David W. Copeland - SM Energy Co. Javan D. Ottoson - SM Energy Co. A. Wade Pursell - SM Energy Co. Herbert S. Vogel - SM Energy Co..

Thank you for joining us by telephone and online for SM Energy Company's First Quarter 2018 Financial and Operating Results Discussion. 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 afternoon, the presentation posted to 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.

Company officials on the call are Jay Ottoson, President and Chief Executive Officer; Wade Pursell, Executive Vice President and Chief Financial Officer; Herb Vogel, Executive Vice President-Operations; and Jennifer Samuels, Vice President-Investor Relations. I'll now turn the call over to Jay..

Thank you, David. Good afternoon to all of you and thank you for joining us. Our operational execution in the first quarter of 2018 was excellent. As you can see on slide 4, we have made good progress on all our major objectives for the year.

Our sizable increase in cash flow and success in reducing net debt are particular highlights, and we continue to deliver outstanding well results. We pre-released many of the important numbers for the quarter to you, so today's discussion will be brief.

Wade will summarize our results and financial position and discuss our guidance for the remainder of the year, Herb will then cover new well results and other operations items, and then I will close.

Wade?.

Thanks, Jay. Yes, we've made good progress on targeted objectives for the year, meaning we are off to a great start on our two-year plan and on track to be net cash flow positive in the second half of 2019. We are achieving this through high-margin production growth, capital efficiency and well performance, and by continuing to core up the portfolio.

Looking at slide 5, you can see some favorable metrics from the first quarter that demonstrate our success to-date. An important metric, cash flow growth, was up 30% over the fourth quarter. This was driven by big increases in the operating margin in Midland Basin production.

The operating margin was $23.10 per Boe, up about 30% from last quarter and up 68% year-over-year. Midland Basin production was up 18% sequentially and 100% year-over-year. Oil accounted for 42% of our total production mix. Oil plus liquids accounted for 59% of our production mix.

We've completed or nearly completed about $800 million in asset sales year-to-date. As of June, we expect all producing assets to be located in our Midland Basin or Eagle Ford programs. Importantly, as a result, pro forma for the second quarter divestiture closings, we have reduced net debt to around $2 billion.

So, as you can see, we have made a step change reduction in net debt year to date. Speaking of that, let's move to slide 6 and look at the balance sheet and liquidity in a little more detail.

We just completed the scheduled April redetermination process for our credit facility and the borrowing base was increased by more than 50% to $1.4 billion based on year-end reserves. Lender commitments total $1 billion and this facility remains undrawn. Liquidity is $1.6 billion, including our $643 million cash balance at quarter-end.

Net debt to trailing 12-month adjusted EBITDAX fell to 3.3 times at quarter-end and should be below 3 times by the end of 2018. The other comment I'll make is that we will be considering reducing absolute debt levels once all of the divestitures have closed.

Moving to slide 7, hedging, we continue to remain well hedged and we are among the best-hedged companies to the Permian basis differential, where we have 70% of Permian oil hedged to basis through year-end. We have recently layered on additional 2019 hedges, including Permian basis swaps, oil collars, and natural gas collars.

We are now roughly 40% hedged for 2019, with roughly one-third of Permian production hedged to basis. All the details is in the slide deck appendix. With respect to guidance on slide 8, I'll reiterate a few points provided last month to calibrate your models.

Production guidance for the full year was slightly modified to adjust for the asset sales, plus the benefit of the first quarter exceeding expectations. We revised the full-year range to 40.9 million Boe to 44.9 million Boe, or 112,000 Boe per day to 123,000 Boe per day.

At the midpoint, this implies significant production growth of around 22% for retained assets in the second half of 2018 over the first half of 2018.

Full-year total capital spend guidance is unchanged at $1.27 billion, which assumes 55% to 60% of capital spend in the first half, consistent with the original plan as we have a higher proportion of drilling and completion activity in the first half, which in turn supports the production growth in the back half of the year.

In short, we're very pleased with first quarter results. We beat expectations for production, operating cost, operating margin, EBITDAX and cash flow per share, due primarily to well performance with some help from the macro. And this positions us well to meet our cash flow growth targets for the year.

Now, let's turn the call over to Herb Vogel to discuss operations..

Lower Spraberry, Wolfcamp A and B. This results in large neighboring pad developments that are simultaneously drilled by multiple rigs and simultaneously fracture-stimulated by multiple frac spreads, and then brought into production in rapid succession.

This means that some months will have very few new wells, while activity is dedicated to this co-development, while other months will bring on multiple pads. Clearly, this will lead to lumpy production quarter-to-quarter.

However, we fully expect co-development in this manner will maximize capital efficiency, drilling inventory and recovery efficiency. Now, let's turn to slide 12 in the Eagle Ford. Here, we are concentrating on enhancing the value of our future drilling inventory and undeveloped leasehold in three ways.

First, we are up-spacing and extending laterals on our Eagle Ford development wells to increase returns. We have seen positive value impact from some of our own data and from offset operators who have up-spaced.

Spacing in the Eagle Ford has changed from where we were a few years ago, when we drilled as tight as 225-foot spacing or 450 feet within each zone while co-developing the Upper and Lower Eagle Ford. Our 2018 program includes wells spaced at a minimum of 625 feet in the Lower Eagle Ford, and 625 to 2,500 feet in the Upper Eagle Ford.

Second, we are assessing additional intervals that would significantly increase our future inventory. And third, we are incrementally improving our completion designs. On this last point, we are really pleased with our first-ever permanent fiber optic installation, which was recently installed in the Eagle Ford JV area.

Not only has this already informed us about the specifics of the fracture stimulation process, it will tell us during flowback how completion design changes have influenced stage-by-stage production performance.

The direct benefit to capital efficiency is the ability to see where production gains are realized from incremental CapEx deployed on completion design improvements. Operationally, in the Eagle Ford, we are running two rigs and one frac fleet now, and they are covering both JV activity and our 100% activity.

In the second quarter, we expect to complete nine net wells. In summary, capital activity is on track with our original plan and results are meeting or exceeding plan. Execution is simply outstanding.

I couldn't be more proud of what our teams have been able to deliver and how relentless they have been at driving improved performance in just about every category this quarter. With that, let me turn the call back over to Jay..

Well, thanks, Herb. I think it's clear we had a very good first quarter and that we are on track or ahead of schedule with all of our objectives for the year. We look forward to taking your questions tomorrow and thank you for your time and attention..