SM Q3 2026 earnings call transcript, November 4, 2026

Hey, hi.

Greetings. Welcome to the SM Energy Third Quarter 2026 earnings call. At this time, all participants are in a listen-only mode.

A question and answer session will follow. The formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I would like to turn the call over now to Megan Hayes, SM Energy's Vice President Investor Relations. Thank you, Megan. You may begin. Thank you and good morning. On the call with me this morning are Beth McDonald, President and CEO, Blake McKenna, Chief Operating Officer, and Wade Purcell, Chief Financial Officer. Before we begin, I'll remind you that we will be making forward-looking statements and our actual results may differ materially. Please refer to the cautionary statements in our earnings release, our presentation, and our filings with the SEC. We will also reference non-GAAP measures. Reconciliations are in the release. With that, I'll turn it over to Beth. Thank you, Megan.

And good morning. I want to start with the commitments we made for 2026. We set out to integrate two companies, capture the value of the merger, optimize the portfolio, and strengthen the balance sheet. We are delivering against those commitments. And in several areas, we have exceeded what we originally set out to achieve. At the merger announcement, we established a $200 million synergy target. Today, we have actioned approximately $400 million, twice the original target and surpassing the previously raised $375 million target. We also set a goal of at least $1 billion of divestitures. within one year of closing and substantially achieved that objective with the $950 million Galway and sell directing the proceeds to debt reduction. And we established a goal of low one times leverage at mid cycle prices. We remain on track to reach that level by year in 2026. More than a year ahead of our original expectations. With the key integration work streams largely complete, the focus now shifts from integration and execution to execution and optimization. Using our lower cost structure and stronger balance sheet to improve capital efficiency, generate durable free cash flow. And continue creating value for stockholders. Our 80-20 framework remains the mechanism for balancing debt reduction and share repurchases as we move toward low one times leverage at mid-cycle prices. Blake will now walk you through our operating performance and the work underway across the portfolio. Blake.

Thanks, Beth. Third quarter production was in line at 433,000 barrels of oil equivalent per day. Oil was within guidance at 230,000 barrels per day, but about 2% below the midpoint. The oil variance primarily came from two areas. In the Permian Basin, downtime ran higher than planned. As we completed compliance work on acquired assets, and temporarily shut in producing during high-risk simultaneous operations. Those actions are now complete, and the related downtime is behind us. In the UINTA, our production was limited by takeaway. An unplanned outage and an in-basin refinery redirected in- incremental barrels to rail when terminal capacity was already fully utilized ahead of the planned expansion. Together, these constraints reduced third-quarter oil volumes by approximately 4,000 barrels per day. Absent them, oil production would have been approximately 234,000 barrels per day. The refinery is back online. Rail capacity remains constrained until the terminal expansion into service, currently expected in the first quarter of 2027. So we've reflected that limitation in our fourth quarter in early 2027 expectations. For the fourth quarter, we expect oil production of 229,000 to 239,000 barrels per day, which reflects the U.N. to constraint in capital of approximately 610 million. Operationally, we have solid updates across the portfolio, and I'll highlight three. First, in the Delaware Basin, the 21 wells we brought on this year across five pads, which is in our core stack pay area, are producing about 40% more oil per foot than our 2020.

24 wells, and they're running about 24% ahead of our 2025 wells at six months. Compared to last year, we have drilled roughly twice as many wells in the Delaware Basin. Second, the Woodford Barnett program in the Midland Basin continues to show encouraging economic and technical potential. The eight wells online to date are delivering above the area average. We continue our delineation work to define the resource and development potential. Third, in the Uwinta, the first SM fully designed and executed pad came online in August with optimized spacing and enhanced completions on 15,000 foot laterals. On a normalized basis, the first 30 days are the highest rates we have delivered in the basin. The next pads that come online in the fourth quarter are 20,000 foot laterals. Stacking these innovations and leveraging our subsurface expertise is beginning to show in pro-well productivity. Turning to costs, our Uinta completion cost per lateral foot fell from 475 in the first quarter to about 400. and a third. On the same lateral length and target zone, SimulFrag increased completions efficiency from about 1,000 feet per day to 2,800. Those efficiencies are a large part of what our Operation Synergy Program delivered, $215 million against a raised $200 million target. The majority of what we action is structural. Careful. Including completion design, simul frac, and drilling performance. In the Permian, third quarter drilling footage per day was up about 15% and completion footage about 23% compared to our 2025 average. On inflation and capital, we had narrowed full-year capital guidance to approximately $2.75 billion.

