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SM Energy reported a strong first quarter for 2026, marking its transition into a scaled, four-basin operator following the Civitas merger. The company exceeded production guidance with 371,000 BOE/d and beat capital expenditure targets through enhanced operational efficiencies. A key highlight was the acceleration of merger synergies, now targeted at $375 million by year-end 2026. Financial health improved significantly as SM utilized $900 million from a South Texas asset divestiture to reduce debt, bringing leverage toward a low 1x target. Consequently, management announced that share buybacks will begin in the second quarter. Operationally, SM achieved record lateral lengths in the Permian and 25% completion efficiency gains in the DJ Basin. In the Uinta Basin, the company realized its highest margins and transitioned to 4-mile laterals. Management raised full-year production guidance to 420,000 BOE/d while maintaining capital spending limits, signaling high capital efficiency. During the Q&A, leadership emphasized a commitment to financial discipline and shareholder returns over production growth, despite rising oil prices. The company expects the second half of the year to reach a production run rate of 430,000 BOE/d, setting the stage for a highly profitable 2027.

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SM ENERGY CO: High-Stakes Permian Consolidation Masked by Massive Dilutive Issuance and Derivative Volatility

Full Earnings Call Transcript — Q1 • 2026-05-07

Operator: Good morning. Welcome to the SM Energy's 2026 First Quarter Operating Results Live Session. [Operator Instructions] Please note, today's event is being recorded. I'd now like to turn the call over to Megan Hays, SM Energy's Vice President, Investor Relations. Please go ahead, Megan.
Megan Hays: Thank you, Rob. Good morning, and welcome to SM Energy's First Quarter 2026 Earnings Call. It's a busy morning for everyone, so we'll jump right in. Joining me are Beth McDonald, our President and CEO; Wade Pursell, our Executive Vice President and CFO; and Blake Mckenna, COO. Today's discussion will reference forward-looking statements. Please see Slide 2 of our earnings presentation as well as the risk factors in our most recent Form 10-K for risks and uncertainties that could cause actual results to differ materially. We will also reference non-GAAP financial measures throughout the call. You can find the definitions and reconciliations to the closest comparable GAAP measures in yesterday's earnings release and in the slide deck available on our website. [Operator Instructions] With that, I'll turn it over to Beth.
Elizabeth McDonald: Thanks, Megan. Good morning, everyone. The first quarter validates what we've set out to build with the new SM. We closed the Civitas merger on January 30 and, in just 2 months of operating as a combined company, we delivered production over the top end of the guidance, capital below guidance and synergy capture that is tracking nearly 2x our original target. That doesn't happen without an exceptional team. So let me tell you what we built SM to do. We have been deliberate and disciplined in assembling this platform. And today, SM is better positioned than at any point in our history. We have scale across 4 premier basins, a high-quality inventory that spans multiple years of high-return development and a team that has proven it can execute. That platform exists for one purpose: to put capital to work in the highest-returning opportunities available and with the technical and operational excellence SM is known for. Execution compounds value for stockholders over time. This is our North Star, and it drives and guides every decision we make. Our 2026 plan is clear: Integrate, Execute, Bolster. Integrate relates to the synergies that make us more efficient. Execute means operational excellence across every basin. And Bolster means strengthening our financial position and leaning into the evolution of our stockholder return framework. After 100 days into the Civitas integration, I can tell you we are executing ahead of plan on all 3 fronts. Our first quarter results are proof positive and allow us to strengthen our full year outlook. On Integrate, we've actioned approximately $300 million in merger synergies, and we have raised our target to $375 million by year-end 2026. That is nearly 2x our original target with a present value of approximately $1.8 billion, up from our prior estimate of $1 billion to $1.5 billion, further evidence that the organizational capability we brought to this merger is real. On Execute, we delivered higher production for less capital. Production was above expectations at 371,000 barrels of oil equivalent per day, with oil at 190,000 barrels per day. Capital was below guidance at $672 million. With this strong start, we are raising our full year production and maintaining our capital guidance, delivering more volume with the same investment and building a strong and sustainable free cash flow growth trajectory. On Bolster, the South Texas divestiture closed April 30 with approximately $900 million in net proceeds directed entirely to debt reduction. We have a clear path to operating at low 1x leverage, and the trajectory from here is toward further improvement. As leverage declines, we expect to increase our share buybacks and we expect to commence buybacks in the second quarter. We see tremendous value in our equity, and we know that the best investment we can make today is in ourselves. I'll hand it over to Wade to cover our recent financial performance and provide more detail on our balance sheet progress. Wade?
