SM
#Thank you, Tiffany.
Good morning, and thanks to all joining us by telephone and online for SM Energy Company's First Quarter 2018 Financial and Operating Results Q&A.
Before we start, I'd 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 on our website for this call, the Risk Factors section of our Form 10-K that was filed earlier this year and our Form 10-Q filed for this quarter.
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.
Other company officials on the call are Jay <UNK>, President and Chief Executive Officer; Wade Pursell, Executive Vice President and Chief Financial Officer; Herb <UNK>, Executive Vice President, Operations; and <UNK> <UNK>, Vice President, Investor Relations.
I'll now turn the call over to Jay.
Well, thank you, <UNK>.
I think everybody understands.
It was a pretty straightforward quarter.
So we'll just turn over to you for your questions.
Yes.
All right, Mike.
This is Herb.
And yes, we've already done co-development of 2 zones and we have for, in this year's plans, co-development of a large pad ---+ set of pads in the rock ridge ---+ RockStar area.
So that's going to be late in the year.
And I believe it's 25 wells.
It will be 3 zones and that will be Lower Spraberry, Wolfcamp A and Wolfcamp B.
So yes, we've done 2 zones, co-development in numerous places.
It will be lumpy.
It just depends on the timing.
In some cases, we have 4 pads that will come on in successive order and they can be a month apart, but that ---+ it will be a pretty lumpy production.
No.
The Lumbergh wells is ---+ are standard completion.
There's nothing really special on Lumbergh wells at all.
And of course, they are the 10,000-foot laterals on those.
Yes.
It's really a great area.
So on the whole market side, we think we're really well-positioned.
Our gathering and sales are diversified to several counterparties and all our counterparties for oil have firm takeaway capacity.
And one real differentiating thing for us is the oil is really high-quality, 37 to 41 API, which is great for Texas refineries.
It doesn't need to be exported.
And then, of course, we're hedging with our routine hedging program where we're really watching that.
And finally, we've got great relationships with all our off-takers.
So we think we've managed through ---+ we're managing through what we see as a temporary tightness that everybody sees.
Yes.
The answer to the first part of that, Joe, is no.
We are not.
We ---+ our purchasers and our gathers are well-positioned and so we don't foresee any issues from those counterparties at all.
And we've had a long-standing relationships with them, some of them in other basins also.
So we're ---+ we do not see any issues with flow assurance.
Yes.
That's ---+ it's hard to understand, Joe, what all drives the ---+ how the market is moving, if people see tightness in the future and ---+ but it would be pure speculation on my part.
So on ---+ let me go to the fiber optic question first.
So that installation was a permanent installation.
And so we've already completed the fraction stimulation of that well.
So we see exactly what happened and we tested a number of different changes in the completion design over typically 6 to 8 stages in each and we're going to ---+ we're just now starting to flow back on that well.
So we'll see how the completion design changes the influence, the contributions from each stage.
So we're really excited about that.
And we did try several different things in the one wellbore.
And we'll just be sharing that as we get the results in over the next couple of quarters.
We only completed 5 wells in the quarter so ---+ and we didn't have any completions for about a couple ---+ 3 months before that.
So it's been pretty light in terms of new results on the Eagle Ford.
And of course, we're going to get the 9 on this next quarter.
Brad, this is Herb.
Yes, I think in the February presentation, we showed our maps and that's a pretty detailed look at where we confirmed and where we believe the sweet spots are.
And we're continuing our march on expanding that confirmed contour over time.
And you're right, over that northeast edge of our acreage, we've got 3 wells up there, 3 different zones.
So we've been real pleased there and, of course, we're stretching it out wherever we can.
Brad, when I put numbers in like 1/3 or 1/2, they're really rounded.
So you can assume, for example, 1/2 might be 45% or 55%, 1/3 would be plus or minus a few percentage points.
So I don't think it's ---+ would work to back calculate off those round numbers.
No.
I think.
.
No ---+ this is Herb.
It's in the February presentation.
We gave all this information in February.
Well, our sales are typically to third parties and it would be Midland basis-priced.
Well, this Jay.
That's a big, big question you just asked.
And in general, what we're going to do at the corporate level is we're focused on returns that will allow us to operate within our own cash flow and generate competitive debt-adjusted per share cash flow growth rates and we're going to optimize based on that.
We will be in a position by the time you get through next year where we've got almost all this acreage held by production in one shape or form.
So we can go at a pace that's going to make sense from an overall corporate returns and growth standpoint.
