Q3 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
Gabriel J. Daoud; MD & Senior Analyst; TD Cowen, Research Division
Oliver Huang
Timothy A. Rezvan; Research Analyst; KeyBanc Capital Markets Inc., Research Division
Presentation
Operator
Greetings. Welcome to SM Energy's Third Quarter 2023 Financial and Operating Results Q&A. (Operator Instructions) Please note that this call is being recorded. At this time, I'll turn the conference over to Jennifer Martin Samuels, Vice President, Investor Relations and ESG Stewardship. Jennifer, you may begin.
Jennifer Martin Samuels
Thank you. Good morning, everyone. We are speaking to you today from a particularly beautiful day in Colorado, land of prime time events. So let's get started on our event today.
In today's call, we may reference the earnings release, IR presentation or prepared remarks, all of which are posted to our website. To answer your questions today, we have our President and CEO, Herb Vogel and CFO, Wade Pursell.
Before we get started, I need to remind you that our discussion today may include forward-looking statements and discussion of non-GAAP measures, I direct you to Slide 2 of the accompanying slide deck, Page 6 of the accompanying earnings release and the Risk Factors section of our most recently filed 10-K, which describe risks associated with forward-looking statements that could cause actual results to differ.
Please see the slide deck appendix and earnings release for definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures and discussion of forward-looking non-GAAP measures. Also look for our third quarter 10-Q filed this morning. With that, I will turn it over to Herb for a brief opening commentary. Herb?
Herbert S. Vogel
Thank you, Jen. Good morning, and thank you for joining us. Let me start by reiterating a few key messages this quarter. Our return of capital program continues to be well received. We have repurchased approximately 6% of shares based on shares outstanding as of September 2022.
We have increased the dividend twice, most recently a 20% increase while at the same time, we have maintained net debt to adjusted EBITDAX at 0.7x and increased our Midland acreage position by 35%. Execution has been outstanding in 2023, underscored by several third-party charts we presented in the slide deck, and we are excited to get out and demonstrate the value of our new assets with the fourth added rig in Midland.
As you can see, we have increased the number of expected fourth quarter completions in Midland from 6 to 11 and will have added benefit in the first quarter from the higher working interest in wells gained through the asset exchange that we just reported, setting up for a more oily first quarter and stronger oil trajectory in 2024.
As we close 2023, SM Energy is very well positioned to deliver on the continuation of our core strategic objectives in 2024. With that, I'll turn it back to Rob to start taking your questions. Rob?
Question and Answer Session
Operator
(Operator Instructions) And our first question today is from the line of Gabe Daoud with Cowen.
Gabriel J. Daoud
It's Gabe from Cowen. Guys, I was hoping we can maybe start with 4Q. Looks like oil is expected to decline quarter-over-quarter, but Midland (inaudible) have actually increased relative to your prior outlook. So just curious if you can maybe give us a bit more color on what's going on there.
Herbert S. Vogel
Yes, Gabe, this is Herb. So yes, we're really not really focused on that quarterly cadence bringing on a large new pad earlier later by a month can have an impact on quarterly rates, but it's really not material at all from a valuation or a cash flow perspective. So we're not really focused on that.
Gabriel J. Daoud
Okay. Got it, got it. So just timing related to a large pad, okay. And then as a follow-up, I was hoping we could maybe get some more color on the asset exchange. And specifically, how the 9 DUCs and the increase in working interest there set you up for a strong 1Q, any way that you can maybe quantify oil volumes for 1Q?
Herbert S. Vogel
So Gabe, first of all, I'm just really excited we were able to do that asset exchange. So getting a substantial increase in wells we've already drilled in our working interest through an exchange was just great value for us and it really boost what we'll be able to produce in the first quarter, but we haven't put any numbers out there yet for 2024. But you can see how it positions us well for an oily first quarter. How oily it is, will depend on exactly how early they come on in the first quarter, but it's just in the right direction for what we're trying to do strategically.
Operator
Our next question is from the line of Zach Parham with JPMorgan.
Benjamin Zachary Parham
Wade, maybe one for you on the buyback. It stepped up pretty significantly this quarter. Just any thoughts on the future pace of buybacks? And I'm also wondering if you plan to ask the Board to increase the size of the authorization because if you ran at the 3Q pace for another couple of quarters, you would finish up that authorization. So just curious on that as well.
