SM Energy Company Aktie

Greetings. Welcome to the SM Energy Third Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would like to turn the call over now to Megan Hays, SM Energy's Vice President, Investor Relations. Thank you. Megan, you may begin.

Thank you, and good morning. On the call with me this morning are Beth McDonald, President and CEO; Blake McKenna, Chief Operating Officer; and Wade Pursell, Chief Financial Officer. Before we begin, I'll remind you that we will be making forward-looking statements, and our actual results may differ materially. Please refer to the cautionary statements in our earnings release, our presentation and our filings with the SEC. We will also reference non-GAAP measures. Reconciliations are in the release.

With that, I'll turn it over to Beth.

Thank you, Megan, and good morning. I want to start with the commitments we made for 2026. We set out to integrate 2 companies, capture the value of the merger, optimize the portfolio and strengthen the balance sheet. We are delivering against those commitments. And in several areas, we have exceeded what we originally set out to achieve. At the merger announcement, we established a $200 million synergy target. Today, we have actioned approximately $400 million, twice the original target and surpassing the previously raised $375 million target.

We also set a goal of at least $1 billion of divestitures within 1 year of closing and substantially achieved that objective with the $950 million Galvan sale, directing the proceeds to debt reduction. And we established a goal of low 1x leverage at mid-cycle prices. We remain on track to reach that level by year-end 2026, more than a year ahead of our original expectations. With the key integration work streams largely complete, the focus now shifts from integration and execution to execution and optimization, using our lower cost structure and stronger balance sheet to improve capital efficiency, generate durable free cash flow and continue creating value for stockholders. Our 80-20 framework remains the mechanism for balancing debt reduction and share repurchases as we move toward low 1x leverage at mid-cycle prices.

Blake will now walk you through our operating performance and the work underway across the portfolio. Blake?

Thanks, Beth. Third quarter production was in line at 433,000 barrels of oil equivalent per day. Oil was within guidance at 230,000 barrels per day, but about 2% below the midpoint. The oil variance primarily came from 2 areas. In the Permian Basin, downtime ran higher than planned as we completed compliance work on acquired assets and temporarily shut in producing during high-risk simultaneous operations. Those actions are now complete, and the related downtime is behind us. In the Uinta, our production was limited by takeaway. An unplanned outage at an in-basin refinery redirected incremental barrels to rail when terminal capacity was already fully utilized ahead of the planned expansion.

Together, these constraints reduced third quarter oil volumes by approximately 4,000 barrels per day. Absent them, oil production would have been approximately 234,000 barrels per day. The refinery is back online. Rail capacity remains constrained until the terminal expansion enters service, currently expected in the first quarter of 2027. So we've reflected that limitation in our fourth quarter and early 2027 expectations. For the fourth quarter, we expect oil production of 229,000 to 239,000 barrels per day, which reflects the Uinta constraint and capital of approximately $610 million.

Operationally, we have solid updates across the portfolio, and I'll highlight 3. First, in the Delaware Basin, the 21 wells we brought on this year across 5 pads, which is in our core stacked pay area, are producing about 40% more oil per foot than our 2024 wells, and they're running about 24% ahead of our 2025 wells at 6 months. Compared to last year, we have drilled roughly twice as many wells in the Delaware Basin. Second, the Woodford-Barnett program in the Midland Basin continues to show encouraging economic and technical potential. The 8 wells online to date are delivering above the area average. We continue our delineation work to define the resource and development potential.

Third, in the Uinta, the first SM fully designed and executed pad came online in August with optimized spacing and enhanced completions on 15,000-foot laterals. On a normalized basis, the first 30 days are the highest rates we have delivered in the basin. The next pads that come online in the fourth quarter are 20,000-foot laterals. Stacking these innovations and leveraging our subsurface expertise is beginning to show in per well productivity.

Turning to costs. Our Uinta completion cost per lateral foot fell from $475 in the first quarter to about $400 in the third. On the same lateral length and target zone, simul-frac increased completions efficiency from about 1,000 feet per day to 2,800. Those efficiencies are a large part of what our operations synergy program delivered, $215 million against a raised $200 million target. The majority of what we action is structural, including completion design, simul-frac and drilling performance. In the Permian, third quarter drilling footage per day was up about 15% and completion footage about 23% compared to our 2025 average.

On inflation and capital, we have narrowed full year capital guidance to approximately $2.75 billion, the midpoint of our prior range. Our synergies and sustainable efficiency gains have largely offset inflation related to higher diesel unit costs, fuel-related transportation costs and other consumables, including OCTG. We're finishing 2026 with momentum and heading into 2027 from a position of strength. Scale, consolidated procurement, simul-frac, local sand are all yielding a lower cost model, and we intend to keep building on it into the new year.

Wade will now take you through the financial performance.

Thanks, Blake, and good morning, everyone. We generated $1.1 billion in operating cash flow and $1.3 billion in adjusted EBITDAX in the quarter. Capital expenditures before changes in accruals totaled $747 million, within our guidance range, and adjusted free cash flow was $397 million. We returned $133 million to stockholders, representing 34% of adjusted free cash flow, through $81 million of repurchases and $52 million of dividends. So repurchases were about 24% of post-dividend free cash flow. And year-to-date, we've repurchased $165 million of stock. We continue to view buying our stock as one of the best uses of our capital.

The rest went to the balance sheet. We redeemed the $417 million 2027 notes at par, and net debt ended the quarter at $6 billion, and that's down from $7.4 billion at the end of the first quarter, our first quarter after the merger. We have no senior note maturities until mid-2028, and we remain on path to low 1x leverage at mid-cycle prices by the end of this year. A quick word on cash taxes. We previously provided full year cash tax sensitivities, including approximately $50 million at $85 oil. With the strength in commodity prices, we now expect full year cash taxes of approximately $100 million to $120 million.

The primary driver of that is the annual tax attributes that offset taxable income earlier in the year have largely been utilized. So incremental taxable income at current commodity prices is now largely subject to cash taxes at the full applicable rate. To wrap up on synergies, $400 million actioned, every bucket ahead of its original target, and the company's structural cost base is reset. Third quarter recurring G&A of $52 million is the run rate. The step-up implied in the fourth quarter reflects normal year-end items, not a change in that base. From here, we manage efficiency through continuous improvement, which will show up in unit costs.

So we enter 2027 with a meaningfully stronger financial foundation, a lower structural cost base, lower interest expense, lower leverage and the full run rate benefit of the merger. That combination improves the durability of free cash flow and gives us greater capacity to compound value per share through disciplined capital allocation.

So with that, I'll turn it back over to Beth. Beth?

Thank you, Wade. Since January, we've integrated 2 companies, actioned more than double our original synergy target, substantially achieved our divestiture target and reduced net debt by $1.3 billion since the first quarter. SM is a materially stronger company than it was at the beginning of the year. As Wade said, our lower cost base increases the free cash flow available to create value for stockholders, while share repurchases compound that value on a per share basis. Importantly, capital will continue to compete for the highest risk-adjusted returns with free cash flow and capital efficiency prioritized over volume.

Integration resets a platform. The next phase is about compounding the advantages created by that work. Our priorities are clear: execute the plan with greater capital efficiency and continue lowering SM's corporate breakeven, deepen the quality and duration of our inventory through organic delineation in the Woodford-Barnett and Uinta and disciplined ground game activity, continue to strengthen the balance sheet toward low 1x leverage at mid-cycle prices while executing our plan of returning capital to stockholders through our 80-20 framework. That is how we intend to translate a stronger operating platform and balance sheet into durable per share value.

With that, I'll hand the call back to the operator for Q&A.

[Operator Instructions] Our first question is from John Freeman with Raymond James.

Regarding the Uinta constraints, you mentioned that the refinery is back online and the terminal expansion could be done in early '27. I know there's another operator that's got a commitment for the majority of that incremental capacity. So just as we sort of think about it, is it more like this just relieves the bottleneck as opposed to maybe dramatically increasing kind of your takeaway capacity? Or said differently, should we continue to assume that you all are kind of 20% local refineries and 80% rail?

Yes. Thanks for the question, John. When we look at our terminal, it's really just us and one other operator. And through the expansion that was planned with them, it more than doubled the capacity, which is much further than either one of us committed to that. So we have the ability to expand in the basin beyond just what our original plan said. So we know that after this expansion hits, we have the ability to shift capital around or do what we need to do to make sure that, that cash flow continues to hit market.

Great. And then my follow-up to you all, last quarter, you kind of indicated that second half '26 kind of average production was kind of a good kind of baseline for us to use for 2027, just sort of given some of the downtime in the Permian, the takeaway constraints in the Uinta that kind of impacted second half and maybe early '27. Just didn't know if you all wanted to sort of elaborate if that kind of impacts those prior comments from last quarter.

Yes. Let me give a little clarity on the second half run rate. I know that that's moving around a little bit, and I want to be clear about what that means for a good framework for 2027. When you think about it, we talked about total production being 435 to 440 MBoe per day with approximately 238,000 barrels of oil a day as the oil production rate. That baseline still holds as a good baseline. So really, when we think about formalizing our 2027 budget, which we'll present early next year, we're evaluating the puts and takes of the Uinta takeaway constraints that are going to occur early in 2027 against the potential of temporarily shifting activity to other basins. So that interplay and those factors will play a role in where we finalize our '27 guidance. So more to come in February.

Our next question is from Gabe Daoud with Truist.

I was hoping we could maybe -- Beth, maybe we could go back to '27 again, just higher-level thoughts around capital requirements to hold that second half run rate, I guess, at least flat into '27. Just how do we think about that number against the inflationary pressures that the industry is seeing? I know you guys have been doing a good job with synergy capture and efficiency gains, but curious if the inflationary pressures will just be too much to offset.

Yes. The 2026 average and our midpoint of $2.75 billion is in general, how we've guided 2027, less onetime costs. We continue to look at oil prices and activity. It's not unreasonable to say that inflation could hit the sector at this point. We'll continue to watch it. But at SM, we benefit from the tailwind of a full year of merger synergies that we've actioned that have exceeded expectations, and we'll continue to find efficiencies across the different basins. So more details as we formalize what that 2027 budget looks like in the beginning of the year. But you can still think of 2026 CapEx, excluding onetime cost as a good starting point.

Okay. Okay. Great. And then maybe a follow-up for Wade. Just wanted to go back to the taxes again, the cash taxes. What should we be using for '27? I think if I heard you right, fully you're exposed now for at least the rest of '26. And I guess I'd imagine that's the case for '27. Just want to make sure I heard that right. And again, thoughts on '27 cash taxes.

Yes, sure. Great question. And yes, you're using the words fully exposed for the rest of '26 is a good characterization. We have a lot of attributes, a lot of carryforward NOL stuff from the merger that we're able to use on an annual basis with limitations. So as I said, we've kind of used those up for this year. So having a fourth quarter where oil runs up into the $95, $100 area, that's driving that increase.

The assumption for next year we'll have attributes to use next year, just like we did this year. And when I said -- I guess I would say if you want to assume an oil price that's kind of in this area, so an elevated area, I think it'd be a good modeling thing for now to just kind of assume something similar to the numbers I gave for 2026. If you -- obviously, if you assume a lower oil price, you'll get back down to those levels that we thought we were going to be at in the $80, $85 oil area, if that makes sense.

Our next question is from Scott Hanold with RBC Capital Markets.

Blake, we've seen some pretty strong improvements on your Delaware Permian wells. Can you walk through some of the key changes or things you all have done to see that size of an uplift?

Yes. So there's a little bit of secret sauce on that. A lot of what we've seen great improvements on is the completion side of things. So that's an area that we're going to lean into. So the combined win from both teams being in the Permian as we've merged up together has led to a lot of shared learnings. And so again, kind of going to synergy capture, we talk a lot about capital for synergy -- what we capture through synergies is how we can reduce costs, but the technical learnings has been a big win. So taking some of that in the combined team has been huge.

So would you say you all are doing something different, say, than industry is? Or are you just bringing up the completions more consistent with what offset operators are doing?

What I would say is we've got great technical knowledge, which has been in the SM DNA for a while. We are heavy leveragers of looking at offset data and utilizing our internal skill sets to go after these wells and think about them differently. And I think that's a differentiator for SM Energy. So I would say, yes, I think there's -- going back to that secret sauce within SM, that I think is a technical differentiator for us and something we've always leaned on here at SM.

Got it. Okay. And then obviously, you guys have captured a lot more on the synergy side and I think now more so pivoting to broad continuous improvement. And could you maybe take a step back, and as you look at the business over the next, say, 12 to 18 months, how much opportunities -- what's the opportunity set that you have? Like specifically, what are some of the line items you're looking to further improve in the business model?

