SM Energy Company Aktie

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.

Our next speaker will be Wade Pursell, CFO of SM Energy. Pursell will be speaking a lot more about the Uinta integration deal that's been ongoing, and we will have prepared remarks, and then we'll get into some Q&A after that. Thanks.

Thank you, Betty. Good afternoon, everyone. Good to be here. Thanks for inviting us this year. It's always good to be in New York City this time of the year, beautiful place. Thank you for joining me today for the update on SM Energy. I'll just jump to the -- I'll jump past that slide. I'm still not a prophet, if you've heard me speak before, so I'm going to be talking about the future today, but just take that for what it is.

So if you've heard us talk before, I know you've heard us describe SM Energy, so who's SM Energy, I know you've heard us describe ourselves this way. Premier operator of top-tier assets, delivering a sustainable return of capital and then empowered by world-class technical team and strong balance sheet, we're poised to repeat that success.

That's kind of who we are. I want to focus today on just one of those pieces, and that is the world-class technical team part of that. If you want to think of just 4 words, why is SM Energy different? Why should I invest in SM Energy versus other companies, other E&P companies, think of returns-based technical focus. That's really what differentiates us, we think, especially from companies our size, and that is that focus on technical expertise, and I'll talk about that as we go through the presentation more. So I said top-tier assets, we're in 3 top-tier assets, 2 of them in Texas, 1 in the Midland Basin, 1 in South Texas, and then most recently in the Uinta Basin.

And I'll actually tell -- they all tell a really good, unique story on their own about us being technical focused, returns-based technical focus so I'll get into that. And really, that's -- we believe that's the only way you can generate a slide like this. And this slide is a really important one. If you just take 1 home today, take this one home. If you look at the last 5 years, these are simple metrics for an E&P company, very rooted in what we do, and that is production and proved reserves. And what you see from this slide is that over the last 5 years since coming out of COVID, we've grown production well over 60%, oil over 70%, proved reserves well over 60%.

And in that period, you would imagine, well, there must have been a lot of capital involved in doing that. And if I go to the capital structure and if I look at total shares outstanding at the beginning of that period and at the end of that period, it's exactly the same, 114 million shares outstanding. So no dilution for that growth. And if you think, well, maybe you levered up to do it. If you look at our leverage at the beginning of that period, it was 2.3x. And standing here today, it's closer to 1x. So we've actually delevered during that period also. So we -- that's who we are and that's the output of what we do.

And if you ask me what the next 5 years should look like. We plan on it looking like that, continued growth, capital-efficient without diluting and without levering up the balance sheet to do it. So how do we do that? It's a great question. Technical team. I would say that over the last 17 to 20 years, SM Energy has been very focused on building muscle in all of the areas that we think are really critical to being a successful resource play company and especially in the technical area. That means geosciences, that means engineering. That means data analytics team, means systems, processes, back office everywhere, really building muscle technically and with people that are attracted to that.

I think we have a culture that attracts people to that environment and a leadership development culture that attracts people in all areas, frankly, of the company. Our attrition is really low compared to our peers. So I said that the 3 top tier assets really tell unique stories around that technical expertise and they do, starting with the 2 in Texas, the 2 older stories, I'll start in the Midland Basin in Howard County. If you go back to 2016 or 2015 and you looked at a map of the Midland Basin, Howard County would be outside the map, it'd be off the map.

And our technical team had done a lot of work and have gotten very excited about that area saying that this is great rock. This is a great, great part of the Midland Basin. Back then, you would have seen maybe 3 intervals in Howard County. This is a good visual. The map on the left is Howard County back then and the level of activity, maybe 3 intervals, not that many wells drilled, a lot of verticals, so a lot of data to study and then fast forward 10 years later and wow, what a different image, right? Over 5,000 wells drilled, 9 intervals now. It's truly been a wonderfully successful acquisition for us and truly a top-tier asset.

And the next story is the Austin Chalk. So in West over near the -- actually in South Texas near the border, the Rio Grande, we have what's called here the West Austin Chalk, and that's important because back in 2018, if I said Austin Chalk, when we said Austin Chalk, everyone said, that's -- they almost said it's a 4-letter word. Because the history of the Austin Chalk was not a good history and it was further east. It would have -- a good well would come on but then it would go away too quickly. And then the next one wouldn't work. And the P10/P90 it was just really, really high. Lots of variability. This Austin Chalk was very different. And our technical team said, this is just a completely different play all together.

We truly should have renamed it the Wolf Chalk or something like that, but we didn't. Took time to prove again to folks. And if you look at the slide on the left, and the picture on the right, you see that eventually, these -- we're drilling wells that the returns are very similar to the Permian Basin, great asset, lots of inventory. We're now seeing 465 locations, and we're just a little over 100 into that. So another great story, top-tier assets, driven by the technical focus. Just an update on both of these assets, they continue to perform really well, and they both continue to have a lot of inventory in them.

These charts we just -- we typically update these. Periodically, it's third-party data. Enverus actually gives us the data for this. And it compares -- the one on the left is Howard County versus our peers. The one on the right is the Austin Chalk versus our peers. And it's just a cumulative production plot showing the average performance of the wells versus the peers in those areas. So this is an enormous amount of data. These are wells going back to 2021 for Howard County and 2018 for the Austin Chalk. So just enormous sample size and just continued outperformance versus the peers in both of these basins.

I said premier operator, that's an important part of the mix also that technical DNA is also in the operations of the company. And that's all the data driven before the well has even drilled, making sure we hit the landing zone perfectly. Drilling longer laterals, trying something new on every completion, bigger completions. And what you see is over the last 4 years, our average time to drill a well, our average time to complete a well has just gone down and down and down and down. And the result is 15% lower D&C cost over that period of time, just based on premier operations. Great work there.

The insets in the green. I'll let you read those yourselves. Those are some examples of some things that they've been doing this year to improve those results as well. Okay. Let's move on to the third story, the Uinta Basin. So the technical team looks for opportunities to add to our inventory, to add to our top-tier assets not just in the areas that we're in, they certainly do a lot of that, and we're able to organically add inventory. We're able to add an Austin Chalk interval on top of the Eagle Ford, which is what happened in South Texas, but they also look in other basins where there is opportunity to deploy our expertise in a new area if the opportunity presents itself.

And that happened a little over a year ago in the Uinta Basin. What we identified in the Uinta was an asset that, again, not well known, not unknown by everyone, but not well known, an area that might look a little smaller to majors, certainly. And to others that might have looked, they might have heard notice things like waxy crude, having to rail out of the area. So things that we think are opportunities that might have looked as deterrence. But what the technical team really loved and loves is the characteristics of the reservoir. So this is 4,000 feet of stacked pay, potentially 17 intervals. So you can imagine the opportunities and the wonderful playground, if you will, to really deploy our expertise into.

And then that excitement met opportunity, which it has to when a private called XCL Resources was selling the assets by design, by plan, and we were able to acquire this position 63,000 net acres for a couple of billion dollars a little over a year ago. Very excited about it, all the reasons that I just told you we love about it. We still believe that -- and the integration is complete. We were able to hire essentially everyone that we hoped to. The cultures were very similar. I think the new employees love working for SM. It's just really a match made very well.

There's a lot of innovation going on in the area, and I'll talk about that on a later slide, but the performance has been very good so far, and we're very excited about this asset. This is just showing you some production. This is, again, a similar chart to what I showed you earlier on Howard County and Austin Chalk. Third-party data. Again, this is inverse data, cumulative production plot. And what you see is the production out of this basin, the top 2 lines, the dark blue and the not so dark blue line. One is what's called the upper cube, one is called the lower cube, there's also a third cube I'll talk about, which is the deep cube. What you see is the production profile of this asset is very, very similar or better than the Midland Basin.

What we've been showing the last few quarters, we've been saying, but we've been actually showing the results. It's really important to remember despite the additional costs involved for transportation out of the basin of the oil, the waxy oil, there's high demand for that oil, by the way. But despite that additional cost, the margin per BOE in the Uinta is almost the same as our Midland Basin margins. And that's because mainly the high oil content. This is 90% oil in the Uinta. Some nice innovation and some opportunities to continue to drive cost, we believe, in the Uinta Basin asset. The folks at XCL, a lot of ex EOG people really innovative, I would say, very well-run operation, things like owning our own sand mine. We're excited about that really, we've seen how that really lowers the cost per well. Some centralized frac operations where you have the completion spread in 1 spot, able to run lines and actually frac other areas without moving, mobbing and demobbing so lots of nice savings there. You can see a picture of ascending the sand versus having to put it on a truck on a little rail that's been built.

Just a lot of innovative things that have been done in the basin already that we're continuing to do a lot of simul fracking too, a lot of examples. So premier operator, we -- I think we've been saying this at least since I've been here, you can't call yourself a premier operator if you're not a top steward of a top protector of people and the environment, and that truly is part of our DNA. We're very proud to deliver that result. And if you want to look into that further, there's just a ton of data on our website updated with a lot of those statistics. I said strong balance sheet. That's obviously a very, very important part of being an E&P company and being able to repeat the success that we've been talking about.

Our balance sheet is currently very strong. It's -- I like to talk about balance sheets in the terms of liquidity, maturities and total leverage. Starting with liquidity, lots of liquidity, a $2 billion borrowing base, which is undrawn, you see it matures way out in the future. It's that really tall bar. That was recently redetermined at lower prices. The borrowing base is actually $3 billion. The bank commitment is $2 billion undrawn again. We're actually building cash currently, $100 million of cash at the end of last quarter. You can see the maturities of the debt that we do add is staggered out reasonably well. We're in debt reduction mode currently.

And obviously, we'll be targeting that next maturity, the volumes that are in 2026 and then the ones in 2027. Both of those are callable at par currently, so we can take those out whenever we wish, kind of philosophically, and we've been very clear about this. Certainly, since 2022, when our leverage is -- it's pretty simple. When our leverage is above 1x, we prioritize free cash flow to reducing debt to getting it back below 1x. When it's below 1x, we prioritize that free cash flow to return of capital and we do that in the form of share buyback. Where we are currently is getting back really close to that 1x area, 1.2x at the end of the second quarter.

If you look at that pro forma for the Uinta acquisition it's 1.1x. I think we said on the call that if you just assumed the strip to the end of the year right at 1x at the end of the year. So we're kind of in that zone right now where we would be considering getting back into share buyback. The way we look at return of capital is, and we kind of began this in a big way back in '22 after we got below 1x, we said that's what we're doing first. Once we got below it, we announced a fixed dividend and a share buyback program, we believe that's the right way to return capital, a fixed dividend that you can count on, that hopefully will grow with the growth of the business.

When we announced it back in '22. We came out at $0.15 a quarter and we've been able to increase that twice since then, once to $0.18 most recently to $0.20 per quarter. So that's the current fixed dividend. We announced a $500 million share buyback during the last few years from '22 to '24 and we were below 1x. I think we acquired $370 million of that $500 million during that period, pulled in a little over 10 million shares during that period. Get the Uinta acquisition, use all cash for that acquisition. So leverage went back up closer to 1.5x. So since then, we've been working it back down to the 1x, the Board has announced a reloaded $500 million share back, which we were anxious to get back into as we kind of get into this near 1x or below area. So that's our philosophy for return on capital.

So with that, I'll close. So again, if you're just going to remember 4 words, it's returns-based technical focus. That's who we are premier operator of top-tier assets, and with that, I'll close it up, Betty and open it up for questions.

