic wells, which we are now showing as also repeatable and predictable.

Turning to Slide 19. I will also note a simple metric to reinforce the quality of our wells in South Texas. The estimated payout for our 2021, 2022 Austin Chalk program is now an average of eight months per well. As of the end of March, 17 of the 31 wells to date have already paid out.

I will also point out that our cumulative production graph now extends to 800 days as these wells perform predictively. And I'd like to give a little call out to the Eagle Ford. As shown on the slide, two Eagle Ford completions in November paid out in 6 months. Then, we also completed a couple of Eagle Ford DUCs in the first quarter, which are not shown since they have not yet reached their IP30, but these Eagle Ford wells are expected to also payout in less than six months.

These strong Eagle Ford wells are well timed in today's gas market, and we expect to complete three more in the second quarter. The Eagle Ford remains a gassier option in our inventory that we haven't talked about much over the past couple of years. With that, I will reiterate some highlights today. First, the balance sheet inflection point is fast approaching.

Second, our increased activity in the Austin Chalk in South Texas is producing some great wells, consistent, predictable performance that support a third-party assessment of it being the lowest breakeven basin in the country. Third, we have a long runway of very high-quality inventory and the operational expertise to optimize this development, which we believe will deliver substantial growth in free cash flow and free cash flow yield levels favorable to our peers. Put these all together, and you can see we are well-positioned to continue to grow shareholder value. I look forward to speaking live tomorrow and answering your questions.

Questions & Answers:

Operator

Good day. Thank you for standing by and welcome to the SM Energy first quarter 2022 financial and operating results Q&A. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to Jennifer Samuels, VP of investor relations.

Thank you. Please go ahead.

Jennifer Samuels

Good morning and thank you for joining us for our first quarter 2022 Q&A call. To answer your questions today, we have our president and CEO, Herb Vogel and CFO, Wade Pursell. Before we get started our discussion today may include forward-looking statements and discussion of non-GAAP measures. 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.

We may also refer to non-GAAP measures. Please see 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 this morning for our first quarter 10-Q, which we have filed. And with that, I will turn it back to the operator to take your questions.

Operator

Thank you. [Operator instructions] The first question comes from the line of Leo Mariani from KeyBanc. Your line is open.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Hey, guys. Just wanted to touch base with you here on capex. So just wanted to get the sense in terms of the year here in '22. Is the second quarter capex really going to be the peak and is there a noticeable drop-off in the fourth quarter? Perhaps, there's a frac holiday or something like that? And then just additionally, is a frac holiday if that is the case in the fourth quarter, is that something that can still be feasible in this kind of tighter service environment, and might you have to keep crews on?

Herb Vogel -- President and Chief Executive Officer

Thanks, Leo, this is Herb. On capex first, you probably saw in the first quarter that we were underspent by about 20 million. And we really just -- that's just timing, and we moved that into the second quarter. The peak activities relate 2Q and 3Q and so that leads to more production in 3Q and 4Q.

We really like to keep crews running consistently, if at all possible, because we get much better capital efficiency that way. So we'll do what we can to just line things out with steady activity through the year. That's really the way it works.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

And I just also wanted to ask about return of capital, just kind of reading some of the prepared comments in the transcript, it sound like you all believe you'll hit your debt metrics in the fourth quarter. So it sounds like maybe the board or whatever will be in a position in the fourth quarter to maybe make a decision on a return of capital and that will be something that investors will receive in '23? Just wanted to make sure I kind of understood the timing and mechanics there.

Wade Pursell -- Chief Financial Officer

Yeah. No, you heard the comments, right, Leo. I mean, we've been pretty clear about our targets and we're approaching really quickly, one times leverage, but also want to absolutely get down to $1 billion. And things stay the way they are right now commodity prices, etc., that should occur sometime in the fourth quarter, as you indicated, and that would be the time that we would start looking at a potential return of cash to shareholders.

And too early to talk about what that might look like that it would be something that we feel very confident in being sustainable. And then the method would be based on things that we would analyze at that time.

Leo Mariani -- KeyBanc Capital Markets -- Analyst

OK. Thank you, guys.

Operator

Your next question comes from the line of Zach Parham from J.P. Morgan. Your line is now open.

