SM Energy Company 2026 Q2 Earnings Call

Yes, thank you. Good morning. Welcome to SM Energy's second quarter 2026 earnings call. I'm Megan Hays, Vice President of Investor Relations. It's a busy morning for everyone, so we'll jump right in. Joining me are Beth McDonald, our President and CEO, Wade Pursell, our Executive Vice President and CFO, and Blake McKenna, our Executive Vice President and COO. Today's discussion will reference forward-looking statements. Please see slide two of our earnings presentation, as well as the risk factors section of our most recent Form 10-K for risks and uncertainties that could cause actual results to differ materially. We will also reference non-GAAP financial metrics throughout the call. You can find definitions and reconciliations to the closest comparable GAAP metrics in yesterday's earnings release, Form 10-Q, and in the slide deck available on our website.

When we get to Q&A, please limit your inquiries to one question and one follow-up, as this simply allows us to get more of your questions in today. With that, I'll turn it over to Beth.

Thanks, Megan. Good morning, everyone. The second quarter was our first full quarter operating as a combined entity. We generated $467 million of adjusted free cash flow, returned $137 million to stockholders, and have now actioned approximately 95% of our merger synergy target. Together, those results demonstrate that SM is already stronger, more cash generative, and more valuable than either legacy business on its own, and they underscore why this platform is materially undervalued today. Integrate, execute, bolster. The framework for 2026 hasn't changed, and this quarter is proof that it's working. I'll take each in turn. On integrate, we have now actioned approximately $355 million of our $375 million run rate synergy target, which we raised last quarter to nearly double the original.

The organizational capability we brought to this merger is real, and it's now showing up directly in our cost structure, including a lower G&A outlook that Wade will cover. Overall, we are ahead of the pace that we laid out when we announced the merger. On execute, production averaged approximately 440,000 barrels of oil equivalent per day within our guidance range and building into the second half of 2026, pro forma for the divestiture of our Galvan assets in South Texas. On the strength of that trajectory, we are increasing our second half production outlook and reaffirming our full year capital plan. Wade will take you through that detail, but the takeaway is clear: we are executing within a disciplined capital framework and turning the combined platform into a higher free cash flow, higher return business for our stockholders.

On bolster, we closed the Galvan divestiture, substantially achieving our billion-dollar divestiture target within a year of the merger and directed the proceeds to debt reduction, putting us on a visible path to low one times leverage. Alongside that, we also repurchased $84 million of shares this quarter under our capital return framework. In addition, with the cash on hand at quarter end, we provided notice to redeem the remaining 2027 senior notes, underscoring the rapid progress we've made in strengthening the balance sheet. That combination, a stronger balance sheet and rising free cash flow with buybacks already underway, is a key part of why we believe SM's equity is so attractive today. In short, this quarter shows we are doing what we said we would do: integrating at pace, executing the plan, strengthening the balance sheet, and demonstrating the free cash flow and returns power of SM.

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

Thanks, Beth. Good morning, everyone. Our financial results were strong. Adjusted EBITDAX was $1.4 billion. Adjusted net income was $526 million, or $2.19 per diluted share. We generated $467 million of adjusted free cash flow. Capital expenditures for the quarter totaled $717 million, below our guidance midpoint of $835 million, primarily driven by D&C timing. We are reaffirming full year capital guidance of $2.65 billion-$2.85 billion. Again, we generated $467 million of adjusted free cash flow for the quarter. We returned 30% of it, or $137 million, to shareholders through the dividend and share buybacks, the dividend being $53 million and $84 million used to jumpstart our buybacks, consistent with our 80/20 framework that we've discussed. Leverage continues to fall, and as it enters the low one times area calculated with mid-cycle commodity pricing, we anticipate increasing the percentage to buybacks.

Speaking of leverage and turning to the balance sheet, we reduced net debt by about $1.1 billion during the quarter, ending with net debt of approximately $6.25 billion. That includes $620 million of cash and an undrawn revolver.

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

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

Blake? Thanks, Wade. Our results start at the asset level, so let me walk through the basins briefly.

In the Permian, our combined footprint delivers procurement and scheduling efficiencies and gives us more flexibility. We're using our scale and technical team to continue unlocking the value of this high return inventory. In the DJ Basin, our combined company completion practices, simul-frac in particular, continue to drive real capital efficiencies. It is a low cost, high margin business. The consolidated footprint has made pad design, scheduling, and the cost structure much more competitive. In South Texas, the Galvan sales strengthen our balance sheet and high graded the remaining position toward higher margin liquids-rich development, weighted towards the Austin Chalk. I want to spend a moment on the Uinta and the work our team is doing to drive efficiency and productivity.

This year, our team has standardized our Uinta development program to pair completion innovations with faster flow back and longer laterals. Together, these changes are meaningfully improving well economics and cycle times, as a result, pulling cash flow forward. We are developing our position with four-mile laterals, which our contiguous acreage makes possible. Our blocked up acreage is a structural advantage few operators can match, and long lateral development is a deliberate capital efficiency lever that improves returns across the program. On the completion side, we've deployed several innovations, including simul-frac operations using natural gas frac fleet, remote frac equipment, a sand slurry pipeline, and dual-string coil drill outs across our long lateral program. Our completion pace has increased over 2,600 foot per day, which is more than double our early 2026 rate.