Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy Third Quarter 2022 Financial and Operating Results Q&A. 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 of Investor Relations, you may begin.

Good morning and thank you for joining us. To answer your questions today, we have our President and CEO, Herb Vogel and CFO, Wade Pursell. As usual, before we get started, our discussion today may include forward-looking statements and discussion of non-GAAP measures. 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 and 10-Q, which describe risks associated with forward-looking statements that could cause actual results to differ. We may also refer to non-GAAP measures. Please see the slide deck appendix and earnings release for definitions and reconciliations of non-GAAP measures to the most directly comparable GAAP measures and discussion of forward-looking non-GAAP measures. Also, look for our third quarter 10-Q filed this morning. And with that, I will turn it over to Herb for brief opening commentary.

Thank you, Jennifer. Good morning. Thank you for your interest in SM Energy and joining us this morning. We have reached a really exciting time for our business and I would like to reiterate that, we are very pleased to initiate our return of capital program ahead of expectations. Our initiation of share repurchases in September was earlier-than-expected and our first increased fixed dividend gets paid next week. We designed our sustainable dividend program assuming $60 oil and $3 gas, which gives us upside flexibility in a stronger commodity price environment including acceleration of buybacks. With that, let me now turn it to Emma to open the line for questions. Emma.

Thank you. [Operator Instructions]. First question today comes from the line of Parham [Lynne] with JPMorgan. Your line is now open.

Hey, guys. This is Zach Parham from JPMorgan. First, just wanted to ask on the oil cut, which moved a little lower in the 4Q guide, can you just talk about the drivers of that oil cut moving lower and how do you expect the oil cut to true and as we move into 2023?

Yes. Zach, that is a question we hear quite a bit. And it is really just driven by how many completions come on in Midland versus how many completions come on in South Texas. We kind of look at it longer-term and the quarterly variations in that really don’t make a difference. We just know it is ultimately going to be driven by the capital allocation between South Texas and Permian. But the returns are very important and those returns are very comparable between the two areas.

Got it. And then just shifting over to cash return, particularly on the buyback. You did about $20 million in buybacks in September. Can you talk about the pace of that buyback going forward? And is that going to be systematic or purely opportunistic and utilized when you are not blacked out?

Yes, great question. This is Wade. I would say, it will be somewhat systematic and methodical, but also very opportunistic. We will certainly take harder looks on down days, I would say that. But it will be done overtime and we will do some each quarter and that is just the way we will play it. We always have a view of the NAV and we certainly believe we are trading below that right now. That makes it easy.

Just one quick follow-up. Are you planning on putting in a 10b5-1 plan so that you can buy back stock consistently when you are in blackout periods?

We have not done that. And I would say, right now, that is not the plan. But that could change, but currently not.

Okay. Thanks for taking my question.

You bet.

Your next question comes from the line of Timothy Rezvan with KeyBanc. Your line is now open.

Hi. Good morning, everybody. In your press release, you mentioned three high performing wells that proved up the Western Flank of Swedish Pac. And just curious if you could provide some more details on zones or what essentially you proved up and why you felt the need to call that out in the release?

Tim, great question. Yes. Those three wells were a one mile step-out to the West from our closest producers, and they were in three different zones and we were quite pleased with the outcome of the wells. So that is why we called those out.

Okay. And do you have any information on the zones you tested and how much acreage maybe that derisks pretty well?

So the one is middle Spraberry, one is lower Spraberry and the others Wolfcamp A. And it just moves to the proved category, an area that would have been in probable or possible previously. So it is more or less what we have been doing, which is at the same time, we are concentrating on development in the core parts. We are also extending our boundaries and that is a great example of doing that.

Okay. Thank you for the color. And if my follow-up, I wanted to touch on a big topic in the Midland Basin on well degradation. A lot of operators are talking about it. You all seem to have been kind of less impacted looking at your results overtime. So I’m just curious kind of how you think you have sort of sidestep this issue and how you are thinking about that going forward?

Yes. Tim, that is an excellent question. So I think if you look in our deck that is really the whole ladder part of the deck is how much time we spend on modeling the fracs and the wells to get the well spacing tuned to each DSU, driven by how much oil is in place in each zone, the vertical and horizontal interference. And that is where I think we really stand out with our ability with the proprietary tools we have developed and we have that one slide, where we show the cloud of all the potential completion designs and where we are compared to kind of the competitors in the Midland Basin. So that is why we view ourselves as really having predictable wealth. For us, it is very easy to predict them. Their performance is spot on always with what we expect on a per lateral foot basis and on a per well basis. If we have got the lateral length fully delivered. So that is really what drives it.

