Q2 2023 SM Energy Co Earnings Call (QnA Session)
Participants
A. Wade Pursell; Executive VP & CFO; SM Energy Company
Herbert S. Vogel; President, CEO & Director; SM Energy Company
Jennifer Martin Samuels; VP of IR & ESG Stewardship; SM Energy Company
Benjamin Zachary Parham; Research Analyst; JPMorgan Chase & Co, Research Division
Oliver Huang
Scott Michael Hanold; MD of Energy Research & Analyst; RBC Capital Markets, Research Division
Timothy A. Rezvan; Research Analyst; KeyBanc Capital Markets Inc., Research Division
Presentation
Operator
Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy's Second Quarter 2023 Financial and Operating Results Q&A. (Operator Instructions) Jennifer Samuels, Vice President, Investor Relations and ESG Stewardship, you may begin your conference.
Jennifer Martin Samuels
Thank you, Rob. Good morning, everyone. First off, I do apologize for any inconvenience yesterday for the delay in posting all of the quarterly materials. Our third-party web host had technical issues. I guess, reporting on the busiest day can overload the system. We may reference those materials today, including the investor presentation and call transcript during today's Q&A call. Thank you for joining us this morning. 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 2 of the accompanying slide deck, Page 5 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.
We may also refer to non-GAAP measures. 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 second quarter 10-Q filed this morning. And with that, I will finally turn it over to Herb for a brief opening commentary. Herb?
Herbert S. Vogel
Thank you, Jennifer. Good morning, and thank you for joining us. Before we get started, I just wanted to reiterate a few key messages this quarter. Our return of capital program has been well received with the repurchase of 2.6 million shares in the quarter and 5.3 million since inception of the program last September. Including our sustainable dividend, we have returned $221 million to stockholders since September, or a 6% yield over 9 months based on the June 30 market cap. Execution was solid in the second quarter, building on a very solid first quarter. We're very pleased to have increased production guidance, reduced CapEx guidance and geared up to add a rig in October that will help drive slightly higher oil growth in 2024.
People who've followed us know that our ability to build inventory organically really differentiates SM. We've added 29,100 net acres this year to date in the Midland Basin, a 35% increase, and the team is excited with these latest 20,000 acres to target more Dean potential, which, today, has been the producing interval in some of our very best wells in the Midland Basin.
I've got to say this is the best way to add true value to an E&P company.
The first half of 2023 puts SM on a trajectory for an excellent year. With that, I'll turn it back to Rob to start taking your questions. Rob?
Question and Answer Session
Operator
(Operator Instructions) And your first question comes from the line of Zach Parham from JPMorgan.
Benjamin Zachary Parham
I guess, first off, just like cash return, you have returned a significant amount of free cash flow through buybacks over the last couple of quarters. In the second half of the year, your free cash flow is set to expand as production increases and CapEx declines. How should we be thinking about your buyback in the second half? Will you continue to utilize 70-plus percent of free cash flow to buy back stock? And maybe just talk about how the stock price plays into how you're thinking about the buyback?
A. Wade Pursell
This is Wade. Great question. Yes. I guess all I can say there is $500 million authorized. We've now used $166 million of that, so $334 million to go. So I think -- I did say in the remarks that the current price looks very attractive to us. I probably shouldn't speculate any more than that. I think if I were you, I would just kind of model the remainder pretty pro rata the rest of this year and into 2024.
Benjamin Zachary Parham
And maybe just 1 on the new operating position, the 20,000 acres. Can you just talk a little bit more about your development plans on that new acreage? I know you've talked about developing the Dean there. But when will you start to initially drill some wells there? When should we expect to see some results?
Herbert S. Vogel
Zach, this is Herb. So I think we (inaudible) conference in June, but we're picking up a fourth rig in the Permian Basin in the fourth quarter. And we're going to be, first, going into another part of RockStar, and then moving over to the acreage as soon as we're ready. But we should start drilling on that acreage late in the year, and then we'll continue on into 2024.
We haven't budgeted how much of the year we'll be doing that. We'll be doing the normal efficient pad execution in terms of when we put the frac spread on there and how quickly we'll do it. So we're just lining out the plans now. We're really excited about it. This is a sort of play that our best wells have been in the Dean. And so we're really excited to see what we can do up here. We do have a lot of confidence given offset well data, both vertical and horizontal wells. So that's really the plan, no more than that.
Operator
And your next question comes from the line of Oliver Huang from TPH & Company.
