Executive Summary / Key Takeaways

• SM Energy has undergone a significant transformation with the strategic acquisition and successful integration of high-quality Uinta Basin assets, establishing a powerful three-basin portfolio alongside its strong Midland Basin and South Texas positions.
• The company demonstrated solid operational execution in Q1 2025, with production at the high end of guidance, driven by Uinta outperformance, despite planned sequential decreases in Texas assets due to activity timing and capital reallocation.
• Financially, SM Energy is prioritizing debt reduction post-acquisition, targeting a return to approximately 1x net debt to Adjusted EBITDAX by mid-2025, leveraging robust free cash flow generation even at lower commodity prices.
• Operational efficiency and technological application, including optimized drilling/completion designs and infrastructure like the Uinta sand mine, contribute to competitive well performance and cost management across the portfolio.
• The 2025 plan anticipates a step change in scale with significant production growth (30% oil, 20% total) and sets the stage for potential flat to single-digit growth and increased return of capital in 2026, contingent on market conditions.

The Reshaping of SM Energy: Scale, Efficiency, and Strategic Focus

SM Energy Company, a dedicated U.S. independent energy producer, has fundamentally repositioned itself within the competitive exploration and production (E&P) landscape. Historically rooted in key Texas basins, the company has strategically expanded its footprint, culminating in the transformative acquisition of the Uinta Basin assets in Utah. This move, finalized in late 2024, marks a significant step change in scale, establishing a formidable portfolio centered on three high-quality, low-breakeven operating areas: the established Midland Basin and South Texas assets, and the newly integrated Uinta Basin.

The company's strategy is clear: leverage this expanded, top-tier asset base through disciplined capital allocation, operational excellence, and a commitment to generating robust cash flows that support a strong balance sheet and sustainable shareholder returns. This vision is underpinned by a culture that prioritizes safety, environmental stewardship, and the application of technological innovation to enhance efficiency and resource recovery.

Within the competitive E&P sector, SM Energy operates alongside larger, diversified players like Occidental Petroleum (OXY) and ConocoPhillips (COP), as well as other focused independents such as Devon Energy (DVN) and EOG Resources (EOG). While SM may not possess the sheer scale or global reach of some of its larger counterparts, it carves out its competitive niche through demonstrated operational efficiency and targeted development in prolific shale plays. Its well performance in core areas like the Midland Basin and South Texas Austin Chalk has consistently shown superior results compared to regional peers, a testament to its geoscience expertise and completion optimization techniques.

A key differentiator for SM Energy lies in its operational technology and approach. The company emphasizes applying its strength in geosciences and development optimization to maximize returns. In the Uinta Basin, for instance, the integration includes leveraging infrastructure like a newly operational sand mine, expected to produce over 1 million tons of sand per year. This not only enhances capital efficiency, potentially saving hundreds of thousands of dollars per well, but also reduces logistical costs and environmental impact by significantly cutting down truck traffic. The company's drilling and completion teams are focused on optimizing well designs, with new SM-designed pads in the Uinta expected to come online in 2026, incorporating learnings from current operations to further enhance capital efficiency and well productivity. This focus on continuous improvement in drilling speed, pumping efficiency, and water handling contributes directly to lower operating costs and higher returns, providing a competitive edge against peers whose operational costs may be higher or whose technological adoption slower.

The recent history of SM Energy is defined by deliberate portfolio enhancement. Over the past year, the company added over 90,000 net acres, a roughly 40% increase in core acreage, through targeted acquisitions and extensions like Sweetie Peck, Klondike, and the South Texas drill-to-earn area. The Uinta acquisition, with its 63,600 net acres, was the capstone, adding significant inventory life (3+ years) and immediate production scale. This strategic growth, while requiring significant capital, particularly the $2.1 billion all-cash Uinta deal, has positioned the company for its next phase of value creation.

Performance Reflecting Strategic Shifts and Operational Strength

The first quarter of 2025 provided the first full quarter glimpse of SM Energy operating with its expanded, three-basin portfolio under its direct control. Average net daily equivalent production reached 197.3 MBOE, landing at the high end of guidance. This performance was notably bolstered by the Uinta Basin assets, which saw a 6% sequential increase in production to 38.4 MBOE per day and outperformed expectations. This growth offset anticipated sequential decreases in the Midland Basin (down 2% to 81.5 MBOE per day) and South Texas (down 13% to 77.4 MBOE per day). The decreases in Texas were a planned outcome of the capital allocation shift towards integrating and developing the Uinta assets and the timing of well completions, including no completion crews operating in South Texas during the fourth quarter of 2024.

Financially, the first quarter results demonstrated resilience. Oil, gas, and NGL production revenue remained relatively flat sequentially at $839.6 million. While average net daily equivalent production decreased by 5%, this was counterbalanced by an 8% sequential increase in the total realized price per BOE, reflecting favorable benchmark price movements. Net income for the quarter was $182.3 million, or $1.59 per diluted share, compared to $188.3 million ($1.64 per diluted share) in the prior quarter. Adjusted EBITDAX, a key metric for evaluating cash-generating ability, stood at $588.9 million.

