SM - NYSE

Good morning, and welcome to the SM Energy's Fourth Quarter and Full Year 2025 Financial and Operating Results and 2026 Outlook Live session. [Operator Instructions]. Please note today's event is being recorded. I would now like to turn the call over to Pat Lytle, SM Energy's Senior Vice President, Finance. Please go ahead.

Good morning, and welcome to today's call. I'm joined today by our President and CEO, Beth McDonald; and Executive Vice President and CFO, Wade Pursell. We're looking forward to sharing our latest results and our 2026 plan with you and answering your questions. Our discussion today includes forward-looking statements. Please see Slide 2 of our earnings presentation, Page 2 of the earnings release, Page 3 of our 2026 outlook release and the Risk Factors section of our most recent 10-K, which was filed earlier this morning for risks associated with these statements that could cause actual results to differ. We will also discuss non-GAAP measures and metrics. Definitions and reconciliations to the most directly comparable GAAP measures can be found in both the earnings release, outlook release and slide deck. Now I'll turn the call over to Beth. Beth?

Thanks, Pat, and good morning, everyone. It's an exciting day as we provide our first release of the new SM Energy. 2025 was a pivotal year for our company, and it set the stage for 2026 in this transformational moment. We improved on every part of our investment thesis, including returns to stockholders, operational execution, financial strength and increasing the scale and quality of our portfolio. With the full details in our posted materials, I will quickly hit some highlights from 2025. We delivered record operating cash flow, adjusted EBITDAX, production and oil volumes. Importantly, oil was 53% of the total. Our teams found new ways to rapidly apply best practices and increase operational efficiencies through longer laterals and development of deeper zones. We integrated our oil-weighted Uinta assets. Since late 2024, we have applied our proven technical capabilities to unlock greater value from this high-quality oil basin and its multiple stack pays. We strengthened our financial position by reducing net debt by $437 million, ending the year at roughly 1x leverage. As a result, we returned capital to stockholders distributing $104 million through dividends and share repurchases. Lastly, we expanded our scale and inventory across the top U.S. basins through organic reserve growth and our announced merger with Civitas. Now let's turn to 2026. We have 3 strategic objectives that you will continue to hear throughout the year: integrate, execute, bolster. First, Integrate. We are focused on integrating Civitas and capturing $200 million to $300 million in synergies. To date, we have already actioned $185 million of our target, which is close to $1 billion in present value and just under 20% of our market cap. Total synergies could unlock up to $1.5 billion in present value or nearly 30% of our market cap. Next, Execute. Our plan maximize sustainable free cash flow. By investing in our high-return opportunities, we can continue to strengthen the balance sheet while accelerating the return of capital to stockholders. We will execute with a safety-first mindset and seek new ways to efficiently develop our assets to maximize free cash flow through disciplined capital allocation. We have reset and optimized our activity levels to accomplish this. Here are the key takeaways from the 2026 outlook. Our plan was developed to maximize free cash flow in a $60 oil and $3.50 gas environment. Capital investments will total $2.65 billion to $2.85 billion with our high-margin Permian activities receiving about 45% of the total. Total expected CapEx is about 14% lower than pro forma 2025. With lower capital, we reset activity levels to 11 rigs, down 3 rigs from a pro forma average of 14. We have prioritized value over volume. First quarter estimates reflect only 2 months of Civitas. Looking forward, volumes in the second half of the year are expected to range between 420,000 and 430,000 BOE per day at 55% oil, more indicative of our go-forward run rate. There are a few slides in the presentation that provide more detail and a reconciliation of production for your reference. Ultimately, our plan reflects greater capital efficiency to maximize free cash flow, strengthen the balance sheet and accelerate return to capital. Lastly, our final objective is to Bolster. This relates to our balance sheet and our return of capital framework. I'll now turn the call over to Wade to cover this important catalyst for us. Wade?