Yes. Great question. What we use is pleased but never satisfied. So to your point, synergy capture just translates to driving cost down. I think naturally, you start with your larger costs, right? So you're going to go after big ticket items that are generally specific more to D&C. And then after that, it's the operational and cultural efficiencies within the company. And then you go to the part of vacuuming up nickels and chasing all the little things. So we've high-graded that. And so instead of going after the big ticket items, it's going to be a lot of focus on the little ones, right? And so we'll be shifting our efforts towards a lot of that. So that will be across D&C. It will also include LOE. It's just going to be everywhere. So you're going to have higher effort to smaller items, and that's just a natural part of chasing cost savings down.

Yes. And Scott, just to add on, on the other 2 buckets that we've either met or exceeded expectations in. From a G&A perspective, we're getting close to 1 year from the closing, and we'll be there by February. And through that, we continue to have contracts that roll off on different software packages, different contractors, that kind of thing. So that will continue to improve. On the cost of capital side, as we generate more free cash flow, under our 80-20 framework, we'll be able to deliver more on an interest savings perspective as well. So there's more in every single bucket.

Our next question is from Tim Rezvan with KeyBanc Capital Markets.

Some have been addressed, but I thought I would start here maybe on the DJ Basin. It's probably the most overlooked asset you have today. The release, you mentioned investing in a local sand mine and it can maybe lower proppant cost by 40%. Can you provide more context on the project and maybe remind us what percent of well cost proppant represent just to understand sort of what the uplift is here?

Yes, absolutely. So we've taken 2 approaches to going after sand. In the Uinta, we operate our own sand mine, and we've partnered with a great company to help us operate that. Here, we found another great operator in the basin that are successfully operating a sand mine, and we've invested alongside them for them to operate and move that sand in the basin for us in the DJ. It's dependent on frac design, so what percentage of your proppant is there, but we think it will generate some meaningful savings coming into Q1, Q2. So you'll see some of that reflected in our results as we go into next year, but sand is a very substantial portion of our cost when it comes to frac. As far as inputs go, it's our number one.

Okay. We'll stay tuned for updates, I guess. And then as my follow-up, maybe this is for Wade or Beth. I want to ask on hedging a bit. We all see the free cash flow and the deleveraging that's coming, but we also see a lot of volatility in the strip in 2027. I think today, it's around $85 for the calendar year. You have some hedges that are out of the money today. How do you think opportunistically about taking advantage of that mid-80s price going forward? Is there a thought on being opportunistic at all with incremental hedging in '27?

Yes, that's a good question. My short answer is our hedging strategy is just -- we're just methodically executing it the way we have been for over a decade. So that means we are, I wouldn't call it opportunistically. I would just call it, taking advantage of some of those higher oil prices as we look out over the next year, 1.5 years or so and just layer in incremental hedges tied to the balance sheet.

I'll just remind everyone, that's how we hedge. With the balance sheet becoming so much stronger, the targeted percentages are lower for our hedging profile. They're no longer 50%, which is where they were when we came out of the merger with higher leverage. They're closer to 30%. So when we're looking out a year from now and a little bit beyond, those are kind of the targeted levels. But short answer is we continue to hedge. So we're happy to take some of these higher prices right now.

Our next question is from Oliver Huang with Tudor, Pickering, Holt & Co.

I wanted to start on the Uinta. Just could you all talk a bit more on the first SM design pad that's recently online, maybe initial takeaways beyond the strong 30-day rates? Maybe also what changes occurred from a spacing optimization perspective and the magnitude of the enhanced completion that you all call out in the slides?

Yes, I can take a stab at that one. So the Uinta is extremely complex. I think similar to the Permian and Delaware, you have a lot of stacked formations, and we have a lot of oil down there. And so we've looked at all of this data from the previous operators, offset operators. And so for us, it's taking in that large amount of data and using it to create optimization within the Uinta. So all of those inputs have been what we as a team have been using to go and create and build this to optimize spacing not just horizontally but vertically as well and find the right fracs for the right portions of those oil-bearing zones.

And so going back to that point I made earlier on SM has got really good technical knowledge in its DNA. The leverage is used towards this in a way that allows us to go delineate between each of these and figure out where we want to put our wells. So that's been the bulk of the work from the team, is putting that into place and then utilizing our low cost in the Uinta Basin, thanks to all of our integrated sand and water delivery systems, to bring these wells online. So again, we're early life in performance. We're very encouraged by them. As time goes on, we'll start to see those results go. But again, a little bit of secret sauce that goes into it, and we're really excited for what we have going on in the Uinta in the future.

Awesome. And just to kind of clarify on the spacing side, is that more -- just more optimal landing zone placement versus just upspacing relative to what you have been doing over the last, call it, couple of years?

Yes, it's 3-dimensional. It's -- you're basically just trying to optimize all the little distances vertically and horizontally between them. And so that's more of what it is fine-tuning. We get a lot of really good technical results coming out of different testing that we do on each of those benches, and that's what allows us to kind of tune that 3-dimensional spacing. So it's a little bit here, a little bit there. That's what we chase.

Okay. Makes sense. And for my second question, just on LOE trends, trying to understand a bit better of what we're seeing here in Q3. It looks like there were decent upticks in the Permian and also South Texas, just looking at the asset breakout. Just trying to understand how much of this is structural versus any one-offs in the quarter that we should be aware of as we just kind of think about where this line item could directionally move over the next year?

Yes. I appreciate that. So third quarter LOE was elevated by the compliance work on the acquired Permian assets. And fourth quarter guide of $6.60 to $6.80 reflects that work being complete. So with a more oil-weighted portfolio and the cost environment we are in, that third quarter level is a reasonable run rate to use into 2027 as well. And we're going to continue to use our synergies to work to offset. So we see it as onetime, not structural.

Our next question is from Jack Kindregan with BMO Capital Markets.

I was hoping you could touch on the basin production trends, like heading into the fourth quarter given the various impacts. I'm assuming that Permian should drive most of the oil and BOE growth that you have guided to, but curious for any comments there. And then given the high number of TILs, I think it's 80 for the fourth quarter, I was wondering if that would help to offset any of the typical 1Q seasonality that we've seen from both SM and Civitas in prior years.

All right. Thanks, Jack. I mean I'll start and then hand it over to Blake. When you look at Permian activity or our activity as a whole, we started the year with much higher activity, and it's come down where kind of a new baseline was established in that July, August time frame. And so some of that drop in production that you're seeing quarter-over-quarter, specifically in the Permian, was planned. So that came in line with what we expected. And then it should go up -- it should be flat to go up a little from this quarter moving forward. So I think that's in line with what you mentioned on your question. So I would start there.

And then on top of that, as you look at our production profile and what we've generally done every year, it's just a useful reminder that we've had activity levels changing throughout the year, which impacts what that profile looks like, and it's not really linear. So we would expect that pattern to continue in '27, but we'll have more formal guidance in February. I don't know if you want to add anything, Blake, to that.

No. On TIL counts, we feel good about what we have going into the fourth quarter. And there's always little tiny straddle ones that might be on the edge of the quarter that bump here to there, but we feel good about the plan that we've delivered to you all.

Great. And then to follow up, you guys described the divestiture target as substantially complete following the South Texas sale. Should we still expect you guys to meet the $1 billion goal within 1 year? Or is the sort of landscape shifted enough with the macro to warrant a little bit more patience to realize full value?

Yes. This answer hasn't really changed for us. We're substantially there, but we're not rounding up. So the Galvan sale got us meaningfully close to that $1 billion target and strengthened our company really for short term. But when we look across our expanded scale, we have a larger candidate set for accretive noncore divestitures. So we continue to look at transactions and those prices, and we'll always review our portfolio and consider these trends.

[Operator Instructions] Our next question is from Peyton Dorne with UBS.

Yes. Peers this quarter have highlighted the benefits that they're seeing from utilizing both chemicals or surfactants on their existing Permian wells. I just wonder if you can maybe touch on your own experience there and whether it's a technology you've tested broadly so far on the Midland assets.

Yes. We're seeing initial encouraging results with that. I think the rest of the industry is as well. I keep using the word secret sauce. This is something that we think has merit, and it's something that we are step-by-step working our way through. So I think we would agree with what is broadly out there. But more testing needs to be done as we do see it as certain formation and area specific, which I won't go into detail on. But we do think this is an encouraging development. We are actively chasing and testing this.

Okay. Great. We'll stay tuned to see more. And then just as a follow-up, I thought the gas and NGLs realizations were notably stronger in the period. I'm guessing a lot of this on the gas side had to do with the expanded Permian pipeline capacity. But I just wonder if you could kind of touch on where you see pricing shaping up for you all heading forward and if this is a level that we can kind of expect, especially on the gas side as we look out to 2027.

Yes. I think that's one component of it, Peyton, that you mentioned there in the Permian. We've seen relief at Waha, and more pipes are to come. We did have NGL outperformance in South Texas, which was great. And as we march kind of toward the West, the wells get more liquids-rich. So we would expect that trend to continue, and that's in our forecast. And then at the same time, we still have those Uinta constraints on the oil side that will continue forward into early 2027, but all that's been taken account into our outlook.

Our next question is from Oliver Huang with Tudor, Pickering, Holt & Co.

Just had one more follow-up on the synergy side. Just thinking about the $400 million actioned, a lot of that's intra-year capture. How much of this total would you say is being felt in the 2026 financials before we get the full run rate for 2027? And when we're thinking about the D&C bucket specifically, just how much of that was fully captured in 2026 before we get the full $200 million run rate in '27?

Yes. Thanks for that. When we rolled out our budget at the beginning of the year, we included $50 million of the synergies into our budget. So that's what's included in 2026. But I think, to the credit of the team, the additional synergies are being felt in the run rate because we've been able to offset inflation that we've seen through diesel and fuel-related charges, just like what Blake said there. And I'll let Blake add more.

Yes. We've seen even with the fuel rise, which started early, we've been able to offset that. So that's been a big win for us. Coming in with that original $50 million in the budget, the team has definitely been exceeding that to hold back inflationary pressure, and we'll see that trickle into our 2027 budget as we work into the year. But I would say that has definitely gone better than we anticipated in being able to action 2026, and we think that will be a real positive story going into the continued value savings and full run rate in '27.

Okay. And just to clarify, the $50 million in the budget for 2026, that's relative to the $400 million actioned?

Yes, that's $50 million of the $400 million. Yes. We laid that out in CapEx.

We have reached the end of the question-and-answer session. I would like to turn the call over to Beth McDonald for closing comments.

Thank you all for joining us this morning and for your continued interest in SM. We really appreciate your time today and look forward to speaking to many of you soon. Have a good day.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Greetings, and welcome to the SM Energy's Second Quarter 2026 Earnings Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn the conference over to Megan Hays, SM Energy's Vice President, Investor Relations. Thank you, Megan. You may begin.

Yes, thank you. Good morning. Welcome to SM Energy’s second quarter 2026 earnings call. I’m Megan Hays, Vice President of Investor Relations. 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, our Executive Vice President and COO.

Today's discussion will reference forward-looking statements. Please see Slide 2 of our earnings presentation as well as the Risk Factors section of 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 metrics throughout the call. You can find definitions and reconciliations to the closest comparable GAAP metrics in yesterday's earnings release, Form 10-Q and in the slide deck available on our website. When we get to Q&A, please limit your inquiries to one question and one follow-up as this simply allows us to get more of your questions today.

With that, I'll turn it over to Beth.

Thanks, Megan. Good morning, everyone. The second quarter was our first full quarter operating as a combined firm. We generated $467 million of adjusted free cash flow, returned $137 million to stockholders and have now actioned approximately 95% of our merger synergy target. Together, those results demonstrate that SM is already stronger, more cash generative and more valuable than either legacy business on its own, and they underscore why this platform is materially undervalued today.

Integrate, Execute, Bolster, the framework for 2026 hasn't changed, and this quarter is proof that it's working. I'll take each in turn. On Integrate, we have now actioned approximately $355 million of our $375 million run rate synergy target, which we raised last quarter to nearly double the original. The organizational capability we brought to this merger is real, and it's now showing up directly in our cost structure, including a lower G&A outlook that Wade will cover. Overall, we are ahead of the pace that we laid out when we announced the merger.

On Execute, production averaged approximately 440,000 barrels of oil equivalent per day within our guidance range and building into the second half of 2026, pro forma for the divestiture of our Galvan assets in South Texas. On the strength of that trajectory, we are increasing our second half production outlook and reaffirming our full year capital plan. Wade will take you through that detail, but the takeaway is clear. We are executing within a disciplined capital framework and turning the combined platform into a higher free cash flow, higher return business for our stockholders.

On Bolster, we closed the Galvan divestiture, substantially achieving our $1 billion divestiture target within a year of the merger and directed the proceeds to debt reduction, putting us on a visible path to low 1x leverage. Alongside that, we also repurchased $84 million of shares this quarter under our capital return framework. In addition, with the cash on hand at quarter end, we provided notice to redeem the remaining 2027 Senior Notes, underscoring the rapid progress we've made in strengthening the balance sheet. That combination, a stronger balance sheet and rising free cash flow with buybacks already underway is a key part of why we believe SM’s equity is so attractive today.