A. Wade Pursell
Yes. Thanks, Zach. Good questions and we spoke about this in the prepared remarks and gave some nice pie charts on our capital allocation. You're right, we do have -- we do still have a ways to go on our authorization. I think we still have another $237 million to go on that. So all I can say is we really -- I think we've been showing and we talked about it in our prepared remarks that we clearly prioritize return to stockholders within our capital allocation, and there's no reason to believe that, that would change. So I guess that's all I can say on that. As far as the pace by quarter, we said that we're going to be methodical and some quarters lean in more. That's really all I can say at this point. We'll continue that strategy on the current authorization. And then when we get to the end of it, we'll consider what to do from there.
Benjamin Zachary Parham
Got it. And then also just had a question on the tax credit that was mentioned in the prepared remarks you posted on the website. Maybe could you give investors some detail on why exactly you received that tax credit? And maybe talk about if there's potential that the credit could increase in size over time?
A. Wade Pursell
Yes. Great -- I appreciate you asking that. We -- as we said in the remarks, and as we've been saying for years, being a premier operator is constantly pushing the envelope with innovation and technology and a lot of what we do just kind of hits right down the fairway of what the R&D tax credit provides for us. So we did a lot of work, and the team did a ton of work qualifying for that credit and quantifying the amounts that we believe fit that -- those criteria and put back several years, and that's the reason for the size of it. You might -- somebody might ask why now? We haven't been a cash taxpayer until recently. And that's obviously part of it because it is a ton of work to quantify these amounts and build the position to take the credits. But that's the primary point. Your question about will it continue? It absolutely should. We continue to do similar things operationally. So we kind of set up the processes and the procedures to hopefully continue to quantify those R&D tax credits going forward. So beyond the amount that we disclosed, I think $77 million as far as the amount from the past that we're able to use in the coming years, significantly offsetting cash taxes in the next few years. So thanks for asking.
Operator
Our next question is from the line of Oliver Huang with TPH.
Oliver Huang
Just one on the extra rig that got added in the Midland in early October on a 6-month contract. Anything you all are kind of able to offer up in terms of the thought process on what would dictate keeping that rig on for the remainder of next year? Or is it pretty firm at this point in terms of just once Q2 kind of rolls around, you all are going to go back to that 3 Midland rig program you all have been running? And also, is this going to necessitate the need for bringing on a spot crew to help get these wells done in that (inaudible) area?
Herbert S. Vogel
Oliver, this is Herb. Yes. Thanks for asking the question. Yes, you're right that fourth rig has a 6-month term and it's got an excellent rate. We haven't decided whether to extend it or not yet. We haven't set our budget for 2024 yet. It's certainly possible that we could extend it and we haven't made the decision yet. In terms of the completions crew, it's a pretty rigorous scheduling process we undergo really -- well, almost continuously, but for 2024 right now, so will determine what the schedule will be for the frac spreads. You're probably aware, we're running Simul-Frac crew, and that's led to some of those great numbers that we showed in the deck in terms of execution. So it will just be part of our schedule when we have to pick up a spot crew or not. We don't do that very often. We really drive for those capital efficiencies, but I never rule it out because sometimes, there's one freed up from another operator really cheap for a pad, and we'll take advantage of those situations.
Oliver Huang
Okay. That's helpful color. And maybe just a follow-up to Zach's earlier question on the tax credit. Any sort of updates with respect to how that might impact cash taxes for next year? I think previously, you all kind of talked about that $16 million or so run rate. Just wanted to see if we could get maybe an update there.
A. Wade Pursell
Sure, thanks for asking it. That's a good point. So next year, if you think in terms of $60 million, 6 0, I think that's what we've talked about and kind of what our model shows right now. The tax credit will enable us to offset 75% of that. So that -- so the number will be more like [$15, 1 5, million] next year. There is a limitation each year that you can only offset up to 75% of your cash tax liability. So that will be the result next year. And it will be -- frankly, it will be similar, I think, in 2025.
Operator
Our next question is from the line of Tim Rezvan with KeyBanc Capital Markets.
Timothy A. Rezvan
Wade, I wanted to dig back in on the repurchases a little bit following up on Zach's question. If you look at your history, you all did about 2.6 million shares in the second quarter at about $27 and you did about the same amount this quarter at a higher price. So I know you can't show your cards too much, but is it safe to say that you and the Board see shares extremely undervalued at that $40 level and that we would assume you all would continue leaning in if the share price stays here?
A. Wade Pursell
I think you can -- I think generally, you can assume that. I mean, we clearly have a view on what we think the stock price is worth our own internal NAV. And the fact that we leaned in, as you said, this quarter at prices averaging around $40, I think, confirms our belief that our -- that it's undervalued.