Oliver Huang
Congrats on the strong quarter. Just wanted to kind of follow up on the Martin, Dawson acquisition a little bit more. I know you all are very excited about the asset, having highlighted the Dean and Middle Spraberry sand intervals as key targets. Just any initial thoughts in terms of how you all are planning to develop the asset from a spacing perspective? Also what's the opportunity set to other zones within the area? And any color with respect to HBP commitments that you all might have to carry out, if any?
Herbert S. Vogel
Yes. Oliver, so first of all, this is not your usual stack mudrock Permian play. In this area, we're really targeting much more conventional sands with a higher porosity and really oil-saturated rock, and that underpins the prolific wells with the -- the type curve characteristic is a bit different than your normal plays. It's quite good from an economic standpoint. Right now, we're looking at optimizing the lateral length. And as part of that, we'll be putting the spacing in that what will optimize our economics. We use the same approach throughout where we really look at the incremental return for the last well assigned to a DSU. So that will basically be making sure that we achieve great economics on the wells.
So that's really the story there. And we'll be getting some well results there, and it'll probably be in the first half of next year we should get some well results from up there. But there's already been quite a bit of offset drilling, too. And just to the southeast of it, we have our best wells ever in the Permian Basin that are in the Dean.
Oliver Huang
Okay. That's helpful color. And just for a second question, in South Texas, certainly great to see the positive ops update out of there. But just really trying to understand the oil handling project a little bit better. It sounds like it's completed at this point. But just are we now at the point where volumes from the Austin Chalk can be flowed in the most optimal way? Or is there still some level of constraint? And how should we think about future investment on this front? Or does this all pretty much satisfy any sort of growth that we might see over the next couple of years?
Herbert S. Vogel
Yes, Oliver, I'm just going to refer back to what we said about a year ago. So we were expanding the pipeline to carry the oil out over a 3-year period progressively synced up with where we were developing. So last year, we did the first part. This year, we did the second part, and we finished that early in the second quarter, and there will be a third extension of that pipeline next year.
The constraints are relieved at this time. The only time that we would wind up with constraints is that we put a couple of really oily pads on adjacent to each other that can flow quite strongly. It doesn't affect the wells at all. It just means it stretches out how long (inaudible) plateau longer. But we're doing that very efficiently, and we try and schedule things so that we mitigate that. But we want to bring the wells on timely and efficiently, and that's what drives it. So -- but the bottom line is, yes, the constraints are relieved. The constraints will continue to pop up if we don't manage things tightly, but we're planning to manage things tightly.
Operator
And your next question comes from the line of Tim Rezvan from KeyBanc Capital Markets.
Timothy A. Rezvan
I think Oliver hit on what I plan to ask. So if I could pivot to the mystery Midland Basin asset, you talked about 9,100 net acres. I was wondering -- I'm trying to think about that in context of the cash on the balance sheet right now, and your decision kind of not to redeem your notes that are callable at par right now. How big is this opportunity set that you're pursuing? Do you think you're close to kind of getting the acreage put together that you wanted? Is there time that you may be able to sort of share some more information with the marketplace?
Herbert S. Vogel
Yes. Tim, I think we've mentioned this before at the JPMorgan Conference that we still see some opportunity to get additional acreage around that. And I'll just give you a heads up that on that Slide 13, we showed 2023 newly acquired acreage. That's only the most recent 20,000 acres. We haven't disclosed yet where the 9,100 acres are that we'd like to expand. So we haven't really given more color. We will at some point. And once we have some wells in there, we'll be sharing the results, but you won't be seeing those until mid next year sort of timing based on the way we're planning to go about things.
A. Wade Pursell
Yes. I'll just add to that on your balance sheet question, Tim. It's a good one. It's -- carrying the cash right now for me is pretty close to a no-brainer. Those '25 notes don't mature for a couple of years, and the coupon is [5 and 5/8]. Our cash is earning pretty close to 5% now. So it's not a big negative carry to be able -- to be more conservative and opportunistic and have some cash and liquidity is always a good thing.
Timothy A. Rezvan
Okay. That makes sense. And then one more question, I guess, circling back on sort of the Dean opportunity. Herb, I spoke to you in December, and you went into great detail on your view on how good and prolific the formation is. Do you believe there's kind of more potential to add kind of Dean inventory? And I was hoping to pin you down a little more in sort of spacing. Can we think about this traditionally in like a 4-wells-per-unit type development? Or -- just trying if you could give a little more context on kind of what you see there because there's been some debate in the marketplace, and you seem sort of firmly in the view that this is a distinct and highly prolific area.