In short, this quarter shows we are doing what we said we would do, integrating at pace, executing the plan, strengthening the balance sheet and demonstrating the free cash flow and returns power of SM.

I'll now turn the call over to Wade, who will cover the second quarter results and our guidance update.

Thanks, Beth. Good morning, everyone. Our financial results were strong. Adjusted EBITDAX was $1.4 billion. Adjusted net income was $526 million or $2.19 per diluted share, and we generated $467 million of adjusted free cash flow. Capital expenditures for the quarter totaled $717 million, below our guidance midpoint of $835 million, primarily driven by D&C timing. We are reaffirming full year capital guidance of $2.65 billion to $2.85 billion. So again, we generated $467 million of adjusted free cash flow for the quarter.

We returned 30% of it or $137 million to shareholders through the dividend and share buybacks, the dividend being $53 million and $84 million used to jump start our buybacks, consistent with our 80/20 framework that we've discussed. Leverage continues to fall. And as it enters the low-1x area calculated with mid-cycle commodity pricing, we anticipate increasing the percentage to buybacks. Speaking of leverage and turning to the balance sheet, we reduced net debt by about $1.1 billion during the quarter, ending with net debt of approximately $6.25 billion. That includes $620 million of cash and an undrawn revolver.

We used the Galvan divestiture proceeds to redeem all $819 million of our senior notes due in 2026. And yesterday, we called the remaining 2027 notes for redemption, leaving no senior note maturities until mid-2028. Turning to guidance. We are raising our second half production outlook to a range of 435,000 to 440,000 barrels of oil equivalent per day with oil at approximately 238,000 barrels per day. As we've said, the second half average production rate is the right framing for 2027. We're in the early stages of building the 2027 plan. You should expect a disciplined capital program focused on maximizing free cash flow, and we'll provide more color on the volume and capital cadence as we approach year-end.

Full year 2026 ranges are in the release -- but with a partial year of Civitas and the Galvan divestiture, both in this year's numbers, the second half average is the cleaner baseline to model. Additionally, reflecting accelerated integration and full capture of our G&A synergies, we are lowering full year recurring G&A guidance by approximately $50 million at the midpoint. This is a durable run rate reduction with a significant free cash flow benefit.

On that note, I'll hand it to Blake for a review of asset performance. Blake?

Thanks, Wade. Our results start at the asset level, so let me walk through the basins briefly. In the Permian, our combined footprint delivers procurement and scheduling efficiencies and gives us more flexibility. We're using our scale and technical team to continue unlocking the value of this high-return inventory. In the DJ Basin, our combined company completion practices, Simul-frac in particular, continue to drive real capital efficiencies. It is a low-cost, high-margin business and the consolidated footprint has made pad design, scheduling and the cost structure much more competitive. In South Texas, the Galvan sale strengthened our balance sheet and high-graded the remaining position toward higher-margin liquids-rich development weighted towards the Austin Chalk.

I want to spend a moment on the Uinta and the work our team is doing to drive efficiency and productivity. This year, our team has standardized our Uinta development program to pair completion innovations with faster flowback and longer laterals. Together, these changes are meaningfully improving well economics and cycle times and as a result, pulling cash flow forward. We are developing our position with 4-mile laterals, which our contiguous acreage makes possible. Our blocked-up acreage is a structural advantage few operators can match and long lateral development is a deliberate capital efficiency lever that improves returns across the program.

On the completion side, we deployed several innovations, including Simul-frac operations using natural gas frac fleet, remote frac equipment, a sand slurry pipeline and dual-string coil drillouts across our long lateral program. Our completion pace has increased over 2,600 foot per day, which is more than double our early 2026 rate. And these initiatives are delivering more than $1 million per well in drilling, completion and equipment cost savings that we have realized over the past 6 months.

We have several compelling levers to pull in the Uinta. And together, they are making this oil basin a more efficient, higher value part of SM's portfolio. And more importantly, the Uinta is one example of a broader advantage at SM, a technical organization that systematically captures shares and scaled innovation across our portfolio, multiplying the impact of every improvement.

And with that, I'll turn it back to Beth.

Thanks, Blake. Before we go to Q&A, let me leave you with 4 things that show our value creation flywheel is turning today. First, the merger is delivering with 95% of our synergies actioned at a present value of $1.8 billion. Second, we are generating substantial free cash flow and returning it to stockholders. As leverage moves toward low-1x of mid-cycle pricing, you should expect the mix of that free cash flow to shift progressively to buybacks.

At today's valuation, we see repurchasing SM shares as a highly compelling use of our capital, and our 80/20 framework is designed to get us to the right leverage level while taking advantage of that opportunity along the way. Third, we are derisking the balance sheet with no senior note maturities until mid-2028.

And fourth, we are constantly high-grading our assets and using our scale to ensure our capital goes to the highest return opportunities. We expect 2027 to showcase the full earnings power of this platform, a full year of the combined company, onetime costs behind us, synergies at run rate and a balance sheet built for returns. I look forward to your questions.

Thank you, Beth. Operator, please open the line for questions.

[Operator Instructions] Our first questions come from the line of Gabe Daoud with Truist.

I was hoping could maybe start off with an ops question, maybe circling back to what I asked last quarter. Just really curious about Howard County and the progress there, particularly with these U-turn wells. So the Zissou wells, it looks like maybe just south of that, you're targeting co-development of the Lower Spraberry, Wolfcamp D and Wolfcamp A. Is that a new development pattern for you guys in that area?

No, I would say -- I'll start off, and then I'll hand it to Blake to add anything that he wants to. That's not a new development for us. As you know, SM has been in Howard County and has really delivered strength in our returns profile there from the Spraberry, the Dean and the Wolfcamp throughout that section. What I would say is we're using the best practices that we've pulled together from a strength in SM after the merger in order to be able to unlock additional acreage in and around Howard County.

And just a follow-up on that. We feel great about our U-turns with the combined team and the work that the DJ team has done on U-turns as well successfully, we have a high degree of confidence in the operational ability of our teams to execute U-turns.

Got it. Got it. Okay. Okay. Sounds good. That's helpful. And then maybe if I can follow up, another ops-related question. Just curious, offsetting the Zissou wells or looks like some 4-mile laterals that have maybe targeted or have gone back to a DSU that hasn't maybe been touched in a few years and looks like these wells are performing pretty well. So curious if you can maybe talk a little bit about that and maybe if some enhanced completion designs have kind of led to some outperformance here.

Yes. I appreciate the question. 4-mile laterals have been a big win for us. And then on the completion design front, we generally like to not comment too much on it, but I think looking at the performance of the wells should give you an indicator of the progress we're making as a team.

Our next questions come from the line of Michael Scialla with Stephens.

It looks like you get pretty close to your leverage target and you've pushed off the nearest maturities. I want to see if we should anticipate any change to the return framework? Are you still planning to direct 80% of the post-dividend free cash flow to the balance sheet?

Yes. Mike, great question. We're obviously very pleased with the pace of the delevering that's been happening. I would -- and we're very pleased with our ability to buy back $84 million of stock during the second quarter, hitting that 20% target with a higher amount. I would say going forward, we've mentioned that kind of the target to get to really what we consider really -- we want a really, really strong balance sheet. And that's that low 1s area at a mid-cycle commodity price. Obviously, right now, the trailing second quarter, I don't think anybody would consider that mid-cycle.

So that's our direction. We're getting there, though. I would just say, to answer your question specifically, for now, just anticipating us buying back at the same pace, kind of sitting that 20% as a minimum. And then we'll just be tracking it as we go forward the rest of this year.

Understood. And I want to get your latest thoughts on some of the newer zones you've been testing, maybe the Woodford in the Delaware, Barnett in the Midland.

Yes. We're really happy with some of the extension and step-outs we've had. It's very much still in progress and in process. So to my comment earlier, I want to stay away from the specifics of it, but the 4-mile laterals and the great technical work of the team, I think, have allowed us to go execute on what we've done so far and feel good about the future potential.

The only thing I would add, Mike, to that is that as you look at the history of SM and what we've been able to do in pushing the technical limits of all those zones and showing through our numbers the success of that, we did that in the Woodford several years ago, and we just continue to compound our best practices and capital efficiency there to continue to drive the returns. And so we were a little bit ahead of the game there. I think most of the industry is catching up in the Midland Basin, but we're continuing to push the limits just like we've always done with success.

Our next questions come from the line of [ Zach Parham ] with [ TD Cowen ].

Zach, could you please check if you’re self-muted?

Operator, we can go to the next question, and we'll circle back to Zach.

Our next questions come from the line of Geoff Jay with Daniel Energy Partners.

I was kind of interested in this fastback flowback effort. Can you give me a little more color on that? And then I wondered if this is something that you sort of imported to the Uinta from another basin or if this is potentially a technology or practice you could export to your other basins?

Great question, Geoff. I appreciate it. For us, it's part of our larger full development package that we do in the Uinta. So we aim for a high level of capital efficiency, right? So that means making sure our rig cadence, frac cadence is there, and it's part of our efforts to continue to improve timing and cost reductions. So what that fast flowback is going to mean getting large equipment out there temporarily to get higher volume flows back and working with the team to have more closer simultaneous operations to reduce the timing from when we spend the first dollar to when we produce the first barrel of oil. So it's a part of that whole process that you can kind of see in our slide deck as well. So it's integrating into the -- our full entire operations cadence to bring our TILs forward a little bit on the Uinta, which has been baked into our budget for this year.

[Operator Instructions] Our next questions come from the line of Michael Scialla with Stephens.

Yes. I just wanted to follow up and get your latest thoughts on divestitures. I know the Galvan sale get you near your target. I want to see if you're still thinking about additional sales? Or have you changed your mind there?

Thanks, Mike. The answer really hasn't changed for us. So there's no real update. The Galvan sale substantially achieved our $1 billion target, strengthened the company in a short time frame. And with our expanded scale, this really creates a larger candidate set for accretive non-core divestitures. So we've observed recent transactions and where those have traded. So we'll consistently kind of review our portfolio and consider those trends as we move forward.

Got it. And I wanted to ask Blake, on Slide 8, those capital efficiencies in the Uinta, are those reflecting the SM designed wells? And if so, can you say how the well productivity of those maybe compares to what you were seeing with XCL?

Yes. Great question. So there has been a great knowledge transfer from XCL into the SM team. And so I think you see that reflected with some of the completions innovations with simul-frac nat gas into the remote frac and kind of through three is where a lot of those innovations, the team integrated into SM at acquisition. And then we've continued to the sand-slurry, dual-string coil drillouts as well as these IP accelerations, right? So that's where those innovations have continued into the SM team. When we're talking about SM drilled spaced design completions, we have a large pad coming on in September, which is our Miracle Pad, and that will be the culmination of our new program.

We have reached the end of our question-and-answer session. I would now like to hand the floor back over to Beth McDonald for any closing comments.

Thanks, Daryl. Thank you all for joining us this morning and for your continued interest in SM. What this quarter shows is that our value creation flywheel is working and sustainable. Strong free cash flow, a strong balance sheet and growing returns to stockholders. And we're focused on executing the second half and compounding that value into 2027. We appreciate your time today and look forward to speaking to many of you soon. Have a good day.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. Please disconnect your lines at this time, and enjoy the rest of your day.

Hi. Good morning, everyone, and thanks for joining us today on Day 1 of the Natural Resources Conference. I'm Jack Daly from the E&P research team here at JPMorgan. Up next, we have SM Energy, an E&P focused on developing assets across 4 U.S. shale basins, the Permian, DJ, South Texas and Uinta. We're very excited to be hosting SM's President and CEO, Beth McDonald. Beth joined SM as Executive Vice President and COO in September 2024, was named President in September 2025 and appointed CEO in January 2026. Beth, thank you so much for joining us today.

Thank you so much for having me.

Yes. So maybe to start off, for those in the room who don't know you, can you tell us a little bit about your background? You started as a field engineer. How does that shape the way you lead today and what drew you to SM?

Yes. Thank you for that, and thank you all for joining us today. I started as a field engineer with my love for geoscience and engineering and problem solving and started as an ops engineer, did time in drilling and completions and then I really found myself in reservoir really more on the strategic perspective.

I joined Pioneer in 2005, working exploration projects in deepwater at the time, Gulf of Mexico and Northern Africa, which is kind of crazy when you think about a company like Pioneer Natural Resources, you think Midland Basin. And so I like to say that I had a tremendous opportunity at Pioneer, 20 years with the company, worked several different basins, primarily South Texas. I led our South Texas asset team. I ran the Pioneer Water management team and then stayed until the end at Exxon when Exxon took over. And I was leading multiple teams at Pioneer, really primarily focused on the pure-play Permian that we ended up being.

And so I think that the thing that attracted me to SM was its technical focus. And if you look at the track record of SM for much of the last 10 to 15 years, SM has really been pushing the limits. And so they did that in Howard County in the Midland Basin, made tremendous wells in the Wolfcamp A and in the Dean. Some of the best wells in the basin came from SM Energy. And then in South Texas, the Austin Chalk was really a differentiator. And then in 2024, we stepped into the Uinta Basin and made a difference in an underappreciated basin and continue to see the high margins that came from that.