Timothy A. Rezvan
Okay, okay. That's helpful. And then as my final question, maybe more for Herb on (inaudible). You talked about Dean in the Middle Spraberry as your targets. I was under the impression that, that was underwritten solely on the Dean. So I was wondering if you could refresh our memory on the intervals you used to underwrite the acquisition? And then maybe what you're going to be targeting with that fourth rig on your first few wells up there?
Herbert S. Vogel
Yes, Tim. Yes, we are very excited about (inaudible). We look at some of the offset wells in that area and our experience (inaudible) Dean wells and Middle Spraberry sand is lesser portion of the value up there, but it's still great value contributor, and we are initially going to pad to exploit the Dean. So that's our plan there. But yes, we are excited to get up there and show what the wells can do up there.
Timothy A. Rezvan
Okay. So those initial wells will be targeting the [Dean?]
Herbert S. Vogel
Yes, they will.
Operator
(Operator Instructions) We have a follow-up from the line of Oliver Huang with TPH.
Oliver Huang
Yes, I just had one more follow-up guys. Just with respect to lateral lengths, just kind of with the 9,000, 15,000-foot DUCs in the Sweetie Peck, looks like you all are kind of extending laterals a little bit. I think you all did 15 of those longer laterals this year. But just wondering, any sort of trends that we should be kind of aware of as you're pulling together the 2024 plan in terms of this lateral length migrating higher in either of your two areas relative to this year?
Herbert S. Vogel
Oliver, this is Herb. It's pretty straightforward just when we get into a year. We look at the pads that we're going to develop, and we look at the acreage position and how contiguous of acreages, in general, it's quite good for us. And you're probably aware, we hold the record in Texas for the longest lateral of anyone at 4 miles. So we can do that if we want to. So it's really an economic optimization question for us. And generally, 15,000-foot laterals will get a benefit in terms of rate of return, as you can expect. So we'll put 15,000-foot laterals in wherever it makes sense. How it turned out for the year on the average lateral length, we've been bouncing in between the 11,000 and 12,000 on average. I kind of anticipate that's sort of where things will be. So -- but we don't have our 2024 program outlined with a planned lateral length yet. But in general, you can bet that we're going to be optimizing the economics here.
Operator
Our next question is a follow-up from the line of Tim Rezvan with KeyBanc Capital Markets.
Timothy A. Rezvan
I wanted to circle back on the asset exchange a little more. Just trying to understand, essentially, you're adding 5.2 net wells, if we think about 58% working interest in 9 wells. So I'm trying to understand that the $50 million in CapEx, is that the completion costs for those wells? Or is that -- are you kind of buying into the whole working interest, the whole D&C side? And then I guess as a follow-up, are there more opportunities like that? Or was that really a unique kind of one-off event?
Herbert S. Vogel
So it's a great question, Tim. It's really -- they're DUCs now. So they've been drilled. We spent the capital. And then for the fourth quarter will be completing the wells. And so that's largely what that incremental CapEx is.
Timothy A. Rezvan
Essentially $9 million per well as the completion cost for the 3 miles?
Herbert S. Vogel
No, because there's some additional where we had to basically cover the cost that we already had in the wells.
Jennifer Martin Samuels
I think there were third quarter costs associated with the completions that as well as fourth quarter costs associated with the completions. So that $50 million is representative of the net completion cost added for the 5 net additional wells.
Herbert S. Vogel
Yes.
Timothy A. Rezvan
Okay. Okay. And then the second piece of the question, are there more opportunities? Like I know ideally, 100% working interest is where you want to be, but are there more meaningful opportunities like that? Or was that sort of a unique one-off?
Herbert S. Vogel
That's a great question. You never can quite anticipate what happens. You'll see working interest change. The way to look at it is when we first acquired, for example, the RockStar acreage, we were around a 60% working interest and we worked our way up to an average of over 80% on that acreage. So there are opportunities just arise all the time as operators adjust their or nonoperators adjust their interest in wells. So we're very opportunistic on that. We're in the land game daily and we'll do what we can to increase working interest that generate quite high returns for us. So I look at it that way, it's very hard to predict. We've never put it in a plan. But when the opportunity comes in front of you, you grab it when it has much value as, for example, this one did.
Operator
We've reached the end of the question-and-answer session. And I'll turn the call over to Herb Vogel for closing remarks.
Herbert S. Vogel
Okay. Thank you all for joining. We're very pleased with our performance in 2023, and we're well positioned to continue this trajectory to build value and deliver returns going forward. Thank you for your interest, and we look forward to seeing a number of you at upcoming events.
Operator
Thank you. This will conclude today's conference. You may now disconnect your lines at this time. We thank you for your participation.