Operating expenses saw some shifts. Total oil, gas, and NGL production expense increased 5% sequentially to $225.1 million. On a per BOE basis, LOE increased 15% sequentially, influenced by lower production volumes and increases in certain operating costs like workover expense. Transportation costs per BOE decreased 4% sequentially, primarily tied to production mix changes, but remain significantly higher year-over-year (up 89% YTD 2025-over-YTD 2024), largely due to the addition of Uinta volumes, which incur substantial railing costs (around $16/barrel for railed oil). Production taxes per BOE increased 16% sequentially, correlating with the higher realized price per BOE. Depletion, depreciation, and amortization (DDA) per BOE saw a 12% sequential increase, primarily driven by the higher DDA rates associated with the acquired Uinta assets. General and administrative (G&A) expense decreased 6% sequentially, benefiting from lower one-time Uinta acquisition costs, though it remains higher year-over-year due to increased headcount.

The Uinta acquisition, while strategically accretive, introduced a need to manage the balance sheet post the all-cash transaction. As of March 31, 2025, the company had $37.5 million drawn on its revolving credit facility, with total Senior Notes principal outstanding at $2.74 billion.

The borrowing base on the credit facility was reaffirmed at $3.0 billion subsequent to quarter-end. Management is explicitly prioritizing the allocation of adjusted free cash flow towards debt reduction. This strategic financial discipline aims to bring the net debt to Adjusted EBITDAX leverage ratio back to approximately 1x by sometime in mid-2025. This focus is deemed achievable even in a lower commodity price environment (e.g., $55 oil), highlighting the cash-generating power of the combined asset base. This deleveraging phase is a necessary step before the company intends to resume its prior pace of share repurchases, effectively transferring enterprise value to equity holders. The fixed quarterly dividend, currently $0.20 per share, remains a consistent component of the return of capital strategy.

Outlook: Growth Trajectory and Capital Allocation Discipline

SM Energy's outlook for 2025 is defined by the full realization of the Uinta acquisition's impact and disciplined capital execution across the integrated portfolio. The 2025 capital program, excluding acquisitions, is expected to be approximately $1.3 billion.

This investment is strategically directed towards high-return development projects in the three core basins, supporting the company's objective of strategic inventory replacement and growth.

The production trajectory through 2025 is anticipated to build momentum. Following the modest sequential increase expected in Q2 2025, management forecasts a "major increase" in production volumes during the third quarter, driven by the timing of well turn-in-lines, particularly from larger pads in the Uinta Basin. Production is then expected to level out in the fourth quarter. This plan is projected to deliver a significant step change in scale for the company, with a guided 30% increase in oil production and a 20% increase in total production for the full year 2025 compared to 2024.

Operational efficiency is a key focus for the capital program. The company plans to reduce its combined rig count from nine to six or seven during 2025, while maintaining approximately three completion crews. This adjustment optimizes the rig-to-completion crew ratio for the larger, integrated program and reflects a focus on capital efficiency rather than managing to a specific drilled but uncompleted (DUC) well count, which is viewed as an outcome of activity timing and pad size. The Q1 2025 DUC count of 121 gross (104 net) reflects this dynamic, influenced by the pace of drilling on the acquired Uinta assets prior to SM taking operational control.

Looking ahead to 2026, while a detailed plan is not yet finalized, management's preliminary outlook, contingent on commodity prices and costs, is for flat to single-digit production growth. The emphasis for 2026 is expected to shift towards increasing the return of capital to stockholders, building on the strengthened balance sheet achieved through 2025. This growth could potentially be achieved at capital levels similar to 2025, depending on service costs and the chosen product mix across the basins.

Key cost assumptions for 2025 include expected increases in full-year LOE per BOE due to the higher oil mix from Uinta and certain Midland operating costs, and higher transportation costs per BOE due to Uinta volumes. G&A is expected to increase on an absolute basis due to the larger organization but remain relatively flat per BOE. The company anticipates between $85 million and $95 million of its full-year 2025 income tax expense to be current.

The company acknowledges that its outlook is subject to inherent risks, including the unpredictable volatility of global commodity prices, geopolitical events, potential supply chain disruptions, inflation, interest rate fluctuations, and regulatory changes. Infrastructure constraints, such as rail delays or refinery downtime, can also impact the timing of production sales, as experienced in late 2024. To mitigate commodity price risk, SM utilizes derivative contracts, which can help insulate cash flows from price downturns, though they also limit upside participation. Management expresses comfort with the plan's resilience, noting it delivers objectives even at oil prices around $55 per barrel.

Conclusion

SM Energy has successfully executed a pivotal strategic transformation, integrating the high-quality Uinta Basin assets to create a larger, more diversified, and highly economic three-basin portfolio. The first quarter of 2025 demonstrated solid operational performance and the initial benefits of this expanded scale. The company's near-term focus on disciplined capital allocation and aggressive debt reduction is a prudent financial strategy that positions it for enhanced financial flexibility and increased shareholder returns once its leverage targets are achieved.

While exposed to the inherent volatility of commodity markets and operational risks common in the E&P sector, SM Energy's demonstrated operational efficiency, technological application in optimizing well performance and costs, and high-quality asset base provide a strong foundation. The clear growth trajectory planned for 2025 and the potential for sustained performance and increased capital returns in 2026 underscore the investment thesis: a transformed E&P company executing effectively on its strategy to sustainably grow value for its stakeholders.