And then finally, I'll just say a little bit more about SM is that the people are really part of the difference, and that's what attracted me there. So the technical focus and you have heard in the past when [ Herb ] would talk about returns-based technical focus, but we really punch above our weight. We tremendously desire being curious and asking what if and making a difference in the industry, even at our size.

Yes. And you stepped into the CEO role at a pretty notable moment, the largest merger in SM's history, volatile price environment and a new board. What's been the mandate on day 1? And what surprised you the most since?

I would say you'll continue to hear me talk about integrate, execute and bolster. Those are our 3 strategic priorities going into the year. And so integration is going really well. We have had tremendous velocity going into the year. We have increased our target from $200 million to $300 million to $375 million on our synergies, and we continue to deliver across the board. You see many of that coming across our cost of capital, which is really, I would say, probably our most I wouldn't call it surprise. I think it's a lot of hard work from our dedicated team to make these things happen.

But what I would say is the sheer amount that we're seeing come to fruition in just the first 100 days of this transaction, I think, is really more of the surprise. The fact that our team accelerated many of our goals throughout the year to the first half of the year and have been able to deliver on that. That's really the surprise point when it comes to the overall transaction. But we're really excited about the value that we're creating through the merger.

Yes. And speaking of value, the E&P sector is crowded with a lot of companies who make similar claims. And maybe can you make the case why SM specifically deserve a place in an institutional portfolio? And what is generally differentiated with SM Energy?

Yes. I think several things. So after the Civitas merger, it brought us into 4 premier basins, and the rock quality is very similar. We were just talking about this in one of my last meetings. And actually, if you look across the board and you take into time depositional history, you know that from South Texas Permian Basin out through the DJ even into Canada, that was a primary depositional environment called the Inter Cretaceous Seaway. And at the time, it really created these premier basins in which SM is part of. So we're -- not only do we have the differential technical team, we now have a portfolio of 4 basins with differential rock. And so we have the ability to have the scale now to create the synergies from a procurement perspective. We have the technical team to do it. And now with the tailwind of commodity prices that we've seen versus where we came into the year, we've been able to meet those strategic priorities even faster.

So we talk about a lot our flywheel. And what that is, is we've doubled the size of the company. We have line of sight to a low 1x leverage position. We have a new return of capital framework where we're focused 80% on the balance sheet, 20% on share buybacks. As that leverage goes down, more goes to share buybacks. We throw off more free cash flow next year as our onetime costs roll off, and we continue to see value creation from the merger.

And you just talked about being a multi-basin operator. We've heard some investors argue that maybe 4 basins is too many basins just given it can create complexity, dilutes focus and makes a little bit harder to model. You've seen large single-basin operators up close. How do you respond to this view?

Yes. I think I love this question because basin diversification is actually a strength. Coming from Pioneer, you're very efficient when you're in one basin, but you're actually pretty limited too. So there's concentration risk. If you can think about capital allocation is always kind of similar. So where am I putting my money when I look at the capital program from a drilling and completion perspective, it's in the best return wells, right? Well, if you're in one basin, you might not be able to do that because you have multiple rigs on top of frac fleets, you have supply constraints from a water perspective and you have water takeaway constraints if they're all on top of each other.

When you have a diversified portfolio, you don't have that concentration risk. Your capital allocation is still the same. You're going to put it on the highest return projects that you can, the most capitally efficient incremental dollar. But now you have the diversification. You also don't have large basis blowouts that impact your entire financial position and one winter storm won't take out a lot of your production. And so we see the diversification as a strength.

The other thing that I think is important to keep in mind, just like I talked about the rock quality being very similar across multiple basins that we see as a strength, and they're not very far from each other. So if you think about it, SM's position now in the Southern Midland Basin is only a couple of hours away from our South Texas position. So utilizing efficiency in our vendors and our equipment and how we operate is easy to do across multiple basins. And so we see that as a strength and having come from a pure play, I think that we'll start to see more and more companies start to diversify over time as we move through the industry.

Got it. And you became a 4-basin operator with Civitas. Maybe just kind of looking back, can you walk us through the strategic rationale behind that deal? What did SM buy that it couldn't have built organically? And where does integration stand today?

Yes. I think a couple of things. When we went into this merger, we saw double-digit free cash flow accretion at $60. And now we are in a fundamentally different commodity price environment. So the accretive metrics that we're going to see are going to be better. The other thing it gave us was the scale in the premier basins that I've already talked about, but the scale really drives us to see those synergies that we're delivering today. And finally, just the synergies, right? So that's a tremendous opportunity. When you look across the board at all of the categories in which we're meeting and ultimately will exceed the goal there, we will create about $2 billion in NPV that neither company could do on its own. So just from the synergies alone, we're creating that valuation.

Additionally, I think it's important that we keep in mind, not only were the accretion metrics there when we did the deal, but also our ability to double the size of the portfolio at the same M&A metrics is just not out there. And so doing it with this opportunity, SM really saw that a strength for us. Our ability to take double the portfolio with our talented technical team, both on the operations side as well as the subsurface side and deliver value from that, we saw as a tremendous opportunity. Now you're seeing it roll through Q1, and you'll continue to see it through the remainder of the year as we execute.

Yes. And SM's technical team has a track record of being ahead of the market. I think some examples of this are being a first mover in Howard County and then drilling the first 4-mile laterals in the Uinta and Midland. And I believe Civi was also similar in that case. And so what's the team working on today that maybe the market fully hasn't appreciated yet? And where do you see are the biggest needle movers in terms of the technical team?

I think all those things are spot on. I love -- we did a lot of kind of digging in that and I asked the DJ team, which I was -- we knew that the DJ team from Civitas was a strength. We knew that their execution team had done things that were differential. U-turn, J-wells, can-to-can wells, whatever you want to call them, they were doing differential things in the DJ as well as lowering our costs there. And what we saw was that, yes, they did the first 4-miler in Colorado. We did the first 4 miler in Utah, and we did the first 4 miler in the Midland Basin. We actually did the first 4 miler in the Austin Chalk in South Texas. So add them to all 4 of our basins, we have the records there.

And so I think what that says to our team is it shows the mentality of what if or why not, right? And so we have this curiosity component to continue to push the limits of what we're doing. And we, as a leadership team, allow our team to do that because we've seen differential movement in our capital efficiency numbers because of that. So that's on the execution side. On the subsurface side, SM continues to provide additional incremental inventory opportunities organically. And we've done that, and we've proven that over time. So start back to Howard County, just like you mentioned, some of the best wells. And then in South Texas, our Austin Chalk position, it was actually bought and purchased for the Eagle Ford position. The Eagle Ford is still there. It is still attractive to us, but the Austin Chalk creates better returns right now. And so that's what's getting our capital.

If we shift to the Midland Basin, you'll hear us and we have talked about for a while, the Woodford-Barnett. I think the industry is catching up to the narrative that we had 2 years ago on our slides as it relates to the Woodford-Barnett. And now you're seeing the ability to execute that more efficiently through managed pressure drilling and landing zone optimization. And so now it's carrying a weightier narrative as it relates to the Permian Basin.

And then finally, if you look at the Uinta and DJ, our Rockies position, we continue to optimize there. We have more locations in the upper cube as well as the deep cube, which we're not counting as part of our inventory. I think it's something that you will see us continue to add over time as we further delineate that part of our portfolio. We have additional acreage to the north in Uinta that we have no locations on. We own it right now. It has vertical production on it. We're drilling a pilot hole to understand that, and you'll see more inventory being added to that. And so there's tremendous opportunity, both from a subsurface perspective on the acreage we already own to add organically to our inventory number. So not only is there value created from the actual accretion numbers, the free cash flow, the synergies and everything that we're doing. But technically, we're adding additional value to our portfolio through what we do every day.

Yes. And I think the Permian Basin obviously gets a lot of focus from investors. I think you guys have done a really good job also strengthening how the Uinta and the DJ fit within your portfolio. Maybe starting with the Uinta. [ Methan ] assets has actually generated the highest cash margin in the portfolio, I believe, I think around $40 per BOE in the first quarter, and you drilled your first 4-mile lateral in the basin. Maybe just walk us through that basin, how does it fit within your portfolio? And how does the extended lateral program, what does that mean for economics and the inventory runway?

Yes. It means it's more capitally efficient. And so when you look at the 4-mile laterals that we've recently drilled there, the first ones, we actually have the measured depth and the TVD records in Utah. We're getting more capitally efficient. And I like to speak to the uniqueness of Uinta and that it's hard-pressed to find the same thing that we're doing there in other places other than the Permian Basin. And so for the Uinta, we have a simul-frac fleet that is run on our own residue gas and it's an e-fleet run on our own residue gas using our sand from our sand mine, and it's a remote frac situation, which means we only move the frac fleet 2 times a year. We remote frac 2 to 3 miles away so that we can see that efficiency and that uptime and what we're doing. And so that's actually not done very often in very many parts of the United States. It's done in a few parts in the Permian Basin. And so when you think about our ability to do that, really driving down costs, increasing our capital efficiency in Uinta is just one of another reason why we love that basin so much.

Yes. And then maybe just quickly on the DJ, it's a newer basin for you. How does that fit into the portfolio? And what are some key learnings that you've had or surprises that you didn't know maybe before you got your hands on the asset?

Yes, a few things. So in the DJ Basin, let's just start with the fundamentals of the basin. Again, it's a great rock and it's produced in many, many basins in the same depositional environment. It is a high-margin play. It has low cost. People equate to drilling in the DJ Basin to cutting powder. And so as a Denver company, we love that we now have the DJ Basin.

The other thing I would say is that we slowed the DJ Basin down in order to be able to operate it more capitally efficient, and you saw that on our first quarter call. And the other things I would tell you is that the DJ Basin is an environmental leader, and we have tankless facilities, right? So what does that mean? Less facility cost, right? And so we're looking at those tankless facilities that use 3-phase flow meters and asking ourselves, how do we apply these same learnings here with less facility costs, less environmental impact from a pad design and how do we save costs in other basins. And so I think that's one thing that we've learned from the DJ Basin, along with the drilling and completion learnings and best practices that I mentioned before as far as the U-turns and J's that they have done.

Got it. And I think if you following SM, it's pretty clear what your framework is for this year, it's integrate, execute, bolster. Can you maybe just quickly just touch upon those 3 frameworks and just how you're tracking along the 3 and maybe where you see the greatest value coming at the end of the year?

Yes. So integrate, execute, bolster. I talked a little bit about each one. I'll go into a little more detail. So from an integration perspective, let's talk about people because one of my focal points this year is to create a united culture that brings people and data together and enables our team to execute on the value mission. And so we've been able to do that. So within 90 days, all of our teams are together in the same buildings by function and all of our data is coming through the same platform. That's something that couldn't be done previously, and we saw that as an opportunity bringing the Civitas assets in to a 100-year-old company that had already established itself from an infrastructure perspective.

And so that's -- from an integration perspective, as the people and the culture and the data, those really drive the rest of the synergies, right? So if you look at the cost of capital piece and our velocity to that, we sold our South Texas gassier assets that were not strategic for us for $950 million. We were able to pay down debt, $700 million of absolute debt. And basically, through that as well as our refinance of some of the high-yield notes that we inherited from Civitas, we've been able to just really knock it out of the park for our cost of capital. And we believe that, that as well as focusing on our balance sheet will continue to [ re-rate ] the stock.

And then if you look at execute, Q1 was just one data point. The proof that we have is to show the Street that we can continue to execute at scale and doing that at double the size. And so we believe that's one data point of many to come that we'll have throughout the year. And like I said, so bolster was the strengthening of the balance sheet. So all of those pieces, I think, are important parts that you'll continue to hear us update as we continue this flywheel of free cash flow generation back into our return of capital profile and especially as we pivot into 2027 when those onetime costs come and they roll off and then we look to that 1x low leverage area and our return of capital starting to shift more into share buybacks.

Yes. And you just talked about 1Q being one data point, but it was a pretty positive data point. I believe 1Q oil was 5% ahead of guidance and total production was 6% ahead of what you guided. Maybe just talking briefly about what were some of the main drivers of that outperformance and kind of the operational momentum you see with the print, you also increased your second half run rate, which you guys have really pegged as what the company should look like on a go-forward basis. So I think around 430,000 [indiscernible] equivalent. So just thoughts on the execute and what's been driving that outperformance?

Yes. So Q1 was really an outperformance on production, our base production as well as some of our new wells that we turned in line across all 4 basins. And so our base production outperformed in all 4 basins. We had outperformance in a couple of different basins on our new wells. And so we were very encouraged by that. We increased the overall production for the year as Q1 kind of just flows through the calculations for the year. and that ends up bringing up the back end second half run rate to that 430,000 BOE per day and that's really where we start to see the most capitally efficient program going forward. That's why we started the year with the value versus volume really focused on that free cash flow profile, strengthening our balance sheet by paying down debt, leaning into share buybacks.

