Earnings call transcript: SM Energy Q2 2025 sees strategic growth and challenges

SM Energy Co (SM) presented its Q2 2025 earnings call, highlighting significant operational advancements and strategic initiatives. According to InvestingPro analysis, the company is currently undervalued, with a market capitalization of $2.6 billion and impressive gross profit margins of 78.4%. Despite a cautious market outlook, the company demonstrated strong technical capabilities and efficiency improvements. The stock experienced a decline in aftermarket trading, reflecting mixed investor sentiment, continuing its volatile trend with a significant 47% decline over the past year.

Key Takeaways

• SM Energy ended Q2 2025 with leverage at 1.2 times, aiming for a full-year target of 1.1 times.
• The company achieved over 60% growth in net proved reserves and production since 2020.
• Focused efforts on the Uinta Basin led to improved well performance and capital efficiency.
• The stock price fell by 2.29% in aftermarket trading, closing at $22.61.
• Anticipated flat BOE production in 2026 with a slight reduction in capital expenditures.

Company Performance

SM Energy reported robust operational performance for Q2 2025, driven by strategic focus on maximizing free cash flow and optimizing production capabilities. The company has significantly increased its net proved reserves and production levels since 2020 while maintaining a flat share count and reducing leverage. This reflects a strong commitment to enhancing shareholder value without diluting equity. InvestingPro data reveals the company maintains a 33-year streak of consistent dividend payments, with an attractive current dividend yield of 3.46%.

Financial Highlights

• Leverage: 1.2 times as of Q2 2025
• Net proved reserves and production growth: Over 60% since 2020
• Capital efficiency improvements in the Uinta Basin
• Record volume movements at Price River Terminal

Outlook & Guidance

Looking ahead, SM Energy maintains a cautious outlook on natural gas due to rapid supply responses. The company plans to continue focusing on free cash flow generation and has authorized potential share buybacks up to $500 million. For 2026, SM Energy anticipates flat BOE production with slightly reduced capital expenditures, aligning with strategic adjustments based on commodity price environments. Analyst consensus from InvestingPro suggests potential upside, with price targets ranging from $27 to $59 per share. Get access to 12 additional exclusive ProTips and comprehensive financial analysis through InvestingPro’s detailed research reports.

Executive Commentary

CEO Herb Vogel stated, "We have delivered a step change in scale and de-risked the balance sheet, all while not diluting our shareholders." This underscores the company’s strategic focus on growth and financial stability. COO Beth McDonald emphasized the importance of maximizing margins and returns, highlighting the company’s dedication to operational efficiency.

Risks and Challenges

• Natural Gas Market Volatility: Rapid supply responses could impact pricing and demand.
• Commodity Price Fluctuations: Potential impact on revenue and profitability.
• Operational Efficiency: Maintaining improvements in well performance and logistics.
• Regulatory Changes: Possible implications for exploration and production activities.
• Market Competition: Challenges from competitors in unconventional resource development.

SM Energy’s Q2 2025 earnings call highlighted both achievements and challenges, reflecting a dynamic market environment. The company’s strategic initiatives and operational efficiencies position it well for future growth, with revenue growing at 27% year-over-year and maintaining strong profitability metrics. Market conditions and external factors remain critical considerations, particularly given the company’s beta of 2.3, indicating higher volatility compared to the broader market. For deeper insights into SM Energy’s financial health and growth prospects, explore the comprehensive Pro Research Report available exclusively on InvestingPro, covering over 1,400 US stocks with expert analysis and actionable intelligence.

Full transcript - SM Energy Co (SM) Q2 2025:

Rob, Conference Operator: Greetings. Welcome to SM Energy Company’s second quarter 2025 financial results and Operating Results Q&A session. At this time, all participants will be in listen-only mode. The question and answer session will follow the presentation. If anyone today is sure to require operator assistance during the conference, please press 0 on your telephone keypad. Please note that today’s conference is being recorded. At this time, I’ll turn the conference over to Patrick Lytle, Senior Vice President. Patrick, you may begin.

Patrick Lytle, Senior Vice President, SM Energy: 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 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 Vogel, President and CEO, SM Energy: 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 Beth’s comments on the prerecorded call. Over the last five 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 de-risked 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.

Rob, Conference Operator: Thank you. We’ll be conducting a question and answer session. If you’d like to ask a question, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you’d like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions.

Thank you.

The first question today comes from the line of Zach Parm with JP Morgan. Please proceed with your questions.

Hey, thanks for taking my questions. Just wanted to ask on cash taxes. You gave some specific guidance on cash taxes in 2025 post the passage of the tax bill. How should we be thinking about your cash tax obligations as we go into 2026 and into future years?

Wade Pursell, CFO, SM Energy: Yes, this is Wade, good question. At this point, for the foreseeable future, I would assume something similar. If you look into 2026, 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. If you’re asking about years beyond.

That.

Those laws stay into effect, and assume our spending stays at similar levels, it’s going to be a pretty similar.

Result for quite a while.

Rob, Conference Operator: Thanks.

My follow-ups 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?