Zach Parham -- J.P. Morgan -- Analyst

Hey, guys. Thanks for taking my question. I guess one, just kind of based on production trajectory for the rest of the year. With your guide, 2Q will be the third straight quarter of declining oil volumes after a big ramp in the back half of '21.

Can you talk a little bit about the trajectory of oil production in the back half of the year and into '23?

Herb Vogel -- President and Chief Executive Officer

Yeah. Zach, this is Herb. There's some history there with how much we ramped up in '21 in 2Q and 3Q following the weather event in Texas. So that kind of changed how we ended '21 and how we started '22 with relatively few completions at that time.

So as we step through '22 and our activity level's pretty flat here and we wind up with more and more completions coming on, that's what leads to great production in 3Q and 4Q. And then in 4Q, we have those four Permian tabs we've talked about before. So those don't come online, that's 20 well, that doesn't come online until early '23. So it's really difficult to look at the quarterly cadence type of numbers for us.

When we have those sorts of things going on, we just see it year over year. We're really focused on that plan to increase and maximize free cash flow over a two to three-year period. And that's how the plan is designed. That's pretty much the way you should look at it, the way you see it, year-over-year low-single-digit production growth and -- but generating a lot of free cash flow.

Zach Parham -- J.P. Morgan -- Analyst

Got it. Thanks for that color. And just one on the Eagle Ford. In the prepared remarks, you talked about completing some Eagle Ford wells in 1Q and then three more Eagle Ford completions in 2Q.

Can you talk about what drove the decision to drill some Eagle Ford wells versus spending that capital in the Austin Chalk and kind of how you think about that drilling Eagle Ford wells going forward?

Herb Vogel -- President and Chief Executive Officer

Yeah. So a couple of things. So there were two of them that we talked about where we would talk about the payouts already delivered. And those were tied together with seven Austin Chalk wells.

So they were right in that development. So it made sense to pretty much stagger those in. The newest to our DUCs that we've had sitting around for a while, we have some other Eagle Ford DUCs. So it's very capital efficient.

Commodity prices are right. It made a lot of sense to do those. But those were in our original plan for the year. I think we talked about 38 completions for the year, I believe around 30 of those are Austin Chalk, maybe 32 and six to eight are Eagle Ford.

So that was the original plan, but very capital efficient when we can get to the DUCs.

Zach Parham -- J.P. Morgan -- Analyst

Got it. Thank you.

Operator

Your next question comes from the line of Michael Scialla from Stifel. Your line is now open.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Yeah. Good morning. Just looking at Slide 6 it shows you're -- in your slide deck, it shows your capital efficiency's among the best in the industry over the last five years. Just want to see if you could provide any update on current wealth costs.

It's been a while since you've put anything out on wealth costs?

Wade Pursell -- Chief Financial Officer

Mike, thanks for the question. So, we're still running off a contract in the first quarter that we've had for a while, so. And that goes for 2Q largely baked-in costs that we had contracted a while ago. So that really helps us on the capital efficiency side.

The others, we continue to use the same drilling and completion service providers. So what happens is we actually wind up drilling faster than expected. So when you see things happening within it's really just things happen faster, and we don't make that in our budget process. But every year we think we're at peak efficiency and then we do better.

So that's really just a really experienced team with sustained commitment to those service providers.

Mike Scialla -- Stifel Financial Corp. -- Analyst

So is it fair to say, you're still in the sub $700 per foot range with those given those contracts and the efficiencies that you're seeing?

Wade Pursell -- Chief Financial Officer

Yes, definitely.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Sounds good. And then one of your largest competitors in the Midland basin just recently mentioned, they're having issues getting sand, wanted to see if you guys are having any problems with that and any plans to address that if it does become an issue for you?

Herb Vogel -- President and Chief Executive Officer

No, Mike. We're really fortunate that, we were quite strategic in getting sand supply committed in 2017 being the anchor customer of a new sand mine in Lamesa. And we also use their logistics arm. So we have not had any sand availability problems at all.

And we're real pleased with that relationship. It continues to deliver and as I said, we found mines closer to our operations. So we cut down on the last mile logistics costs.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Great. Thanks, Herb.

Operator

[Operator instructions] You have a follow-up question from Michael Scialla from Stifel. your line is open.

Mike Scialla -- Stifel Financial Corp. -- Analyst

I know it's a continuous process when you're working on your well design. It sounds like you're pretty far along within Midland now. Can you see where you are in terms of the Chalk? Maybe in terms of innings relative to where you are in the Midland in the completion design?