Thanks, Beth. Good morning, everyone. So let's talk about Bolster now and how we'll strengthen an already strong capital structure. Starting with the balance sheet on Slide 15. This reflects the impact of the Civitas merger. I believe the 3 categories for measuring balance sheet strength are #1, liquidity; #2, maturities profile; and #3, total leverage multiple of annual EBITDAX. So first, liquidity. As we announced in late January, and our secured bank facility, the borrowing base was increased to $5 billion, with lender commitments increased to $2.5 billion. The maturity date was extended to January 30, 2031. Therefore, we currently have nearly $3 billion of liquidity. In addition, last week, we announced the sale of a select natural gas weighted South Texas assets totaling $950 million, which we expect to close in the second quarter. The metrics behind this deal are very favorable to where SM stock trades today. This will further strengthen our significant liquidity position, which leads me to #2, maturities. We anticipate using some of this liquidity to take out all of the 2026 bond maturities this year and the $417 million bond due in 2027 at some point as well. The remaining maturities are staggered nicely. We'll continue to delever with our free cash flow. We may also look to term out some of the earlier maturities should the bond market terms look compelling. I should also mention that we recently received credit upgrades by S&P and Fitch. Now number three, total leverage multiple. Our total pro forma leverage is in the mid-1s area. We are comfortable with this area given the liquidity and maturities profile just discussed. However, our goal is to drive it down into the low 1s area, further strengthening our position, which is a perfect segue to return of capital on Slide 16. The increased scale and quality of our assets, combined with our strong balance sheet, give us confidence to increase the fixed dividend by 10% to $0.88 per share annually. Our base fixed dividend remains a core component and with this increase provides a current yield of just under 4%. Remaining free cash flow will be allocated between debt reduction and stock buybacks, enabling us to delever from increased post-merger debt levels while continuing to take advantage of the compelling value we see in our equity. Today, our plan is to allocate 80% of our quarterly free cash flow after dividends to debt reduction and 20% to stock repurchases. Looking forward, as we reduce debt, we would expect to increase our allocation to share buybacks. And on that note, I'll turn the call back to Beth for closing remarks. Beth?

Thanks, Wade. As our results and plan demonstrate, we are relentlessly focused on maximizing free cash flow, reducing debt and accelerating returns to stockholders. We have new flexibility in how we allocate capital across our expanded portfolio, where our inventory now spans more than 8 years. As such, we are able to prioritize value over volume. We look forward to reporting on our progress throughout the year. Joe, this concludes our prepared remarks, and now we're ready to take questions.

[Operator Instructions] And our first question comes from the line of Brian Velie with Capital One Securities.

I thought I could maybe dive in here real quick. In terms of total production guidance for this year that you put out your initial numbers last night there, you pointed out in the release that a portion of the decline year-over-year is the result of the 3-stream conversion to 2-stream conversions. I wondered if you could talk through where those conversions are happening to help give us an idea of the magnitude of that piece of the impact. And then maybe after that, how we can think about modeling or anticipating price realizations that go with those NGL and gas streams on those assets?

Yes. Thanks, Brian, for that question. The plan is really focused on prioritizing value over volumes. We're maximizing free cash flow to bolster the balance sheet and enhance our return on capital framework. We have a lot of confidence in this plan, and we understand there's a lot of movement going on within the production itself. If you turn to Slide 9, you can see a reconciliation for your reference. And when you normalize for all those moving items, the production change is not that different. Let's speak specifically to the question that you had on the 3-stream to 2-stream conversion. If you look at it by basin, there's really no change for SM South Texas or Uinta Basin clearly. For the DJ, we would exit about 20% of DJ BOEs to be allocated to NGLs. So when you're modeling that, you can continue to use Civi historical gas and NGL realizations as estimates. When you turn to the Permian, the value is really small. We really only expect about 5% of the BOE to be reported as NGLs going forward there. And you can use Civi's historical NGL realizations. And for Permian gas, you could use SM's realizations. So within that reconciliation, I think it's important that most of you guys kind of focus on the right-hand side of that slide, the second half '26 volumes, which are expected to be the 420 to 430 MBOE per day at 55% oil and that's really where we start to see our capital efficiency increase as we have our go-forward run rate.

Yes, if you look at total capital, Brian, about 45% will be in the second half. So if you think about what that run rate looks like, I think it's going to look pretty capital efficient.