We'll open up for Q&A. But I'll kick it off way. When you guys first looked at the Uinta Basin. Was that something that was actively pursued in the Uinta basin, what did you see at the time of the acquisition? What did you underwrite? And how did that -- how the reality compared to what you underwrite and how you think about the potential or undiscovered potential for here?

Yes. No, that's a great question. Thank you for asking. I'll just kind of walk through that again. It's all about the technical team and looking for areas that are very similar characteristics, frankly, to the Permian Basin, the stacked pay very oily areas that we can deploy our technical abilities on and generate a return. It's not just technical focus. It's a returns-based technical focus. It would be very hard to replicate what we're able to acquire in the Uinta in the Permian, for example, so competitive. It would be very hard to replicate those returns.

So what did they see? What did the technical teams see? They map everything. I shouldn't say everything. It's not -- we're not looking all around the world. Let's just say North America, not offshore. But areas like the Uinta, they get very excited about when they see these characteristics, and that is primarily, again, the very, very thick stack pay. The 4,000 feet of oil, 90% oil with all the potential of the intervals. Remember when we talked about Howard County, the industry thought maybe 3 intervals. And now we've seen 10 years later, 9 intervals. So things like that, all the upside of the intervals.

You got -- so you got -- those 7 intervals are kind of broken up in 3 cubes, we call them, like the upper cube, the lower cube, which is in the middle, sorry, and then the deep cube is the deepest so that lower cube is what was mostly underwritten in the acquisition. That was the most known. That's where there's clear value. And that's where 90% of our capital is going this year. But we're very excited about the potential in the upper cube. And then even the deep cube is just really, really upside, right, to be really explored. So that's kind of the makeup of it.

You'll see us testing more the upper cube next year, I'm quite sure. A lot of the things that when you said, what can we do I talk about the technical team, and it's not just the way we drill and complete the wells, but it's kind of our philosophy of co-developing we think will also make the overall asset much more valuable at the end of the day versus just focusing on intervals that we know first, but actually codeveloping intervals together, we think works very well. So that's...

I do think you guys have the credibility in Howard County because as you said, the 3 interval, I didn't even tell we're at 9 now so that's quite impressive. Maybe from an M&A standpoint, do you think you have scale in Uinta now, would you want bigger? And is there other parts of the U.S. that technical team have looked at that looked -- found interesting?

Yes. So obviously, it's always better to have more. Would we like to grow in the Uinta? Sure. We knew going into that acquisition that we really wouldn't have to. It's a really good size position, certainly for a company our size. We will look for opportunities, though, if they can meet the criteria that we have for being returns based, the assets they need to be what we consider top-tier assets, and that means they generate really good returns at commodity prices, oil prices much lower than certainly where we are now.

So we'll look -- there's other people around us, and we will look for those opportunities. I think there would have been a lot of concern a few years ago. FTC concerns with respect to getting too large in the area. So that's something to factor in. We think we don't know. We think that's probably a little bit easier than it would have been just given the dynamics of the basin, mainly so much of the crude is now trained out -- railed out of the -- actually out of the state and the administration may be a little friendlier to that. But we don't know and we wouldn't count on it, but it feels intuitively like it probably is. So we would look for that.

Do we look at other basins, yes, I mean we -- it's not -- we're very happy in the basins we're in, and the plan would be to be able to grow in those, but we're not against looking in other basins. It just wouldn't be the -- I don't think it would be the near-term plan to do that, but that's possible. And then on M&A, again, we certainly appreciate the benefits of scale from an investability standpoint, from a valuation standpoint. So we look at every possible way that we could take advantage of that. But we don't believe in doing something just to do it. We don't believe in scale just for the sake of scale. It needs to meet criteria of being accretive again, assets that compete, assets that are top-tier assets, certainly not seaming the balance sheet the other direction from a leverage standpoint is not something we're interested in. But yes, that's kind of how we view all of that.

It's interesting to hear that the margin is actually comparable to the Permian. From a return standpoint, like maybe where is the well cost now and then how quickly that could come down? And do you expect the full cycle or half cycle return can be competitive as well?

Yes, we certainly think so. I mean from a well cost standpoint, I think company-wide, we've -- I think the most recent number we put out is around $725 a foot. That's company-wide on average. We didn't report it by basin. The Uinta is probably a little north of that, but not significantly. Yes, we completely believe that we have the ability to drive costs down, drive efficiencies down. That slide we showed that was just the Texas assets. The drilling and completion and the lower cost that's resulted from what we've been able to do in that area. No reason to believe that we can't continue to do in the new basin.

Makes sense. Maybe wrapping up with the cash return, I think you have reached your net leverage target at the end of 2Q with a 1.2x leverage. How do you think about the allocation of free cash flow from here? I don't think you have an explicit free cash flow return of figure. So how you think about balancing the buyback versus raising base dividend versus just putting it on the balance sheet.

Yes. Great question. So again, so I'll just repeat. So as we approach 1x, that's kind of the area where we start looking at prioritizing free cash flow toward return of capital. As we get -- we're not there yet, but we're close enough to where we're considering visibility and how well we -- I mean if you go back to '22, if you think about how we did that, we were on our way to 1x and we actually started the return of capital program kind of as we were approaching it because we felt so strong about the environment and the sentiment and the visibility we had, things are pretty uncertain right now in the macro we know that. So we might be a little more cautious.

However, we feel really strong about our program and the returns and the cash flow we're generating. So as we start kind of moving some cash flow to share buybacks, that would be the first choice. And we -- I'll just say the way we did it before, nothing's changed. We don't have any programs. We just -- during open window periods, you might see us in the market supporting the stock certainly on weaker days. I mean that's just kind of our philosophy. So you might start seeing some of that any time.

With respect to doing that versus the fixed dividend, we're happy that we've been able to raise the fixed dividend twice. We kind of look at that in the context of overall size of the business, how much free cash flow we're generating, again, visibility, what yield does that show versus our market cap and enterprise values.

So there's nothing magical about when we would raise the fixed dividend again, it would just be more of a -- this is a time where we feel very strong about where we are and the visibility we have coming. For now, I would anticipate the share buyback will be the choice, but we'll continue to evaluate that.

Great. All right. I think without any questions, then we'll wrap it up. And Wade, thank you so much for the update. And it's a lot of momentum across the business. So good to see that.

Thank you. Thanks, everyone.

Greetings. Welcome to SM Energy's Second Quarter 2025 Financial Results and Operating Results Q&A session. [Operator Instructions] Please note that today's conference is being recorded.

At this time, I'll turn the conference over to Pat Lytle, Senior Vice President of Finance. Pat, you may begin.

Thank you, Rob. Good morning, everyone. In today's call, we may reference the earnings release, IR presentation or prepared remarks, all of which are posted to our website. Thank you for joining us to answer your questions today. On the call this morning, we have our President and CEO, Herb Vogel; COO, Beth McDonald; and CFO, Wade Pursell.

Before we get started, I need to remind you that our discussion today may include forward-looking statements and discussion of non-GAAP measures. I direct you to the accompanying slide deck, earnings release and Risk Factors section of our most recently filed 10-K, which describe risks associated with forward-looking statements that could cause actual results to differ.

Also, please see the slide deck appendix and the earnings release for a discussion of forward-looking statements and definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures. Also, our second quarter 10-Q was filed this morning.

With that, I will turn it over to Herb for brief opening comments. Herb?

Thanks, Pat. Good morning, and thank you for joining us. Before we get started, I want to make sure that you all took a close look at Slide 6 in the slide deck we posted yesterday afternoon and heard Best comments on the prerecorded call.

Over the last 5 years, our growth has been intentional, strategic and compelling. Slide 6 shows that since 2020, we have grown both net proved reserves and net production by over 60%, while increasing our oil percentage and production margins. Amazingly, we achieved this growth while share count remained flat, meaning no dilution, and we cut our leverage by more than a full turn from the end of 2020 to where it is today.

In other words, we have delivered a step change in scale and derisked the balance sheet, all while not diluting our shareholders. benefiting per share metrics significantly. You can attribute this exceptional outcome to date to our team's extensive geoscience, engineering and advanced analytics experience in unconventional resource development, all hyper-focused on adding shareholder value. We see a future where we can continue to access underappreciated assets, apply our deep technical skills, repeat this level of performance and grow shareholder value meaningfully.

With that, I'll turn the call back over to Rob to take your questions.

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

First, just wanted to ask on cash taxes. You gave some specific guidance on cash taxes in 2025 post the passage of the tax bill. But how should we be thinking about your cash tax obligations as we go into 2026 and into future years?

Zach, yes, this is Wade. Good question. At this point, for the foreseeable future, I would assume something similar. If you looking into '26, under the new plan and the increased level of deductions that we will be able to achieve.

I think our base plan right now looks very similar, depending on commodity prices, of course. And if you're asking about years beyond that, assuming that those laws stay into effect, it's -- and assume our spending stays at similar levels, it's going to be a pretty similar result for quite a while.

My follow-up is on the Uinta. You grew the Uinta pretty significantly quarter-over-quarter in 2Q compared to 1Q. How do you think about Uinta production from here? What's the capacity of that asset over the back half of the year and as we go into 2026?

Zach, it's Beth. When you look at our turn-in lines for Uinta, we had a majority of those coming on in the first half of the year. So we came out of the gate really strong. We also have the outperformance of our wells in the quarter that led to the high production.

But we'll have more of South Texas and Permian coming online in the second half, but Uinta continues to stay strong. And we're really excited about what we saw in Q2 and look forward to seeing continued performance and repeatability in that asset going forward.

The next question is from the line of Leo Mariani with ROTH MKM.

I wanted to just focus a little bit on some of the additional activity. I think if I read this right, it sounds like you guys are adding an additional 10 net wells to the drilling program for roughly $75 million. Was that the total that got the $75 million seems maybe a little high if you're just drilling wells.

It seems like you're not completing them, but maybe these are just drills. And it sounds like they're also all non-op. Have some of those kind of already happened? Are they hitting in third quarter? And do you expect to see CapEx come down in 4Q?

Leo, it's Beth. When you look at the timing of that, we had additional activity pull into Q2. So we had the 2 additional net drill wells and 6 turn-in-lines that came in, in Q2.

But when you look at the overall capital raise that we had in new guidance for the year, it's primarily associated with non-op and better line of sight to those projects. So some of it is acceleration and some of it is nonoperated projects that we know now that we're participating in, high-return ones in the Midland Basin, primarily associated with those.

Yes. And Leo, those don't add any production in '25. That's all in '26.

Okay. So do you guys expect to see CapEx come down here in the fourth quarter then? I know obviously, you dropped a lot of the operated rig activity.

Yes, Leo. We expect fourth quarter capital to come down.

Okay. That's helpful. And then on the Uinta, obviously, it sounds like well performance has been certainly quite a bit stronger. This quarter, you had a lot of wells. It look like the IP30s were up quite a bit despite shorter laterals.

I was hoping you could provide a little bit more color on sort of what drove the improved results? And can you also comment on how well costs are trending? Have you been able to bring the well cost down in addition to seeing better performance?

Yes, on both. So what I would say is that what we're seeing is our technical expertise combined with that of XCL's former operational execution, and we're seeing capital efficiency really drive costs down there. And we showed that also on Slide 11, especially as it relates to the conveyor system and where we are now.