Herb Vogel -- President and Chief Executive Officer

Yeah. Mike, that's a great question. So, we are in the -- you're probably aware, last quarter, we talked about that additional 18 million in data gathering, which will help us optimize the completion design. And we're in the midst of gathering that data.

In some cases, we've got some additional data. So we're hard at it, we have not implemented anything really differently so far. There's one minor variation, but that's -- there's still lots to come. The interesting thing though is that we've noticed now that there's 11 operators active in Webb County in the Austin Chalk, five of them are public and six are private.

So our well results have definitely been noticed by industry. So activity is picking up out there.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Anything you can say in terms of the – are you seeing any other wells being drilled and plans? Do you share data with any of these or any thoughts around how you approach the competition?

Herb Vogel -- President and Chief Executive Officer

Yeah. So, Mike, we do engage with a few of the other participants on data trade, and then some of them are -- other ones are quite new. And then we're in the oilier part. So we're not doing that much with the dry gas folks down there.

But it's encouraging to see and I'm looking forward to seeing what the well results are looking like as they sort out the right landing zone. Some of the early wells were probably not in the optimal landing zone and now you see people moving toward the better landing zones.

Mike Scialla -- Stifel Financial Corp. -- Analyst

I know you were asked about the Eagle Ford earlier, I just wanted to follow up on that. Looks like those wells are, you'd mentioned there once, is that strictly attributable to higher prices or did you do anything different with the completion design at Eagle Ford relative to what you were doing previously?

Herb Vogel -- President and Chief Executive Officer

Well, our price has definitely helped there, the completion design is pretty much the same that we've been running in the Eagle Ford. There were a couple that were drilled in 2019 and those are targeting great landing zone and they're decently long laterals, and that helps also. But we do feel like we have a great Eagle Ford option out there in -- that's really not much in our approved reserves, but it's out there in our inventory. So if there is a sustained high gas price out there, we have quite a bit of inventory to come after.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Got it. And then I guess just one last one in terms of inventory, anything different on the 400 locations that you've talked about in the target? I know you've got 40 wells now that you've delineated the play with, still looking at that 400 locations as kind of the best number for the inventory there. Any update there?

Herb Vogel -- President and Chief Executive Officer

Mike, we're sticking with 400 now. We'll see what more we can do. But 400 is quite a bit of runway in front of us. And we'll work to optimize that over time.

So, but it's just a great resource base out there.

Mike Scialla -- Stifel Financial Corp. -- Analyst

Great. Thanks, Herb.

Herb Vogel -- President and Chief Executive Officer

Thanks, Mike.

Operator

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

Scott Hanold -- RBC Capital Markets -- Analyst

Hey, thanks. I'm just kind of curious. And as you started looking into 2023, there's a lot of obviously concerns about Permian gas takeaway, and your production in the Permian typically is a little bit more oily. But can you remind us of how you're positioned there if you've got, firm takeaway that's going to be ample and not seeing these issues? And also in the Eagle Ford, given the I guess, larger kind of gas component there, is there -- can you just remind us of what the gas takeaway capacity for you guys is in the Eagle Ford? And how you guys price that, are you seeing some pretty good differentials to be able to get into the LNG corridor or other places?

Herb Vogel -- President and Chief Executive Officer

Yeah. Thanks, Scott. So, let's go on the Permian gas takeaway. So kind of the perception last quarter was that we see quite a bit of tightness in the takeaway in fourth quarter of '23.

Since that time Kinder has gone out there and said, they'd be able to do compression expansions and those would be online by fourth quarter of '23. That really pushes things out where you wouldn't be oversight applied until the back half of '24. We're not really changing our plans at all for any of this, because on the volume risk side, most of our purchasers hold firm capacity or they're selling in the fair markets. So we don't expect any production contaminants there.

That's on the volume side. And then on the price risk side, things do start getting tight. We've put basis hedges in place, you'll see in our appendix, we've got base hedges in place through '25. So that mitigates the risk on pricing if there is a flow out some sort.

But overall, it's going to depend on supply and demand. Out at the Permian, people really crank up production when that shortfall might occur. But it's encouraging to see the midstream are stepping up and making sure that we can deliver the gas which allows the oil to flow. So that's the Permian.