at midpoint of our prior range. Our synergies and sustainable efficiency gains have largely offset inflation related to higher diesel unit costs, fuel-related transportation costs, and other consumables, including OCTG. We're finishing 2026 with momentum and heading into 2027 from a position of strength. L, Consolidated Procurement, Simulfrac, LocalSand are all yielding a lower-cost model, and we intend to keep building on it into the new year. Wayne will now take you through the financial performance. Thanks, Blake. Good morning, everyone. We generated $1.1 billion in operating cash flow and 1.1 billion in operating cash flow. $2.3 billion in adjusted EBITDAX in the quarter. Capital expenditures before changes in approvals totaled $747 million within our guidance range and adjusted free cash flow was $397 million. We returned $133 million to stockholders representing 34% of adjusted EBITDAX. adjusted free cash flow through $81 million of repurchases and $52 million of dividends. So repurchases were about 24% of post-dividend free cash flow. And year to date, we've repurchased $165 million of stock. We continue to view buying our stock as one of the best uses of our capital. The rest went to the balance sheet. We redeemed the $417 million 2027 notes at par. And net debt ended the quarter at $6 billion. And that's down from $7.4 billion at the end of the first quarter, our first quarter after the merger. We have no senior note maturities until mid-2028. And we remain on path.

To low one-times leverage at mid-cycle prices by the end of this year. A quick word on cash taxes. We previously provided full-year cash tax sensitivities, including approximately $50 million at $85 oil. With the strength in commodity prices, we now expect full-year cash taxes of approximately $100. to $120 million. The primary driver of that is the annual tax attributes that offset taxable income earlier in the year have largely been utilized. So incremental taxable income at current commodity prices is now largely subject to cash taxes at the full applicable rate. To wrap up on synergies. $400 million actioned, every bucket ahead of its original target, and the company's structural cost basis reset. Third quarter recurring GNA of $52 million is the run rate. The step up implied in the fourth quarter reflects normal year end items, not a change in that base. From here we manage efficiency. Through continuous improvement, which will show up in unit costs. So we enter 2027 with a meaningfully stronger financial foundation. A lower structural cost base, lower interest expense, lower leverage, and the full run rate benefit of the merger. That combination improves the durability of free cash flow and gives us greater capacity. To compound value per share through disciplined capital allocation. So with that, I'll turn it back over to Beth. Beth? Thank you, Wade. Since January, we've integrated two companies, actioned more than double our original synergy target, substantially achieved our divestiture target, and reduced net debt by $1.3 billion.

The first quarter. SM is a materially stronger company than it was at the beginning of the year. As Wade said, our lower cost base increases the free cash flow available to create value for stockholders, while share repurchases compound that value on a per share basis. Importantly, capital will continue to compete for the highest risk. Adjusted returns with free cash flow and capital efficiency prioritized over volume. Integration resets a platform. The next phase is about compounding the advantages created by that work. Our priorities are clear. Execute the plan with greater capital efficiency and continue lowering SM's corporate breakeven. Deepen the quality and duration of our inventory through organic delineation in the Woodford Barnett and UENTA and discipline ground game activity. Continue strengthening the balance sheet toward low one times leverage at mid-cycle prices while executing our plan of returning capital to stockholders through our 80-20 framework. That is how we

intend to translate a stronger operating platform and balance sheet into durable per share value. With that, I'll hand the call back to the operator for Q&A. Thank you. We will now be conducting a question and answer session. We ask that you please limit yourself to one question and one follow-up.