A. Pursell: Thanks, Beth. Good morning, everyone. Well, to summarize, our financial performance was strong. Our adjusted EBITDAX was $970 million and adjusted net income was $309 million or $1.55 per diluted share. Lease operating expense and transportation came in below guidance. We're maintaining that guidance as cushion against potential cost inflation in a higher commodity price environment and to get a full quarter of the new SM under our belt before we revisit. On a GAAP basis, the net loss was largely related to a noncash mark-to-market adjustment on our entire hedge book as of March 31. As you know, that number moves around with commodity prices every quarter. What doesn't move around is the underlying business. We delivered adjusted free cash flow of $20 million despite the fact that we had approximately $180 million of onetime integration and transaction cash costs in the quarter. Capital came in below guidance. And we expect our free cash flow profile to accelerate meaningfully through the balance of the year. Let me spend a minute on the hedge book and remind you how we use it to reduce risk while maintaining upside exposure. We hedge to protect cash flow to meet near-term objectives, including funding high-return drilling, reducing debt and returning capital to shareholders. In short, our derivatives allow us to run the business for long-term value creation. Turning to the balance sheet. Since Civi closed in January, we have reduced absolute debt by approximately $700 million through several well-timed and decisive actions. As a result, our pro forma leverage is moving into the low 1x area, ahead of our original year-end target. From here, the trajectory is toward further improvement as free cash flow builds through the back half of the year. The credit agencies have recognized our rapid progress. S&P and Fitch both recently upgraded us, and Moody's moved to a positive outlook. We're running our business with investment-grade metrics. Lastly, our bank group reaffirmed our $5 billion borrowing base under our credit facility even after removing our recently divested South Texas assets and while also holding lower commodity price assumptions, a clear testament to the quality of SM's asset portfolio. So with that, I'll hand it back to Beth.
Elizabeth McDonald: Thanks, Wade. Our results start at the asset level. So let me take you through each basin's recent performance. In the Permian, we turned 25 net wells in line. Our teams drilled the longest and fastest Wolfcamp D wells in SM's history. And we're also advancing Woodford development and see real upside with that effort. Completion efficiency improved 4% compared to 2025. And scale in the Permian creates procurement leverage and scheduling efficiency that neither legacy company had independently. In the DJ, first quarter turn-in-line showed early time outperformance versus offset wells. More importantly, we implemented simul-frac in our Watkins area, which drove a 25% improvement in completion efficiency compared to zipper operations. That is not a marginal gain, and the DJ is a low-cost, high-margin business. In South Texas, base production is outperforming and completion efficiency improved 6% compared to 2025. The South Texas asset divestiture strengthened our balance sheet and high-graded our South Texas position towards higher-margin, liquids-rich opportunities. In the Uinta, our cash production margin was nearly $40 per barrel, the highest margin in our portfolio and the highest torque to higher oil prices of any asset we operate. That margin was achieved with only 1 month of the stronger oil price environment we've seen in 2026. We're encouraged by our move to longer, 4-mile developments, which are delivering meaningful savings in drilling cost per foot. In summary, the portfolio delivered, and we are raising our full year production midpoint from 410,000 to 420,000 barrels of oil equivalent per day, and the oil production midpoint from 221,000 to 225,000 barrels per day. Importantly, we are maintaining our full year capital guidance of $2.65 billion to $2.85 billion. We expect the second half production run rate to be approximately 430,000 barrels of oil equivalent per day and 238,000 barrels of oil per day. Faster cycle times, strong well performance and synergy-driven cost savings are enabling our teams to do more with less. Looking ahead, our inventory-rich, 4-basin platform sets SM apart to deliver value today and well into the future. Let's turn to our framework for returning capital as it's important that the market understands its significance. Because of our strong start to 2026, we are moving to low 1x leverage. And with free cash flow accelerating through the back half of the year, we expect to strengthen that position further. We've taken decisive actions on the balance sheet, and onetime integration costs are largely behind us. The synergy benefits are building. With commodity price tailwinds, our free cash flow is accelerating faster than expected. Lower leverage and higher free cash flow are a powerful combination. This will enable us to increase the percentage allocated to buyback sooner than originally anticipated, and we expect to begin repurchasing shares in the second quarter. We see upside in our equity, and as the year unfolds, we have the flexibility to lean further into repurchases. What this quarter demonstrates and what I want to leave you with is that this organization can execute at scale. We captured synergies ahead of schedule, delivered results above guidance and built a new company all at the same time. That capability doesn't show up in any line item, but I believe it is the most durable competitive advantage that we have. Our enhanced full year outlook reflects that confidence: more volume, the same capital and a clear path to our leverage target. And 2027 is when full earnings power of what we've built becomes visible: a full year of the combined platform, onetime costs behind us, synergies at full run rate and a balance sheet at or below 1x leverage and significant returns to stockholders. We are a powerhouse in shale, and we are just getting started. I look forward to your questions. Megan, back to you.