On the Eagle Ford, you're probably aware that there was a lot of gas production out of the Eagle Ford, mid-decade, from 2014, '15. So there's a lot of fair takeaway capacity and what we see and have baked in for July '23 and beyond is some of our old legacy contracts that were at higher takeaway costs, higher takeaway – basically, costs. They'll drop by about $0.35 an Mcf. And there's plenty of capacity.

As to LNG uplift, we were really just going to be going with the marker. So if LNG pulled up Houston Ship Channel or Tennessee Zone 0 or Hub, we would see it brought in that way. We wouldn't see it directly where we could access an international on the LNG side.

Scott Hanold -- RBC Capital Markets -- Analyst

OK. And back to the Permian, can you tell us the purchasers that take away your gas there, you said they affirm capacity. Can you say where that capacity is on there? Is there like ample room on those lines right now, or is that -- do you have, as you look at your projections, I guess through '24, I mean, do you have that pretty much locked in?

Herb Vogel -- President and Chief Executive Officer

So what we do is we sell to the purchaser at the wellhead, and the purchaser only will sell to parties who represent that they have firm capacity on the line or are selling into a firm market, like a local market. So that's how we mitigate the volume risk. We won't sell to somebody who doesn't have any capacity at all. So because they have that capacity, so let's say they have 20% of one of the pipelines and 15% of another line's capacity, that's where our Mcf will flow.

Scott Hanold -- RBC Capital Markets -- Analyst

Got it. OK. And then my follow-up question is, as you start --- and I think this quarter you guys didn't book a valuation allowance in taxes, can you remind us your positioning on cash taxes and at this commodity price drip when that could occur?

Wade Pursell -- Chief Financial Officer

Hey, Scott, it's Wade. I would assume that things stay the way they are currently with the strip and in our kind of our steady activity profile that we would probably begin paying some cash taxes later this year, in the kind of teen and mid-teens million area. So not significant, obviously. On a go-forward basis, and this is very round forecasting, but I see something for us that getting up to kind of peaking in an area of the 100 million to 150 million a year.

And that again, that assumes that kind of a strip type price. So obviously that assumes a significant amount of free cash flow, offsetting that. But that's kind of where things could be added, assuming there's no big changes.

Scott Hanold -- RBC Capital Markets -- Analyst

Yeah. And just out of curiosity, what is that like 100 million to 150 million in play on an effective cash tax rate on pre-tax income?

Wade Pursell -- Chief Financial Officer

Yeah. It's certainly well south of the statutory rate, the 20% area, it's wealthy under there.

Scott Hanold -- RBC Capital Markets -- Analyst

Yeah. Are we talking like 10%, 15%? Somewhere in there around 10%?

Wade Pursell -- Chief Financial Officer

Yeah. Very round numbers, probably somewhere in the half of the statutory tax rate area, but that's very round numbers. But that's simply because of the assumption that we continue with a steady capital program, all of the tax rules stayed where they are, IDCs, etc. As long as those things are in place, that's what's going to happen with respect to our rate -- effective rates.

Scott Hanold -- RBC Capital Markets -- Analyst

Got it. That makes sense. Appreciate it.

Operator

[Operator instructions] There are no further questions at this time. I would now like to turn the conference back to Herb Vogel for closing remarks.

Herb Vogel -- President and Chief Executive Officer

Thank you all for your interest in SM Energy. Since I've got the time when this started if you ask me why invest in SM Energy now? Just consider the key attributes. First, we're producing top-tier flow-breaking assets in two great basins, No. 1 and No.

4 in the country. We're able to generate significant free cash flow. We're rapidly paying off debt, and really moving EV to equity. We're definitely a premier operator pushing technical advancements to add value.

And we're enjoying an intrinsic increase from NAV or EV from confirmation in the Austin Chalks. So thanks again for your interest.

Operator

[Operator signoff]

Duration: 38 minutes

Call participants:

Jennifer Samuels

Herb Vogel -- President and Chief Executive Officer

Wade Pursell -- Chief Financial Officer

Leo Mariani -- KeyBanc Capital Markets -- Analyst

Zach Parham -- J.P. Morgan -- Analyst

Mike Scialla -- Stifel Financial Corp. -- Analyst

Scott Hanold -- RBC Capital Markets -- Analyst

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