If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing...

...the star keys. One moment, please, while we pull for questions. Our first question is from John Freeman with Raymond James. Please proceed with your question. Thank you. Good morning. I appreciate it.

Yeah, thanks for the question, John. You know, when we look at our terminal, it's really just us and one other... And through the expansion that was planned with them, it more than doubled the capacity, which is much further than either one of us committed to that. So we have the ability to expand in the basin beyond just what our original plan said. So we know that after this expansion hits, we have the... ...ability to shift capital around or do what we need to do to make sure that that cash flow continues to hit market. Great. And then my follow-up, y'all, last quarter kind of indicated that, you know, second half 26 kind of average production was kind of a good kind of baseline for us to use. For 2027, just sort of given, you know, some of the downtime in the Permian, the takeaway constraints that you went to that kind of impacted second half and maybe, you know, early 27, just didn't know if y'all wanted to sort of elaborate, if that kind of impacts those prior comments from last quarter. Yeah, let me give. a little clarity on the second half run rate. You know, I know that that's moving around a little bit and I want to be clear about what that means for a good framework for 2027. You know, when you think about it, we talked about total production being 435 to 440 MBOE per day with approximately 238,000. barrels of oil a day as the oil production rate, that baseline still holds as a good baseline. So really, when we think about formalizing our 2027 budget, which will present early next year, we're evaluating the puts and takes of the UN to take away constraints that are going to occur early in 2027 against the potential.

of temporarily shifting activity to other basins. So that interplay and those factors will play a role in where we finalize our 2027 guidance. So more to come in February. Great. Thanks, Beth. Yep. Thanks, John. Our next question.

is from Gabe Dowd with Choice. Please proceed with your question. Thanks, operator. Morning, Beth and everyone. Thanks for the time. Hey, Beth. Maybe we could go back to 27. Again, just higher level thoughts around capital requirements to hold that second. Half run rate, I guess, at least flat into 27. Just how do we think about that number against the inflationary pressures that the industry is seeing? I know you guys have been doing a good job with synergy capture and efficiency gains, but curious if the inflationary pressures will just be too much to offset. Yeah, you know, the 2026 average and our midpoint of 2.75 is in general how we've guided 2027, less one times cost. You know, we continue to look at oil prices and activity. It's not unreasonable to say that inflation could hit the sector at this point. We'll continue to watch it. But at SM, you know, we benefit from the tailwind of a full year of merger synergies that we've actioned that have exceeded expectations, and we'll continue to find efficiencies across the different basins. So, you know, more details as we formalize what that 2027 budget looks like in the beginning of the year. But, you know, you can still think of 2026 CapEx as excluding one times cost as a good starting point. Okay. Okay, great. Thanks, Beth. And then maybe a follow-up for Wade. Just wanted to go back to the taxes again, the cash taxes. What should we be using for 2027?

I think if I heard you right, fully exposed now for at least the rest of 26. And I guess I'd imagine that's the case for 27. Just want to make sure I heard that right. And again, thoughts on 27 cash taxes. Yeah, sure. Great question. And yeah, using the words fully exposed for the rest of 26 is a good characterization. We have a lot of attributes, a lot of carry forward in a well stuff from the merger that we're able to use on an annual basis with limitations. So as I said, we've kind of used those up for this year. So having a fourth quarter where oil runs up into the $9,500 area, that's driving that increase. Assumption for next year, we'll have attributes to use next year, just like we did this year. And when I said, I guess I would say if you want to assume an oil price that's kind of in this area, so an elevated area, I think it'd be a good modeling thing for now to just kind of assume something similar to that. The numbers I gave for 2026. Obviously, if you assume a lower oil price, you'll get back down to those levels that we thought we were going to be at in the $80, $85 oil area, if that makes sense. Yeah. No, that's very helpful. Thanks, Wade. Thanks, everyone. Thanks.

Our next question is from Scott Hanold with RBC Capital Markets. Please proceed with your question.