Yes. And maybe with execution, you've talked about the flywheel and the momentum that you have going to next year. Another thing you've talked about is buying back your own stock is really one of the best uses of capital that SM can make right now. With leverage declining, you have a buyback authorization in place and free cash flow accelerating, maybe paint the picture of what your return of capital looks like now versus what it could look like as you approach low 1x leverage and maybe when that shift is going to start to happen?

Yes. I think that's a perfect segue to how we're going to continue to create value through the merger. And so we started this year going into the year thinking that we could see commodity prices in the low 5s, maybe even a 4 handle, right? So it was pretty bearish going into the year. We created a plan that would focus on strengthening our balance sheet as well as returning capital through share buybacks. So first thing that we did was we increased the base dividend. You saw us do that. That was confidence that the Board and our management team had in our ability to create value from this merger. And then beyond that, we started the year in the high 1x area. And then with the tailwind of the Iran war in the commodity price environment, we have line of sight to the low 1x area.

What does that look like? So we had the 80-20 as we started the year. As we continue to drive down to that low 1x area, that percentage changes. Obviously, we're still going to focus on debt because it's important. We have too much absolute debt. We want to get that down over time. but we see where we are trading, and we see that as a tremendous opportunity and return on our capital. And so we'll continue to lean in more. So as we get down to that low 1x area, you'll see that percentage increase. Is it going to be a shift right off the bat? No, I think it's going to be a gradual increase into the share buybacks over time as we see our leverage come down.

Yes. And obviously, the Civitas merger was a big catalyst in terms of this rate of change story. Maybe just brief touch on your industry views on just consolidation in general and how Civi is going to play in this picture kind of -- sorry, how SM is going to play in this picture kind of going forward?

Yes. I think in general, overall public M&A has slowed down. We've seen some -- you've seen us, you've seen Devon Cotera. But in general, what we're seeing hit the market are asset sales, including our South Texas gassy asset, right? So I think what you'll continue to see is those asset sales happen, what the commodity price environment has given us maybe now over the last week is maybe the bid-ask spread is coming together and some of these deals actually move forward. What does this mean for SM? We're not going to be in the acquiring mode. We just doubled the size of the company. We have asked our technical team to go back to the acreage position that we have and really build that organic inventory from the acreage that we have. And so that's what we're focused on. What does the market and the asset do for SM? It allows us to look at the rest of our portfolio and understand where the market is as far as valuation for what those assets might go for.

And then as we roll into our evaluation of here's where the synergies are coming out, here's how it rolls into our economics, here are where the different pieces of our portfolio land out. Now let's understand where those asset sales are in the market. And if there's an arb between those 2, then there's more value for selling that piece than SM keeping it. And that's something that we'll continue to look at as we optimize our portfolio over the time.

Yes. And SM with the deal has already pretty much shown a strong track record in terms of that integration. You've increased your synergy capture to $375 million from the prior $200 million to $300 million range. And with $300 action today and 100% expected by the year-end '26, it just, I think, shows some strong proof in what you guys are able to do on that integration front. Maybe update on how you've been able to increase the synergy target so far? And what buckets have you seen the greatest upside?

Yes. I think just straight out the gate, we've made a lot of very quick decisions to strengthen our balance sheet. When you look at our South Texas divestiture, that was an SM legacy strategic part of our portfolio to divest. And we knew that right out of the gate. We knew what we were getting with the Civitas transaction, and we said, let's go see what we can get on the market during a time when there were very strong gas prices. And we were able to do that. So our cost of capital decreased by eliminating $700 million in absolute debt.

The other thing that we did on March 3 was we refinanced our 8 and 3/8s and pushed those out into 6 and 5/8s notes. And so we've been able to strengthen it there. So we exceeded that target right out of the gate within the first, call it, 60 days of the -- basically the close of the transaction. And so beyond that, if you look at our G&A, we got most of that done in the beginning. We have some that is still to come as far as vendor duplicity, and we have also firms that were over time, we don't need 2 of the same firms. So those kind of public company transactions and synergies that you see over time, those will come with time.

And then finally, on the D&C and probably most importantly, D&C and ops, we're seeing completion optimization from the standpoint of now we have 2 data sets in a much larger Permian position. Our teams got together right away. They started to talk about how do we optimize this, how do we save costs but increase or keep production flat as the same well performance. And it was really more of a value-driven decision. And if you guys kind of know on completion optimization, you can make a change today in an evaluation or a data set and tomorrow, you can implement it in the field. And so those are some of the quick wins that we did that we saw on the synergy side right away.

Another part of the quick wins that we had was the procurement leverage. So right after the deal, we met with several of our vendor partners. We saw -- here's our plan. We were looking at 2026 and understanding what our activity levels would be. We sat down with them and made strategic decisions to lock in great pricing at scale in multiple basins with several vendor partners. And so we were a little fortuitous on that, and it's great that we've been able to keep our costs low and our synergies high there.

Additionally, I think there are more things to come. And so that's why we increased that target. It takes a little bit of time to implement a new facility design. What does that look like? It looks like a streamlined facility in the Permian Basin where you can harvest equipment from one location and use it in the next one, so you don't have to continue to buy new tanks, right? So that's just one example.

If you look at the water disposal and water supply infrastructure that we now have by having a larger footprint in the Permian Basin, we're able to get some of our costs down there from the supply side that goes into your completion costs and from the disposal side that runs through your OpEx. And so I think those kind of combinations, we continue to see opportunities that will start to get us closer and closer to that ultimate goal.

Great. And I think we have just a little over 1 minute left here. So maybe just for one last question. What do you want investors who are meeting with SM for the first time at the conference to walk away with? What's, I guess, the key headline messaging that people should leave here with?

I think we have now a premier portfolio in 4 basins, 4 of the best basins in the United States. SM has doubled the size of its scale. It's given us the ability to deliver on synergies that is creating tremendous value up to $2 billion that we couldn't do without this merger. And additionally, what we have is a pivotal moment for investors to look at our stock and see the valuation that's going to come through this merger. So we're coming into the year. We have the tailwind of commodity price. We just doubled our size. We have line of sight to low 1x leverage, and we continue to -- basically, we're lowering our leverage there. We're generating more free cash flow. We're going to lean more into the share of buybacks. And this is a time for people to really be part of that valuation and that story that's going to continue to generate more returns into the future. So now is the time.

Sounds like a great update and a lot to look forward to as kind of head throughout the rest of the year. Well, thank you so much for your time.

Thank you.

Great. And thank you everyone for joining.

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.

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.

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?

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.

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.

I'll turn the line now over to the operator for Q&A. [Operator Instructions]

[Operator Instructions] Our first question today is from the line of Zach Parham with JPMorgan.

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.

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.

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.

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.

Next question is from the line of Phu Pham with ROTH Capital Partners.

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?

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.

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.

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.

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.

The next question is from the line of Gabe Daoud with Truist.

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?

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.

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.

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.

Beth, you certainly have. Really appreciate that.

Our next question is from the line of Oliver Huang with TPH & Company.

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.

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.

Fundamentally shifts our outlook for free cash flow. Because production will continue to be an output. We will maximize free cash flow.

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?

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.

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.

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.

Our next question is from the line of Jack Kindregan with BMO Capital Markets.

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.

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.

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.

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.

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.

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?

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 Instructions] The next question is from the line of Michael Scialla with Stephens.

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?

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.

Yes. And the only thing to add there, Mike, is just any additional divestitures that we do will drive that even faster.

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.

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.

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.

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

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.

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.

We have a follow-up from the line of Jack Kindregan with BMO Capital Markets.

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.

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.

At this time, I'll turn the floor back to Beth McDonald for closing comments.

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.

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.

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.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and enjoy the rest of your day.

I've been up on the stage for 12 years. You've been here every year, and I can go back to a lot of conferences. It's nice to see you again.

It's great to be here.

Exciting times for SM, big merger in the last month between and Civitas. Obviously, a lot to talk about there. I'm going to turn it over to Wade to give a state of the union intro, and then we'll jump into a fireside. I'll remind you, if you have questions later on, please feel free to raise your hand, and we'll call on you.

Thanks, Gregg. It is great to be here again. Thanks to BofA for this conference, and thanks for doing it in Boca Raton in December. Coming from Denver, Colorado, it's really nice to be here right now. Just anecdotally, just so you know how cold it is in Colorado. Yesterday morning when I was leaving, I went to Starbucks where I normally go to get my coffee. I know the lady really well. And she said, I always go into the walk-in freezer and get some stuff, get ready for the day, and I walked in here this morning, and it felt really good. It's not a good sign, not a good sign. So thanks for having us in Florida.

It is an exciting time for SM Energy, as you say. We've been around -- those of you who know us, we've been around for over 115 years. We've become very known for kind of brand recognition for being a premier operator, operation execution on top-tier assets and having kind of technical bent toward innovation, I think that really differentiates us from others, especially companies our size. So we're really excited at the opportunity to add scale to over double in size in assets that -- in 4 different basins that are top-tier basins. So we're very excited to apply our operations expertise and technical innovation in those areas.

We see significant synergies from the deal. We put out an announcement with some additional data a couple of weeks ago. I hope you've had a chance to look at that. I'll refer to some of it today. It was really just in -- we weren't pleased with the way the stock responded to the deal, and we just wanted to kind of lean in and kind of quantify some of the areas that -- and give some more meat to the bone on the reasons we're so excited about this deal. And I mentioned the synergies, $200 million to $300 million of kind of annual run rate synergies that we see being very achievable. And that's mostly on the D&C, the drilling and completion side and LOE side, as you would expect. A lot of -- I won't read the slide for you, a lot of stuff in there. You can look at on your own. Then also, obviously, two public companies headquartered in Denver, Colorado. It's not hard to start immediately thinking about a lot of savings there on the overhead side. And on the cost of capital side, there's going to be significant savings there as well.

Didn't really lean in too much on that as far as quantifying a number. You can easily see how I think we put $30 million to $40 million or $45 million of savings there. And just thinking about the synergies and the reducing debt from those, it's easy to start thinking about cost of capital savings. We talked about divestiture proceeds. I'll say something about that in a second. That would obviously drive savings there as well, but also just the average borrowing rate. You look at some of the coupons on some of the maturities. And you can see how -- as we refinance those and move along left to right, as a larger company, you can easily see a lot of cost of capital savings from this combined entity going forward.

Rating agencies were very favorable on the announcement, two of them even said positive outlook. People love to ask, is this -- does this move you to investment grade? I'm always afraid to speak for the agencies. I think it definitely moves us that direction. Definitely checks a box on the scale side, the diversity side, sure as well. Commodity mix, those kind of things are positive. So the last point I'll make before we go to Q&A is we did also announce that we'd be targeting $1 billion plus in divestitures within the first year. We think that's very attainable. That would obviously be dedicated to strengthening the balance sheet, accelerating that deleveraging that we really want to do. We -- you all know us really well, we run -- we try to run the balance sheet in that 1x area. We consider that a strong balance sheet. This pro forma moves us kind of up into that mid-1s area, not an uncomfortable area at all, but we like to move it back towards the 1x area and that's what we'll be focused on doing in the near term.

Pro forma company generates a lot of free cash flow. I think if you just look at pro forma this year, it's something in the $1.5 billion area. So that will be prioritized to debt reduction early on. Divestiture proceeds could accelerate that. And we look forward to getting back into that low 1s area and kind of prioritizing the free cash flow more to return of capital, stock buybacks, et cetera. That's my summary.

That's a great start. So I think we were talking about the -- originally, you put out -- u announced the transaction a couple of weeks later, you announced an update. I think part of that was because the stock wasn't necessarily trading to reflect the M&A transaction. What's the arb today on that? Is it -- do you see any challenges with the deal closing?

I don't see any challenges. I don't -- I think it's -- I haven't looked at it today or too recently. I think it's gone -- I think since that announcement, if I'm correct, I think it started going back the other direction as far as our stock versus their stock and what that implies for the exchange when we close. So I don't think there's anything to be overly concerned about at this point.

Do you think you have to announce acquisitions of asset sales prior to the transaction close. Obviously, you can't announce Civitas sales, but like...

Can't sell assets we don't own. So that's not going to happen. So there's no plans to do anything. We're ordinary course of business, looking at things all the time. So that's all I can say on that.

Got it. The potential sales, there was a headline a couple of weeks ago about Eagle Ford, possibly for sale. I'm curious what's on the table and what might not be?

Well, as you would expect, I can't answer that too directly, too specifically. We love all of our assets, I'll start by saying that, for different reasons. As far as -- when we think about divestiture candidates, there's a lot of factors that go into that, that we would consider. It would be things like PDP component versus inventory upside. We're -- you can imagine that being a consideration. Commodity mix is a consideration. Gas versus oil, where we are in the cycle, those kind of things, which probably led some to speculate on the Eagle Ford having that gas mix that we have there. Regulatory environment certainly is also a factor. There's -- and then inventory upside is clearly a factor. So different things go into what we would consider divesting.

