SM Energy Q1/2024 – higher than expected production due to Eagle Ford

Author: phinds Category: Oil & Gas News

SM Energy Company reported a strong start to 2024 with first-quarter net production exceeding expectations at 13.2 MMBoe, driven by efficient operations in South Texas.

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The company achieved a net income of $131.2 million, and due to robust performance, it has raised its full-year production guidance to 57-60 MMBoe and lowered capital expenditure forecasts to $1.14-$1.18 billion. Operational efficiencies led to faster well completion, significantly contributing to the increased production volumes. SM Energy continues to focus on environmental stewardship, earning a leadership score of A- from the CDP for supplier engagement. Looking ahead, the company plans to expand its drilling activities, particularly in the South Texas and Midland Basin areas, while maintaining strong capital discipline and shareholder returns.

South Texas

The report from SM Energy highlights several key points about its operations in Texas, specifically in South Texas:

  1. Increased Production: The company experienced higher than expected production in South Texas, largely due to better performance from new wells and accelerated turn-in-lines which were facilitated by faster drilling and completion times.
  2. Strategic Expansion: SM Energy entered into an agreement to potentially increase its acreage in the South Texas Austin Chalk region by about 8,000 net acres through a drill-to-earn arrangement. This is part of their strategy to expand in areas with high oil and liquids content.
  3. Noteworthy Well Performance: New wells in the high-liquids area of South Texas are showing impressive early results, with significant initial production rates reported.
  4. Future Plans: For the second quarter of 2024, SM Energy plans to continue its focus on South Texas by drilling about 9 of the planned 31 net wells and turning in line about 10 of the planned 38 net wells in the region.

These points emphasize SM Energy’s strategic focus on optimizing and expanding its operations in South Texas, leveraging both the geological potential and operational efficiencies to drive growth and performance.

Permian

In the report, SM Energy also discusses its activities in the Permian Basin, specifically the Midland Basin segment, which forms a significant part of their operations:

  1. Production Contribution: The Midland Basin contributed substantially to the company’s total production. For the first quarter of 2024, oil production from the Midland Basin was recorded at 4,363 MBbls (or 47.9 MBbls/d), which is a major portion of the overall oil output.
  2. Operational Focus: The company is actively drilling in the Midland Basin, with 17 of the 29 net wells drilled in the first quarter of 2024 located there. Additionally, 11 of the 27 net wells completed during the quarter were also in the Midland Basin.
  3. Future Plans: For the second quarter of 2024, SM Energy expects to continue significant activities in the Midland Basin, planning to drill 22 net wells and turn in line 28 net wells.

The emphasis on the Midland Basin highlights its importance to SM Energy’s overall strategy, particularly in terms of production volumes and ongoing development activities. This focus underscores the basin’s role as a key driver of production growth for the company.

Drilling & Completions

The report from SM Energy provides detailed insights into its drilling activities, emphasizing efficiency and strategic growth through its operations. Here are the key points related to drilling:

  1. Increased Efficiency: The company reported that higher than expected production was largely driven by accelerated turn-in-lines, which were facilitated by faster drilling and completion times than originally anticipated.
  2. Expanded Drilling Operations: SM Energy is actively expanding its drilling operations. In the first quarter of 2024, they completed drilling 29 net wells, which exceeded their initial guidance of approximately 20 net wells. This indicates a significant step-up in drilling activity.
  3. Future Drilling Plans: For the second quarter of 2024, the company plans to drill approximately 31 net wells. This includes 9 wells in South Texas and 22 wells in the Midland Basin, demonstrating a balanced focus on both key areas.
  4. Strategic Acreage Expansion: The company entered into an agreement that provides the option to increase its South Texas Austin Chalk acreage position by approximately 8,000 net acres through a drill-to-earn arrangement, further highlighting the strategic importance of drilling in expanding and securing valuable acreage.
  5. Operational Focus Areas: The drilling efforts are concentrated in both South Texas and the Midland Basin, indicating a targeted approach to optimize resources and maximize production in these high-potential areas.
  6. Future Completion Plans: For the second quarter of 2024, SM Energy plans to turn in line approximately 38 net wells. This includes 10 wells in South Texas and 28 in the Midland Basin, reflecting a continued focus on both key operational areas.

Overall, SM Energy’s report underscores a robust and strategic drilling program aimed at capitalizing on operational efficiencies and enhancing production capacities in its core operating areas.

Budget

The report from SM Energy provides several key insights into their budget, particularly concerning capital expenditures and their adjustments in financial guidance for 2024. Here’s what it mentions about their budget and financial allocations:

  1. Capital Expenditures Reduction: SM Energy has revised its full-year guidance for capital expenditures downward. Initially set higher, the company now expects to spend between $1.14 billion and $1.18 billion for the entire year of 2024, which represents a 2% reduction at the midpoint from previous forecasts. This adjustment is attributed to their increased operational efficiency and capital discipline.
  2. Capital Expenditure Details for Q2 2024: For the second quarter of 2024 alone, the company plans capital expenditures (net of the change in capital accruals and excluding acquisitions) of approximately $315 million to $325 million. This indicates a planned continuation of significant investment in drilling and completion activities.
  3. Budget Allocation for Drilling and Completions: The planned budget for Q2 underscores the company’s focus on expanding its drilling and completion operations, with specific plans to drill and turn-in-line multiple wells in both the South Texas and Midland Basin areas.