Okay. That's great. That's a good segue maybe to my follow-up, if I can. I did notice your 1Q CapEx, it's a little bit of a heavier spend versus a straight ratable through the year. I guess would it be fair to assume that a piece of that is just the pro forma 14-rig total that Beth mentioned in the prepared remarks there, that that's kind of your starting point and you -- in that presentation, you're shedding down to about 11 rigs by year-end. So is that kind of what's driving that front half spending? Or is there anything else at play that I should maybe be thinking about?

Yes, I'll start and then let Wade finish on that. First of all, we just love the strength of our combined portfolio. And this transaction really provides us some optionality and really, frankly, optimization beyond what either company could do individually. With that, we come into the year with 15 rigs. So we started with a high CapEx spend and then it will lower throughout the year to average out around 11%. And so yes, there is that optimization of the program on the back half of the year. And we really look forward to our technical team, seeing them in action on this new portfolio and seeing that continued optimization on the back half of the year. Wade, do you want to add anything?

No, that covered it well.

Next question comes from the line of Tim Rezvan with KeyBanc Capital Markets.

I want to follow up. Wade, we had we had a quick chat last night. You mentioned you're not going to have a formal debt or leverage target in place going forward. Our modeling, which is a work in process, shows a path to sub-$5 billion in 2027. And I know you highlighted the liquidity. But we're also looking at the other side of things where we see -- we appreciate your honesty on that 8-year inventory life. So given that's maybe shorter than some peers or maybe where you want to be, how do you think about the appropriate leverage profile given you're not really where you want to be with inventory life? I'm just trying to kind of weigh those 2 topics?

Yes. That's a great question, Tim. By the way, we love our inventory. But on the leverage side, I mentioned we're in the mid-1s area, which is not -- we're very comfortable in that area. I said that in my remarks, and I'll say it again, especially given all of our liquidity and the maturities profile and the fact that that's being calculated at an oil price that we believe is mid-cycle or below. I think that's really important. Our desire is to get leverage into that low 1s area. I'll just call it that without getting too precise. And as we move down into that low 1s area, when I say that, 1.2, 1.3, then assuming the liquidity position is similar to what it is, assuming the maturity profile is manageable, assuming that's at a reasonable commodity price assumptions, then you'll see us increase that stock buyback percentage.

Yes. And then I'll just -- Tim, I'll just hit on the inventory real quick since you brought it up. The inventory was run at $60 and $3. So that's quite different than last year where we had it at $70 and $3.25. And our inventory really is 3P high-confidence locations rather than sticks on a map or acreage math. And so we're very confident in these high-quality, low breakeven inventory that we have on here. It's resulting in longer laterals and greater capital efficiency.

Okay. I appreciate the context. And then as a follow-up, this is sort of a related theme, Beth. That the Permian assets you're acquiring from Civitas, on the Midland, you've operated there obviously many years. Civitas had commented in the past, about really focusing on the Wolfcamp A and B for their inventory. They didn't talk about the Jo Mill, the CRD or even the deeper intervals. So I know it's early days, but that's probably the easiest asset to sort of integrate given your skill level there. Can you talk about what's sort of baked into that 8-year number? Are you using those same assumptions that Civitas had? Or maybe broadly speaking, do you anticipate organic additions as you do more work on the Civitas Midland assets?

Yes, good question, Tim. The first thing I would say is that we love the strength and position of our portfolio, especially as it relates to the Midland Basin and our technical team is jumping right in and combining with the prior team from Civitas which we now just call those people our teammates at SM Energy. But we're very happy with what we've done so far. We're 4 weeks in, but we'll continue to use are high-quality, multivariate analysis, our geomechanical modeling that we have going on in the Southern Midland Basin as we optimize that stacked pay development. And we'll continue to see those optimizations in the back half of this year and into '27. So is the work done? No. We have a lot of work to do, but we have the best people and the best processes, along with the best technical data to get us there.

The next question comes from the line of [indiscernible] with ROTH Capital Partners.