Beth McDonald, COO, SM Energy: Yeah, hey Zach, it’s Beth. You know, 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. We came out of the gate really strong. We also had outperformance of our wells in the quarter that led to the high production. You know, we’ll have more of South Texas and Permian coming online in the second half. Uinta continues to stay strong and we were really excited about what we saw in Q2 and look forward to seeing continued performance and repeatability in that asset going forward.

Thanks, Matt.

Rob, Conference Operator: The next question is from the line of Leo Mariani with Roth MKM. Please proceed with your questions.

Patrick Lytle, Senior Vice President, SM Energy: Yeah, thanks.

Why don’t you just focus a little bit on some of the additional activity. I think if I read this right, 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, seems like you’re not completing them, but maybe these are just drills and sounds like they’re also all non-op. Have some of those kind of already happened? Are they hitting in third quarter? Do you expect to see CapEx come down in 4Q?

Beth McDonald, COO, SM Energy: Yeah. Hey Leo, it’s Beth. You know, 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. 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. Some of it is accel and some of it is non-operated projects that we know now that we’re participating in, high return ones in the Midland Basin, primarily associated with those.

Herb Vogel, President and CEO, SM Energy: Yeah, and Leo, those don’t add any production in 2025.

That’s all in 2026.

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

Beth McDonald, COO, SM Energy: Yes, Leo, we expect fourth quarter capital to come down.

Herb Vogel, President and CEO, SM Energy: Okay, that’s helpful.

On the Uinta, obviously it sounds like well performance has been certainly quite a bit stronger this quarter. You had a lot of wells, looked like the IP 30s were up quite a bit despite shorter laterals. Was hoping you could provide a little bit more color on sort of what.

Patrick Lytle, Senior Vice President, SM Energy: Drove the improved results.

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?

Beth McDonald, COO, SM Energy: Yes, on both. 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. We showed that also on slide 11, especially as it relates to the conveyor system and where we are now. 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.

Herb Vogel, President and CEO, SM Energy: Okay, appreciate it.

Rob, Conference Operator: Our next question is from the line of Oliver Huang with TPH. Please proceed with your questions.

Good morning Herb, Wade and Beth, and thanks for taking the questions. 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. 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, just given how you all had close to 50 of these wells online in the first half of the year, it’s a decent sample size with the 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.

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.

Beth McDonald, COO, SM Energy: Yeah, thanks, Oliver, for the question. I think, you know, when you look at our top initiatives as we evaluate the Uinta, we’re really looking at the entire development of the wine rack. 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. I think when you combine all those things, you see that repeatability in the 22 wells that we put online.

Okay, makes sense. Maybe just a quick follow-up on the trajectory. Just thinking through how the program was fairly front-end weighted with respect to CapEx and till. 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 tills, and most of the Uinta oilier wells were very front-end weighted. 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?

Herb Vogel, President and CEO, SM Energy: Yeah, Oliver, I think your back download math is pretty accurate there for fourth quarter, you know, and especially on the till count and what that implies. We’re not really going to discuss our plans for 2026 until our normal timing, which, you know, is February, and last July when we announced the Uinta transaction, we said we were going to reduce the rig count and we’re doing that.

So.

We’re down to six already, and it would be pretty much safe to assume we stick with six rigs for next year, spread pretty evenly across all our assets between South Texas, Midland Basin, and Uinta. 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. 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 two to three years as we usually do. 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.

We’ll do our normal program there, and as usual, it’ll be focused on free cash flow generation.

Okay, fair enough. Thanks for the time.

You bet.

Rob, Conference Operator: Next question in the line is Scott Hanold with RBC. Please proceed with your question.

Yeah, thanks. Certainly a lot of focus on the Uinta, and you all had a nice step up in 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? Do you expect things could be status quo, or even better, moving ahead based on what you know today?

Herb Vogel, President and CEO, SM Energy: Yes, Scott, I’ll start and then hand it over to Beth. You know, we went into Uinta Basin because we saw all this potential, not just near term and then lower cube, but beyond that for massive inventory expansion. We do see it as quite sustainable on a drilling program and the ability to grow inventory. With that, I’ll hand it over to Beth for the rest of that.

Beth McDonald, COO, SM Energy: I agree. 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. We have stellar performance. Most of that’s weighted toward the front half of the year. 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, thanks. My follow up, this one’s probably for Wade, on shareholder returns, as 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 rather than later, and what kind of scale would you feel comfortable doing that at?

Wade Pursell, CFO, SM Energy: A lot of good questions there, Scott.

Herb Vogel, President and CEO, SM Energy: Thank you.

Wade Pursell, CFO, SM Energy: Yeah, we are. Line of sight. That is a good word. I mean, we’re close getting there. We ended the quarter at 1.2 times, really more like 1.1 times if you look at it on a full year basis for XCL. 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. We’re really bouncing along right there, close to one times the second half of the year. 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. I’m talking about oil prices primarily. You could see us stepping in. Just to remind everyone, we have authorization from the board, $500 million share buyback program.

You very well could see us step in there, especially if there’s a period of weakness that we want to support.