So you mentioned regulatory. You entered the DJ Basin, obviously, Colorado-based company, makes sense, right? How do you feel about the regulatory environment there? Obviously, to have bought Civitas had to have gotten comfortable with it. But you mentioned regulatory is a consideration. Was that what you're alluding to?

Yes. No, we -- yes, you said it well. We know Colorado really well living -- being headquartered there, living there. I would say that looking at the Civitas team and how they manage the process, permits, et cetera, they do an exceptional job. Things have actually improved. There was a recent report from Enverus talking about how things have improved a lot this year as far as getting permits, time to get permits. So it is looking better. The asset, underground, we really like. That asset generates a lot of free cash flow. So it's something that we'll be learning and as we move along.

But I mean, I guess it's fair to say, look, you don't want to tell people what you're selling because you want to optimize value, right? So there's a price for everything, right? That's fair to say. What's tricky for us is we see the cash flow generation of the combined company and we understand that you've asked to sell, but we're trying to -- I try to figure out what's the pro forma company look like. And one of the things that the agencies -- you talked about the rating agencies like they care about scale and scope. Obviously, I think you're over 500,000 barrels per day. So it's -- do you feel there's a risk that you could -- or do you think about this that you could sell so much of the company that you remove the scale and scope that the agencies like how you do investment grade?

It's a great question. It's -- the short answer is yes, but the long answer is no. I think looking pro forma, looking at the possible divestiture scenarios leaves the company significantly larger than it is today, even after some divestitures.

And just remind us the maintenance capital in the combined entity today or the reinvestment ratio, whatever you think -- how should we think about the right capital in the current pro forma business?

Yes. I can't give you any dollars today. I mean we're working that combined plan. And we'll -- after closing, we'll announce something. But you can imagine that we're working it the way we would work it in the past, and that is looking out at a 2- or 3-year horizon, really maximizing, focusing on free cash flow generation, not necessarily production. So I think I've already said it, so we can say it again, that you can imagine if the commodity price environment kind of stays in this area, 60 or below, I would imagine and I would predict an activity level that is reduced somewhat from what the pro forma just putting the companies together right now would look like.

And this is more of an experiential question for you.

I can't wait.

I always -- so we follow the rating agencies what they write. And over the years, the timing of investment grade is -- everyone now -- every CFO knows the caveat. We want investment grade profile, but we leave it to the agency's divine will to tell us...

That's what we have to say.

So what I wonder is -- so, it seems to me that in most cases, their holdup is always -- well, you bought all these assets. We know how it operate separately, but you need to show us organic growth. We need to see how you operate organically. And I would -- I suspect that's what will happen here. But I'm curious, do they tell you that? Do they say, look, you're there on the size and scale? Or do they send you -- like what's the feedback that they give you to help you understand what that time frame could be?

Well, we haven't closed yet. So the feedback has been fairly limited just on the announcement.

So they don't -- they haven't -- they set out this note. They said, "Hey, Wade, this is what we're thinking right now. We'll follow up later."

Things -- certainly nothing that specific, nothing that black and white. Scale, diversification, love it. There's always going to be, and I've heard a little of it already that seeing some execution, seeing the deal close, seeing what the new actual guidance looks like, seeing what the actual return of capital plan looks like things like that, but those are not long-range areas at all.

So their feedback is just as ambiguous as what they tell us.

Yes.

Okay. So we share the same experience. There we go. That's my first experiential question in my career by the way. So maybe as you -- coming back to the asset, you talked about probably a little bit less spending. There's some areas of the Permian that there's consideration that maybe you see more development because of higher gas prices, especially with the less oil development because of the lower oil price. Do you see that at all?

We're just now getting into those kind of questions on capital allocation and commodity mix, nothing really to speak to yet. That would be getting specific into the plan.

Maybe getting to more fun stuff on SM, the operations today. You sit in a seat where you get to rerack your CapEx budgets and see how well people do on recognizing capital savings. And some of it's service costs, some of it is efficiencies. What's your observations about productivity gains in your portfolio? Where you think they can go and how that translates into potentially a better CapEx or less or a more capital-efficient company?

Yes. There are so many levers. I guess, is what I would say sitting here today and looking forward and trying to see what the opportunities are. And we've listed a lot of those areas in those slides that I referred to from I think it was November 17, if you want to look back at those. But it's going to be -- first of all, the first question is just are we in an overall deflationary environment on cost in our industry. And that answer is you probably heard it from others. I assume you've heard it from others today. And it's certainly -- as CFO, it certainly feels like we're heading into that unless something changes on the commodity side. If oil stays in this 60 to below area, people are looking at their budgets for next year, hard for me to imagine that activity overall is not going to be slowing. And history says that has an impact on cost. And so we're not predicting anything yet, and I haven't really seen anything material yet. But that's certainly something we're trying to get our arms around before we kind of see what we want to forecast for next year. Then from an SM standpoint, having the -- we talk about it every year just from a -- on the technical side, the team is just so diligent. The operations team is so diligent at trying new things, being innovative, whether it's completion design, spacing decisions on the drilling, the lateral lengths. That's going to continue until we drill our last well, I'm told. So -- not only will it continue, but now it's going to be applied a lot more on new areas. So that's exciting. That will be exciting to see what can come out of that. There's clearly going to be more just centralized, streamlined combining supply chains between the companies. Purchasing power with the vendors is going to have -- there's going to be a positive impact from that. There's no doubt in my mind. So those are some examples.

Just question, when do you expect the Civitas deal to close right now?

We're saying first quarter.

More likely, does that probably delay your capital budget from -- when the...

It depends on -- could, hopefully not.

When you -- so you mentioned some of the -- just coming back to some of those savings, cost of capital must said $30 million to $45 million. When you talk about the capital efficiency size in drilling, like what is that number and help us understand that?

Yes. I mean -- again, I hate to keep going back. There's a slide that -- there's actually -- we did an additional slide that just focuses on the D&C and the LOE and tries to break it down. It doesn't get that granular, but it breaks down the $100 million to $150 million by different areas. And I want to mention again how big that is. That $200 million to $300 million, we tried to put that in context. First of all, it's incredibly achievable, right? If you look at half of that being D&C, that's only 2% or 3% of the combined capital. But in terms of valuation, if you think of $200 million to $300 million saved every year for -- just pick a number, pick 7 years and discount it back, that's $1 billion, $1.5 billion discounted back to today which is 30% of our market caps combined. So a big number, I guess, is what we wanted to make sure that investors understood.

Got it. When you -- it's sort of an interesting process. Obviously, you've been through it. As a CFO that has people put these numbers in front of you, and you're kind of like, how they come up with that, right? What's your sense of -- like how is -- how do they figure out like the amount of D&C cost they should fund? Is it a consultant? Is it your internal folks?

Yes.

But as you look at those numbers, and I wanted to put a number in front of people that was achievable, how do you get comfortable?

Well, it's very much driven by our internal folks, which is what you would expect. I mean, we pride ourselves on being experts in that area, working really hard. And just based on looking at what we're doing, looking at what we could do and looking at the data that we were provided on the new assets, the assumptions, again, seem very reasonable.

Is there some expectation that you can run the asset better than Civitas, or is it...

Yes. I don't want to it's not -- I don't want to make a broad brush statement. In certain areas, that is absolutely the case. But then there are some areas where we're going to see, wow, they're doing something really interesting there that -- and we're not in the DJ by the way, right? So there's going to be things that we're going to learn from them. There's no doubt about it. But we're excited, certainly about areas like -- certainly about the Permian, where we've been for a very long time and doing things really well that we can apply some of the things we do well on their assets, but there's going to be some things that they do well that we're going to learn from also.

And then you said you expected deflation in service costs. What type of indications do you have today?

It's really -- for me, it's mostly anecdotal at this point, mostly. We're having conversations with vendors and we're here -- I'm not going to name anyone or anything like that, that when we're hearing numbers are starting to -- when we bid this next, it's going to go down a little bit. There's some of that happening. But it's really just mainly watching activity, watching the oil price. And just knowing that you look back when things line up this way, especially during a period where people are setting their budgets, you tend to get some deflation during these environments. That's really no guarantees, but it certainly feels like it.

And then just marketing side of things, which -- on the marketing side of gas and oil, what do you -- do you see any constraints right now? Do you see opportunities to reduce costs there just in SM's business, but just maybe walk us through that a little bit.

Yes. I don't see any constraints, any concerns about us being able to deliver what we're planning on in all the basins. That's my general response to that. There's always areas to work and the team works those really hard.

And there's the -- you mentioned part of your synergies is the debt is it lowering your cost of capital. When you look at the debt stack, I think we've discussed it. I think your plan is just to guarantee -- post guarantee the structure. I don't know if you've contemplated how you...

You can assume they're all SM bonds. Nothing is going to be stranded or anything like that.

How do you think about refi? Like when you think about, oh, there's some -- in terms of -- when you look at what's a near term event in terms of -- maybe the better question is of the $30 million to $45 million of cost of capital savings, over what time period do you -- do think you'll recognize that?

Yes, we -- I mean we tried to put a number in there that was reasonable. And kind of the overall assumption for that $200 million to $300 million in total is all being actioned within 2026, with it all being realized all of it on a run rate basis beginning in 2027 and beyond. So some of it in '26, but all of it by '27 and all of it actioned in '26. So as I said, we -- we're pretty modest on the cost of capital assumption. We didn't want to put a big number in there that you could say, well, that's coming, but it's not coming that soon. The number will -- that number is going to grow. That number is really -- there are several different ways that can and will be achieved. As I said, just starting with the synergies, the $200 million to $300 million just apply an interest rate to that number, and you get a pretty big chunk of it. You take some out with divestiture proceeds and you blow through it. You start thinking about just your weighted average interest rate or cost of capital. That will take a few more years probably, maybe not, but probably as you start to refi some of the higher-cost stacks. The first one of any size being in 2028. So that will come. So there's a lot of ways that, that number is going to grow. We just wanted to be modest with the kind of the -- we wanted to really focus people on -- this is a run rate that's going to happen pretty quick. So that's why we were more modest on the cost of capital.

I know it's a little early to talk about the next deal, actually M&A. How long does this keep you -- you're going to be in divestiture mode after this? It's probably keeps on the sideline for a little bit.

As a general statement, that's a good assumption. Digesting is important. Integrating is important, focusing everyone on those efforts is very important. It doesn't mean we will put blinders on and not continue to look for opportunities to improve the company and the value for shareholders and bondholders. But the primary focus in the near term will be digesting this combination.

And then as you were involved in this process, obviously, and there were probably other people involved. And there's been just a lot of what's called SMID-cap M&A consolidation as of late. When you think about -- do you think that this trend is going to continue. And when you looked at who showed up in various data rooms have where you've probably been in, not just Civitas, I suspect, did you see that it was a lot of SMID-caps looking to get bigger? Or were there also larger IG players or larger investment-grade names like...

Yes. The I guess the first thing I'd say, and the lawyers will be proud of me, the proxy hasn't been filed yet. I look forward to reading it, you should do. There'll be a lot of that in there. Yes, I can't really speak to who was there or any of that. Your first question, though, is I can theorize, and it's hard to imagine an environment where that changes, where the desire to get larger, that's kind of the environment we're in. That's what investors want. Our industry is more mature. It's -- the -- you get -- the drivers are cash flow generation, return of capital. That means you're not getting paid to grow up and to the right. So that automatically makes you think drives you to scale being important. And so scale is important, size is important. So it's hard for me to imagine the trend not continuing.

I'm going to look out to the audience for -- to see if there's any questions. I think I'll take one more here. So if you think about by the DJ Basin, which is something SM should know, and obviously, you pointed to how the regulatory environment is improving. But those equities have historically traded at a discount, right? So how did you -- when you thought about that, what got you over that hump?

Well, you're just talking about 1 piece of...

Obviously, there's a lot of...

But it's an important piece.

It's an important piece. Obviously, I get the synergies argument, which and perhaps that was the argument. I'm just curious like...

That's a big part of the argument. And all I can say is just from a value proposition, doing our own assessment of NAV, we felt like it was a very compelling time. It's a good -- it feels like a good time in the cycle, and it just felt like a good time to -- and the moons had to line up, right? You don't just get to pick when M&A is going to happen. Things have to line up and they lined up, and we got very comfortable with the asset and the value.

Look, I'm going to -- I'm looking around to see if there's any more questions. I think we drilled into the merger as well as much as we can get out of you. But I just want to -- Wade, we'll let you off the hook a little early. I just want to thank you for your time and making it here. Always enjoy our conversation.

My pleasure. Thank you.

And I'll see you at the next one.

Absolutely. Thanks, everybody.

Thank you.

Greetings. Welcome to SM Energy Company and Civitas Resources Merger Joint Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to Wade Pursell, Executive Vice President and Chief Financial Officer. Thank you. You may begin.

Thank you, Sherry. Good morning, everyone, and thank you for joining us on this very exciting day in the history of our companies. Our call today is to discuss SM Energy Company and Civitas Resources merger announcement.