Got it. Okay. And then, you know, obviously you guys have captured a lot more on the synergy side and I think now are, you know, more so pivoting to broad continuous improvement. And could you, you know, maybe. Take a step back and as you look at the business over the next, say, 12 to 18 months, you know, how, you know, how much opportunities, what's the opportunity set that you have? Like specifically, what are some of the line items you're looking to, you know, further improve in the business model? Yeah, great question. You know, what we'll use is please. We're satisfied. So to your point, synergy capture just translates to driving costs down. I think naturally you start with your larger costs, right? So you're going to go after big ticket items that are generally specific more to DNC. And then after that, it's the operational and cultural efficiencies within the company. And then you go to the part of vacuuming of nickel. I'm chasing all the little things. So we've high graded that. And so instead of going after the big ticket items, it's going to be a lot of focus on the little ones, right? And so we'll be shifting our efforts towards a lot of that. So that'll be across DNC. It'll also include LOE. It's just going to be everywhere. So you're going to have higher efforts. to smaller items, and that's just a natural part of chasing cost savings down. Yeah, and Scott, just to add on

in the other two buckets that we've either met or exceeded expectations in, you know, from a G&A perspective, we're getting close to one year from the closing, and we'll be there by February. And, you know, through that, we continue to have contracts that roll off on, you know, different software packages, different contractors, that kind of thing. So that will continue to improve. On the cost of capital side, as we generate more free cash flow, under our 80-20 framework, we'll be able to, you know, deliver more on an interest savings perspective as well. So there's more in every single bucket. Got it. Appreciate the context. Thanks. Yep. Thanks, Scott. Our next question is from Tim Resven with Key Bank Capital Markets. Please proceed with your question.

Opportunistically about taking advantage of that mid-80s price going forward. Is there a thought on being opportunistic at all with incremental hedging in 2027? Thanks. Yeah, that's a good question. My short answer is our hedging strategy is we're just methodically executing it the way we have been for the overhead. So that means we are, you know, I wouldn't call it opportunistically. I would just call it taking advantage of some of those higher oil prices as we look out over the next year, year and a half or so, and just layer in, you know, incremental hedges tied to the balance sheet. I'll just remind everyone that's how we hedge. With the balance sheet becoming so much stronger, the targeted percentages are lower for our hedging profile. They're no longer 50%, which is where they were when we came out of the merger with higher leverage. They're closer to 30%. So when we're looking out, you know, a year from now and a little bit beyond. Those are kind of the targeted levels. But the short answer is we continue to hedge. So we're happy to take some of these higher prices right now. Okay. Thank you. Thanks.

Our next question is from Oliver Honk with Tudor Pickering.

Thanks to all of our integrated sand and water delivery systems to bring these wells online. And so again, we're early life and performance. We're very encouraged by them. As time goes on, we'll start to see how those results go. But again, a little bit of secret sauce that goes into it and we're really excited for what we have going on in the Uinta in the future.

Awesome. And just to kind of clarify on the spacing side, is that more just more optimal landing zone placement versus just upspacing relative to what you all been doing over the last, call it, couple of years? Yeah, it's three-dimensional. You're basically just trying to optimize all. the little distances vertically and horizontally between them. And so that's more of what it is fine tuning. We get a lot of really good technical results coming out of different testing that we do on each of those benches. And that's what allows us to kind of tune that three-dimensional spacing. So it's a little bit here, a little bit there. That's what we chase. Okay, makes sense. And for my second question, just on LOE trends, trying to understand a bit better of what we're seeing here in Q3. It looks like there were decent upticks in the Permian and also South Texas, just looking at the asset breakout, just trying to understand how much of this is structural versus any one-offs in the quarter that we should be aware of, as we just kind of think about where this line item could directionally move over the next year. Yeah, appreciate that. So third quarter LOE was elevated by the compliance work on the acquired Permian assets and fourth quarter guide of 660 to 680 reflects that work being complete. So with a more oil weighted portfolio and the cost environment we are in, that third quarter level is reasonable run rate to use into 2027 as well. And we're going to continue to use our synergies to work to offset. So we see it as more one time, not structural.

