Executive Summary / Key Takeaways

• Strategic Transformation & Scale: SM Energy has undergone a significant transformation, marked by the pivotal acquisition and successful integration of Uinta Basin assets, which has substantially increased its scale and oil-weighted production, positioning it as a premier operator with three top-tier assets.
• Operational Excellence & Technological Edge: The company consistently delivers superior well performance across its core basins, driven by advanced technological initiatives like machine learning for well design, extended laterals, and innovative operational efficiencies that translate directly into lower costs and higher cash flows.
• Robust Financial Health & Capital Discipline: SM Energy's strong Q2 2025 financial performance, including record production and significant free cash flow generation, has enabled it to pay down debt and build a substantial cash balance, putting it on track to achieve its 1x leverage target by year-end 2025.

• Clear Capital Allocation & Shareholder Returns: The company prioritizes debt reduction to optimize its balance sheet, with a clear path to resuming enhanced shareholder returns through its stock repurchase program once leverage targets are met, complementing its fixed dividend.
• Resilience Amid Volatility: Despite ongoing commodity price volatility and geopolitical uncertainties, SM Energy's low-breakeven assets, strategic hedging program, and disciplined capital allocation provide financial resilience, allowing it to maintain its operational plan and pursue long-term value creation.

A Century of Evolution: SM Energy's Strategic Ascent in the E&P Landscape

SM Energy Company, with roots tracing back to 1908, has evolved from its origins as St. Mary Land & Exploration Company into a formidable independent energy producer. Its journey has been characterized by strategic adaptation and a relentless pursuit of efficiency within the dynamic oil and gas exploration and production (E&P) sector. Operating exclusively in the United States, primarily across the prolific Midland Basin of West Texas and the Maverick Basin of South Texas, SM Energy has carved out a niche through focused expertise and disciplined capital deployment.

The industry landscape for E&P companies is currently defined by significant uncertainty and volatility. Global commodity prices for oil, gas, and natural gas liquids (NGLs) are subject to unpredictable fluctuations driven by a confluence of factors, including OPEC+ supply decisions, geopolitical instability in key producing regions, U.S. Federal Reserve monetary policy, and global shipping constraints. For instance, JPMorgan's analysis suggests Brent crude will remain in the low-to-mid $60s through 2025 and flat at $60 in 2026, with a notable $10 per barrel geopolitical premium when tensions escalate. This environment underscores the critical importance of operational efficiency, financial resilience, and strategic hedging for E&P firms.

SM Energy's overarching strategy is a multi-year plan aimed at sustainably growing value for all stakeholders. This involves maintaining and optimizing a high-quality asset portfolio, generating robust cash flows, and upholding a strong balance sheet. The company executes this strategy by prioritizing safety, technological innovation, and environmental stewardship, which are deeply embedded in its corporate culture.

A pivotal moment in SM Energy's recent history was the all-cash acquisition of Uinta Basin assets from XCL Resources, finalized at $2.1 billion in Q1 2025. This acquisition, which closed on October 1, 2024, represented a "step change in scale" for the company. It expanded SM Energy's core acreage by approximately 40% (adding 63,300 net acres) and extended its inventory life by over three years. The strategic rationale was clear: to enhance the portfolio with top-tier assets capable of generating strong returns and providing resilience against commodity price volatility, immediately increasing net oil production by around 40% sequentially.

Technological Edge and Operational Mastery

SM Energy's competitive advantage is deeply rooted in its technological differentiation and operational excellence. The company has developed and advanced machine learning models to refine its well designs, leading to stronger performing wells and higher cash flows. This commitment to innovation is evident across its operations.

In the Midland Basin, SM Energy has achieved remarkable efficiency gains, reducing its average drilling and completion (D&C) cost per foot by 15% since 2022. The company recently drilled its two fastest Woodford wells in the Midland Basin, achieving speeds 25% faster than previous wells. Furthermore, it continues to extend lateral lengths, successfully completing more 4-mile wells, and evolving well designs to enhance performance and efficiency. These efforts have resulted in Howard County wells performing over 30% better than peer-operated wells.