So costs are coming down there in the Uinta. And also, when you look back on Slide 10 and you see the well performance, truly stellar well performance. Our subsurface team worked very well with our completion optimization, our design going forward, and I think you're seeing some of the benefits of that combination.

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

I wanted to hit on the Uinta Basin first in a little bit more detail. I know we're still waiting for the first fully SM start to finish well design. So year-to-date, I think all these wells thus far were kind of part of the inherited DUC backlog from the deal when thinking about what spacing or zones that might have been targeted.

But just kind of given how you all have had close to 50 of these wells online in the first half of the year, it's a decent sample size with a handful of months of public data, which all look to be performing better than what we saw from the program last year that your predecessor ran. So just trying to get a sense for when you all look at the data and changes within the program on a year-over-year basis, what are some of the main differences you all would pinpoint as specific drivers for that positive rate of change?

Yes. Thanks, Oliver, for the question. I think when you look at our top initiatives as we evaluate the Uinta, we're really looking at the entire development of the wine rack. So we're looking at landing zone, our co-development strategy within the lower cube as well as looking and evaluating the upper cube. We continue to extend laterals across the acreage position, and we really look at maximizing capital efficiency. So I think when you combine all those things, you see that repeatability in the 22 wells that we put online.

Okay. Makes sense. And maybe just a quick follow-up on the trajectory, just thinking through how the program was fairly front-end weighted with respect to CapEx until.

So just doing some back of the envelope math, it looks like 15% to 20% of your full year CapEx remains for Q4, roughly 15% of TILs and most of the Uinta oilier wells were very front-end weighted. So when we're kind of thinking about just Q4 and Q1, any sort of color that you all could provide on the magnitude of potential roll-offs on oil volumes or any sort of color on the expected shape as we kind of head into 2026?

Yes. Oliver, I think your back of the envelope math is pretty accurate there for fourth quarter, especially on the TIL counts and what that implies. So we're not really going to discuss our plans for 2026 until our normal timing, which is February.

And last -- in July last year, when we announced the Uinta transaction, we said we were going to reduce the rig count, and we're doing that. So -- and we're down to 6 already, and it would be pretty much safe to assume we stick with 6 rigs for next year, spread pretty evenly across all our assets between South Texas, the Midland Basin and Uinta.

And we kind of flagged that, that would generate pretty much flattish BOE production on a little bit less CapEx year-over-year, even without assuming deflation. So we're going to look at the plan later in the year, evaluate where we are on commodity prices and then really work to maximize that free cash flow over 2 to 3 years as we usually do.

So with the commodity price experience that we've had this year, it's just really difficult to figure exactly where things are going to be with -- is there going to be a tailwind on gas or headwinds on gas and then on oil, likewise. So that -- we'll do our normal program there. And as usual, it will be focused on free cash flow generation.

Next question is from the line of Scott Hanold with RBC.

Certainly, a lot of focus on the Uinta, and you all had a nice step-up in sort of the returns and performance there. My question is, do you think there's some sustainability for that?

I know there's going to be general ebbs and flows, but should we level set things to -- this was a sort of a peak quarter? Or do you expect things could be status quo even better moving ahead based on what you know today?

Yes, Scott, I'll start and then hand it over to Beth. But we went into the Uinta Basin because we saw all this potential, not just near term and in the lower cube, but beyond that for massive inventory expansion. So we do see it as quite sustainable on a drilling program and the ability to grow inventory. And with that, I'll hand it over to Beth for the rest of that.

Yes, I agree. And if you're looking specifically at the production this year and what does that mean moving forward, it's really all timing of our turn-in lines.

So we have stellar performance. Most of that's weighted toward the front half of the year. So as we continue to complete wells throughout the year, we'll still bring on great -- just as Herb said, that repeatable performance that we have and sustain our cash flow coming out of the Uinta.

Okay. And my follow-up, this one is probably for Wade. On shareholder returns, you guys have now a line of sight on hitting your leverage target. Would you anticipate being a little bit more, I guess, not cautious, but a little bit more conservative in terms of when you'd flex that? Or would you be willing to step in if the opportunity is right sooner than later? And what kind of scale would you feel comfortable doing that at?

A lot of good questions there, Scott. Thank you. Yes, no, we are -- line of sight that is a good word. I mean we're close to getting there. I mean we ended the quarter at 1.2x, really more like 1.1x if you look at it on a full year basis for -- and I think we mentioned in our comments that based on just using the current commodity prices, we see it happening by the end of the year.

So we're really bouncing along really right there close to 1x the second half of the year. So to answer your question, I could see us opportunistically stepping in at some point. As we see stability in the market, we're looking for that also. We've seen some stability in recent weeks. We'll continue to monitor that. And I'm talking about oil prices primarily.

So yes, so you could see us stepping in. We have -- just to remind everyone, we have authorization from the Board, $500 million share buyback program. So you very well could see us step in there, especially if there's a period of weakness that we want to support.

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

I wanted to ask on the Uinta, I think you said 90% of this year's program was focused on the lower cube. You've talked about the 17 prospective intervals there. I guess could you provide an update on how many you've tested thus far? And as you look into next year with this year's program being so much focused on the lower cube, any more plans to delineate some of these other zones next year?

Yes. Thanks, Mike, for that question. I mean when you look back kind of at the historic landing zones that we've seen across, a majority of those have been in the lower cube. So there's 7 different landing zones within the lower cube itself.

And we've had production out of all of those that we're evaluating and taking into account in our geologic model as we set the first SM well designed and executed pad that we talked about on the call that will come online in '26.

We also have about 10% of our program associated with the upper cube. And we have several landing zones in there, too, that we're monitoring to make sure that we pull that in, design the right completion and make it most capitally efficient and value-adding going forward.

Appreciate that, Beth. And then you had a pretty large beat on production this quarter. you did raise your oil guidance for the year, but I guess a little surprised you didn't push the overall production guidance higher. Could you speak to that at all? What prevented you from taking the total BOE guidance for the year?

Yes. I think the increase in volumes that we saw this quarter was really due to the mix that we had coming from the strong performance on our Uinta and all of the POPs that you saw there. The production profile really has just shifted to earlier in the year. So that's shifted forward, if you will. We still see Q3 slightly higher than Q2, and that's reflected in our guidance for Q3.

But that production has moved forward in time due to our efficiencies and putting more wells online, but primarily associated with the outperformance that we've seen in all 3 of our assets.

Our next questions are from the line of Michael Furrow with Pickering Energy Partners.

Just got a follow-up to Zach's cash tax question earlier. In the OBBA, the capitalization of R&D seems to include a multiyear catch-up and should benefit operators like SM that have historically had higher levels of R&D. So I'm curious if you could add some color to that statement and if SM expects to see some benefits to longer-term cash taxes, particularly from the R&D contribution angle.

Yes. No, that's a good point, and that is definitely part of our conclusions with respect to changing our guidance on cash taxes. We are -- we do accumulate a pretty significant amount of R&D every year and now having the ability to deduct those quicker is definitely part of the impact. And that will be a recurring thing for us. We do incur R&D expenses every year. And so that is a component for sure.

Great. Appreciate the color. And then just a follow-up for me on the Uinta. It looks like operations are humming along. Cadence seems ahead of schedule for the full year guidance of 50 net completions, completing 41 year-to-date.

So should we consider the 50 completion guidance as sort of a hard target for the year? Or would the company consider continuing to run a steady program in the basin potentially turning into sales a bit more wells than originally contemplated if the efficiencies allow for it?

Yes. Thanks, Michael. This is Beth. I just wanted to point out one thing that Herb mentioned on the call also as it relates to Uinta. We started the year with a double barrel, which is similar to what you might call simul-frac in other basins. So we started with a double barrel and are down to single barrel as our frac fleet runs very efficiently and catches up with our rigs.

But we're going to continue to run that frac fleet as efficiently as possible. And if that moves more of those turn-in lines into the year, that's great. But right now, we're catching up to the rigs a little bit, and we're seeing those efficiencies, and that's just a product of going from the double barrel to the single barrel in our frac.

[Operator Instructions] The next question comes from the line of Tim Rezvan with KeyBanc Capital Markets.

I'm not sure if this is for Beth or Herb. The release in the prepared comments repeatedly sort of reiterated the importance of logistics and optimizing takeaway out of the Price River terminal.

I was curious if you could be a little more specific about what was done? And if that -- if you -- is that more a reliability issue? Or could we see a potential uplift to realizations as you look to maybe get more -- you went to barrels on rail?

Yes. Thanks, Tim, and that gets into the details of the rail transport. So I'll hand that one over to Beth. And there's a lot of great opportunities in front of us there, which is pretty exciting to see. We anticipated some, but it's probably even better than we thought.

Yes. And what I would say is that our team had to respond to that increase in production growing faster. As a result, we sold -- of course, we maximize -- and we said this before, we maximize as many barrels as possible to the Salt Lake City refineries, and we were able to do that.

And then we were able to work with our team at Price River Terminal as well as our railroad logistics team to move. We just moved more cars, and they did an amazing job moving the barrels in and out of that terminal, and we hit record volumes. So it was a collective team effort across our infrastructure partners as well as our operations team.

Okay. So we shouldn't think of this as a sort of marketing strategy change. This is just good execution?

Yes, exactly.

Okay. Okay. I appreciate that context. And as my follow-up for Herb, in the past, you've been pretty cautious on natural gas and you've allocated capital, I guess, the Board has accordingly. I know the last time I spoke to you in person about this, it was December, you were cautious on gas.

And it feels like we've had several price cycles since last December. I was curious, are you getting more constructive on gas as 2026 approaches? Or sort of what's the kind of internal view given the volatility and the export outlook?

Yes, Tim, it's a great question. And Wade always reminds me if you're going to forecast, forecast often. I would say that we're just cautious on gas because of the ability to develop supply fairly quickly. We've really been watching how does the market perform through the shoulder months.

And we're really looking for sustained price signals at a higher level. And we even had a 2 handle earlier in the year. And so we're just cautious. We think there's going to be a day. We're looking at the structural demand changes between LNG and the data centers. And when we see those really come along that the turbines are available for them to create that demand, then we would be a little bit less cautious on the gas side and maybe lean in a little bit more.

But right now, it's pretty much coming out as we kind of expected, which is supply does respond to market signals. And we feel like we've got a great plan. Oil has turned out a bit better than we expected from April and May, and it's actually right at our budget for the year. So I don't know how that will continue through the end of the year, but -- we didn't see a reason to change our plan to respond to the shorter-term gas price signal. And obviously, there's been a little bit of erosion, unfortunately, in that one.

We are happy to hedge gas in the out years.

The next questions are from the line of David Deckelbaum with TD Cowen.

I did want to follow up just on the marketing in the Uinta. Just given the wider basis this quarter, particularly with the higher production levels, what is the outlook for basis in the back half of the year and then heading into next year as you continue to ramp the asset?

Yes. David, it's asking about basis for Uinta is a bit challenging because the rail volumes are sold at the refinery locations, and those can vary from, call it, Houston being most of them and the markers there versus in Salt Lake, where we sell at more or less the wellhead or the tank.

But I'll let Beth answer -- give a little more granularity around that. But it's not like a single basis market that you'd look at in the Permian or other markets.

Yes, I totally agree with you, Herb. And our marketing team just continues to work with different purchasers as we see that demand for our product continue to increase. We look for the highest realization that we can have across.