Okay. And then if I could just follow-up on that. Your spacing assumptions over the last couple of years versus how you are thinking about the next two years are those consistent or have you made any up spacing changes?

We have basically lined out by DSU and after all these years of tuning, there is less and less tuning going on each year. So I think we are pretty much right on. We have done really well with the Dean wells. Those are really outperformed. And so we modified some when we saw zones that performed particularly well. We have done some minor modifications. But in entirety, it is pretty much the same. Q - Timothy Rezvan Thank you. I appreciate the comments.

You bet.

Your next question comes from the line of Gabriel Daoud with Cowen and Company. Your line is now open.

Hey guys. Gabe here. Thanks for all the prepared remarks last night. I was curious if we can maybe just get an update on some of the supply chain issues that were referenced in the pre release about a month ago or a couple of weeks ago, and then also the offset frac issue. I guess how long you think these issues could linger and just given all the wells that were anticipated to come on and maybe push to the right of it, should we expect like a pretty nice start to the year in 2023?

Yes. Gabe, great question. We put that early release out to cover the production differences from our expectations. And that was really about 60% from delays and turning well inline and about 40% from offset activity. The supply chain difficulties really is, where we have got a really finely tuned instrument out there, especially when we are final fracking or even when we are zipper fracking. And if the provider has to wait for parts that slows us down. If there is slowdowns in trucking, whether that is counterparts or other materials required on the site that can slow us down. And then for the service sector, finding and keeping experienced folks labor on the job, that is another challenge. So those sorts of things with the activity at the highest level has been in a several years now, that is what is really driving that. Overall, the number of completions in the Midland Basin, we completed 14, but some came on later in the quarter than expected. And then South Texas, we couldn’t have brought online for fewer and two of those are already online now, but two more are yet to come. So our base production looks great, but it is just a matter of what the outlet timing is. That is really the story on that one. On the offset activity, it is kind of funny actually that we have been accused to being conservative in our forecasts. And it is kind of funny that three quarters in a row, we are accused of conservative, while that offset activity was lower than we expected, and then this quarter the offset activity was higher than what we had baked into our estimates. So that will happen at times, and not much really we can do about it.

Okay, got it. Thank you. That is great color and very helpful. Maybe now just on the buyback maybe, just curious, what do you have to see to get comfortable with either accelerating it or even raising it. You noted, it is on a pretty conservative price deck and calendar 2023 TI showing $84 or so. So like how long is that to be sustained, or is it something on the debt side obviously, you are pretty close to or about to exceed your target. So maybe just help us to think about upside to that program and what you guys need to see? Thank you.

Sure. Great question. As you mentioned, we are kind of right at our target on the leverage side of well below one-times and right around the billions of net debt, and all I can say right now is that we will move forward. We will deliver on our commitment to return the levels to the shareholders that we have talked about. And as you mentioned, we built that in pretty conservatively to make sure that would happen so we use 60 and three. So as we move forward into finalizing our plans for 2023 and looking at other opportunities we might have and seeing how stable the commodity prices in that being. That will just be part of the decision making as we go as we move forward. Can’t give you any like metrics to watch for right now. But the more comfortable we get with the stability of the commodity and the free cash flow we are generating, there is obviously an opportunity and a possibility that will increase the levels on the return to the shareholder side. But too early to indicate any of that yet.

Okay. Understood, thanks Wade. Thanks guys.

You bet.

Your next question comes from the line of Oliver Huang with TPH. Your line is now open.

Just wanted to follow back up on the Q4 guide. Just I guess compared to prior to initial expectations of having encountered the offset frac and supply chain issues in Q3. Does that 60/40 mix that you just kind of referenced for Q3 also hold for Q4 or does it lean a bit heavier one way or the other?

Yes. Oliver, for 4Q, all we would say is there is been delays and when we can turn some wells in line. Offset activity is something that is really hard to forecast. So what we did for our 4Q was just more or less delayed turning lines somewhat. And then for the asset activity, we basically just use our asset activity model where we know our own offset activity, and then we know what offset operators will do. Sometimes they will change their schedules, sometimes we will have a delay. But there is nothing specific that I would say into on percentages of one versus the other. Kind of all grouped together.

Okay, thanks. That makes sense. And for a second question, I know, you all historically bake in some risk in per offset frac downtime, but just kind of getting the strong commodity prices, more players and activity in the basin. Just kind of wondering if you all are expecting a more elevated impact relative to historical norms when thinking about 2023 just based on conversations that other operators have kind of communicated with you in the planning phase for next year at this point in time?

