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    SM
    Earnings call· Mar 2026(Q1 FY26)

    SM Energy Q1 FY26 earnings call SM

    May 7, 2026 Source

    Executive summary

    SM Energy Q1 FY26 — Strong Integration and Raised Outlook

    SM Energy delivered a strong first quarter, exceeding production guidance and managing capital efficiently following the Civitas merger. The company raised its synergy target and full-year production outlook, while maintaining capital guidance, demonstrating successful integration. With accelerated debt reduction and a clear path to low 1x leverage, SM Energy plans to commence share buybacks in Q2, signaling confidence in its equity and future free cash flow generation.

    Highlights

    5

    • Q1 production exceeded guidance at 371,000 boe/d, with oil production at 190,000 bbl/d.

    • Capital expenditures were below guidance at $672 million.

    • Synergy target raised to $375 million by year-end 2026, nearly double the original estimate, with a present value of $1.8 billion.

    • Reduced absolute debt by $700 million since January, achieving pro forma leverage in the low 1x area ahead of schedule.

    • Full-year production midpoint raised from 410,000 to 420,000 boe/d, and oil production midpoint from 221,000 to 225,000 bbl/d, while maintaining capital guidance.

    Concerns

    2

    • Reported a GAAP net loss primarily due to a noncash mark-to-market adjustment on the hedge book.

    • Incurred approximately $180 million of one-time integration and transaction cash costs in the quarter.

    Guidance & targets

    7
    CategoryTargetConfidence
    Full-year 2026 production midpoint
    420,000 barrels of oil equivalent per day
    high materiality
    High
    Full-year 2026 oil production midpoint
    225,000 barrels per day
    high materiality
    High
    Full-year 2026 capital guidance
    $2.65 billion to $2.85 billion
    high materiality
    High
    Second half 2026 production run rate
    approximately 430,000 barrels of oil equivalent per day
    high materiality
    High
    Second half 2026 oil production run rate
    238,000 barrels of oil per day
    high materiality
    High
    Leverage target
    at or below 1x leverage
    high materiality
    High
    Share buybacks commencement
    commence buybacks
    high materiality
    High

    Segment performance

    4
    SegmentRevenueYoYQoQMargin
    Permian
    Advancing Woodford development with real upside. Scale in the Permian creates procurement leverage and scheduling efficiency.
    25 net wells turned in lineLongest and fastest Wolfcamp D wells drilled4% completion efficiency improvement compared to 2025
    		————
    DJ Basin
    The wells on schedule are very high-return, and the basin recycles cash very fast with low drill times and fast fracs.
    First quarter turn-in-line showed early time outperformance versus offset wellsSimul-frac implementation drove 25% improvement in completion efficiency compared to zipper operations
    		———low-cost, high-margin business
    South Texas
    Asset divestiture strengthened the balance sheet and high-graded the position towards higher-margin, liquids-rich opportunities.
    Base production outperforming6% completion efficiency improvement compared to 2025
    		————
    Uinta
    Oil-focused basin with strong Q1 performance, continuing to develop the high-return lower cube and encouraged by upper cube developments.
    Highest margin in portfolioHighest torque to higher oil pricesMove to longer, 4-mile developments delivering meaningful savings in drilling cost per foot
    		———nearly $40 per barrel cash production margin

    Operational metrics

    16
    Adjusted EBITDAX
    $970 million
    Q1 FY26

    Strong financial performance.

    Adjusted Net Income
    $309 million
    Q1 FY26
    Adjusted Diluted EPS
    $1.55
    Q1 FY26
    Merger Synergies Actioned
    $300 million
    Q1 FY26

    Actioned within 2 months of merger close.

    Merger Synergies Target
    $375 millionnearly 2x original target
    FY26

    Raised target by year-end 2026.

    Absolute Debt Reduction
    $700 million
    Since Jan 2026

    Reduced through well-timed and decisive actions since Civitas merger closed.

    Pro Forma Leverage
    moving into the low 1x areaahead of original year-end target
    Q1 FY26

    Expected to improve further as free cash flow builds through the back half of the year.

    Borrowing Base
    $5 billionreaffirmed
    Current

    Reaffirmed by bank group even after South Texas divestiture and lower commodity price assumptions.

    Hedging Coverage
    50%
    Rolling year basis

    Strategy tied to leverage, particularly in the 1x leverage area.

    Cash Taxes
    below $100 million
    FY27+

    Cash taxes become minimal closer to $70 oil due to IDCs and deductions.

    Completion Efficiency Improvement
    4%compared to 2025
    Q1 FY26
    Completion Efficiency Improvement
    25%compared to zipper operations
    Q1 FY26

    Not a marginal gain.

    Completion Efficiency Improvement
    6%compared to 2025
    Q1 FY26
    Cash Production Margin
    nearly $40
    Q1 FY26

    Achieved with only 1 month of stronger oil price environment in 2026.