And of course, the transportation cost to get us to Salt Lake City is lower than railing it to Houston and to the Gulf Coast, but we continue to look at what are our -- ultimately, what's the best margin and best return. And that's what our marketing team focuses on, on a monthly basis. And so we'll continue to do that and optimize as best as possible.

Appreciate it. And then I was asking for a little bit more color on the increased non-operated budget this year. Is that mostly a function of catch-up in activity just given commodity signals that are out there? Or are these efficiency gains that you're seeing on the non-operated side as well in terms of just drilling and completion times?

David, I'll start that and then turn it over to Beth. But we -- sort of unique this year. And when we put the budget out there in February at $1.3 billion, we noted that we did not include non-op because it wasn't clear exactly what the non-op program would be from a couple of operators.

Then that was exacerbated with the uncertainty in commodity prices, particularly after April. So given that, we didn't include it, but we said we'd tell you how much we were spending each quarter. Now it's a clear outlook.

We also have the ability to potentially adjust that program with the different nonoperators. And we've dialed in what we think they're going to do and how they're going to execute. And so we just brought that all in for the full year. But Beth, do you want to add anything on that one?

No, nothing really to add. We just have better line of sight of what those projects are, and we participated in them because they have very strong returns.

At this time, we've reached the end of the question-and-answer session. And I'll now turn the call over to Herb Vogel for closing remarks.

Thanks, Rob, and thank you all for joining us today. We look forward to seeing a number of you at upcoming events. Have a great day.

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

Good afternoon. This is Pat Lytle, Senior Vice President of Finance. Welcome to SM Energy's Second Quarter 2025 Financial and Operating Results Webcast. Before we get started on our prepared remarks, I remind you that our discussion today will include forward-looking statements. I direct you to Slide 2 of the accompanying slide deck, Page 5 of the accompanying earnings release and the Risk Factors section of our most recently filed 10-K, which describe risks associated with forward-looking statements that could cause actual results to differ.

We will also discuss non-GAAP measures and metrics. Definitions and reconciliations of non-GAAP measures and metrics to the most directly comparable GAAP measures and discussion of forward-looking non-GAAP measures can be found in both the earnings release and slide deck. Today's prepared remarks will be given by our President and Chief Executive Officer, Herb Vogel; our Chief Operating Officer, Beth McDonald; and our Chief Financial Officer, Wade Pursell. I will now turn the call over to Herb.

Thanks, Pat, and good afternoon, everyone. We had a truly standout second quarter as record production volumes drove a strong financial beat across many metrics with the Uinta Basin standing out as a major driver of our success. We paid off our credit facility and built a cash balance of over $100 million, progressing nicely towards our 1x leverage target, which we expect to achieve near year-end in the current commodity price environment. Record production volumes totaled 209,000 barrels of oil equivalent per day, exceeding the midpoint of guidance by 5%, driven by top-tier asset performance and strong execution.

Uinta Basin volumes outpaced expectations, and our operations and marketing teams worked effectively to ensure timely sales by streamlining logistics and optimizing takeaway. These operational wins translated to bottom line strength with beats versus consensus for adjusted net income, adjusted EBITDAX and adjusted free cash flow. An important milestone was achieved during the second quarter. We successfully completed the integration of our Uinta Basin assets and entered the optimization phase. Our team is actively pursuing margin-enhancing opportunities across the entire value chain, optimizing well design and deepening their understanding of the 17 prospective intervals across our Uinta Basin acreage position.

We are proud of the results we achieved during the first half of 2025. However, we recognize that the industry still faces challenges for likely the remainder of the year and into 2026, including the potential impact of OPEC+ supply decisions, sanctions, tariffs or other geopolitical tensions. While we can't predict these outcomes, we continue to manage commodity price volatility and risk through our hedging program. Additionally, our supply chain team continues to mitigate tariff-related risks and pursue deflationary savings.

We are well positioned to weather a lower oil price environment, if it materializes due to our increased scale, low breakeven program and a strong balance sheet with ample liquidity. As we said in May during our first quarter results webcast, our 2025 plan was developed to optimize the allocation of capital across our 3 core assets with a plan already in place to slow the pace of development throughout 2025. We had dropped from 9 to 7 drilling rigs during the first quarter and are now down to 6. On the completion side, we ran double barrel frac operations in the Uinta Basin into the second quarter and reduced to single barrels during the quarter.

Wade will speak to our capital expenditure expectations later in the call, but we are obviously very pleased with our operational execution during the first half of the year. Our team continues to drive differentiated performance, which Beth will speak to shortly. The successful integration of our Uinta Basin assets, coupled with strides in capital efficiencies and optimization of takeaway capacity are just a few examples of how we're unlocking value across the business. We remain focused on executing a multiyear plan to maximize free cash flow, reduce debt to our target leverage and deliver on our stockholder return commitments. I will now turn the call over to Beth for operational highlights and progress made during the quarter. Beth?

Thank you, Herb. I'll begin on Slide 6 by stepping back to reflect on how far SM Energy has come over the past 5 years. Our growth has been intentional and strategic with the Uinta Basin acquisition serving a pivotal milestone, delivering a step change in scale and positioning us for even greater impact. This chart illustrates that since year-end 2020, we have significantly grown estimated net proved reserves and net production each by over 60% with an increase in oil mix contributing to higher production margins.

Amazingly, over the same period, our share count remained flat, and we cut our leverage ratio by half from 2.3x at the end of 2020. We believe this to be a clear reflection of our team's execution and vision. And although we've been in business for nearly 120 years, we're just getting started. On Slide 7, we highlight many of our technology initiatives. One example is our talented technical team developed and advanced machine learning models to refine SM well designs. And through this workflow, we have realized the benefits of these investments by delivering stronger performing wells and higher cash flows.

On a later slide, you will see this illustrated as our Howard County wells perform over 30% better than peer operated wells. Stay tuned as we continue to preview our innovative efforts. Next week marks our 16th Annual Geosciences and Technical Conference deemed next horizons, honoring our origins and forging ahead. I'm excited for our employees together for 3 days to learn from each other and collaborate on bold ideas as we build for the future. Moving on to the next couple of slides, you'll see familiar graphs plotting average cumulative oil production for our 3 core assets. What stands out is how each asset consistently delivers strong competitive results within our portfolio and how they continue to outperform peer operated wells.

That's a direct result of our team's discipline in capital allocation, the depth of our technical knowledge, which I just referenced and our unwavering focus on execution. It's this combination that drives our differentiation, and it shows up clearly in the data. As highlighted later in this deck, we hosted various federal, state and local officials on a field tour in Utah, and we're proud to hear State Senator Ron Winterton, comment on our bold leadership in deploying cutting-edge technology. We believe that our recent well results on Slide 10 showcase just that.

During the quarter, we benefited from strong well performance in all 3 of our core assets. The robust performance of these 22 new wells in our Uinta Basin, combined with our marketing team's outstanding work to improve transportation logistics and optimize takeaway contributed meaningfully to our second quarter production beat. The South Texas Austin Chalk continues to generate exceptional returns. This is an impressive pad that is projected to reach payout in just 8 months.

Next up on Slide 11, we're highlighting some of our early integration and efficiency wins in the Uinta Basin. The team truly hit the ground running and has shifted into optimization mode.

You can expect that story will continue to evolve as we evaluate the results of our first fully designed and executed SM pad development in early 2026. During the quarter, we achieved a new milestone with a record daily volume transported from Price River Terminal via rail. As a reminder, the waxy crude produced out of the Uinta Basin commands a market premium. And in the second quarter, the Uinta Basin had the highest cash production margin of all 3 of our operating assets. We also successfully drilled the first 3-mile lateral in the upper cube in the basin, setting the stage for future development and higher returns.

Lastly, we safely relocated the centralized remote e-fleet, which will now frac over 30 wells into 2026 using 100% recycled water. We also started up our sand conveyor system known as the [ Sand Slinger 3000 ], which reduces costs, eliminate sand truck traffic and improves overall safety. On Slide 12, we spotlight our Texas assets, long-standing pillars of consistency and performance within our portfolio. This slide shows that reliable execution day in and day out results in efficiency gains. Since 2022, we have reduced our average D&C cost per foot by 15%. Notably, we recently drilled the 2 fastest Woodford wells in the Midland Basin in our history, achieving speeds 25% faster than previous wells.

Further, we continue to extend the length of our laterals, successfully completing more 4-mile wells in the Midland Basin, while also evolving our well design to further enhance performance and efficiency. In South Texas, we are utilizing lease gas to power frac operations and optimizing sand logistics to reduce nonproductive time and save costs. Finally, turning to Slide 13. This summer, we welcomed several groups to Utah for field tours, giving them a firsthand look at the uniqueness and safety of our operations.

As part of our outreach, we partnered with the Utah Petroleum Association and the Uinta Basin Technical College to host various federal, state and local officials. It was a collaborative effort that reflects our commitment to being a responsible operator and an engaged neighbor, one that values transparency, education and long-term relationships. And with that, I will turn the call over to Wade to talk about second quarter financial results. Wade?

Thank you, Beth. Good afternoon, everyone, and thanks for joining us today. I have 3 parts to my discussion this afternoon, and the summary is: one, performing at a high level; two, prioritizing debt reduction; and three, plan intact. If that's all you remember from my part, that will be enough. Now for some details. First, performing at a high level on Slide 14. The team performed at a very high level in the second quarter, delivering a record for quarterly net daily equivalent production and beating the midpoint of our guidance by 5%. Oil production was even stronger at 115,700 barrels per day or over 55% of total production.

Financially, we delivered huge beats to consensus estimates, including adjusted net income, adjusted EBITDAX and adjusted free cash flow. Production outperformance was driven by a few factors. We successfully pulled forward some of our activity into the second quarter because of more efficient drilling and completion operations in the Midland and Uinta Basins. Importantly, with these higher-than-expected volumes, our team's efforts to streamline transportation logistics and optimize takeaway were key to selling the incremental barrels. In addition, our base production in Texas outperformed our expectations.

Commodity prices were more challenged during the quarter than in the first quarter, but our hedges offset some of the weakness. On the cost side, operating costs were down 7% per BOE sequentially, driven by lower LOE and lower production taxes. We experienced lower LOE during Q2 due to the deferral of certain workover activities until the second half of the year and higher production volumes, resulting in fixed cost being lower on a per BOE basis.

Lower production taxes resulted from lower realized commodity prices. Transportation expense per BOE was 5% higher sequentially due to the Uinta Basin becoming a greater part of our total production mix. As you'll see on Slide 20, our cash production margin was resilient in a lower commodity price environment. Importantly, our Uinta Basin cash production margin exceeded our Midland Basin margin for the second quarter. We expect each of our operating areas to generate strong margins through the end of the year.

Turning to capital. Second quarter CapEx came in slightly higher than guidance as a result of accelerated drilling and completions. Operational efficiencies pulled forward 2 net drills and 6 net completions in the quarter. More on how this impacts our full year capital estimates in a moment. Bottom line, adjusted free cash flow for the quarter funded our fixed quarterly dividend of $0.20 per share and annualized yield of 3%, provided for the repayment of the remaining outstanding balance under our credit facility and resulted in cash on hand of over $100 million at June 30, which is a nice segue to the balance sheet on Slide 15, which I summarized as prioritizing debt reduction. That describes our general philosophy while our leverage is above 1x. Our balance sheet continues to be in very good shape.