Megan Hays: I'll turn the line now over to the operator for Q&A. [Operator Instructions]
Operator: [Operator Instructions] Our first question today is from the line of Zach Parham with JPMorgan.
Zachary Parham: First, oil's moved higher post Iran, and while it's pulled back the last 2 days, it's still quite a bit higher than it was coming into the year. You're in a bit of a unique situation in that you closed a merger in 1Q and you had plans in place to allow some acquired volumes to fall to kind of rightsize that asset. But does your thinking change at all in a higher oil price environment? Is there a scenario where you could look to add activity? If so, is that later this year? Is it into 2027? Maybe just talk about that a little bit.
Elizabeth McDonald: Zach, our deliverables for 2026 are clear and unlikely to change. So we don't see this current disruption in the market as a green light to increase our activity. We're just going to keep investing in our high-return projects, generating additional free cash flow, reducing leverage and returning capital to our shareholders. I've said this on the call that our current -- at our current valuation, there's not a better investment than buying our own shares, and so we'll have incremental capital to do that.
Zachary Parham: And then my follow-up, maybe for Wade. You gave some updated guidance around 2026 cash taxes, which is helpful. Could you just give us an update on how you're thinking about cash taxes over the longer term? Would you expect cash taxes to move higher in 2027 where the strip is today? Just trying to get a sense of where cash taxes might trend over time.
A. Pursell: Yes, Zach. It's a great question. Yes, I would say that -- and we gave the guidance for this year, and it's all going to be about the oil price, obviously, in the coming years on whether we pay a lot of cash taxes or not. And I can just say if oil stays kind of in this area, strip wise, if it looks like $70 or $80 next year, or below, cash taxes will certainly be below $100 million. And if you get down closer to $70, the cash taxes become quite minimal actually. And that's based on the IDCs and the deductions we have and the efforts with R&D and all those things that allow us to maintain a lot of deductions.
Operator: Next question is from the line of Phu Pham with ROTH Capital Partners.
Phu Pham: My first question is about just the Uinta activities. Can you provide a little bit about like the well productivities and the well costs over there, like how are they trending right now?
Elizabeth McDonald: Yes, I'll start, and then I'll hand it over to Blake Mckenna, who is also in the room. So our Uinta delivered strong Q1 performance. And our basin is oil-focused, so it has the highest torque to this higher oil price, which we love. We've been continuing to develop the lower cube, which is our high-return development. And we have also leaned into several upper cube developments as well, and we're very encouraged by the results to date. So with that, I'll turn it over to Blake and he can add any color.
Blake Mckenna: Yes. We like the Uinta, especially in the oil price environment we have. This is a very integrated basin, meaning we've rolled together a lot of our different services, very consolidated from the land side. And it's an area where we continue to deploy some of our newest technology and some of our most exciting operations. And so we're going to continue to do that in Uinta and feel great about how we're positioned in Uinta right now.
Phu Pham: All right. And my just follow-up, about the asset sales. Yes, I know we just -- you did a big asset sale last quarter. So in the current high oil environment, are you looking to do more asset sales? And what's going to be the size? Is it going to be smaller or the same size? I guess it would be smaller.
