Jennifer Samuels - Vice President, Investor Relations Jay Ottoson - President and Chief Executive Officer Wade Pursell - Executive Vice President and Chief Financial Officer Herb Vogel - Executive Vice President, Operations.

Brad Heffern - RBC Capital Markets Oliver Huang - Tudor, Pickering, Holt Michael McAllister - MUFG.

Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy Q3 2018 Q&A Conference Call. All lines have been placed on mute to prevent any background noise. After the prepared remarks, there will be a question-and-answer session.

[Operator Instructions] Jennifer Samuels, Vice President, Investor Relations, you may begin your conference..

Good morning, everyone, and thank you for joining us today for a live question and answer discussion. I think you've all had the time to go through our press release, pre-recorded call and presentation materials, all of which provides details behind the great quarter and solid growth trajectory. In addition, we filed our 10-Q this morning.

As always, before we get started I will remind you that we will be making forward-looking statements regarding our plans, expectations, and assumptions for 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.

Please refer to today's earnings release, the IR presentation posted to the website, or Form 10-K for further discussion of these risks. In our discussion of results for the quarter we may reference certain non-GAAP financial measures that we believe are useful in evaluating our performance.

Reconciliation of those measures to the directly most comparable GAAP measure are provided in the earnings release and IR presentation. Jay Ottoson, Wade Pursell, Herb Vogel are all here to answer your questions. And with that I'll turn it over to Jay..

Thanks, Jennifer. Good morning, everyone and thank you all for attending. I think the materials we released were very comprehensive and I don't see any reason to spend more time we have today. So Tiffany, why don't you just go ahead and open the line for questions..

[Operator Instructions] Your first question comes from the line of Brad Heffern with RBC Capital Markets. Your line is open..

Hey. Good morning, everyone. You talked about getting down your first couple of 15,000 foot laterals in the Permian.

Can you talk about how much of the acreage is suitable for 15,000 foot development versus 10 or 1 mile?.

Brad, this is Herb. Yeah, let me go Eagle Ford first. So there's quite a bit of room for 15,000 foot and even longer laterals in the Eagle Ford, particularly in the Western area. So I guess, there's - we don't have a number out there and we're going to be working the inventory this fall and publish some of the results in n February.

On the Permian, it's really driven by the existing well in the lease geometry. So there's areas where there's quite a few 15,000 foot wells. We're going to figure out the optimal between 10,000 and 15,000 plus wells and that will depend a little bit on area and location. So basically, the location and the interval. So I don't have a number there..

Okay. Thanks. And then I guess on the infrastructure and weather issues in the fourth quarter, of the 0.6 million barrels how much of that is just sort of temporary onetime impact.

And then how much of that stacks the ramp going forward in terms of you know, drilling delays or anything along those lines?.

Okay. Yeah, that's great question. Let me first to give you a visual. I'll spend a little bit of time on this because I figured this question would come up.

On rainfall, so you can picture in September there were about 4 plus inches of rain in the Big Spring area and the ground got quite saturated and at same time we had a lot of trenches that were being put in place or open for connecting wells and for gathering lines and for water infrastructure.

That was followed by Hurricane Willa coming through, and we wound up with quite a bit of standing water everywhere. So our choices were to attempt to pump a lot of water out of those trenches and continue our operations or to wait for the water to subside. Obviously, you can't pump forever and be successful, it's very inefficient.

So we basically elected to defer delaying of the lines and that led to a deferral of completion. So you can picture what happens. Also it's hard to move trucks through muddy roads.

So you can picture really a deferral is how to look at this that differs our entire schedule, so it moves everything out compared to what we had before and so that's why you're seeing the production in 4Q drop. So we viewed it as a temporary event, a temporary as rainfall events are, so that's one then. The other - the third party aspect.

So first, our gas plant issue where there was a force majeure event. That, when there's a removal of plant of plant for some period of time then we expect that to come back on at the end of the year. We merely responded by tying together our gathering system, so we could go to other plants and that's been very successful.

But there are still issues that develop in the entire gathering system for all - a lot of operators around us that defers some of the production. On the oil pipeline, that's another event that's relatively short, but that was just with one of our takeaway, really one of our purchasers and their long haul takeaway. So that problem is temporary.

But the upshot of it is that this is a temporary event, but it defers some of our completions, the well performance itself is great, so you've seen from third quarter results that we actually put on fewer completions, but wound up with better than expected production.

So that's kind of the picture that I wanted to lay out there for the 600,000 barrel estimate. And that was our best estimate as of early this week. There is some things that could make it go up. There is some things that could make it go down, but we thought that was a reasonable estimate for the quarter..

Yeah. Brad, I'll just make a really stark comment, what you shouldn't do is just take that 600,000 barrels and add to the third quarter. We definitely deferred our completion schedule for a good portion of those barrels, which means the ramp is you know, it will happen, but it's going to happen a little later than we expected.

So that will have an impact. We think overall we'll be able to make up these volumes in our '19 program, but it will tend to push the rate later in the year as a result. And that's just a consequence of essentially having to defer the whole program a few weeks because of the rainfall. So it's regrettable.

Unfortunately we haven't developed anyway to control the weather yet, but I think our people have done a tremendous job, I want to make sure I say that, they've done a great job of working through all this and working in difficult conditions to keep us as close to schedule as we could, but it's just, again nothing here that changes the value of this company.

It's just an issue of timing. Really..