With cash on hand and an undrawn revolver, we finished the quarter with substantial available liquidity of $2.1 billion and net debt to adjusted EBITDAX at 1.2x. Remember, this leverage ratio only includes Uinta EBITDAX since the October 1 close date. Pro forma, if we include an estimate of XCL EBITDAX in the trailing 12-month number for the full 12 months, the leverage ratio would be just under 1.1x. Our priority of reducing leverage to the 1x level remains on track, and we expect to meet this target near year-end, assuming current commodity prices. Until then, we will generally prioritize debt reduction before directing free cash flow towards additional share buybacks.

Moving now to Slide 16. We have continued to layer on hedges for a portion of our expected oil and gas production in 2025 and 2026 and a portion of our expected gas production in 2027. We're now hedged at 46% of expected remaining 2025 oil production and 45% of expected remaining 2025 natural gas production. You can see the appendix for a full summary of our hedges.

Finally, I will move on to the third topic, which I summarized as plan intact. Slide 17 provides an update on our expectations for the rest of the year. As a reminder, our 2025 plan, as described in February, provided for 20% production growth and 30% oil production growth, which now looks more like 38%. We're making a few updates to our guidance as a result of first half performance and expectations for the second half. Production, we're reiterating our total net production of 200,000 to 215,000 BOE per day, while increasing the oil contribution to 53% to 54% or approximately 106,000 to 116,000 barrels per day at the midpoint. This reflects the greater contribution from our Uinta Basin assets.

Capital expenditures. We're updating our full year total capital expenditures guidance to approximately $1.375 billion as well as increasing our expected number of net drilled wells to 115 with no change in expected net completions. This increase in guidance primarily reflects expected capital expenditures for non-operated projects, which we now have a clear line of sight to. Given the planned timing of turn-in lines, these nonoperated projects will not contribute to production until 2026. DD&A expense. We're increasing our full year DD&A expense to approximately $16 per BOE due to the increase in expected full year oil production.

Projected cash taxes have changed with the One Big Beautiful Bill Act signed into law on July 4th. While we're still evaluating, we expect to benefit from certain key provisions and as a result, have reduced our expected cash taxes to approximately $10 million for 2025, down from a range of $75 million to $95 million. You can expect to see the financial impact from the OBBBA to be reflected in our third quarter financial statements.

For those of you that model quarterly, a few points regarding the third quarter. Production for the third quarter is expected to range from 209,000 to 215,000 BOE per day at approximately 53% to 54% oil or 111,000 to 116,000 barrels per day. CapEx is expected to range from $300 million to $320 million and is expected to include approximately 25 net drills and approximately 30 net completions.

We're regularly asked about our plans for 2026. I'm on Slide 18 now. Given the uncertainty in the commodity price environment, we don't expect to discuss our plans for 2026 until early next year. We have significant optionality across our 3 core areas. We remain steadfast in our pursuit of innovation, improving capital efficiency, operational excellence and expanding our portfolio of top-tier inventory. As a premier operator, we continue to demonstrate environmental stewardship and deliver a sustainable return of capital program comprised of fixed dividends and debt reduction to a target level of 1x to enable us to return to our stock buyback program.

In closing, we're very pleased with our results through the first half of the year. Completing the integration of our newly acquired Uinta Basin assets and moving into optimization mode is an exciting achievement. A special shout out and thank you to all members of team SM for the very high level of performance during the first half of the year. This performance once again highlights our excellent team and our top-tier low breakeven assets.

With the balance sheet already in a strong position, our prioritization of free cash flow toward debt reduction has it poised to become even stronger. With the plan intact for the second half of the year, we're excited to have line of sight to returning additional capital to our stockholders in the near term through our Board-approved stock repurchase program. Thank you for listening today, and we look forward to answering your questions on the live Q&A webcast and call tomorrow morning. Have a great evening.

Good afternoon, and welcome to our 10th Annual Energy Power Renewables and Mining Conference. I'm Zach Parham from the E&P research team here at JPMorgan.

Up next, we have SM Energy and E&P focused on developing assets across three U.S. shale basins. The Midland Basin in Texas, South Texas, where they focus on the Austin Chalk and Eagle Ford development and the Uinta Basin in Utah, which SM acquired in a transaction last year. We're very excited to be hosting SM's President and CEO, Herb Vogel.

Herb, I'll turn it over to you for a brief presentation, and then we'll have a quick Q&A.

All right. Well, thanks, first of all, to JPMorgan and Zach. Thanks for hosting this fireside chat. This might be the third year in a row here. I'm accompanied today by Beth McDonald, our COO; and Pat Lytle, our SVP of Finance.

So any questions, direct them to them. Just kidding. I'm going to talk to a few slides here and to get us rolling, and we'll leave plenty of time for Q&A. And first, a few disclaimers that I'll point you to in our slide deck that we posted online this morning. So most of you know us quite well. But for those who don't, I'll just point out that we have really focused over the past decade on identifying, owning and developing high-return assets, operating them well for capital efficiency and free cash flow generation and maintaining a leadership position in -- among our peers in sustainability and stewardship.

A quick summary, and we've used this for quite a while now. We're a premier operator of top-tier assets that focuses on operational execution, returns capital to stockholders and drives for expansion of our portfolio of top-tier inventory in the Lower 48 states. So rather than talk over 1Q results again, I decided today to just focus on what really differentiates us from our peers. And this is about our track record, and it all starts with deep and experienced geoscience and engineering capability. While SM Energy has operated in the Lower 48 in almost all the basins over 117 years of history, I'll concentrate on 3 where we have distinguished ourselves. And I'm going to start with Howard County. Many of you know this, but when we entered the county in 2016, there were only about 79 horizontal wells that had tested just 3 intervals. However, there were a lot of vertical wells, and that meant there was a lot of data in the basin and in that county.

With the data from vertical wells, we saw an overlooked horizontal play where previous industry concerns about the presence of carbonates turned out to be incorrect. Pundits really thought that we'd move too far east. Well, that turned out not to be the case. So Howard County rapidly became a top 10 county in the industry in terms of drilling rigs, given the attractive economics that we were demonstrating. Now you look at it just 9 years later, and there are over 4,900 horizontal wells in the county producing from as many as 8 intervals. So that's right, from 79 to 4,900 wells and from 3 up to as many as 8 intervals in less than a decade.

At the bottom of the slide, same story goes for the Austin Chalk play in Webb and Dimmit counties in Southwest of San Antonio in the Western Eagle Ford. In 2018, when we opened up this play, there were only 8 industry horizontal wells in this general area and the economics were dismissed as high breakeven or $80 per barrel. So to us, we view that as an opportunity. That is something we can really go after to really create shareholder value. Now you look at it, there's over 475 industry wells.

There's 465 SM Energy locations, about 150 of which we've drilled up and the breakeven prices are down to $44 a barrel. So that's the impact of technology and recognition of really the rock that's in location. So the next -- what's next for SM? Well, it's the Uinta Basin, and it's the next chapter or the same playbook that I just went over. This summarizes the metrics well. So many people don't know this, but that basin has been producing conventionally for over 75 years. There's extensive data, and there's been quite a bit of derisking from over 8,500 vertical wells.

Now you look at it, and there's 4,000 feet of stacked pay, overpressured source rocks, which is a key success factor for unconventional plays. The lower cube, which is the middle section of the 4,000 feet has over 800 industry horizontal wells, of which SM has about 200. The upper cube has about 18 industry horizontal wells. So you're going from a past of limited activity, constrained oil takeaway, uncertain economic viability and industry skepticism and actually not many companies that were at the cutting edge of the industry in the way of horizontal wells. Now you look at it, there's sufficient oil takeaway. It's really high-quality inventory in terms of breakevens. It's competitive with top-tier basins. In fact, the margins we see are almost the same as the Permian Basin, and there's significant upside.

So we view a significant future, first of all, in developing the known areas, the lower cube, identifying more inventory in the upper cube and then there's the deep cube, which we're still in the early stages of figuring out what the ultimate potential is. I will come back to in the Basin and talk about how the integration is going in a bit here. So technology is part of our DNA. I'm not going to elaborate on this one, but why are we able to be the first to drive a play in the economic territory that others have overlooked. And it really comes down to that experienced technical team and the long-standing support for developing the tools and the infrastructure needed to get exceptional results. This slide summarizes some of that technology, but I'm going to turn to specific examples. This is about the process we employ, our ability to forecast, the results we achieve and the ability to iterate back and forth to continually improve those well results.

So before we ever convinced drilling on a new pad, we utilize an extensive database of our wells and others wells from data trades. We simulate our stacked pay configuration and the well interactions with numerous completion designs. In this case, we tested 25,000 unique designs, all premised on data and determined that the best value proposition involves somewhat more capital than the Midland Basin average. And this is a Midland Basin example. And basically, we showed that going from that orange to the blue achieved an incredible amount of value add for the capital that was spent on that incremental. So taking this just a step further, this is actually the forecast of the 50 best horizontal well designs, and we chose the one that optimized the development from all considerations. That means the value from the DSU.

So if you go to the very top, that might just be 1 well in the DSU, but that doesn't optimize the value. And here, in this case, you'll see the dotted black line is the Midland Basin average well design and the blue is the SM well design, which optimizes from all factors in a full drilling spacing unit. And you might look at this and say, well, doesn't everyone do that? I mean, what's the big deal? And it's astonishingly, no. We obviously operate and then we participate in other non-operated wells. And we can tell you that optimization is still -- there's some art to it, but there's a lot of science behind it, and that's what we employ there.

So now let's go to the next step, which is the actual well results. So here, you can see from the subsurface design optimization, when we're operating in an area in Howard County, this example is our operated wells, all of them over a period of time versus peer operated wells and about 32% better performance. And this is cumulative oil production per 10,000 foot of lateral.

Likewise, in the Austin Chalk, there it's 42% better. And I'll flip through relatively quickly here. We also have identified new targets, and that's really our geoscience team. This is a Woodford-Barnett. And here, you can see our first 2 wells in the play are about 50% better than the nearby peer operated wells, and that's just a function of that ability to optimize performance, and that's pre-drill simulation that drives what that performance is. Going to the north in the Midland Basin, our Klondike wells, which we just announced this acquisition actually at the JPMorgan conference 2 years ago. And you'll see there, we're showing the delineation program that we're conducting. And the red was our acquisition model that we were using 2 years ago. And you can see the 8 wells that we've delineated to date, and we'll bring another 6 online this year to confirm the overall benefits of that play.

So now let's turn to the Uinta. So I'm not going to elaborate on this one. We talked about it at the time of the acquisition last year. But the lower cube wells produce a substantial amount of oil in their first 2 years of life, substantially above Midland Basin and Gulf Coast wells. And that's key to this. But the point I wanted to make from this slide was Enverus came out and added more inventory to us, a 28% uptick in their view. We obviously have taken a forward-looking view. They're looking rearward at how proven a play is. But that's a material shift. So we like the quote here, those recent buyers may be on to something, and we completely agree with that sentiment.

So now how is the integration going? First of all, the driver of our first quarter production beat just recently that we announced in late April was we optimized marketing and that boosted our oil takeaway and increased the volumes we were able to take away and sell. We had significant capital efficiency gains around record pumping times. We basically set new records on the total longest and deepest wells in the Uinta Basin, and we used a centralized e-fleet using residue gas to make the simul frac record that ProFrac announced in -- after March, which was the record month. And then the key thing that drives cost down is we have an operated sand mine that started in October, and that eliminates all the 80 miles of truck transport to other sand mines that we were used before. More recently, and you'll see on the lower right here, that's a conveyor belt we installed. So even within the field from our sand mine, we've eliminated the trucking to get costs even down further. So that was another $15 to $30 per lateral foot.