Elizabeth McDonald: Yes. With our South Texas gassier divestiture, that really got us meaningfully to the $1 billion target. And that said, our assets have strong Q1 performance and our teams are really doing amazing things in the early innings. And what this sale did for us was allow us to be patient. And it really allows us to look at the entire portfolio and be strategic about what creates the most value in the future for SM.
Operator: The next question is from the line of Gabe Daoud with Truist.
Gabe Daoud: I was hoping we can maybe pivot to an ops question, particularly in the Permian, in Howard County. I was looking at your permits. Does it come across these Zissou wells, which appear to be U-turns? So I guess the question would be, how confident are you in U-turn wells? And maybe what's changed in your view around U-turn wells relative to the past where I think maybe there's a little bit of hesitancy from SM on drilling U-turns?
Blake Mckenna: Gabe, I appreciate that question. One of the things we're excited about with the integration portion of these companies and getting these synergies together is some of the legacy team has come in with a really great experience on U-turn wells. We have been getting up to that curve. And as a combined team, we're extremely confident in it. We have had great experience here in the DJ Basin, and we're still pushing that in areas where we can be creative to unlock leases and rock we had before, and the team is executing on that. And we're taking those same learnings down. We've also completed one of our longest laterals, and we feel highly confident about U-turn wells and have not seen a huge effect in our cost at all in executing or fracking these U-turn wells. So they will continue to be a big part of how we strategically go after rock that may have previously been stranded and more difficult to access.
Gabe Daoud: Awesome. Okay. That's great color. That's great to hear. Appreciate that. And then just as a follow-up on the same topic again, just kind of sticking to that Big Spring area in Howard as we think about development on a go-forward basis and remaining inventory. Just was curious around your confidence in the stack overall in that neck of the woods. It looks like many of the offset wells there are largely Wolfcamp A's. So I was just curious around your belief in there being an adequate frac barrier between the Wolfcamp A and Lower Spraberry, and even deeper, Wolfcamp A versus the Wolfcamp D? Just trying to get a sense of, I guess, future reserve bookings from those multiple zones there that I noted.
Elizabeth McDonald: Yes, Gabe. I think when you look at the history of SM, we really put Howard County on the map. And so we have a deep understanding of the entire section within Howard County. So our teams continue to evaluate that to deliver high returns in Howard. And that's multiple landing zones, some of which you mentioned, and then continuing to extend our technical capabilities beyond kind of the conventional cube. But overall, we're really excited. We've always loved Howard County. And we push the limits for the Midland Basin as it as it stands in that area, and we'll continue to do so.
Gabe Daoud: Beth, you certainly have. Really appreciate that.
Operator: Our next question is from the line of Oliver Huang with TPH & Company.
Hsu-Lei Huang: I just wanted to ask, is there a scenario where if you're looking ahead to 2027 plus, that you all would look to drive a bit more growth on the oil side under where that -- just kind of given where the current commodity strip backdrop sits? I know you all have been kind of in that maintenance type of area.
Elizabeth McDonald: Yes. Again, just reiterating that 2026 is really about Integrate, Execute and Bolster, and we're going to continue to do that. That incremental free cash flow is going to go to our return of capital framework as we've laid out so far. But kind of beyond that, we have to look at the overlying conditions in the market, right? So we look at the longer-term oil price strength, and we'll continue to monitor the market. I think we can all agree that there's a lot of uncertainty right now, and we need the strait to open and understand the infrastructure hits before we really understand the underlying fundamentals of the market going into 2027. Once we understand that, then we can build our 2027 story. But for now, we've guided to our second half run rate being in that 430,000 BOE per day and CapEx similar to this year. So we've said that all along and we'll continue with that story unless we see a fundamental shift in the 2027 commodity outlook.
A. Pursell: Fundamentally shifts our outlook for free cash flow. Because production will continue to be an output. We will maximize free cash flow.
Hsu-Lei Huang: Okay. That makes sense. And maybe just kind of a follow-up to that, I mean, have you all considered reallocating incremental activity towards maybe the Uinta just given it is some of the highest torque to stronger oil prices, given the higher oil cut within your portfolio, is there anything that's preventing you all for doing that from a logistical perspective?