These budget details illustrate how SM Energy is strategically managing its capital to enhance production efficiency, optimize operational performance, and ensure financial stability. This careful financial planning supports their overall growth objectives while also maintaining a strong focus on shareholder returns.

Production

SM Energy provided detailed insights into their production performance for the first quarter of 2024, along with updates on guidance for the full year. Here are the key points about their production:

  1. First Quarter 2024 Production: The company reported net production of 13.2 million barrels of oil equivalent (MMBoe), averaging 145.1 thousand barrels of oil equivalent per day (MBoe/d). This production was comprised of 44% oil, equating to about 63.7 thousand barrels per day (MBbls/d).
  2. Production by Region: The production was split between the Midland Basin and South Texas, with the Midland Basin contributing 51% of the total volumes and South Texas contributing 49%. The specifics for each region include:
    • Midland Basin: Oil production was 4,363 MBbl (47.9 MBbl/d), natural gas was 14,475 MMcf (159.1 MMcf/d), and NGLs were a negligible 3 barrels total.
    • South Texas: Oil production was 1,431 MBbl (15.7 MBbl/d), natural gas was 16,670 MMcf (183.2 MMcf/d), and NGLs were 2,214 MBbl (24.3 MBbl/d).
  3. Exceeded Expectations: The first quarter production exceeded the company’s expectations, largely due to strong performance and early completion of new wells in South Texas.
  4. Updated Full Year 2024 Guidance: Due to the strong performance in the first quarter, SM Energy has increased its full-year production guidance to 57-60 MMBoe, or 156-164 MBoe/d, at approximately 44% oil.
  5. Second Quarter 2024 Guidance: For the second quarter, the company expects production to be approximately 14.1-14.3 MMBoe, or 155-157 MBoe/d, maintaining a similar oil ratio.

These production figures and updates reflect SM Energy’s operational success and strategic planning in maximizing output from their key operating areas, particularly noting the significant role of new wells and faster-than-anticipated completion rates in South Texas.

The report from SM Energy provides several details regarding their natural gas operations, particularly highlighting production volumes and pricing. Here are the key points related to natural gas:

  1. Production Volumes: The total natural gas production for the first quarter of 2024 was substantial. The Midland Basin contributed 14,475 MMcf (or 159.1 MMcf/d), and South Texas contributed 16,670 MMcf (or 183.2 MMcf/d), resulting in a combined total of 31,145 MMcf (or 342.3 MMcf/d).
  2. Realized Prices: The report gives detailed information on the realized prices for natural gas. Before hedging, the natural gas price averaged $2.18 per Mcf, and after the effect of hedges, the price was $2.57 per Mcf.
  3. Hedging Strategy: SM Energy has active hedging strategies in place for its natural gas production. For the second through fourth quarters of 2024, approximately 25% of the expected net natural gas production is hedged at an average price of $3.41/MMBtu. Additionally, there are basis swaps in place for differentials at WAHA and HSC (Houston Ship Channel), which are significant for managing price risks associated with regional price variations.
  4. Regional Pricing Differentials: The report mentions basis swaps for managing the price differentials in different regions. For example, they have hedged approximately 15,870 BBtu of expected natural gas production to WAHA at a weighted-average price of ($0.93)/MMBtu and 12,490 BBtu to HSC at a weighted-average price of ($0.35)/MMBtu.

These points emphasize the importance of natural gas in SM Energy’s production portfolio and illustrate how the company manages price risks and regional differentials to stabilize revenue streams from natural gas sales.

Conclusion

The report from SM Energy provides a comprehensive overview of their strong performance in the first quarter of 2024 and sets a positive outlook for the rest of the year. Here’s the conclusion based on the provided information:

  1. Operational Excellence: SM Energy demonstrated excellent operational execution in the first quarter, exceeding production expectations due to faster drilling and completion times, particularly in South Texas. This has led to increased production guidance for the year.
  2. Financial Strength: The company reported solid financial results with significant net income and adjusted free cash flow increases. They also continued their shareholder return programs, indicating a strong financial position and commitment to returning value to shareholders.
  3. Strategic Adjustments: Reductions in capital expenditure forecasts reflect heightened capital discipline and efficiency in operations. These adjustments, along with strategic expansion opportunities such as the potential increase in acreage in the Austin Chalk area, position the company for sustainable growth.
  4. Environmental Commitment: Achieving a Leadership level score of A- from the CDP highlights SM Energy’s commitment to environmental stewardship and sustainable practices, particularly in supplier engagement.
  5. Future Outlook: With the updated production and financial guidance, along with strategic operational plans, SM Energy is well-positioned to continue its growth trajectory and maintain operational and financial health through 2024.

Overall, SM Energy’s strong start to 2024 is a testament to their operational capabilities and strategic foresight, making them well-equipped to navigate the upcoming challenges and capitalize on opportunities in the energy sector.

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