Earlier this morning, we issued a press release, posted a presentation to our website. We hope that you've had a chance to review both of those. So during today's call, we'll be making forward-looking statements, which consist of statements that cannot be confirmed by reference to existing information, including statements regarding our beliefs, goals, expectations, forecasts, projections and future performance and the assumptions underlying the statements. Please note, there are a number of factors that will cause actual results to differ materially from our statements.

Also, please recognize that except as required by applicable law, we undertake no duty to update any forward-looking statements, and you should not place undue reliance on such statements. We may also refer to certain non-GAAP financial measures and metrics to help facilitate comparisons across periods and with peers. Please refer to Slides 2 and 3 in the presentation posted earlier this morning for additional discussion of forward-looking statements and non-GAAP measures.

Today's prepared remarks will be given by SM Energy Company's Chief Executive Officer, Herb Vogel; and President and Chief Operating Officer, Beth McDonald; and Civitas Resources Interim Chief Executive Officer, Wouter van Kempen. I'll now turn the call over to Herb. Herb?

Thanks, Wade. Good morning, everyone, and thank you for joining us today. Earlier this morning, we announced that we've entered into a merger agreement with Civitas Resources. Wouter, Beth and I are excited to share how this transformational merger delivers superior value for both SM Energy's and Civitas' stockholders. This is more than just a combination of 2 companies. It's a remarkable opportunity that creates value-enhancing scale, value-driven synergies and value-accretive substance in the form of significant free cash flow generation.

Before handing the call over to Wouter for a few remarks, I want to extend my congratulations to Wouter and the entire Civitas team for building Civitas into a leading sustainable energy producer. Today's transaction reflects the exceptional talent and operational excellence they've cultivated. I look forward to seeing what our 2 companies can achieve as stronger organization.

I will now turn the call over to Wouter. Wouter?

Thanks, Herb, and good morning, everyone. Thank you for joining us. Today marks a very significant milestone for both Civitas and SM Energy. We firmly believe this merger unlocks new potential to deliver enhanced shareholder value and achieve outcomes that neither company could reach independently. While our asset portfolios and operational practices share many advantages, it's the integration of our strong technical teams that will truly elevate our performance, bringing out the very best of both organizations to sharpen our competitive edge and drive increased returns.

The advantages of scale are clear. Our industry continues to consolidate into larger, financially robust enterprises that lead with top-tier operational and environmental standards. This combined company will be well positioned to responsibly produce energy supplies, making people's lives better and contributing to energy security and prosperity while delivering sustainable value to our shareholders. We're confident that shareholders from both companies will recognize the meaningful synergies this merger affords, and we're eager to move swiftly through integration and earn market recognition for the value we see in our unified organization.

Finally, I want to acknowledge our employees. Today's announcement would not have been possible without the dedication and talent of our people, Civitas's greatest assets. I extend my sincere thanks to each and every employee for your commitment to one another and our mission of delivering long-term shareholder value while advancing sustainable energy development.

I will now turn it over to Beth to walk you through the highlights of the transaction.

Thank you, Wouter. I'll begin on Slide 4. As Herb said, this is a remarkable opportunity, one that creates a company with value-enhancing scale consisting of a premier portfolio across the highest return U.S. basins, delivers a step change in free cash flow, enabling sustained capital returns and enhances trading liquidity with broader investor appeal. We have brought together 2 highly complementary portfolios and teams to generate value-driven synergies, which are identifiable, achievable and deliverable by proven management. The synergies are expected to drive greater accretion, accelerate debt reduction and deliver through-cycle returns.

Our returns-based technical focus will unlock significant value, and our people, processes and infrastructure will work together to capture identified synergies and accelerate integration. Stockholders will benefit from accretion on key financial metrics and from the substance of this transaction, which is the expected significant free cash flow that the combined company will generate. On a per share basis, the transaction provides significant cash flow, debt adjusted cash flow, free cash flow and NAV accretion even before synergies. We will prioritize applying free cash flow, along with any proceeds from opportunistic divestitures we plan to pursue to debt reduction while maintaining a sustainable quarterly fixed dividend of $0.20 per share until we reach our leverage target of 1x. Upon reaching our target, we plan to direct our free cash flow towards growing our regular dividend and upholding a consistent stock repurchase program. Finally, but certainly not last, we are proud of the excellent safety and environmental track record of both companies and are committed to continuing that legacy.

Turning to Slide 5. This combination results in a step change in scale showcasing a premier portfolio. Pro forma, as of June 30, 2025, the company holds over 800,000 net acres in 4 contiguous states and production totaled approximately 526,000 barrels of oil equivalent per day. Estimated net proved reserves pro forma as of year-end 2024 totaled nearly 1.5 billion barrels of oil equivalent. The combined company has approximately 50% of the production and remaining locations in the Permian Basin. This step change in scale across these top-tier assets will drive differentiated free cash flow and sustained stockholder value.

On Slide 6, you can see the contribution to value enhancing scale that is provided by our positions and the highest return in U.S. shale basin. Each of these basins provides unique value and competitive returns, which will further strengthen our technical expertise and bolster our ability to deliver synergies across all assets.

I'm now on Slide 7. As the combined company's cornerstone asset, the Permian position represents nearly half of the pro forma BOE production and just under half of the year-end 2024 estimated net proved reserves on an oil equivalent basis. This premier asset is also a source of potential inventory growth in new horizons that we are currently delineating. We are excited about each of our 4 core areas as they will deliver strong free cash flow, generate highly economic returns and collectively provide multiple opportunities for inventory growth.

With Slide 8, we will showcase the value enhancing scale this combination provides through a relative size comparison. The transaction transforms the pro forma company into a top 10 U.S. independent oil-focused producer, better positioned as an attractive investment due to the step change in free cash flow, net equivalent production and enterprise value. We expect this expanded scale will appeal to a broader universe of institutional investors and will increase pro forma trading liquidity.

We now turn our attention to the value-driven synergies that bolster this combination. The combined technical expertise is expected to unlock significant value and drive synergies. Our proven technical team has repeatedly demonstrated differentiated technical abilities, generating meaningful value across SM Energy's legacy core assets. By leveraging advanced technology and fostering a collaborative inquisitive culture that challenges paradigms and solves complex problems, we achieve operational excellence. Our recent integration success powered by exceptional talent, streamline process and robust technology instills confidence in our ability to deliver a cohesive outcome. We recognize the great performance of the Civitas team and a similar culture of technical excellence and look forward to welcoming members to collaborate and learn from each other to create value for our stockholders together.

Moving to Slide 10. Let's spend a few minutes looking at our plans to enhance stockholder value by delivering identifiable and achievable annual synergies totaling $200 million with upside potential to $300 million. We believe the complementary operations lead to significant pro forma annual synergies that are achievable post integration. We have identified approximately $70 million of overhead and G&A synergies with $25 million of potential upside, driven by a streamlined corporate structure and optimized G&A across the combined asset base.

On the drilling and completion side, we have identified approximately $100 million of synergies with a potential for an additional $50 million. We expect to achieve these synergies through improved capital efficiency, an optimized drilling program and lower LOE with integration and scale. The combined company will benefit from swapping learnings to lower drilling and completion costs while continuing to deliver highly economic wells.

On the operations front, we expect the combined company to benefit from several opportunities from Civitas' low-cost operations and SM's technical focus to lower cost and increase performance. We anticipate gaining purchasing power, debundling services, bringing recurring costs in-house and optimizing our operations with machine learning and AI. Reducing our cost of capital is the next identifiable and achievable synergy that will enhance stockholder value. The previously mentioned cost and operating synergies will accelerate debt reduction and provide interest savings.

And we also expect to be able to opportunistically refinance certain tranches of debt at a lower cost of capital due to an improved credit profile. We estimate achievable cost of capital savings at $30 million with potential upside for an additional $25 million. Neither of these estimates include the potential for cost of capital synergies if we achieve investment-grade status. As is apparent from our diligence to date, we believe the identified and achievable synergies will enhance stockholder value in the near term, reduce debt faster and create a sustainable return of capital program.

Next, Slide 11 showcases how the combination of our 2 companies provides for value-accretive substance as we realize significant accretion across key financial metrics before synergies. The identified and achievable value-enhancing annual run rate synergies of $200 million to $300 million, meaningfully increased the free cash flow generation of the pro forma company. We plan to prioritize free cash flow to debt reduction with a path to 1x net leverage by year-end '27 at $65 WTI. At $60 WTI, leverage is expected to be slightly higher at 1.4x at year-end '27.

While we are encouraged that leverage is at a manageable level, we will seek to reduce debt faster through opportunistic asset sales at the appropriate time. Scale, diversification and synergy enhanced free cash flow strengthen the pro forma company's credit profile. Several opportunities to accelerate the achievement of our leverage target exist through an optimized drilling program, and as mentioned before, potential asset sales. We will evaluate those as a part of our effort to continue to maximize free cash flow generation and improve the pro forma balance sheet.

Turning to stockholder returns. We remain firmly committed to our sustainable quarterly dividend, fixed dividend at $0.20 per share. The previous Board authorized $500 million share repurchase program remains in effect. This transaction is highly accretive on a per share basis, which is why our near-term policy and priority is reducing debt and strengthening the balance sheet. Once we achieve our leverage target of near 1x, buybacks will become a larger part of our capital return program and even before them, we never rule out the possibility of opportunistically repurchasing shares. Taken together, this financial policy provides stockholders with value-accretive substance through an attractive mix of disciplined balance sheet prioritization, consistent capital returns through a sustainable fixed dividend and future share buybacks upon achieving our 1x leverage target.

I'm now on Slide 12, looking at the manageable maturities of the pro forma debt profile. As of Q3, combined liquidity totaled $4.4 billion. The well-staggered maturities provide opportunity to reduce debt with the significant free cash flow generated pro forma through potential asset sales and through reduced interest costs upon refinancing enabled by an enhanced credit profile.

Moving to Slide 13. The pro forma company will be recognized as a dependable leader of sustainability and stewardship, building stronger communities through responsible action. Each of the top-tier assets contributes to this recognition as a premier operator.

Stepping back, I'm now on Slide 14. This strategic combination is transformational, delivering superior value to stockholders, immediate and significant per share accretion and long-term value creation. This merger is about creating something stronger together than either company would achieve on its own. Sherry, we are now ready to take questions.

[Operator Instructions] Our first question is from Scott Hanold with RBC Capital Markets.

For my first question this morning, I was wondering if you could give us a little bit of color on the process in terms of how you all came up with the relative value allocation to each in the merger ratio. I guess I was a bit surprised that SM shareholders aren't a majority owner here.

Scott, I'll start and then see if Wouter wants to add anything on that. It was pretty much balanced based on the way the market traded over time. And we looked at the appropriate shares based on market trading and the values of the assets that both were contributing. So it was pretty logical, straightforward sort of approach.

Yes, nothing to add.

And on a per share basis, the results are quite accretive.

Okay. And I guess my follow-up is on -- I guess, Beth, you had mentioned a few times potential asset divestiture to help get leverage down. I think, obviously, that's going to be an important aspect of this merger and seeing that leverage ratio get down faster than hopefully than you all provided here. So hopefully, that's a bit conservative. But can you give us a sense of like when you think about like divestitures, what would you consider as like noncore-type assets? What would be at the top of the [ pecking ] order?

I think it's a little bit premature or early to tell you specifics about what asset we would go after. I think if you look back what the assets are that we really value are ones that generate high free cash flow, but in turn, ones that have a runway of strong, highly economic returns. And so we'll balance those as well as the commodity price environment as we look to what assets we could potentially sell.

Okay. Is this a process that may take a while? Like when will you have identified those potential assets? Do you guys have something in mind? Or will it be something more into 2026 as you get the combined kind of entity together?

Yes, Scott, it will be more into 2026. Our focus right now is on successful integration of the 2 businesses and making sure that execution happens in a safe way as well. And so we'll be focused on that, but we'll also be looking at that prioritization at the same time.

Our next question is from Leo Mariani with ROTH MKM.

I wanted to just follow up a little bit on the synergies here. So you guys identified kind of as your base case, $200 million. Can you provide a little bit of color kind of around the timing there? And then with respect to the basically kind of operational synergies of kind of $100 million to $150 million, which I guess is the upside case. Can you provide a little bit more color around kind of how you get there? I mean there's not too much in the way of asset overlap between the 2 companies. So I just wanted to dive a little bit more on the synergies here, please.

Leo, thanks for joining. I'll just start by saying we're not assuming any synergies for 2026. So this is really the run rate for 2027. And Beth can elaborate on all the synergies that we've assumed.

Yes. So I'll quickly hit on the fact that we think on the G&A front as well as the cost of capital front, those are -- the [ 70 ] and [ 30 ] are relatively low. We think we can reach the upside potential there. And then as it relates to the operational synergies, there's really quite a bit actually, when you look at the overall technical teams. Let's start with the fact that we'll combine the best people and the best practices among both of these great organizations. Beyond there, we know that we can do swap -- we can swap our learnings. We have joint learnings that we know that they drill some of the longest laterals in the DJ Basin. And with that, combined with our landing zones and completion designs, we think can be differential for performance.