And obviously, that's from an ESG perspective, that's positive and a cost perspective. So we're really pleased with not only what the predecessor operator, XCL did, but what possibilities there are to get the well cost down even further. Just quickly, in the slide deck, you may notice that we've got 3 more Austin Chalk wells that we just announced on a pad. I haven't done the math here, but I just saw an analyst said that this is 28% better than the previous pad that we announced. So pleased to see that -- and this is way at the northern edge of our position, how well those wells are doing with relatively high oil percentage and long lateral lengths.

Overall, we've shown this slide before just how we keep getting more efficient from a D&C cost basis in the Midland Basin and in South Texas, and we expect that to continue. And everyone says, hey, are you in the eighth inning or the ninth inning? And they asked that in 2018. And I would say we keep blowing out new records all the time. And that's just a testament to the entire industry and what we're able to do there.

Finally, on the operational excellence, we just took our Board and executives to look at the field in Utah and check out every -- all phases of production. And I wanted to point out from a Rystad perspective, we're #1 among oil-focused operators for ESG scores, #3 overall, including gas operators. So that's really what I was going to cover real briefly, Zach, and then I'll open it to Q&A.

Balance sheet-wise, those of you who want to know where we stand balance sheet-wise, we look at -- we got a maturity in 2026 and maturity in 2027. And our focus is on debt repayment. And as soon as we get through our -- to 1x levered, then we'll go ahead and recommence our buyback program on stock. And this goes over that. We've got cumulative capital return to stockholders over the last 3 years has been $567 million, and we'll continue the dividend and the buyback program.

So with that, I'll hand it over.

Thanks, Herb. A number of your E&P peers slowed activity with 1Q earnings just given lower oil prices and economic uncertainty. But SM maintained the prior budget. Can you talk about why you believe that was the right thing to do in this macro environment? And what would you need to see to slow or alternatively to speed up activity?

Right. Exactly, it's a great question, very topical post liberation day. It's really -- the program we laid out, it was fortuitous that we had already planned to drop from 9 rigs to 6. And by end of first quarter, we were already down to 7 rigs. And you say, well, why were you doing that? And why don't you continue to drop further?

Really, we're about maximizing free cash flow over the next 3 years. We didn't know how long a downturn in crude might last. And the events over the last couple of weeks were very hard to forecast. So we -- in the Uinta, we have a strategic desire to understand more intervals and to assess the best way to optimize performance. So we want to continue that program because we'll wind up with better and better wells over time.

In the other basins, we wanted to see -- South Texas is gassier, Permian is oilier like the Uinta. So we wanted to see what gas prices would really do. Was there a sustained uplift in what that commodity price would be that would underpin any sort of shift in allocation. We chose to keep things the same, let things sort out, and we also increased our hedges, and you'll see that in this latest slide deck that we posted this morning. So we're hedged better for oil. We're up to over 40% on the next year's oil hedging.

Yes. You mentioned that I think you added around 15,000 barrels a day of hedges in 2026. With the volatility, can you talk a little bit more about how you're thinking about hedging? You clearly stepped in when there's some volatility here. And do you want to add more to the hedge book? Or do you think you're good for now?

Right. It is always a fundamental question. We hedge for two purposes. One is for the balance sheet and the other is for basis risk in certain basins we operate. When we tie our hedging level to the balance sheet and what leverage we're running at and our forecast of leverage. So there's a trailing 12-month dimension, there's a forward-looking dimension. As commodity prices drop, we forecast what our leverage might be, and we want to cover that to be in a really good position from a free cash flow standpoint and when you look at all the dimensions. So that's really what drives us.

So yes, we are now hedged to a little bit higher level than we were before, and that's because the risk of a lower commodity price is a bit higher than it was at the start of the year.

And you mentioned this a little bit in your first answer in South Texas wanting to see what the gas price would end up. How are you thinking about capital allocation between the basins here? I think -- we think and a lot of investors think that there's a bullish case for gas in 2026. You've seen the strip move quite a bit higher.

Are we to a level where you might allocate a little more capital in South Texas potentially to that southern part of the play that's more dry gas focused?

So Zach, it's an excellent question, and we view it as a big opportunity that we have the ability to devote more capital to the gassier play. I would say we take a measured approach.

First, on the existing program, we like really smooth operations that are as capital efficient as possible. So we won't suddenly move a rig from one location to another and bear the consequences of that additional cost from moving it. It's very good to have build up to a certain DUC count level, use a simul-frac as much as possible to keep those well costs down and allow you more -- you're more resilient to commodity price downturns. So we -- when we look forward, we really look like a year or 2. And if we like what we're seeing on potential AI-related power demand, which would be supplied by gas fundamentally. And we like that and the LNG plant growth. And then assuming the international markets are there to underpin those the LNG production and the LNG cargoes being shipped out. That's also a positive.

We also know it's relatively easy to bring gas online to production. And when you're in an over $3.50 gas world, it's quite attractive to drill for gas. So those elements can be attractive, but we want to see that sort of sustained. And we view that as something that we can do in our annual cycle of assessing the budget and the plan for the next 2 to 3 years to maximize free cash flow generation. So if we were to make a change, and you've told me that oil was going to be at $50 a barrel and gas is going to be north of $4, that's when we really evaluate. We run the scenarios and we'll say, this is a better plan than our previous plan, and we would optimize.

And you have a unique operating position where you're across 3 basins and you have assets that produce kind of each commodity.

Can you talk a little bit about how the returns compare across each basin? How does the Uinta compare to South Texas and the Midland?

Yes. So this is where we really consider ourselves blessed, but it wasn't just happenstance. If you looked at our portfolio 12 years ago, we had a lot of Tier 2 assets that we, over time, really recognized what it took to have a Tier 1 asset, and we moved ourselves into those 3 basins. And we were already in South Texas, but we identified the Austin Chalk, which was quite a bit better. So you -- when you go through that whole program -- say again the question you had there. Let me make sure I got that straight. The question...

The compare and contrast the returns across your 3...

So I always go to the mid-cycle pricing and mid-cycle pricing, so let's call it $70 and $3.25 to $3.50. There, the returns are about equal across all the assets. So if you're allocating between, say, we're running 2 rigs, 2 rigs and 2 rigs, we would be balanced there. We could move capital between in an efficient manner, and it wouldn't make much difference to the free cash flow generation over the next 3 years. If you're in that high commodity price environment for oil, then you'd shift more towards the Permian and Uinta. If you were in a high gas, you could shift some more to South Texas, but it wouldn't be a dramatic amount of shift in there. But really, that's really what I call mid-cycle pricing, comparable returns.

You'll took over operations officially in the Uinta almost around 6 months ago. Can you just talk about how operations are going so far? What have been some of your early wins there that you've seen?

Yes. It's been a great run. First of all, we made offers to all the field employees of XCL, and we had 100% acceptance and those were extended October 2. They came on -- people came on board in January 1. From an execution standpoint, we were surprised to see how advanced XCL was in their operations. And part of that was they took over the acreage in early 2020 when necessity was the mother of invention, and they came up with really ways to reduce cost across the board. So they looked at how do they reduce their sand trucking costs, how do they drill better wells. The went through everything.

So when we looked at it, they put capital into water infrastructure, so there'd be 100% recycle capability. They introduced a new sand mine, which has started up in October. They brought in an e-frac and supplied the gas to a turbine to generate the power for the e-frac from residue gas coming off a plant nearby. So that lowered the cost significantly for them. So we wound up with the benefits of a lot of infrastructure investment that lowered our cost.

So what does SM Energy bring to the table with those operational excellence items is really on the subsurface side, the ability to model the stacked pay from our experience in the Permian Basin and South Texas. And that stacked pay capability is really the ability to simulate the interaction between the wells, so you can optimize the spacing and ultimately optimize your returns and your incremental capital returns in particular. So we'd look at how many wells XCL might have put into a lower cube area. We'd probably use larger completions, more fluid volumes, space them a bit wider and wind up with much more value out of those. So you won't see us our actual designs online until early next year, but we've already improved individual wells. So the first thing when we started, we encouraged them to drill 15,000-foot laterals and rather than 10,000-foot laterals. So there's an element of capital efficiency there. Then we did do some modifications in the completion design, and those have been beneficial also. That was a long-winded way to answer that one, Zach.

No, that's great detail. I also wanted to ask on your exploration plays in the Midland Basin. You mentioned this a little bit in your prepared remarks, but Klondike in Dawson County and then the Barnett-Woodford on your Sweetie Pack acreage. How do you think about exploration in the future? And maybe update us on what's the latest on both of those areas?

Zach, we've long held the belief in a 117-year-old company that an E&P company can't really exist unless it has the ability to produce a play from ground zero. So it's a fundamental ability that -- capability that we believe our team needs to have. And the Lower 48 today is not what it was 15 years ago. But what it does have that's unique compared to almost anywhere I know of internationally is an incredible amount of vertical well data. And between the AI and our team's capabilities that are there, how much data we can churn through to identify new plays is just remarkable. And you'll see even the Austin Chalk was really the result of -- this is an area where we had drilled 600 Eagle Ford wells right through the Austin Chalk.

And I still bother our geologists by saying, why did it take you 10 years to figure this out? Well, look at it this way. There was on our own acreage and it took us 10 years to figure out. Just think what's out there in all those other basins where we can apply the tools and skills we have that things have been overlooked. And the -- when we went in just 2 years ago when we went into Dawson County, everyone said that was too far north. It wouldn't work. But there, we did more or less a conventional play. It's migrated oil play from the hotter central part of the basin, but it migrated to a sandstone up to the north, and we saw that and did that.

And then the Uinta, basically, it's just smaller operators who have operated there for years or it was off not in the focus areas of some of the bigger companies that were there. And so to us, that's massive opportunity.

You all entered the year running 9 rigs. You've talked about plans to get down to 6 rigs by the time we exit the year. I know it's early, but how should we be thinking about 2026 activity levels? Is 6 rigs the right run rate? And that -- if you're at a 6-rig program, would that grow production? Or how should we be thinking about volumes?

Right, right. So the -- when you think about 2026, we haven't budgeted for 2026 yet. We don't know what the commodity prices are yet. There's quite a bit of volatility going on right now. We'll get into that process in November to January. But the way to look at it is 6 rigs is kind of flattish production for us with one caveat is if we shifted more capital to the gassy areas, you actually wind up with some BOE growth.

But if you stay in the oily areas, it's really flattish from that standpoint. But I can't tell you where we'll be. If you're in $50 oil and $3 gas, it gets tough to maintain a program like that. If you're in $60 north on oil and $4 gas, it's pretty easy to run a program like that and generate free cash flow and reduce the debt below our target.

And you mentioned the debt there. Following the XCL acquisition, which was all cash. You noted plans to pull back on buybacks and focus on debt reduction with the goal of one turn of leverage before you restart that share buyback program.

At current strip pricing, and I realize this has been volatile recently. When do you expect to hit that leverage target? When could we expect you to be buying back stock again?