Elizabeth McDonald: No, Oliver, there's nothing preventing us from doing that, other than the fact that we don't respond really quickly to changing dynamics or disruptions in the market. We look at the overall program from a capitally efficient perspective. So we look at those high returns and we know that we're driving capital efficiency. If we throw in activity in and out of a basin really quickly, we might not have or be able to drive those capital efficiency numbers to the metrics that we're performing today. So we look at it holistically. It's not just one variable that pushes our allocation differently. Just like we said a second ago, if Uinta activity makes sense to drive our incremental free cash flow in 2027 at higher oil prices, then that's when you could see us making a change. But for now, we have a great program going on, we have a high-margin business there, and we'll continue to perform.
Hsu-Lei Huang: Okay. Perfect. And if I could just squeeze one more in, just on workover side of things. Are you all doing anything incremental there or considering doing so just given the more constructive oil environment? I'm just trying to think through what might have been contemplated in the initial outlook in February versus where things have shaken out since.
Blake Mckenna: Oliver, we've been pretty efficient on staying on top of all of that. Are there little tiny things we might move ahead? Sure. But nothing meaningfully. We've got a great program on our workovers that are always looking at incremental returns. In general, we've been on top of all of our workovers. So I'd say we're pretty efficient to date. I think you see those efficiencies in our 1Q numbers. So nothing substantial here.
Operator: Our next question is from the line of Jack Kindregan with BMO Capital Markets.
Jack Kindregan: First one, to touch on the DJ Basin, which is a new asset for you guys and you've had a couple of months under your belt now. But just curious about your initial impression there on resource, returns and the general operating environment.
Elizabeth McDonald: Yes, I'll start and then hand it over to Blake. When you look at the DJ Basin, just like I said in the prepared remarks, it's a high-margin business. I mean our drilling and completions team there is top-notch, really pushing the limits on what we can do, and they've delivered. And so we're really proud of what the team has been able to put together. As far as the individual well performance and anything like that, I'll turn it to Blake for that.
Blake Mckenna: Yes. These are -- the wells that we have on our schedule are very high-return wells. And the great thing about the DJ Basin is it recycles cash very fast. And so drill times are low, fracs go very fast. And we've got a really good development program, especially with the DJ Basin being one of the older resource plays here in the United States. And so everything that we have in the schedule, we are very excited about upcoming.
Jack Kindregan: Great. And then just wanted to touch on inventory as well. At year-end, you communicated an 8-plus-year inventory. I think it was $60 a barrel, but most mid-cycle oil prices have increased since then. Just curious about what the resource is beyond that $60 level that could be derisked or become more economic at, say, $70.
Elizabeth McDonald: Fair point. The inventory that we released earlier this year was at the $60 WTI mark, in line with what our budget was set at. And so in the current price environment, that number really only grows, right? So higher prices make more economic locations, extending the runway further. I think it's important that everyone just -- and I reemphasize that we remember that our number is primarily a 3P number, so it contains a lot of certainty and it doesn't include all the additional allocation -- I mean all the additional locations that we continue to test and work on. And our technical team is known to bring those opportunities forward. So you can see in the current price environment how that runway is extended, much longer than the 10-plus years.
Jack Kindregan: Got it. If I could squeeze one more in on oil differentials that I know SM doesn't guide to, but we've seen some elevated numbers from peers looking into 2Q and the balance of the year. Given your diverse asset base, any insight on what to expect there?
Elizabeth McDonald: I would say, you look at Q1 performance and everything that's happened there, we would just guide back to what we've done to date. And it's really pretty much steady. One thing I will emphasize is that we have a diversity within our 4 basins. That allows us to take advantage of any increases that we see in order to gain realized prices that are better than the holistic market or 1 individual basin. So we love our diversity. We love the fact that we can capitalize on different markets, and we're going to lean into that to drive more free cash flow.
Operator: [Operator Instructions] The next question is from the line of Michael Scialla with Stephens.
Michael Scialla: Wade, you mentioned you're delevering -- you mentioned you're deleveraging more quickly than you thought. I guess based on where the strip is, I realize you just put this framework in place, but do you stick with that 80-20 split going forward given that your stock is one of the least expensive in the industry? Or could that formula change this year?