So my first question is going to be like can you please walk us through the capital cadence of the 2026 and also the production cadence. I knew that you said it's going to be front half weighted and also the production is going to be around 420,000 to 430,000 BOE per day in the second half of the year. But I just -- what I'm thinking right now is like is the first quarter's capital is going to be the highest of the year and also the production will be peaked in second quarter of '26?

Yes. So I'll start on that. And again, we're prioritizing value over volume in our plan to maximize free cash flow. And we understand that the first quarter and even into the second quarter, have some variables and things changing in there, which we've highlighted on Slide 9. One of the things that's really important to take into account is the legacy Civitas assets. Those were front loaded on their CapEx side, and we -- from September into kind of January of this year, there was a significant decline on those assets, about 14%. And so we have inherited that and pulled it into our program. And so that's a result also of the underlying decline that you're not seeing in this reconciliation. So that's one piece that's not shown on the slide here. But I think the important piece is as you move past this and you look at the second half of the year, that second half '26 run rate is clean. We have 45% of our capital in the second half of the year, and it's a 55% oil mix. And so that's really where you should focus where there's less changes going on in the front 2 quarters.

And it's built to where it rolls right into 2027 at that level.

That's very helpful. So maybe my second question would just about the cash tax. Do you -- I don't expect to pay any cash tax for 2026?

Yes, pretty minimal this year. I'm pleased to report, and that's just due to the benefit of IDCs, some of the benefits from the Big Beautiful Bill. Even with the divestiture and the gain on that, we're not -- we're projecting minimal cash taxes this year.

The next question comes from the line of Oliver Huang with Tudor Pickering & Holt.

For my first question, just when you're thinking about the Permian program that you all have laid out for this year, any sort of color you can provide around the composition of the program, just how much of that activity is expected to come out of the Delaware? And then when we're looking at the Midland, any sort of split on your traditional oilier RockStar area versus the southern part of the basin where assets carry a higher GOR mix?

Yes. So let me just dive in. We -- just like I just told Tim, we really love our strength in inventory position, especially as it relates to the Permian Basin. We think this is a cornerstone asset for us, and we'll continue to optimize it over time. When you look at the program having most allocation going to the Permian because it has great returns and great margins. The composition of that program is about 1/3 Delaware, 2/3 Midland Basin. And then within the Midland Basin, we're still optimizing on kind of the allocation between the overall program. And we'll continue to do that and increase our returns and capital efficiency late through this year and into '27.

Okay. That's helpful color. And maybe just for a follow-up question. I know you all mentioned earlier that back half of the year run rate seems like a good starting point to carry forward. Just given all the moving pieces for A&D, the conversion to 2 stream on certain volumes, any sort of color on where maintenance CapEx for you all sits on a pro forma basis at that run rate?

Well, I think looking into 2027, and we -- look, we haven't gone to the detailed level that we will do eventually. But if you're assuming a CapEx in the area of this year's CapEx or slightly less, you're going to be -- you're definitely going to be in the ballpark.

Okay. Perfect. And just to clarify, when you say this year's CapEx, is that assuming 12 months for both Civi and SM or what you all have kind of rolled out for the 11 months of Civi and 12 months of SM?

I'm assuming the guided number there when I say that.

That's one time cost.

[Operator Instructions] Next question comes from Michael Scialla with Stephens.

I wanted to ask -- when I look at Slide 4 and compare the percent production from each of your 4 core areas with the CapEx going into each on Slide 8. They look I guess, somewhat similar? I know production is an output, not really something you're targeting. But I guess, as you look at those, do you anticipate production growing in any area? Is it may be growing in the Uinta and declining in the DJ and Permian a bit? Or anything we can deduce from how much you're spending versus what you anticipate the production profile to be for each of those areas?

Yes. Thanks, Mike. I'll just start and then I'll let Wade add any color to what I'm saying. If you look on Slide 4, those are really the 2025 production volumes, and where that stands kind of on a pro forma basis? And then as we roll into 2026, just like you said, we're prioritizing value over volume specifically. When we looked at the capital allocation across all of the basins, we're really focused on maximizing free cash flow. That's why on Slide 8 in the bottom right, you see the capital allocation by basin. And I think that really addresses most of where the production is as well as kind of the split there in the Permian of 1/3 to Delaware and 2/3 to the Midland Basin. Do you want to add anything?