Okay, I appreciate that. Thank you.

Herb Vogel, President and CEO, SM Energy: You bet.

Rob, Conference Operator: Our next questions come from the line of Michael Scanlan with Stephens. Please proceed with your questions.

Good morning everybody. Wanted to ask on the Uinta, I think you said 90% of this year’s program was focused on the lower cube. You talked about the 17 prospective intervals there, I guess. Could you provide an update on how many you’ve tested thus far? 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?

Beth McDonald, COO, SM Energy: Yeah, thanks, Mike, for that question. When you look back at the historic landing zones that we’ve seen across, a majority of those have been in the lower cubes. There are seven 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’ll come online in 2026. 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. 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?

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, primarily associated with the outperformance that we’ve seen in all three of our assets.

Sounds good.

Herb Vogel, President and CEO, SM Energy: Thank you.

Rob, Conference Operator: Our next questions are from the line of Michael Furrow with Pickering Energy Partners. Please proceed with your questions.

Hi, good morning. Thanks for taking our questions. Just got a follow up to Zach’s cash tax question earlier in the call. The capitalization of R&D seems to include a multi-year catch up and should benefit operators like SM Energy Company that have historically had higher levels of R&D. I’m curious if you could add some color to that statement and if SM Energy Company expects to see some benefits to longer term cash taxes, particularly from the R&D contribution angle.

Wade Pursell, CFO, SM Energy: Yeah, that’s a good point and that is definitely part of our conclusions with respect to changing our guidance on cash taxes. 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’ll 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. Just a follow up from me on the Uinta. 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. 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?

Beth McDonald, COO, SM Energy: Yeah. 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. We started with the double barrel and are down to single barrel as our frac fleet runs very efficiently and catches up with our rigs. 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. 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.

Understood. Thanks for the time.

Rob, Conference Operator: Thank you. As a reminder, if you’d like to ask a question today, you may press Star one from your telephone keypad. The next question comes from the line of Tim Resvan with KeyBanc Capital Markets. Please receive your questions.

Good morning, folks, and thank you for taking my questions. Not sure if this is for Beth or Herb. The release and 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.

that more a reliability issue, or could we see a potential uplift to realizations as you look to maybe get more Uinta barrels on rail? Thanks for any color on that.

Herb Vogel, President and CEO, SM Energy: Yeah, thanks, Tim. That gets in the details of the rail transport. I’ll hand that one over to Beth. 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.

Beth McDonald, COO, SM Energy: Yeah. 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 maximized, 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. We were able to work with our team at Price River Terminal as well as our railroad logistics team to move more cars. They did an amazing job moving the barrels in and out of that terminal, and we hit record volumes. It was a collective team effort across our infrastructure partners as well as our operations team.

Okay.

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. As my follow up for Herb, you know, 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 was December. You were cautious on gas. 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?

Herb Vogel, President and CEO, SM Energy: Yeah, Tim, it’s a great question. 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 the market performs through the shoulder months and we’re really looking for sustained price signals at a higher level. We even had a two handle earlier in the year, 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.

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. 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. Obviously there’s been a little bit of erosion unfortunately in that one.

Wade Pursell, CFO, SM Energy: We are happy to hedge natural gas in the out years.

Beth McDonald, COO, SM Energy: Yeah, okay.

Okay, thanks. We share that caution. I appreciate the insights.

Rob, Conference Operator: The next questions are from the line of David DeKelbant with TD Cowen. Please proceed with your questions.

Thanks everyone for taking my questions this morning. 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?

Herb Vogel, President and CEO, SM Energy: Yeah, David, asking about basis for Uinta is a bit challenging because the rail lines are sold at the refinery locations. Those can vary, you know, from 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. I’ll at best answer, give a little more granularity around that. It’s not like a single basis market that you’d look at in the.

Permian or other markets.

Beth McDonald, COO, SM Energy: Yeah, totally agree with you, Herb. You know 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. Of course, the transportation cost to get us to Salt Lake City is lower than railing it to Houston and to the Gulf Coast. We continue to look at what are our ultimately what’s the best margin and best return. That’s what our marketing team focuses on on a monthly basis. We’ll continue to do that, optimize as best as possible.

Appreciate it.

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 giving commodity signals that are out there, or these efficiency gains that you’re seeing on the non-operated side as well in terms of just drilling and completion times?

Herb Vogel, President and CEO, SM Energy: David, I’ll start that and then turn.

It over to Beth.

We are 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. That was exacerbated with the uncertainty in commodity prices, particularly after April. 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 non-operators, and we’ve dialed in what we think they’re going to do and how they’re going to execute. We just brought that all in for the full year. Beth, you want to add anything on that one?

Beth McDonald, COO, SM Energy: 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.

Appreciate it, guys.

Rob, Conference Operator: Thank you. 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.

Herb Vogel, President and CEO, SM Energy: Thanks, Rob. Thank you all for joining us today. We look forward to seeing a number of you at upcoming events. Have a great day.

Rob, Conference Operator: Ladies and gentlemen, this will conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.

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