I appreciate all the color….

Its fourth quarter, just a little bit later..

Yeah, same number of completions in period - just later than we expected..

[Operator Instructions] Your next question comes from the line of Oliver Huang with Tudor, Pickering, Holt. Your line is open..

Good morning. You all mentioned having closed on several land trades and bolt-on acreage enabling longer laterals are increasing working interest and operated sectional units in your prepared remarks last night.

Just wondering what the opportunity here is on a go forward basis and also how you all are thinking about M&A on a corporate basis just given some of the recent transactions that we've seen from your peers?.

Yeah, that's a great question. We have been - and I'll give our land group all the credit for this, really successful in doing trades that have quart up our position. I think if you watched our maps over time you can actually see that on the map, a much more quart up our position is then when we started.

And we've done a number of trades, a lot of some large ones that we had to talk about others, a number of smaller ones, as well. And there's still a list of those out there. There's probably not as many big ones that we tackle most of those first, but there is still opportunities we think to do some of that and grow longer.

As Herb indicated earlier, basically our program now is almost all greater than 10,000 feet, pushing 50,000 in some areas. So you know, we've done a lot of work there and it's been very, very successful. With respect to M&A, there have been a flurry of deals and it's certainly been interesting to see the various rationales for every deal.

And they're all a little bit different. So let me address it from two perspectives. From a buy side perspective for us, we do - really do understand the value of scale in a commodity business like ours but we generally believe that the source of most competitive advantage is asset quality.

So in our particular case we don't feel under any particular pressure to do a deal that would be in any way dilutive just to get bigger. But we're certainly open to ideas about transactions that would make our business better. And so we look at - we look at a lot of things and look at it from that perspective.

On the sell side, we really believe we're a premier operator with top tier assets and frankly that we're executing extremely well our plan, that will create a lot of differential value for our shareholders over the next few years.

With that said, arguably, the company is for sale every day and I know that our board would carefully evaluate proposals that might meaningfully accelerate or increase that value realization..

Okay, perfect. And I guess just switching over to the Eagle Ford, it seems like the JV has been beneficial towards SM, thus far, on improving optimization on the design of your wells.

But just kind of wondering how you all are thinking about the JV beyond 2018 and if there is any flexibility to kind of extend that program out into 2019?.

Yeah, that's another really good question. So we're just wrapping up the Phase 1 activities which were 16 D&C wells, plus 7 DUC completion and we have three more wells to bring on for Phase 1 and they'll all come on this quarter. We're in the midst of negotiating our second phase of that JV.

It has been successful and we have a great relationship with the other parties in the JV. And what we've learned has been beneficial for improving returns.

So I can't talk about the details of Phase 2, but we're in the midst of negotiation and I'm sure we'll be able to talk more about it when we give our guidance in 2019 because obviously it will affect our 2019 CapEx spend and program in the Eagle Ford..

Okay, great. Thank you..

Your next question comes from the line of Michael McAllister with MUFG. Your line is open..

Thank you very much. Can you guys talk about as you get closer to cash flow neutrality and hopefully a positive free cash flow SMs approach to hedging? And any comments about marketing whether it be NGLs and oil would be very helpful as well? Thanks..

Hey, this Wade. I'll address the hedging question. Our hedging strategy is really tied to leverage and we're locking in - we're protecting the EBITDAX.

So it's predictable that as our leverage goes down and we see that going down and we told you that you know, as we approach getting to cash flow neutrality and heading toward the end of next year you're getting leverage metrics in the lower twos areas.

You know, as you approach two times, I would just tell you that you would probably be seeing us hedge more like you know a 50% area of that production as you approach a year. So definitely lower is the short answer to your question..

And on the marketing side, first on the NGLs, we have the ability on part of our volumes from the Eagle Ford to capture ethane or to reject ethane and that's monthly election, then that's driven by what methane and ethane prices are. So right now we're clearly in ethane capture mode and will continue as long as it's financially beneficial to do so.

On the other aspects, oil, gas, marketing, we're continuing with what we've done in the past and we have multiple purchasers with multiple takeaway that commit to us that they've got firm takeaway capacity and that's been a successful strategy for us and we'll continue to do that..

All right. Great, that's helpful. And then to - going back to the hedging.

So the directive would be that almost any free cash flow would go down to attack that balance sheet and create value through that?.

Well, it's a great - thanks for asking this. It's great opportunity. Actually when you live it free cash flow, so we really have three opportunities, you can accelerate activity either in the Permian or Eagle Ford or pay down debt. And certainly my bias is to - at this point given where our leverage is at and use it for debt reduction.

The great thing about that and you know, if you could say it's ever great to have debt, that our debt call - all that debt we have is callable at some point. We have some that is callable now.

Some that will be - more that will be callable in November and we have this opportunity to essentially use that to enhance our debt adjusted per share cash flow growth rate, which is the metric we care the most about and the one we think shareholders should care the most about at a very low risk from the standpoint of using that cash.

So in a way it's a way that it's just moving value from the debt side of the balance sheet to down to their shareholders equity. And we think that's a great strategy going forward and certainly that's our intent..

All right, great. Thank you very much..

I will now turn the conference back over to Mr. Jay Ottoson, CEO for closing remarks..

Well, we thank you again for your attendance this morning and your interest in the company and hope you have a pleasant day. Thank you..

This concludes today's conference call. You may now disconnect..