Okay. Yes. Zach, I don't know if this will help you answer that. But when we came out with our budget in February, we said that at $70 and $3.25, we'd get to our 1x leverage target at end of third quarter, early fourth quarter. First quarter looked good. Second quarter, commodity prices are lower. I can't quite tell you where third quarter is going to be yet. But we're making good progress in terms of what we see, but it will really depend where commodity prices are, but we're not that far on a pro forma basis, at the end of the first quarter, we were 1.1x. We reported 1.3, but we can only count 2 quarters of the Uinta production. So pro forma, if we brought in 2 quarters of XCL, then that would put us at 1.1. So we're not far -- strong balance sheet. And -- but we also are making sure that in a low cycle price time like it looks like we're in, that we can sustain and do well.

And we've seen some activity come out industry-wide and with the commodity price volatility. Have you all started to see any cost deflation yet? And maybe remind us how contracted you all are on your rigs and your frac equipment?

Yes. It's a great question. It's been the topic of the day. It's just we are seeing cost deflation. It's very specific service aspect driven. I would say steel has been an area where we prebought, so we don't have much exposure this year, but there is some slight increase in steel, but it's a small component of our cost. Rigs and pumping services are in much better shape. We see slight deflation there, but not significant, nothing double digits in any way. It's all relatively small, but there's continued cost pressure with the commodity prices where they are and activity levels dropping the way they are. No deflation in labor costs whatsoever.

And you mentioned utilizing simul-frac earlier. Can you talk about how SM is using that? How much of the 2025 program will utilize simul-frac and maybe give us a view on simul-frac as well, which we've heard some of your peers talk about.

Okay. So we'll simul-frac wherever we can. So in -- first in South Texas there, the spacing of the pads is pretty significant. There's not as many wells per pad. So there, we zipper frac. We are currently running a simul-frac in the Permian and in Uinta. And in the Uinta, they call it double barrel. We have kind of a unique situation in Uinta where we don't have to move that frac fleet much at all because we have the ability to remote frac as much as 3 miles away, and we can do 2 pads at once and minimizing those moves leads to a lot of efficiency.

In the Permian, how much we run the simul-frac will depend really on the pad sizes. So if the pad is smaller or if it's delineating like up in Dawson County, we really can't simul-frac there. We use the zipper frac in that situation. So I can't give you a percentage on how much is simul-frac versus zipper frac, but we'll use simul-frac as much as we can feasibly.

Trimul-frac, we don't quite see the incremental benefit as much, but you'd also need to have relatively large pads or nearby large pads and remote fracking. So that -- we haven't seen sufficient benefit to try the trimul-fracs at this stage.

Thanks, Herb. We're at the end of our time here, but I appreciate you and the SM team being at our conference this year.

Okay. Thanks a lot Zach. Appreciate it.

Everybody, we are fortunate to have SM Energy, a longtime attendee, Wade Pursell, the CFO doing this -- you've been to everyone. I've been to, I think.

You want to give that statistic that you gave last year.

I did. I did. It was out of 35 or 34 companies, 4 -- I discovered that number, almost 5 were back 10 years later. SM was one of those.

One of those 5.

You can figure out what happened to the rest between M&A and bankruptcy. Anyway, so you're still here. You're a little different than you were last time you were here.

Very different.

I will turn it over to you to tell the story. Just obviously, Permian, South Texas was always a story, and then you added Uinta last year. And we'll turn it over to you just to run through some -- jump into Q&A.

Yes. I'll just -- I'll kind of jump around and just do part of the presentation, hit some highlights. So good to be with you all today. I'm here with Pat Lytle, our SVP of Finance. Yes, it's been an honor to be at this conference so many years. We have been around a while. Believe it or not, we've been around since 1908. I don't know if you know that. So I joined the company in 2008.

Can I ask, does anyone know what SM stands for?

St. Mary?

Looking for the crowd. I give a pause. St. Mary?

The company was formed in St. Mary Parish, Louisiana. Frankly, we got tired of answering questions about are you a church, are you a school? So we shortened it, made it easier for investors. We have the same ticker symbol SM. But yes, so I joined in 2008 as CFO.

So what I'd like to say is I missed the whole first century, but I've been here for all of the second century so far. So anyway, that's some quick history. As far as who we are now, I would say that those of you that have listened to the story before or know us really well, know that we continue to say that and really strive to be a premier operator of top-tier assets -- premier operator of top-tier assets, and I'll talk about those assets in a second.

And then we also say that empowered by a world-class technical team. I think that's a differentiating part of who we are, especially versus companies our size. Empowered by the technical team and a strong balance sheet, we are empowered to repeat the success. And all that means is replace inventory, add inventory as we move along. And I said premier operator, there's one slide in the deck that I'll point you to. I think it's Slide 11. It's just an example of that, making top-tier assets better. We really focus on that with every well.

And I think that Slide 11, I kind of like because it looks back 3 years in the Midland Basin and in South Texas, and shows drilling faster, completing faster, and the result is obviously lowering the cost. And that's a 10% level in Midland Basin and 19% level in South Texas. So that's just an example, a very high-level example. The top-tier assets now are 3. There's 2 in Texas. These 2, Midland Basin and South Texas. And then the third, which we added since we were here last year, actually right after we were here last year, and that is the asset -- an asset we're very excited about, and that's the Uinta Basin.

So I mentioned the technical team. I'll just say a word, the technical team was instrumental in all 3 of those in very similar ways. The Midland Basin, we've been in the Midland Basin for almost 20 years, but we went really large back in 2016 with an acquisition in Howard County. And if you go back to '16 and look at any Permian Basin maps, you will see Howard County outside the line. And our technical team decided -- determined that, that was not the case. And the technical team was proven right over the years, and that asset is a wonderful asset and has been proven one of the best in the country.

We define best as low breakeven oil price assets. And that asset as long as well as the other 2 assets generate really good returns at oil prices way below where we are currently, down below $50. So that was that asset. Then the one in South Texas is 155,000 contiguous acres that we've been in for almost 20 years there as well. That was an Eagle Ford story for a long time, a great asset, produced a lot of gas, a lot of wet gas. But then, I don't know, around 2018 and '19, the technical team determined that the Austin Chalk interval, which is above the Eagle Ford, through a lot of testing, a lot of examining core data, you can imagine every well that was drilled in the Eagle Ford had to go through the Austin Chalk. So they had a lot of data to study and determined that, wow, this Austin Chalk could be a really, really great asset. And we started testing it, and they were absolutely right. I mean, it's a top-tier asset. We now -- the last time we announced locations, it's up to like 465 locations. We've drilled -- we're now well over 100, but still obviously, a lot of great inventory to go there.

And then finally, the Uinta Basin, I'll jump on a slide for that one, if I can. If I can get back to it. Bear with me for a second. Yes, there it is. So Uinta Basin. So the team identified this -- I mean, it's not an unknown basin, obviously, in Utah, but identified an opportunity and did a lot of work on the basin and got really excited about it because it has a lot of characteristics that we love, multiple intervals, potentially 17 intervals, believe it or not, 4,000 feet of stack paid, very oily, like over 90% oil. So just a wonderful area for us to exploit and drill wells and improve upon those wells, and we were able to get it at what we believe was a very good price, not as not as well understood, I guess, I would say, as maybe the Permian Basin, for example, and other areas.

So things have gone very well there. I guess, what I would say is the integration has been very successful, and we're kind of in stabilization mode, I think we call it. We're integrated. We're running the things since January 1. If you followed our first quarter results, you saw that we actually had a very good quarter in the Uinta and actually exceeded our expectations. Nice to get started that way. And we're getting some good press already from Enverus, who's been doing more studying of the basin and actually announced that they added a bunch of locations, over 150 locations in what we call the upper cube. And that's important because I mentioned the 17 intervals, it's really broken up into 3 kind of defined cubes sections, and that's the upper cube, the lower cube and the deep cube.

I know -- I wish the lower was something middle, but it's hard to remember that. But the lower cube in the middle is where most of the work has been done and that we put the most value on that section. And it's proven to be exactly what we hoped it would be. That's where we're spending 90% of our dollars this year. And we know there's upside though, in the upper cube and hopefully in the deep cube as well. And that's why it's important that Enverus added all these locations in the upper cube, showing that there's more value, more locations. And of those -- I think I mentioned of those locations they added, defining them as top tier because they're sub-$50 breakeven about 1/3 of those are ours. So that's really important. So we're very excited about the Uinta.

So that's kind of the 3 assets. I guess, the only other thing I'll mention, I talked about the technical team. I mentioned the balance sheet. Balance sheet is in very strong shape. We were happy to be able to use it for this acquisition, all-cash acquisition. And now we're kind of in debt repayment mode, 1.3x levered as of the last reporting date. If you look at that on a pro forma basis, it's 1.1x. So a very strong balance sheet, lots of liquidity. The revolver, $3 billion borrowing base, $2 billion of commitments. What's important there is the banks just redetermined the revolver in the spring redetermination and kept the same levels despite the fact that they lowered their commodity prices, obviously.

I believe the oil price they used was in the $57, $58 area going down to $52. So that was a nice positive affirmation of the value of the underlying assets. And then the maturity schedule, you can see it on the slide later in the [Audio Gap] the next maturity to '26 is with free cash flow, reducing absolute debt levels, getting debt back down to 1x or below is our target for a strong balance sheet. And then we tell the equity investors that it's at that point that we would resume share buybacks, return of capital program.

So with that, I'll stop talking and start taking a few questions.

You gave me a debt teaser there at the end, so I'll keep going with it. So '26 is the goal to pay them down completely? Or is there some element of refinancing of debt over the...

I think the base case would be to take them out completely and do some absolute debt reduction. I mean, you then have the '27s, which are at a similar level and you have the '28s at a similar level. So as we move along, we'll be following the market and seeing if there's an opportunistic way to maybe do some form of refi that is coupled with absolute debt reduction as well.

What's -- you held on to your last '25s, are a pretty low coupon, that when rates were higher, it was an asset, right? So you -- will you probably proceed the same way with this? Or do you think it's more likely to refinance these earlier?

I think your base case assumption should be that we would do it a similar way and just generate some free cash, pile up some cash and then at some point, take them out.

And I think you have this target of 1x in your -- 1.3x today, but that's not pro forma for -- 1.1x really pro forma. When do you think you get to your 1x target? And what's the [indiscernible].

Tell me the oil price -- yes. When we came into this year and announced our plan, if you assume like a $70 oil price or something close to that, you get there pretty quickly, like middle or second half of this year. At current prices, that moves to the right somewhat, obviously, but not too far. We just kind of -- we kind of bounce along just above 1x, frankly, at a $60 oil price. If you just assume current prices, we get there, not long after.

And there's -- once you do get there, what do you do in this environment, you buy back more shares?

Yes, that would be our base plan. Everything always competes with other opportunities. But the base plan would be to resume the share buyback program, which we have $500 million authorization for, but we'll see what the landscape looks like at that time.

I'll give you the standard credit question about corporate cash flow breakevens. Do you -- what's the number you provide today and do you provide it unhedged?

Yes. So it's a great question. So on a corporate basis, if we just look at this year, I can tell you that you can run an oil price down into the $40s, and still generate free cash sufficient to pay the dividend and not really get into the revolver. That obviously has some hedges. As you move into the -- I don't want to dodge the question, but if you move into the next years, which already have some hedges, but if you try to look at it unhedged, you really have to start making some assumptions with what would happen to cost. If you take oil down to $50, I think all of us believe there would be a pretty significant pullback in activity. History tells us you get some pretty good deflation, so you have to start playing with those scenarios to really get a good breakeven, but it's down in that area though.