Okay, perfect. Our next question is from Jack Kindergon with BMO Capital Markets. Please proceed with your question. Hi, good morning. Thanks for having me on. I was hoping you could touch on the basin production.

You know, when you look at Permian activity or our activity as a whole, we start... ...started the year with much higher activity, and it's come down, you know, where kind of a new baseline was established in that July-August timeframe. And so some of that drop in production that you're seeing quarter over quarter, specifically in the Permian, was planned. So that came in line with what we expected. And it should go up. It should be flat to go up a little from this quarter moving forward. So I think that's in line with what you mentioned on your question. So I would start there. And then on top of that, as you look at our production profile and what we've generally done every year, it's just a useful reminder. that we've had activity levels changing throughout the year, which impacts, you know, what that profile looks like. And it's not really linear. So we would expect that pattern to continue in 27. But we'll have more formal guidance in February. If you want to add anything to that? No, until counts, we feel good about what we have going into fourth quarter. And, you know, there's always little tiny straddle ones that might be on the edge of the quarter that bump here to there. But we feel good about the plan that we've delivered to you. Great. Thank you. And then to follow up, you guys described the divestiture target is, you know, substantially complete following this. South Texas sale. Should we still expect you guys to meet the $1 billion goal within, you know, one year? Or is the sort of landscape shifted enough with the macro to warrant a little bit more, you know, patience to realize full value?

Yeah, this answer hasn't really changed for us. Substantially there, but we're not rounding up. So the Galvan sale got us meaningfully close to that $1 billion target and strengthened our company really for short term. But, you know, we look across our expanded scale. We have a larger candidate set for creative non-core divestitures. So we continue to look at transactions and those prices. We'll always review our portfolio and consider these trends. Great. Thank you very much.

Once again, if you would like to ask a question, please press star 1 on your telephone keypad.

Our next question is from Peyton Dorn with UBS. Please proceed with your question.

Yeah, I think that's one component of it, Peyton, that you mentioned there in the Permian. You know, we've seen relief at Walhoff and more pipes are to come. We did have NGL outperformance in South Texas, which was great. We march kind of toward the west. The wells get more liquid rich, so we would expect that trend to continue, and that's in our forecast. And then at the same time, you know, we still have those Uintah constraints on the oil side that will continue forward into early 2027, but all that's been taken into account into our outlook.

Okay, great. Thanks for getting me on. Thanks, Peyton.

Our next question is from Oliver Hong with Tudor Pickering Holt & Co. Please proceed with your question.

Yeah, thanks for that. You know, when we rolled out our budget at the beginning of the year, we included $50 million of the synergies into our budget. So that's what's included in 2026. But I think, to the credit of the team, the additional synergies are being felt in the runway because we've been able to offset inflation that we've seen through diesel and fuel-related charges, just like what Blake said there. And I'll let Blake add more. Yep. We've seen even with the fuel... ...which started early, we've been able to offset that. So that's been a big win for us. Coming in with that original $50 million in the budget, the team has definitely been exceeding that to hold back inflationary pressure. And we'll see that trickle into our 2027 budget as we work into the year. But I would say that has definitely gone better than we anticipated. Being able to action 2026, and we think that'll be a real positive story going into the continued value savings and full run rate in 2027. Okay, and just to clarify, the $50 million in the budget for 2026, that's relative to the $400 million actions? Yes, that's $50 of the $400 million. Yeah, we laid that out in the big question. Okay, makes sense. Okay, thank you so much.

We have reached the end of the question and answer session. I would like to turn the call over. to Beth McDonald for closing comments. Thank you all for joining us this morning and for your continued interest in SM. We really appreciate your time today and look forward to speaking to many of you soon. Have a good day. This concludes today's teleconference. You may disconnect your lines. at this time. Thank you for your participation.