Herbert S. Vogel
Yes. Tim, so I understand why people would have different views about it. It's really -- it doesn't work everywhere. You have to really understand the geoscience and the nature of the sands, where they are and where they are oil saturated, and where the porosity is strong that would allow for high productivity. So that takes quite a bit of detailed mapping. You can really start with the vertical wells and then it helps when there's offset horizontals to confirm the thought process that you have.
So I would say it isn't for everyone and on everyone's acreage, but there are certain areas where it will work extremely well. And that's what we've homed in on. And we've mapped throughout the basin and said, okay, here the Dean works, here the Dean would be wet, and here the Dean, the sands are too thin, here, the sands are really thick. So we've mapped that through to identify the sweet spots that will give, what I call, top-tier returns, which is what we've had in our existing Northwest RockStar position, which underpinned our Dean performance.
Timothy A. Rezvan
Okay. Okay. That's helpful. So I guess we should think about this as sort of an ongoing process to continue to find more inventory perspective for the Dean...
Herbert S. Vogel
Yes. I would say we know where the inventory is, and then it's whether we can get access to the land or not.
Timothy A. Rezvan
Okay. Okay. Fair enough. And then if I could just sneak 1 last 1 in to sort of close the loop on the oil handling question. So in theory, there could be some constraints next year if there's issues with the build-out. But that piece next year, would that sort of handle your medium-term development in South Texas for many years once that final build is done next year?
Herbert S. Vogel
Yes, that would do it, Tim. It's just the last southern most extension of that line is all we'll have left. And we'll make sure we get it in there before we bring the pads on. It's unlikely that we get pads on early. But if it does happen, that's always an issue. But in this case, we're ahead of it.
Operator
(Operator Instructions) Your next question comes from the line of Scott Hanold from RBC Capital Markets.
Scott Michael Hanold
You all gave some pretty good color on how you think about buybacks. Maybe a little context of the dividend side of things. Do you feel comfortable with where it is? Do you want -- what do you think about the yield and where that might go going forward?
A. Wade Pursell
Scott, it's Wade. Good question. We kind of established that dividend level, I guess, last September, October. So we'll be coming up on a year. We'll take -- I certainly can't predict anything at this point. But as we said, we'll reassess occasionally. And you can assume we'd be doing that soon and decide whether we wanted to increase it or not or leave it where it is based on our view of the market and commodity and free cash flow generation in the coming years, so stay tuned.
Scott Michael Hanold
Yes. But if you can give us some context on like how do you think about sizing that? Do you want it to be competitive with some peers in this mid-cap, with larger caps, with the S&P 500, a percent of cash flow? Any kind of view on like how you think about sizing it?
A. Wade Pursell
Yes. No, I -- that's hard to answer at this point. Whether we want to compare it too much with who we want to compare it to, I think is a great question. What we really want to accomplish is a very sustainable dividend that shareholders can count on even in low commodity price environments. I think we used [60 and 3] before. So we'll do the same analysis again and determine what we think fits that bill.
Scott Michael Hanold
Okay. Fair enough. And thinking about 2024, you gave a few breadcrumbs on how you're thinking with that mid-single-digit growth. Can you give some context around -- and I think there was some context around that, maybe the Permian gets -- has a little more momentum going into next year. So if you can kind of discuss how you think about capital allocation and any kind of further cost savings tailwind that would have some implications to the budget?
A. Wade Pursell
Yes. I'll say a word about that, and then Herb can answer better. I mean, as far as capital allocation, we're going to be watching really closely the next 3 months or so and determining what that free cash flow number is going to look like next year. Deflation is a big question, and it appears that costs will be lower next year. Commodity price kind of stabilizing here at a higher level, hopefully. So there will be some allocation decisions coming out of that, but determining how much free cash flow we're going to have first, I think, is going to be a big thing for us in the coming months.
Herbert S. Vogel
Yes. And then, Scott, I'll just add. Yes, you've heard exactly right. We do see a mid-single-digit growth. We will be leaning a little bit more into the Midland Basin. We're just picking up the fourth rig in the fourth quarter, and we haven't identified how long we'll be running it through next year. But just that alone would allocate more to the Permian than we did this year and last year. And obviously, it's oily and commodity environment is quite good for that. So that's really what we're planning to do.
Operator
And there are no further questions at this time. Mr. Herb Vogel, I turn the call back over to you for some final closing remarks.
Herbert S. Vogel
Okay. Well, thank you, Rob, and we are very pleased with our first half successes, and we're well positioned to continue this trajectory to build value and deliver returns. Thank you all for your interest, and we look forward to seeing a number of you at upcoming events.
Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.