I've enjoyed having to do that analysis twice already and possibly for the third time. Everything keeps moving. And your maintenance CapEx, just as you think of it today, what do you -- how do you define that in terms of the...

Yes. I mean, we haven't given a true maintenance CapEx number, but I mean, it's kind of what level are you maintaining as part of that question. We're in this mode of reducing activity since the acquisition last October. We came in -- closed the acquisition October 1. So that added 3 rigs. So we had 9 rigs at the time, and the plan was and is to slowly reduce that down to 6 by the time we get to the -- toward the end of this year. So then what's a maintenance level, I guess you could ask at that point in time. So we've said that, that program, that activity level gives us, we think, the optimal level for us of generating free cash at a level of production that is flattish to slight growth. So you could start assuming that, that number is pretty close to a maintenance level once you get to that level.

And what do you estimate per rig right now? What do you -- per rig, what's a good number right now?

I don't have a capital number for you on that. And again, by the time you get to that point, you need to make an assumption.

I appreciate that.

For the market.

I think you are ramping into the second half of this year in production. Were you talking about flat from exit or flat on average?

Yes. So what we've said is that was the rig count. So from a production standpoint, production will grow Q1 to Q2, and it will grow Q2 to Q3 and then decline in the fourth quarter somewhat.

And the 6 rigs will keep...

That's just a function of the actual wells that we're drilling is higher in the first half of the year front-loaded.

So you touched a bit about costs coming down. What are your observations of productivity today in terms of how much you can get there without cost -- without just cost savings? Like, where are you seeing -- how is that enhancing your economics? Are you seeing material improvements today?

You're talking about just efficiency in the operations?

Yes, just what you're seeing.

Just -- it's hard to peg a number to that, but that's something the team works on, on every single well, trying new things. On the XCL side, they were a great operator, first of all, a lot of great innovation that we've enjoyed learning about and we'll apply where we can. But we obviously believe that we bring a lot to the table from an operatorship and maybe doing things differently, maybe larger completions, longer laterals, maybe different spacing. We're applying a lot of that right now. So you won't really see the outcomes of that -- of those wells until later this year or early next year. Looking forward to seeing those results and maybe trying to quantify some of the efficiencies there. But otherwise, it's just kind of business as usual, trying to be more efficient with every well and do things faster the way I showed the chart on the improvements they've made the last 3 years. And then on the deflation side, I don't have anything quantitative to report at this point, but activity is starting to fall. And we know that story. And if activity continues to fall, then costs fall right after.

You're not providing an estimate on that because you just haven't -- you haven't been at the table negotiating these things yet or...

There's a lot of discussions going on, but I haven't heard anything quantitative yet.

When you -- you developed this budget this year, you talked about a $55 to $65 oil price, and that's -- I believe that was -- that's $3.50 gas. When you talk about your inventory of 10 plus, you use $70 and $3.50. How does that inventory change as you get closer to $55? How do you think about it?

It's a great question. I would -- we use $70 and $3.50 for inventory because that's what we believe is the mid-cycle price. So that's the way we calculate it. We haven't calculated [ oil ] prices. All I can tell you is that inventory is 10-plus years. It's -- when we say economic, I think we say the average IRR of that inventory at $70 and $3.50 is like 65%. So you can imagine going down in price, you're just losing some of that. Again, you have to start making cost assumptions also in that inventory, which would offset it. So that's -- I guess, that's all I'd say.

And when you look at your inventory, you got to replace it every year. Obviously, the Uinta has a lot of upside opportunity. Do you think it's likely that you replace your inventory this year? And how much do you have to place -- how much can you replace organically and how much inorganically, maybe even just through leasing and things like that...

Yes. I mean, that is always our goal every year. And it's hard to predict within a year what's going to happen. Last year was obviously a great year. And this year, there's a lot of upside. And hopefully, we'll be able to add some in the Uinta, as you say, and in other areas. But I don't have a forecast for you at this point, but that's always an objective.

That's always I got to ask. So look, the marketing constraints in terms of moving to oil and gas, a lot of people focused on Permian. What's your personal view there as to what's happening in the basin today and how it's going to move?

Yes, I think, we're in pretty good shape compared to certain -- some periods in the past. We're not overly concerned. We feel like we're going to be able to get what we're forecasting out. We continue to hedge the basis where we hedge Waha quite often. There's big asymmetrical risk to Waha as we know, it's kind of insurance to get a lot of that hedged. So we feel good there. And in the Uinta, which is a popular question, we feel very good about our ability to get our product out that we have forecasted, and I think we even have some cushion if it was -- if it ends up being higher.

The first quarter, the question about how much can you go to the refinery, obviously, that's going to be much better on the margin versus getting trained out on rail. And I think what we've told folks is we feel very confident in being able to get 15% to 20% of our production to the refineries, the 5 refineries in Salt Lake City, with the rest of it going out. And we actually -- if you look at the first quarter, we actually beat that assumption in the first quarter, closer to 25%, I believe. I can't count on that in the future. We didn't change our guidance in the future, but that's something to watch.

And how should we think about the rail cost -- the incremental rail cost to get it out of the basin?

Well, you can look -- in the appendix, you can look at the transportation cost and see exactly what it is there by barrel. And it was lower in the first quarter, which tells you that we were able to get more to the refinery.

This is a bigger picture question. It's -- look, everyone looks at the Permian as the last big basin. It's going to grow for some time, not at a huge rate, but at a rate and then plateaus maybe 2030, obviously, who knows that. But it also speaks to the other basins saying, there isn't growth. Obviously, you just entered the Uinta and maybe that's an exception. But can you tell us what you think about, one, that statement, which I think is hard to refute. But two, what you think about the other basins in terms of the ability to grow?

Yes. Great question. Very big picture question. Whatever I say is you can take it with a grain of salt. I'm not sure I know that much more about that kind of question. But I would say that I've seen similar data that you're quoting, and it is -- yes, it's irrefutable. I would also say I love the words that a lot of people love to repeat, never bet against the Permian. It continues to be the gift that keeps on giving. We love the Permian Basin, and we've done some things around the fringes adding organically over the last year or 2. We'll continue to work that. It's obviously a very competitive basin, which is a lot of the reason that we ended up entering the Uinta last year.

We would have loved -- I love to say that we would have loved that kind of acquisition in the Permian, but that wouldn't have been realistic from a price standpoint. We're very driven by return of capital and what you're getting versus what you pay. And we're -- again, we couldn't be more excited about the Uinta Basin and the ability to add more inventory there. The Permian, it still has some legs, but it's a very competitive basin. It's the biggest difference for us.

So you transitioned to the M&A question. So what is the opportunity set? And is adding Uinta mostly small leasehold additions? Or is there actually something to acquire there?

We look at all possibilities. So I wouldn't say there's not possibilities in both regards. It's hard to predict things like M&A. But I can tell you that we continue to look at all possibilities the way we have been in the last several years. And we get the thesis for being larger, the thesis for the valuation, we get all that. So it's worth working really hard. But it's -- but our criteria is the same. I mean, we don't believe in doing it just to do it. The assets have to make sense. It has to be accretive. Can't send the balance sheet the other direction. I mean, those are kind of the big 3 for us. So yes, we'll continue to look at all possibilities.

How about -- obviously, after Liberation Day and the OPEC share war. The M&A market had to reset. And I'm curious where you think that is. We saw a stock-for-stock deal for royalty companies yesterday, right? Someone's trying to buy a Canadian company, whether that happens or not. But that's at a corporate level, but what about on the asset level?

Yes. I think it's a -- as you would imagine, I think it's a little challenging right now because of that. You can imagine the bid-ask depending on your commodity price deck. So uncertainty is never great for that. So that doesn't mean things can't get done, but I think it's definitely thrown some a general pause for uncertainty, I would say. It doesn't mean people are not working, but it just makes it a little bit more challenging.

Are there any questions from the crowd?

I'll take one. So you're kind of coming into the situation, where you acquired the Uinta asset last year, and it had a growth trajectory that was already baked into its program. That's what you're running out this year. And that's why we're seeing this sort of uneven cadence in oil growth as we roll through 2024 -- or 2025. Production increases through 3Q, declines through 4Q. I guess, first question, operationally, market really doesn't like this sort of choppy production cadence. Why not sort of decelerate as you get into the second half of the year to provide more of a linear trajectory for oil growth, which a lot of the simpletons are used to because we can think in linear terms.

Yes. Well, that's kind of what we're attempting to do. I mean, we -- we're getting down to the 6 rigs, which is probably 2 rigs in each basin, and you need to get down to 2 rigs. And if you look at the activity, the number of wells we're bringing online, it's very front-loaded in the first half of the year. So the idea is to get to a level as we get -- as we exit, that's going to be very -- and I know it's never fun getting there for analysts and investors watching the quarter-to-quarter cadence. But the idea is to get to a level that is very stable moving into next year, kind of a flattish like production trajectory with slight growth maybe.

And as we're in 2026, you talked about getting down from 9 rigs to 6 rigs. If you were to apply some kind of capital number per rig line, call it, $150 million, perhaps you're saving $450 million next year as you're running 3 fewer rigs in 2026 and you're holding that production number flat. Is that maintenance level that you're getting towards to in 2026?

That's -- I'm not going to affirm that number, but that is the idea of getting to that maintenance type level in '26. And I think we'll be able to see what that is.

And maintenance level, are you holding oil flat or BOEs?

We focus on BOEs. Production is an output. I mean, we're not trying -- we're not tied into like an oil number, trying to manage the oil number. It's really more about free cash flow generation, returns with an overall production level. So I wouldn't say an oil number yet at this point.

And kind of going back to your comment on M&A, our understanding of the Uinta Basin that it's a pretty captive market given that a lot of the oil goes to the local refineries. And there's been perhaps some languish from the state suggesting that we don't want our oil industry to be too concentrated. What's your understanding of that statement? And do you think there's room for SM to become larger in the Uinta Basin?

Hard to say. It's a great question. We know what the FTC has said in the past in the basin for all the reasons you just said. It does look very different now than it did not too long ago, though. I mean, with -- I mean, I just gave you percentages. So much of the oil is now being railed out of the state, that it looks very different. Administration has changed. It's an unknown. I mean, it's an unknown at this point. We're not counting on the ability to get bigger there, but I do think things are evolving and hopefully loosening up.

I'll end with one last question. That's a bigger picture question, but it would...

Bigger picture than the last one?

A little less, more of an administration. Obviously, we have a pro fossil fuel administration. Have you seen that show up in the business in any way?

We haven't, not -- but it's -- all I can speak to is our business and the areas that we operate, not really on federal acreage. And so it has had no impact on us. The bigger impact on us has obviously been the decline in the oil price.

I knew that was a separate item, obviously. Obviously, I think all the ESG efforts, gas capture, methane capture, things that all these firms are working on, including yourself, that's still part of the mantra, right? Nothing's really changed.

That's who we are. I mean, it's been in our DNA, certainly since I've been at the company and before. So that's still who we are. You may not see as many slides now because people don't need to see them as much, but it's still very much who we are.

Well, look, we have 1 minute left. We'll let you off the hook.

Thank you.

Thank you very much, Wade. It is always insightful. I'm glad to have you. Let's have Wade of -- a round of applause for, Wade. Thank you.

Thank you.