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SM Energy Co (SM) Q1 2019 Earnings Call Transcript

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SM Energy Co (NYSE: SM)
Q1 2019 Earnings Call
May. 02, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy Company First Quarter 2019 Financial and Operating Results Q&A Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.

Jennifer Samuels, Vice President, Investor Relations. You may begin your conference.

Jennifer Samuels -- Vice President, Investor Relations

Thank you, Chris. Good morning, everyone, and thank you for joining us. I thought I'll kick off our Q&A session this morning with a question for you all. In Herb's prepared remarks, he references straws in the milkshake. What movie is that from?

It's a busy morning. I need to quickly remind you all that we may discuss forward-looking statements about our plans, expectations and assumptions regarding future performance. These statements involve risks that may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements. Please refer to the cautionary information about forward-looking statements in today's release, the first quarter IR presentation, and the Risk Factors section of our Form 10-K filed in February and our Form 10-Q filed this morning, all of which are posted to our website.

Our discussion today may include discussion of non-GAAP financial measures that we believe are useful in understanding and evaluating our performance. Reconciliation of those measures to most directly comparable GAAP measures and other information about these non-GAAP metrics are provided in our earnings release and IR presentation.

Here to answer your questions this morning, our President and CEO, Jay Ottoson; EVP and CFO, Wade Pursell; and EVP of Operations, Herb Vogel.

I will now turn it back to Chris to take our first question.

Questions and Answers:

Operator

(Operator Instructions) Your first question comes from Gabe Daoud of Cowen & Company. Your line is open.

Gabe Daoud -- Cowen and company -- Analyst

Hey. Good morning, everyone. I appreciate the comments last night and nice Sarah Connor well name there, but could you maybe just talk a little bit about the Dean and the Wolfcamp D? And what you learned, how you think about these zones over the next couple of years? And what this could potentially mean for inventory?

Herb Vogel -- Executive Vice President, Operations

Okay. This is Herb, Gabe. Thanks for questions. So, in the yesterday's remarks, we talked about how the Wolfcamp D is separated and the Middle Spraberry are separated from the Wolfcamp A, B and Lower Spraberry. So those are two separate intervals, and they're relatively thick in the -- just in the Rock Ridge area. The Middle Spraberry is about 250 feet thick and the Wolfcamp D is about 330 feet thick, and there is an entire Wolfcamp C section in between those. So -- what we really see -- like about it is that they can be independently developed. The Dean is quite productive and at the 200-foot thick interval in the Rock Ridge area. So when you look at those, there is quite a bit of oil in place, and that's really what we like. And then over time, we'll be delineating out along with quite a few other parties who are operating near us. So we feel quite good about those intervals and the ultimate potential for inventory and reserves.

Gabe Daoud -- Cowen and company -- Analyst

Great, great. Thanks for that. And just a follow-up. Obviously, it looks like you're on track for second half free cash flow generation and you've been pretty clear about usage of free cash flow. Just curious about how you think about like the A&D environment or the M&A environment, if there is any interest in looking to continue to bulk up the Permian position, or are you satisfied for now? And thanks, everyone. I'll leave it there. Thank you.

Jay Ottoson -- President and Chief Executive Officer

Yes. This is Jay, and I'll take that one. While we're open to ideas that would clearly accelerate meaningful value realizations, we are not going to consider doing anything that would not be both an obvious step in the same direction as our current planned priorities and accretive to our shareholders. At this point, we don't need to buy inventory. And, as I said, we wouldn't do anything for the sake of scale that wouldn't be clear with our priorities and accretive to our shareholders.

Gabe Daoud -- Cowen and company -- Analyst

Thanks, Jay.

Operator

Your next question comes from Mike Scialla of Stifel. Your line is open.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Yes. Hi. Good morning. I think to answer Jennifer's question, and There Will Be Blood if I remember my movie script.

Jennifer Samuels -- Vice President, Investor Relations

Good job.

Jay Ottoson -- President and Chief Executive Officer

There's going to be a prize for that.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

All right. I'll collect that later. Just want to follow up, first, on Gabe's question on the Dean and Wolfcamp D. Pretty encouraging results there. Any chance of testing those further this year, or is that a 2020 event?

Herb Vogel -- Executive Vice President, Operations

So... This is Herb, Mike, and we will be looking at how these are performing, very early days. I mean, we just had these on a week and a couple of weeks. And so, we'll be -- plan out seeing how they perform and then we'll be integrating them into our development plans for 2020 and beyond. So no, we're not going to be doing anymore on those this year.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Got it. Okay. Also, looks like pretty encouraging results out of the second Austin Chalk well. Wondering if you're looking at that zone any differently now on your acreage, on other parts of the plate, I think I've asked you in the past, if you see it as more of a resource play or more of a conventional type play. Any updated thoughts there?

Herb Vogel -- Executive Vice President, Operations

Hey, it's Herb again, Mike. The Austin Chalk, we're really excited about it, because it overlies pretty much all of our acreage, gets thicker to the West, a little bit thinner to the East. And it's quite a good interval. I'd view it as an unconventional play. We're putting pretty big fracs on it. And we really like the liquids content relative to the intervals below. We can extend our high liquids content to the South quite a bit compared to the Eagle Ford. And, obviously, the revenues from the NGLs and the condensate are -- really help the economics. So we're encouraged with it, and you can see we're putting one more well in that, and that's really just shifting some completion dollars around from another Eagle Ford well, so it's not incremental to our capital program. Excited with what we got there, and we'll integrate it with the lower Eagle Ford and upper Eagle Ford development.