No, that's good. I mean it's -- as you know, Mike, it's that we built the plan with a desire for sustaining free cash flow through the years here with efficient operations in the areas. So that's all I would add.

Okay. I guess I was just trying to think of, is one area of sort of looked at as more of a free cash flow generator or cash cow, while you're trying to grow any of the areas. It looks like Uinta maybe has some ability to grow? Is that a fair assumption?

I'd say, when you look at the combined portfolio, we've known that Uinta and South Texas, both are growth areas for us. We have multi-stack pay there with great returns. And I think as we look at the combined portfolio and the strengthened position that we have in the Permian Basin, we'll continue to evaluate that with our technical teams to see how we can continue to grow that area because it has such great returns and great margins as well.

Appreciate that. I wanted to ask about the decision to increase the dividend. Your stocks lagged over the past year, and it's one of the cheapest in the sector on the EBITDA multiple. Just your thoughts around that decision? Was there pressure from investors, you feel like you need to increase the dividend to be competitive with the rest of the group. I just wanted to get some more color on that?

Yes, I would say it was not due to pressure from investors. I would say it was more due to our confidence in the combined company going forward, strengthen the balance sheet, quality of the assets, visibility. We set that fixed dividend back in late 2022 at a level that we feel comfortable with, but we expressed the desire as things develop and the company grows to increase it over time modestly. And I think this is the third time we've done that now. So it was really nothing more than that. It was just to express our confidence in the company going forward.

The next question comes from the line of Kevin MacCurdy with Pickering Energy Partners.

It looks like the biggest difference between maybe the combined companies last year and your pro forma plan is in the DJ. And so maybe you can talk about what you saw in the DJ and what Civitas was doing and how you wanted to approach that plan differently this year in 2026?

We really like the DJ program that we have. Let's start there that it's great returns, and it's very capitally efficient when you're looking at new wells going forward. One of the things that's slowing down enables us to do is strengthen our position as far as optionality and flexibility to where we go within the basin in order to maximize free cash flow and optimize really the plan and what the returns are coming out of there. And so slowing down a little bit gives us the ability to take time since our technical teams haven't worked that. And so we're basically integrating with the broader Civitas technical team. Looking at the broader portfolio, slowing down a little bit, allows us to optimize and strengthen our position there.

Great. And as a follow-up, and I apologize if this is already addressed on the call, but the -- if I look at Slide 19, it appears that you're turning in line more wells than you're drilling in 2026. And I just want to kind of confirm that this is like -- are you drawing down DUCs in 2026? And if so, is that happening in the first part of the year versus the second part of the year? And is that kind of -- I assume that's not sustainable in 2027. But maybe if you can just kind of address that and unpack that a little bit?

Yes, I'll just start that. Again, our capital allocation and our plan was really built on maximizing free cash flow. And as a result, we have the options to basically slow down and do that. Our DUC count really is related to the timing of our active development. We don't manage to that. We have a level and a balance that just really depends on the pad size, how many rigs we're running and the activity levels that we're carrying. So the DUC count is really just an artifact or an output of that planned activity slowdown, right? So we remain focused on capital efficiency. And basically, going in there with the fleet right after the rigs are finished in order to build a plan and deliver results that are maximizing free cash flow.

There are no further questions at this time. I'd like to hand the call back to Beth McDonald for closing remarks.

Thanks, Joe. Thank you all for your time today and your questions. As we close, I want to reiterate our 3 strategic priorities of integrate, execute and bolster. First, integrate. The Civitas integration is progressing well, and we are really pleased and proud with the strong performance of our team. We've already actioned $185 million of our $200 million to $300 million target which represents under $1 billion of present value or nearly 20% of our market cap. For execute, we're focused on execution across our scaled strengthened portfolio to maximize free cash flow and deliver differential stockholder value. And bolster, we recently announced our $950 million divestiture that will strengthen our balance sheet and accelerate return of capital to stockholders under our new return of capital program. We look forward to seeing many of you guys in the coming weeks. Have a great day.