Yes, Oliver.
This is Herb.
So the 420-foot spacing makes a lot of sense for certain areas and 513 makes sense for areas in 660.
So what we've really been doing is refining what's optimal by different intervals and by different locations.
So it's hard to say there's just one single rule of thumb.
It just so happens where the wells that came on, those 19 wells that came on, the majority of those were Wolfcamp A and they were where we were doing the 420-foot spacing.
So it's really that's what it comes down to.
Yes.
I think when we talked about 500 spacing, we're talking sort of an average number across the acreage.
And we've used that to help people understand our inventory numbers.
Yes, <UNK>.
Yes.
So let me just step back a minute.
So we've got this large Eagle Ford acreage position and it's really a great asset and it's not really valued as highly as we think it should be.
And we mentioned over the last couple of quarters in our calls what we're seeing and we're moving to wider spacing and definitely drilling longer laterals.
And then, we're also steering a little bit into different landing zones and then we're working on that frac optimization that I just talked about earlier with the fiber optics.
So we think that with what we're doing in our 2018 program and going forward is that we're going to add significant value to each of the wells we drill, just like when we talked about the Permian when we went to longer laterals that we were quadrupling the value per well.
This is the same sort of thing that we see significant value enhancements by going to the new plan.
And we've got lots of data off-site operators plus when we do a lot of data analytics on our existing wells, we can really see and we're now just putting that program in place.
And we're doing that really where we're drilling, which is basically on the undeveloped leasehold.
And so it's really increasing the value of the undeveloped leasehold that we have.
Yes.
The undeveloped leasehold in the eastern acreage hold, that Galvan area, that's great rock out there.
Well, as far as further divestitures go, I think we've proven that we're not shy about making portfolio changes.
If you track our divestitures today, you know that, on average, those assets were sold at very highly values relative to the cash flow they generated, at the same time not materially reducing the amount of our really high-return drilling inventory.
And that's still going to be our objective in any transaction or combination of transactions that we would pursue.
Well, we work on improving our portfolio all the time, but we're not in the market selling anything right now.
Yes, this is Herb.
Pretty much we see, after first quarter, things are right on track with what we assumed, that 10% to 15% increase over last year.
We don't really see any reason to take a different view at this time.
And really, the pace we kind of laid out there, what we're doing in terms of dropping some rigs and frac spreads a little bit later in the year.
So we look on track right now.
And of course, well results we've been really pleased with, too.
<UNK>, just let me clarify.
So you're talking about in the JV area on the western acreage when we're getting results from there.
Yes.
Right.
We just got 8 ---+ the first 8 full D&C wells in the JV.
We just got them online now.
We'll get another 8 by the end of the year.
So you're really talking towards the end of the year that we'll have some months of production from the first 8 and then it will be in the next year that we'll have results from the next set of 8 out there in the JV area.
Well, <UNK>, first of all, the NGL component is really big on the Eagle Ford, so that's really a key driver.
And so we've shown like in the IR figures in February where NGL spend and that drives it.
And you'll see that they're pretty competitive and what we're doing now is making them even more competitive by expanding the laterals and widening spacing somewhat.
We see those returns really coming out considerably.
I think your question implies something that we don't necessarily agree with.
We think the Eagle Ford can compete with our Permian returns, but clearly we need to drill an amount of spacing that's appropriate for the price environment we're in and the NGL value is significant.
So we really believe that it's a great asset.
It's just not valued the way it should be.
And results from these next-generation wells are going to show us a lot of potential and increase substantially the value of that undeveloped acreage and that's what we're about this year.
Okay.
Let me take that, <UNK>.
It's really the NPV ---+ clearly, it goes up substantially when you're increasing NPV per well by a considerable amount.
In terms of inventory, we're really talking about economic inventory and that's really a threshold IRR that we use.
So economic inventory, it's really a positive outlook on economic inventory if you look forward, if we get the results that we expect.
We put a lot of this data in to our February release.
There's a pretty good rundown on inventory there and you can assume that almost all those laterals are 10,000-foot laterals at this point.
Well, thank you.
I mentioned earlier, our vision for the company is to be one that generates high returns, can grow with our own cash flow and deliver high debt-adjusted per share cash flow growth rates.
And we're on a path to get there as quickly as we can.
And I'm really happy with our quarter.
We're on track with all the plans, on track or ahead of our trajectory on everything we can come up with today.
So thanks, again, for your time and attention and we'll look forward to sharing our results with you next quarter.