When you look across the planning side of the Permian and within the Midland Basin, we can really plan for efficiency. So when you look at our drilling rigs, our frac fleets and our drill-out crews, the faster that we go, the more efficient that we go and in a safe way, we can actually get to greater capital efficiency together with the combined activity levels. So there's those pieces as well as what I mentioned on the call, which were really bundling -- debundling services, bringing recurring costs in-house, I think chemicals, utilizing field gas and recycled water, those kind of things just continue to elevate with scale. And so we really see that there is differential operational synergies in this transaction.

I might add on the cost of capital just -- just to be clear on the cost of capital, I think we've been pretty modest on the assumption there, something like 100 basis point savings. And if you look at the combined the improvement of the credit profile and look at where the coupons are versus where we could be going in the market, that's pretty easy to see. We certainly haven't assumed anything in the investment-grade area. This is a path toward that, pretty good check mark on the scale side, now focused on getting leverage down below 1x and enhancing that further.

Leo, I'll just add one -- I'll add one other thing that it's just when we look at -- reflect back on our combination with XCL, we found that some teams can get quite complacent in the way they do things, and that gets challenged when you look really closely, and you're working together with another, and it's how much more shows up than you expect because of that fresh look. And we expect to see fresh looks from both sides here on this one.

Okay. Very thorough answer. Appreciate that. And then just also wanted to just kind of ask on the leverage side. So you guys kind of spoke to a couple of cases, kind of the $65 and $60 oil case. Obviously, Strip is unfortunately a little closer to $60 over the next couple of years. So as you're looking at it, in the $60 scenario, do you have a better sense of when you guys get to that kind of 1x leverage in your models here?

Yes. It will depend on several things, Leo. One is we don't -- we haven't put forth our plan for next year from an activity standpoint. If it stays down in that area, you know that we focus on free cash flow maximization, not -- certainly not production. So it would be -- I think it would be logical to assume that just putting the 2 companies together and if prices stay low, you might have an activity profile that's somewhat less than the combined looks right now, just again, based on free cash flow generation and that would certainly enhance the delevering effort. That will be one factor. And certainly, a big factor will be divestiture opportunities and when that happens. Other than that, it's hard to project too far ahead beyond next year at this point.

Okay. And your kind of assumptions on leverage, I assume don't assume any divestiture opportunities that's more just paying off debt with free cash flow over time.

That would be a base case, exactly.

Our next question is from Phillip Jungwirth with BMO Capital Markets.

In the Midland, SM has always operated in the north and western side of the basin. A lot of the Civitas acreage is going to be more south or east. How do you view the different trade-offs, opportunities and also challenges of this part of the basin versus where you've historically operated?

Yes. Phillip, it's Beth. Just wanted to have a little point of clarification there. One of our anchor assets that really was a foothold into the Midland Basin was Sweetie Peck. And so that's actually in the southern part of the Midland Basin, and we have an extreme amount of knowledge of the entire Midland Basin and how the geology changes across that, and so we'll continue to just look at that and really bolster our technical abilities by combining those teams together. So we look at it just like we would our Sweetie Peck acreage as well as complementary base for the Howard County acreage, and we see significant synergies there.

Okay. Great. And then following up on the prior question. Just in the deck, you did now 1.4x expected leverage by year-end '27 at $60. It looked a little high versus our model, but just without getting into the details, is there any high-level framework or assumptions you're using here? I assume it's just kind of a maintenance production and CapEx outlook, but I want to make sure.

It's a very conservative that type of outlook, exactly.

Our next question is from John Abbott with Wolfe Research.

My first question is back to the synergies. Now like Civitas had -- and it's really on -- are some of these sort of synergies driven also by the individual programs that the companies were already executing on, for example, Civitas was already executing on a $100 million optimization program, and then maybe they would expand upon that. But so I guess, when we come to that synergy number, how much of this is already being baked in on an individual company basis versus the pro forma basis?

Yes. John, there are none that are baked in from the Civitas plan. These are actually going forward with the new pro forma company and the synergies that we identified, and we believe are achievable together.

Appreciate it. And then my next question is really for Wouter. If we go back to second quarter results, there was a discussion of the desire for looking for more consistent operational performance, and that would drive value. I mean we haven't seen that as of yet. The deal has been announced before that. So why do the deal -- why was this the appropriate decision for Civitas at this time versus letting the execution operations side play out first?

Yes. So thanks, John. And obviously, we're not announcing our earnings here today. We're announcing our earnings on Friday so can't talk about that. But in the end, you can't -- you can time deals in a perfect way, and you never know what shows up at what time. I can tell you that from our side and the Civitas side and the entire Civitas team, everybody's been working really, really hard on the third quarter to make sure that we deliver on the promises that we're making, and we had those discussions at our August conference call. And in the end, this is the right time to do this. This is the right opportunity. This makes both companies a lot stronger ourself. So we're very excited about it.

Our next question is from Oliver Huang with TPH & Company.

For my first question, maybe just a follow-up in terms of just when we're thinking about each of your respective basins on a pro forma basis, is there one where you would potentially look to let oil volumes roll a bit more meaningfully if we're talking about oil prices being in the $50, $55 range next year?

I would say at this point, it's a little premature to answer that question. We love all 4 of our basins. And if you look at Slide 6 in the presentation, it really focuses on advantages and the unique value that each of those brings. And so we'll use that in conjunction as we build our 2026 pro forma plan.

Okay. That makes sense. And for my second question, just had a quick question around inventory. I was doing some rough math around your pro forma net locations highlighted in Slide 5. If we think about the SM and Civi stand-alone programs this year, I think it's roughly [ 400 ] net 10,000-foot equivalent locations of lateral turn-in-lines. That imply roughly 6 years of inventory. So trying to get a better understanding of what is included within the assumption of that [ 2,400 ] total shown in the slide and what you all feel might fall into the upside bucket that would not have been reflected in that figure?

Yes. So really, when you're looking at the Enverus inventory, we all kind of know that that's backward looking. So that's really the minimum amount of inventory that we would expect going forward. It doesn't include a lot of the upside that we're excited about and that we've talked about as far as Woodford, Barnett, Upper Cube. So there's multiple zones that we're delineating now that aren't reflected in that amount right now. And so we see upside there. Also, as you heard, we talk about future, and we look at the current commodity price environment and the activity level there will probably slow down a bit. Again, we're focused on free cash flow generation and maximization of that free cash flow to increase time to debt reduction, but a resulting factor that comes out of that is that your inventory is prolonged a bit.

Our next question is from David Deckelbaum with TD Cowen.

Congrats, Herb, Wouter and Beth. I'm curious, as you look at the synergies, particularly just given the increased scale in areas like the Midland, do the announced synergies envision any capital optimization between assets, perhaps emphasizing capital allocation to the Midland versus perhaps some other areas? Or should we mostly assume that those slides are kind of combining the current plans as we see them today?

It's a combination of both, David. So it's a combination of combining the plan to an optimal drilling program, but it's also really around capital efficiency and learnings, right? So we also think that we have price negotiation, potential purchasing power with scale and that we can really plan for efficiency through our drilling completions and drill-out crews, keeping those busy within the Midland Basin among all of our acreage will just help drive those efficiencies even further.

Appreciate that. And I know you've been asked a few times already about asset sales, and you mentioned them earlier. You also laid out, obviously, the priority on deleveraging post this deal perhaps at the expense of returns of capital to shareholders. So I guess how do you think about the priority of divesting noncore assets and you already internally have sort of an absolute dollar target that you would be looking to pursue?

No, not at this time. We -- it's really early in the process. And like I said before, we're really focused on the execution and the integration of the deal. In the meantime, we'll prioritize what assets really make sense, especially as we go into the current commodity price environment. So we just -- we have more work to do, and there's not a specific dollar amount that we're targeting. You could back into dollar amounts that could show you what asset sales are needed with these synergies to get us to 1x faster.

Wouldn't be a lot.

Yes. It's not a lot.

Our next question is from Noel Parks with Tuohy Brothers.

I just had a couple. I think one thing I found interesting is that in the Permian, the degree of overlap is not particularly high between the 2 companies. So it's a nicely larger combined footprint. Any thoughts on, I guess, just as you looked at various Permian opportunities, just what your thinking was in terms of whether you're looking more for an expansion of the footprint or consolidation of footprint? And also, I'm not really familiar with your gas infrastructure strategy in the Permian. I was wondering if you could talk a little bit about that and how that might shift with the merger.

Yes. I'll start with just talking high level about the synergies that we see from the combined footprint. And I know I'm repeating myself a little bit, but we have joint learnings that we have between the 2 companies. We know that in certain zones, we outperform each other so we can combine those learnings as well as the Civitas longer lateral learnings. And we think that, that will really drive down our cost on the drilling side.

As far as our technical expertise, we think SM Energy really can unlock value on the performance side. So we think the combined operational excellence as well as the scale, purchasing power, debundling, bringing in chemicals in-house, those kinds of things can really drive that efficiency. As far as the gas infrastructure, we've really been focused on increasing our margins there and getting that gas to market as much as we can, right? So you're very familiar probably with WAHA prices. And so we've been doing a great job there on the hedging side to really cover us as far as WAHA is concerned, but we've never had any takeaway issues. So we don't expect those to continue.

Noah, I'll just chime in and just say that if you can -- thought of the Southern Midland Basin 5, 6 years ago, people underestimated how good the economics were there. And over time, people have recognized there's more zones there that are economic, and we can actually do better in them, and that's partly technology and partly lateral length. So that's the way to look at it is there's opportunity to improve on historical Southern Midland Basin potential for the industry as a whole.

Got it. And I'm just wondering in terms of post-deal accounting, is there anything for us to be aware of as far as tax carryforwards? We're, of course, going to have some tax legislative changes for 2026. But just wondering if there are any considerations there?

Yes, it's a great question in this environment, especially. Nothing significant to answer your question about the impact the tax NOL carryforwards or anything like that. We're both benefiting from the -- from the big, beautiful bill, no question as far as how much federal taxes we both have. Civitas is very similar to us in that regard. So minimal taxes in the foreseeable future, I would say, a similar story on a combined basis.

Our next question is from Bill Dezellem with Tieton Capital Management.

Would you please discuss your strategy for production growth and what goals you do or do not have and how that interrelates with cash flow generation, please?

Yes. Bill, this is Herb. Just briefly if you've followed us for a long time, you know we plan each year looking forward the next 2 to 3 years and maximize free cash flow generation. So production is not an input or a goal. It's an output of that maximization and it's driven by commodity price and commodity price mix. And we continue to drive that, and that's been very successful for us in achieving our targets on the debt side, free cash flow generation and return of capital. So that's the way to look at it. Don't think of production targets, think of maximizing free cash flow generation.

To the point. I mean, we target -- we shoot for flattish. I mean, obviously, we could generate a ton of free cash by letting it fall. So it's not -- looking at it over a multiyear period, I think, is the key to that.

[Operator Instructions] Our next question is from [ Geoff Jay ] with Daniel Energy Partners.

Just one for me. As I look at the D&C synergy number, I'm just wondering -- and I'm sorry if I missed it, but is there a reduction in activity that's kind of contemplated in that figure? Or is it purely efficiency, pricing, et cetera?

Geoff, it's efficiency and pricing only. So we have not baked in anywhere, any sort of change in activity.

Our final question is from Scott Hanold for the follow-up with RBC Capital Markets.

Appreciate the follow-up. And just a question on the management structure moving forward. Obviously, in the first part of next year, this merger is expected to happen, and Beth will be taking over the CEO role. Can you discuss what are the plans to backfill the COO role? And with Beth, like, look, you're stepping up into a new role and -- and certainly, with the merger, it's going to create a lot of work and potential complexities. Can you talk to your priorities as you take the reins?

Let me just start with that, that we haven't announced the leadership fully. We got in mind where we're going to go and really be focused on getting the synergies and having an effective integration. And Beth, do you want to...

Yes. And I would just say that -- the priorities of where we're taking us in energy haven't changed. They're long lasting, and they're really focused, especially as it relates to this deal on debt reduction, keeping our fixed dividend and then growing that over time once we get back to that 1x level and then going back to the share repurchases. And so that is the continuation of what we've been doing as well as adding to our inventory for a sustainable and repeatable program long term.

Okay. I appreciate that. We'll look forward to seeing that. And just real quick one. I think you kind of inferred this or said this, but just to make sure I got my thoughts straight. But the way we should look at the combined company moving forward in terms of allocation of activity between the basins, it should be very similar to what individual companies have at this point, pending any decisions you make later on?

Yes, I think that's a good assumption right now, Scott.

There are no further questions. I would like to turn the conference over to Herb Vogel for closing remarks.

Thank you, Sherry, and thank you all for joining us today.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.