Not really. It is something that it is every month we will get an update on things that sort of thing. So it is really hard to forecast exactly what the rig count will be in Howard County. That is one proxy. Just look at the rig count in Howard County when it is way up. There is going to be more activity in the area. So South Texas is different because we have got quite a bit of - it is only our own wells really, very complex to where we have got offset activity directly off us.

Perfect. Thanks for the time.

[Operator Instructions] Your next question comes from the line of Gregg Brody with Bank of America. Your line is now open.

Just to follow-up, in terms of the debt side, clearly below your leverage target, and you have paid down your revolver. So you still got another 600 million or so to reduce in terms of debt from the bond side to try to get to your one billion dollars target. Just talk to us about how you are planning on approaching that. Should we think about you just calling on the first maturities as they come due or are you thinking about it in a different way?

You know how we operate typically by maturity. So you can assume that when we are ready to reduce the absolute debt numbers to get down to that one billion. As you mentioned, we have a lot of cash right now that is why we can say close to one billion. It would probably be the - 25s would be the first target, although we watch the trading levels of the others as well. But that is just generally speaking how we would do that. We tap the brakes a little bit on that just given the uncertainty with inflation and interest rates. It feels like a good time in this time of uncertainty and rising rates to have cash. So that is kind of the way we are running things right now. As we move forward and build more cash than that we will make those decisions as we move forward. But that is kind of a general thinking.

And then you had some comments in your pre call that I just wanted to clarify to make sure I understand them. So I think when you were talking about inflation, you talked about how this year you model - for 2022, you average in 25% to 30%. And I think you said that you expected the exit rate to be above that number. So implying 2023 patients higher than twenty five percent to 30%? Did I understand that correctly and just how does that translate potentially for your capital budget when we think about what you may have locked in from this year already and maybe how you are approaching contracting, are you thinking about having longer duration contracts to try to address some of the inflation?

Yes. I will respond to your comment on my prepared remarks. But let Herb add any color he wants, but you did hear it correctly. 25% to 30% and that we are seeing an exit rate out of 2022 higher. And we listed the things that are that are still going up too early to give any specifics on 2023 in those areas though.

Yes. Greg, the only thing I will add on that is that we have not done the 2023 budget. We are watching things really closely. We have done as much as we can to lock in the supply chain for next year. But there is no doubt there is inflation going on and we don’t know when it will pop out.

Are you considering smaller duration contracts now with some of your providers, was it also addressed in the supply chain issues that you have had occurred this quarter?

Yes, it is a mix of the contracts themselves, getting the steel, making sure we have got the steel and we can drill the wells, that is a critical starting point. And then on the frac service providers, making sure we are set there. We are really good. Stand supply, we are in great shape because we do lock that in a bit longer-term. So we really work that hard as the way I would sum it up.

Great. Thanks for the time guys. I appreciate it.

You bet.

Your next question comes from the line of Daniel John with Daniel’s Energy Partners. Your line is now open.

Hey, guys. Thank you for including me. Herb, I got a quick question on just the supply chain. If the industry activity stabilizes from here, do you think the industry sees these headaches ease in 2023? What happens in your view, if we see another 5% to 10% activity across the board, what is the duration of the headaches, if you will?

Yes. John, thanks for the question. You probably know better than anyone on what it looks like. There is areas that are quite tight and it is if there were the hypothetical of increasing activity, those tight areas will obviously have more inflation. I think there is quite a bit of discipline on the E&P side and the service side. But I think the thing is that, if you are going to forecast, forecast often. I don’t think we are ready to forecast cast. We are going to put a budget together with our expectations in November through January timeframe. And we will go with that, and then we will see where things come. But we are focused on our relationships with those key suppliers and service providers and materials. So that is just what I would say on that.

Fair enough. I have got a dumb guy question for you now. Where are we on the evolution of well completion designs any big picture thoughts on that? Like how often you are testing new designs?

So John, I’m going to point you to one slide in our deck. I don’t know if you have looked at it, but it really just showed...

- I’m not sure. sorry?

I’m going to point you to Slide 13 and you can see how we have moved our completion design to add value and in some cases it does take additional capital, but the performance that incremental return for that additional capital is phenomenal. We are going to continue to do that. You are going to continue to see us get better and you are going to see our competitors moving towards our designs overtime. I think we are right at the cutting edge on that and it is a place we want to be.

Awesome. I really appreciate you guys letting me ask some questions. Thank you.

You bet John.

This concludes today’s Q&A. I will now turn the call to Dr. Herb Vogel, Vice President and CEO.

Thank you, Emma. And thank you all for your interest in SM Energy. Thank you.

That concludes today’s call. Thank you for attending. You may now disconnect.