A. Pursell: Mike, we do like stock price as far as buybacks, so thanks for pointing that out. You're right, it's very exciting to be able to see the path to the low 1's area accelerating based on the higher oil price. I would just say for now, we're very focused on, obviously, the second quarter. Very excited to be buying back a lot more stock than we would have anticipated because the free cash flow is going to be so much higher than it was. And then as we progress through the year, we'll continue to monitor the leverage levels and just see how that plays out. I'll reiterate what I said before, what we're looking for is a low 1's area leverage, assuming a mid-cycle oil price. Determining what that is, I think, is a good question, and we'll be monitoring that as well. And so as we move through the year, and if all this plays out that way, then, yes, at some point, at the appropriate time, you could see us move that percentage up on the share buyback side.
Elizabeth McDonald: Yes. And the only thing to add there, Mike, is just any additional divestitures that we do will drive that even faster.
Michael Scialla: Yes. Good to hear. Beth, you'd mentioned too early on the plans for '27 with the uncertainty, you got to see how the Middle East plays out. I was curious how you're thinking about hedging '27 right now with the strip and a pretty steep backwardation.
Elizabeth McDonald: I'll start and hand it to Wade. But our hedging strategy really hasn't changed, Mike. It's in line with what our philosophy has been for a long time, and it's really tied to leverage. So Wade, I don't know if you want to expand on that.
A. Pursell: That is a great summary and that's what we continue to do. I'll just remind you that in this leverage area that we entered post the merger, kind of in the 1's area, that drives us to hedge about 50% of our volumes on kind of a rolling year basis. And that's what we've continued to do. So we've continued to do that as the prices have moved higher. And we've gone, to answer your question on '27, that means we've been putting in some hedges, kind of beginning some layers. We never go in too large at any one time. We methodically kind of layer in as we move along. So that allows us to capture big moves up in the price, which is what we've been doing recently.
Operator: The next question is from the line of Kevin MacCurdy with Pickering Energy Partners.
Kevin MacCurdy: I wanted to ask about the second quarter production. It looks like it's a little bit lower than the second half run rate. But I wonder maybe if you could talk about where and what assets the production is declining and how you kind of see that trajectory through the back half of the year. And that's it for me.
Elizabeth McDonald: Yes. What I would say about the -- just looking at the second quarter in a vacuum, really you should look at it more holistically. We're off to a great start. We've driven Q1 production to beat the top end of our guidance. Our well productivity was a primary driver behind that beat. So that should indicate how confident we are in our production going forward. And really just to drive home, our second half of the year production run rate has increased. If you remember on the first call, I said 420,000 to 430,000, and now we're driving that to at least 430,000 BOE per day. And I think that's really the run rate that you need to look at going forward as it's important in our future to drive that free cash flow.
Operator: We have a follow-up from the line of Jack Kindregan with BMO Capital Markets.
Jack Kindregan: I was just hoping to follow up once more on the asset sales. I know South Texas largely got you to your target. But I was just hoping to get some more clarity on the nature of any potential sales, whether it's more PDP heavy, midstream and infrastructure, or any specific geography.
Elizabeth McDonald: Yes. I think we still have yet to determine that. So as we continue to review the portfolio, we'll start to fold in the synergies that the team is building and then align that with our technical expertise to really understand the valuations. And from there, we can prioritize the portfolio. As you imagine, we've only had all the full data for just a couple of months really. And now that we're folding that in together, it really allows us to understand where we can create the most value on the market ourselves as well as where can we see other E&Ps willing to pay for that. So we're still in the phase of understanding and prioritizing. So I can't give you an exact place of where that might be. But we're looking at it especially in this market of more interest and significant capital chasing these assets. So we're definitely looking at it.
Operator: At this time, I'll turn the floor back to Beth McDonald for closing comments.
Elizabeth McDonald: Thanks, Rob. Thank you, everyone, for joining our call today. We're really encouraged about the performance we've had to date. Excited that we got to share that with you today. And we look forward to seeing many of you on the road in the coming weeks. Have a great day.
Operator: Thank you. This will conclude today's conference, ladies and gentlemen. Thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.