    Drilling Cost Savings
    meaningful savings
    Q1 FY26
    One-time Integration and Transaction Cash Costs
    $180 million
    Q1 FY26

    Impacted Q1 adjusted free cash flow.

    Industry KPIs

    3
    MetricValueDetails
    D c efficiency rig activity25%%
    Basin level production volume371,000boe/d
    FCF shareholder distributions$20 millionUSD

    Deals & partnerships

    1
    nullSale of gassier South Texas assets.$900 million

    Strengthened balance sheet and high-graded South Texas position towards higher-margin, liquids-rich opportunities.

    Risks & headwinds

    4
    Noncash mark-to-market adjustment on hedge bookQ1 FY26

    net loss was largely related to a noncash mark-to-market adjustment on our entire hedge book as of March 31

    Mitigation: Management uses hedging to reduce risk while maintaining upside exposure, protecting cash flow for near-term objectives like funding drilling, debt reduction, and shareholder returns.

    One-time integration and transaction cash costsQ1 FY26

    approximately $180 million of onetime integration and transaction cash costs

    Mitigation: These costs are largely behind the company, with synergy benefits building and free cash flow expected to accelerate.

    Potential cost inflation in higher commodity price environmentFY26

    maintaining that guidance as cushion against potential cost inflation in a higher commodity price environment

    Mitigation: Maintaining lease operating expense and transportation guidance as a cushion, planning to revisit after a full quarter of combined operations.

    Uncertainty in the market and infrastructure impacts2027

    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.

    Mitigation: Monitoring the market and underlying fundamentals before making decisions on 2027 activity, prioritizing capital efficiency and free cash flow.

    What to watch in Q2 FY26

    5

    Share buyback commencement and pace

    Q2 FY26 and beyond
    Currentexpect to commence buybacks in the second quarter
    Targetincreased percentage allocated to buyback

    Why it matters

    Indicates management's confidence in equity valuation and commitment to shareholder returns, especially as leverage declines and FCF accelerates.

    As leverage declines, we expect to increase our share buybacks and we expect to commence buybacks in the second quarter.

    Q&A highlights

    6

    Will SM Energy increase activity or production in response to higher oil prices, especially given the recent merger and prior plans to rightsize acquired volumes?

    Management stated that 2026 deliverables are clear and unlikely to change. They will continue to invest in high-return projects, generate free cash flow, reduce debt, and return capital to shareholders, with share buybacks being the best investment at current valuation.

    “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.”

    asked by Zachary Parham · answered by Elizabeth McDonald

    2 min read6 chapters

    Detailed Narrative

    01

    Successful Integration and Synergy Acceleration

    SM Energy successfully integrated the Civitas merger, closing on January 30 and actioning approximately $300 million in merger synergies within two months. The company has raised its synergy target to $375 million by year-end 2026, nearly double the original estimate, with a present value of $1.8 billion, up from $1 billion to $1.5 billion. This rapid capture highlights the organizational capability and efficiency gains from the merger.

    02

    Operational Excellence and Capital Efficiency

    The company demonstrated strong operational execution, delivering Q1 production of 371,000 boe/d (190,000 bbl/d oil), exceeding the top end of guidance, while capital expenditures came in below guidance at $672 million. This capital efficiency allowed SM Energy to raise its full-year production midpoint to 420,000 boe/d (225,000 bbl/d oil) while maintaining its capital guidance of $2.65 billion to $2.85 billion.

    03

    Strengthening Financial Position and Shareholder Returns

    SM Energy significantly bolstered its financial position, reducing absolute debt by $700 million since January, partly due to $900 million net proceeds from the South Texas divestiture. Pro forma leverage is now in the low 1x area, ahead of the year-end target. This improved financial health, coupled with accelerating free cash flow, enables the company to increase share buybacks and commence repurchases in Q2, reflecting confidence in its equity valuation.

    04

    Basin-Specific Operational Highlights

    The Permian basin saw 25 net wells turned in line, with record-setting Wolfcamp D wells and 4% improved completion efficiency. In the DJ Basin, simul-frac operations led to a 25% improvement in completion efficiency. The Uinta basin delivered the highest cash production margin at nearly $40 per barrel, benefiting from longer 4-mile developments. South Texas base production outperformed with 6% improved completion efficiency.

    05

    Strategic Approach to Growth and Capital Allocation

    Management emphasized a disciplined approach to capital allocation, prioritizing high-return projects, debt reduction, and shareholder returns over immediate activity increases in response to higher oil prices. The company's 8+ year inventory at $60 WTI is expected to extend significantly at higher commodity prices, with a focus on maximizing free cash flow and long-term value creation.

    06

    2027 Outlook and Long-Term Vision

    The company anticipates 2027 to be a year where the full earnings power of the combined platform becomes visible, with one-time📎 costs behind, synergies at full run rate, and leverage at or below 1x. This foundation is expected to drive significant returns to stockholders, positioning SM Energy as a "powerhouse in shale" with a clear path for future value creation.

    AI-generated summary of the company’s earnings call. Not investment advice.