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Very good. Thank you.

Operator

Your next question comes from Oliver Huang of Tudor, Pickering, Holt & Co. Your line is open.

Oliver Huang -- Tudor, Pickering, Holt & Co. -- Analyst

Good morning, everyone, and thanks for taking my questions. On the Merlin Maximus pads that came online, I was wondering if you can provide some color around what some of the key learnings throughout the project were that can be carried forward? And how we should be thinking about optimal pad and project sizing going forward?

Herb Vogel -- Executive Vice President, Operations

Hey, Oliver, there's a lot to that Merlin Maximus pad. So I'll just summarize by saying we drilled it with four rigs starting in April last year. We started completing and we used three frac spreads and we moved from East to West as we were completing the wells and kind of hopped the first frac spread over the fourth location -- fourth slice of well. So the key thing we were also doing some spacing testing in there, and we were working to improve Wolfcamp B performance, so the sequence wasn't necessary always top to bottom. We were trying some things to see how we could enhance Wolfcamp B performance and contain Lower Spraberry fracs. So the main learning we'll see as the production proceeds over the next year or so. And that's when we'll see how it performs, particularly given the different tests that we've got integrated and what we've done. Does that helps, Oliver?

Oliver Huang -- Tudor, Pickering, Holt & Co. -- Analyst

Yes, that's helpful. And as a follow up, you had a slide on the Permian showing, I guess, co-development projects versus some of your peers. Just wondering if there is any incremental color to the prepared remarks on what SM is doing differently to drive that outperformance?

Herb Vogel -- Executive Vice President, Operations

Yes. I think it's really in just what you're trying to achieve. And I think I mentioned that in there, as clear as I could. We target that 25% return on the last well. So we have a pretty -- a very, very good correlation with all the data we have on what impacts are as we space tighter and tighter and what happens as we get tighter and tighter vertically also. And so the key thing is we're really striving to get that 25% return on the first -- last well. So that means overall the returns will be higher. So that's why the milkshake analogy. If you put too many straws in there, you're not going to get as good a performance per well, and so you really have to understand that in designing these co-developments. That's really the point of the whole slide there.

Oliver Huang -- Tudor, Pickering, Holt & Co. -- Analyst

Okay, perfect. Thank you very much.

Operator

Your next question comes from Paul Grigel of Macquarie. Your line open.

Paul Grigel -- Macquarie Research -- Analyst

Hi, good morning. I was wondering if you guys could maybe elaborate on the Lower and Middle Spraberry initial peak rates and the subsequent lower declines as compared to maybe the upper Wolfcamp wells and try to put some numbers or some directional color to just how big the difference may be there.

Herb Vogel -- Executive Vice President, Operations

Yes. So there's not a single answer to that one, Paul. It depends where it's located. So, for example, on the 2018 program, our Lower Spraberry wells actually performed stronger than Wolfcamp A from an overall standpoint. But if you look over time, you'll see that even when you shift to where the Lower Spraberry has come on a little bit slower, they ultimately have a lower decline. So the economics in 2018 were actually slightly better for the Lower Spraberry and, in 2019, we expect them to be slightly lower. And it's simply where it's located, the thickness of the section and the spacing we are using.

And what we're doing is targeting a certain rate of return by putting all those factors together, the spacing horizontally, the spacing vertically to get that 25% return on the last well, so that the overall DSU has a much higher return. We have a lot of control, it's not like it just happens. We have the ability to influence the returns we get on these wells. I think that's really the point we want to make on all these.

Paul Grigel -- Macquarie Research -- Analyst

No. Understood. Great color there. And, I guess, maybe turning to the CapEx budget. You guys have noted before today and then again today the kind of front-end loaded of 2019 and lower CapEx in the back half of 2019. I realize it's early, but how should we think about cadence in 2020. Is this a seasonal aspect that could be front-end loaded and that may be the situation? Is it based on just when large pads like Merlin Maximus come on? How should we think about just from how you operate the business kind of beyond 2019 as you move toward free cash flow?

Wade Pursell -- Executive Vice President and Chief Financial Officer

Yes, Paul, it's Wade. Some of all of that. I mean, as we approach 2020, we'll give a lot more color on cadence and specifics with respect to those questions, but I'll just reiterate that 2020, we do -- our plan does show us generating free cash flow and reducing debt during that year -- during the year. So, again, as we get closer, we'll give you more detail on the cadence.

Paul Grigel -- Macquarie Research -- Analyst

Okay. Thanks.

Operator

I would now like to return the call to Jay Ottoson, President and CEO. Please go ahead, sir.

Jay Ottoson -- President and Chief Executive Officer

Well, thank you. I guess, I'll take the minimal number of questions today as a sign that our materials were clear and comprehensive. Obviously, we're thrilled about our new well results and Jennifer will be happy to address any subsequent questions you have. Thank you for your interest this morning, and we'll let you go. Thanks.

Operator

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

Duration: 13 minutes

Call participants:

Jennifer Samuels -- Vice President, Investor Relations

Gabe Daoud -- Cowen and company -- Analyst

Herb Vogel -- Executive Vice President, Operations

Jay Ottoson -- President and Chief Executive Officer

Michael Scialla -- Stifel Nicolaus & Company -- Analyst

Oliver Huang -- Tudor, Pickering, Holt & Co. -- Analyst

Paul Grigel -- Macquarie Research -- Analyst

Wade Pursell -- Executive Vice President and Chief Financial Officer

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