SM Energy Co Q1 FY2026 earnings call

Bullet points:

• Closed Civitas merger on January 30th, in two months as combined company delivered production over top end of guidance, capital below guidance, and synergy capture tracking nearly two times original target.
• SM built to put capital to work in highest returning opportunities with technical and operational excellence. 2026 plan: Integrate (actioned ~$300M in merger synergies, raised target to $375M by year end 2026 with present value ~$1.8B), Execute (delivered higher production for less capital, raising full-year production and maintaining capital guidance), Bolster (South Texas divestiture closed April 30th with ~$900M net proceeds for debt reduction, clear path to low one times leverage, expect to increase share buybacks and commence in second quarter).
• Financial performance strong: Adjusted EBITDAX $970M, adjusted net income $309M or $1.55 per diluted share. Adjusted free cash flow $20M despite ~$180M one-time integration and transaction cash costs. Hedge book used to reduce risk while maintaining upside exposure. Balance sheet: Reduced absolute debt by ~$700M since Civitas closed, pro forma leverage moving into low one times area, credit agencies upgraded, borrowing base reaffirmed by Bain Group.
• Portfolio delivered with strong results in all basins, teams executing ahead of plan on integration, execution, and bolstering fronts.

Permian: Turned 25 net wells in line, drilled longest and fastest Wolf Camp D wells, improved completion efficiency by 4%. DJ Basin: First quarter turn in lines showed early time outperformance versus offset wealth, implemented simulfrac in Watkins area driving 25% improvement in completion efficiency. South Texas: Base production outperforming, completion efficiency improved 6%, divestiture strengthened balance sheet. Uinta: Cash production margin nearly $40 per barrel, highest margin in portfolio, highest torque to higher oil prices, moved to longer four-mile developments delivering savings in drilling costs per foot. Full-year production midpoint raised from 410 to 420,000 barrels of oil equivalent per day, oil production midpoint from 221 to 225,000 barrels of oil per day. Maintaining full year capital guidance of $2.65 to $2.85 billion. Second half production run rate expected to be approximately 430,000 barrels of oil equivalent per day and 238,000 barrels of oil per day.

Bullet points:

• Raised full-year production midpoint from 410 to 420,000 barrels of oil equivalent per day and oil production midpoint from 221 to 225,000 barrels of oil per day.
• Maintaining full year capital guidance of $2.65 to $2.85 billion.
• Expect second half production run rate to be approximately 430,000 barrels of oil equivalent per day and 238,000 barrels of oil per day.
• Expect to begin share buybacks in the second quarter as leverage declines.

Q: Oil's moved higher post-Iran, with SM in unique situation of closing merger and having plans to right-size assets. Does thinking change in higher oil price environment, scenario to add activity, later this year or into 2027?

A: Our deliverables for 2026 are clear and unlikely to change. Don't see current market disruption as green light to increase activity, will keep investing in high return projects, generating additional free cash flow, reducing leverage and returning capital to shareholders. At current valuation, no better investment than buying own shares.

Q: Follow-up on cash taxes over longer term, would cash taxes move higher in 2027 with strip at today's level?

A: Cash taxes in coming years depend on oil price. If oil stays in current area, strip-wise, if like $70 or $80 next year or below, cash taxes will certainly be below $100 million. If closer to $70, cash tax becomes quite minimal based on IDCs, deductions, R&D efforts.

Q: About UNTA activities, well productivity and well costs?

A: UNTA delivered strong Q1 performance, oil focused with highest torque to higher oil price. Continuing to develop lower cube high return development and leaning into upper cube developments. Very encouraged by results. Uinta is very integrated basin, rolling together different services, deploying new technology and exciting operations.

Q: Follow-up on asset sales, in current high environment, looking to do more, size?

A: With South Texas gassier divestiture getting to $1 billion target, assets have strong Q1 performance, teams doing amazing things. Will be patient, look at entire portfolio strategically to create most value in future for SM.

Q: Pivot to ops question on Permian in Howard County, confidence in U-turn wells and stack overall?

A: Excited about integration, legacy projects team has great experience on U-turn wells. Combined team extremely confident. Have great experience in DJ basin and taking learnings down. SM has deep understanding of Howard County, multiple landing zones, continuing to extend technical capabilities beyond conventional cube.

Q: Scenario for 2027 plus to drive more growth on oil side given current commodity strip backdrop?

A: 2026 is about integrate, execute, bolster, incremental free cash flow to return of capital framework. Beyond that, monitor longer-term oil price strength and market infrastructure hits before understanding 2027 fundamentals. Guided to second half run rate being in 430,000 BOE per day and CapEx similar to this year unless fundamental shift in 2027 commodity outlook.

Q: Follow-up on reallocating incremental activity towards Uinta?

A: No preventing factor other than not responding quickly to changing dynamics or disruptions. Look at overall program from capitally efficient perspective. If activity makes sense to drive incremental free cash flow in 2027 at higher oil prices, then could see change. But for now, have great program and high margin business.

Q: Follow-up on workover side in more constructive oil environment?

A: Been efficient on workovers, no substantial changes contemplated, efficiencies seen in 1Q numbers.

Q: DJ Basin initial impressions on resource returns and operating environment?

A: DJ Basin is high margin business, drilling and completions team top notch, delivering well. Wells on schedule are very high return, recycles cash fast, drill times low, fracks go fast, good development program.

Q: Follow-up on inventory beyond $60 level, what's de-risked or more economic at $70?

A: Inventory released earlier this year was at $60 WTI mark. Higher prices make more economic locations, extending runway further. Number is 3P number with certainty, doesn't include all additional locations, technical team brings opportunities forward, runway extended longer than 10 plus years in current price environment.

Q: Oil differentials given diverse asset base?

A: Q1 performance steady, diversity within four basins allows to take advantage of increases to gain realized prices better than holistic market or individual basin. Love diversity and ability to capitalize on different markets to drive more free cash flow.

Q: Wade mentioned de-levering more quickly than thought, stick with 80-20 split going forward, could form change this year?

A: Do like stock price for buybacks. Very focused on second quarter, excited to buy back more stock than anticipated due to higher free cash flow. As progress through year, will continue to monitor leverage levels. Looking for low ones area leverage assuming mid-cycle oil price, will monitor and at appropriate time could move percentage up on share buyback side. Any additional divestitures will drive it faster.

Q: Hedging 2027 with strip and steep backwardation?

A: Hedging strategy hasn't changed, tied to leverage. In leverage area entered post merger, hedge about 50% of volumes on rolling year basis. Continued to do so as prices moved higher. Beginning some layers for 2027, methodically layering in as move along to capture big price moves.

Q: Second quarter production, where and what assets production declining, trajectory through back half of year?

A: Look at second quarter holistically. Driven Q1 production to beat top end of guidance, well productivity primary driver behind beat. Second half production run rate expected to be approximately 430,000 barrels of oil equivalent per day and 238,000 barrels of oil per day, indicating confident production going forward.

Q: Follow-up on asset sales, nature of potential sales, PDP heavy, midstream and infrastructure, specific geography?

A: Still to determine. As continue to review portfolio, will fold in synergies and align with technical expertise to understand valuations. Prioritizing portfolio, still in phase of understanding and prioritizing, can't give exact place but looking at it in current market of interest and significant capital chasing assets.