The Uinta Basin acquisition has provided a new canvas for SM Energy's operational prowess. The company successfully drilled its first 3-mile lateral in the upper cube of the Uinta Basin, a move setting the stage for future development and higher returns. Environmental stewardship is also integrated into their operational technology; the company safely relocated a centralized remote e-fleet, which will now frac over 30 wells into 2026 using 100% recycled water. Additionally, the startup of the "Sand Slinger 3000" sand conveyor system reduces costs, eliminates sand truck traffic, and improves overall safety. In South Texas, SM Energy is utilizing lease gas to power frac operations and optimizing sand logistics to reduce nonproductive time and save costs.

These technological advancements and operational efficiencies are not merely incremental improvements; they form a critical competitive moat. They directly contribute to SM Energy's ability to achieve superior margins, lower operating costs, and enhance its market positioning. By consistently outperforming peers in well productivity and capital efficiency, the company strengthens its financial performance and underpins its long-term growth strategy, even in a volatile commodity price environment. The ongoing efforts to optimize well design and deepen the understanding of the 17 prospective intervals in the Uinta Basin, with a new SM design pad expected in 2026, underscore a continuous commitment to leveraging technology for value creation.

Strategic Integration and Financial Performance

The successful integration of the Uinta Basin assets was completed by Q2 2025, marking a significant achievement for SM Energy. This period saw record production volumes, with average net daily equivalent production reaching 209.1 MBOE per day in Q2 2025, exceeding the midpoint of guidance by 5%. Oil production was particularly strong, comprising 55% of total production at 115.7 MBbls per day. This outperformance was largely driven by a 25% sequential increase from the Uinta Basin and a 3% increase from the Midland Basin.

Despite the strong production volumes, Q2 2025 saw a 6% sequential decrease in total oil, gas, and NGL production revenue to $785.1 million, primarily due to a 13% sequential decline in realized prices per BOE. Weaker Waha pricing notably impacted realized gas prices. However, the company's hedging program provided a significant offset, contributing a net derivative gain of $78.3 million in Q2 2025, a substantial improvement from the $17.2 million net derivative loss in Q1 2025. This highlights the effectiveness of their financial risk management in mitigating commodity price volatility.

Operating expenses demonstrated disciplined management. Oil, gas, and NGL production expense remained flat sequentially at $224.0 million in Q2 2025. Lease operating expense (LOE) per BOE decreased by 10% sequentially, benefiting from lower workover expense and the spreading of fixed costs over higher production volumes. Transportation costs per BOE increased by 5% sequentially, primarily due to the higher contribution from Uinta Basin assets, which have a higher transportation cost of approximately $16 per barrel for railed oil. Production tax expense per BOE decreased by 23% sequentially due to lower realized commodity prices, with Uinta Basin assets expected to incur a lower production tax rate overall. Depletion, depreciation, and amortization (DDA) expense per BOE remained relatively flat sequentially but increased 22% year-to-date, reflecting the addition of Uinta Basin assets and a shift in production mix towards higher DDA rate basins like Midland and Uinta.

Financially, SM Energy is in a robust position. Net cash provided by operating activities increased to $571.1 million in Q2 2025, primarily due to the timing of Senior Notes interest payments. The company paid off its revolving credit facility balance and ended Q2 2025 with over $100 million in cash and cash equivalents. This progress positions the company well to achieve its 1x net debt to adjusted EBITDAX leverage target near year-end 2025, assuming current commodity prices. As of June 30, 2025, the borrowing base and aggregate revolving lender commitments under its credit facility stood at $3.0 billion and $2.0 billion, respectively, with the company in full compliance with all covenants.

Competitive Landscape and Strategic Positioning

SM Energy operates in a highly competitive E&P sector, vying with larger, more diversified players and other focused independents. Key competitors include EOG Resources (EOG), Devon Energy (DVN), ConocoPhillips (COP), and Occidental Petroleum (OXY).

SM Energy's competitive standing is characterized by its deep regional expertise and operational agility, particularly in its core Texas basins and now the Uinta Basin. Its Howard County wells outperform peer-operated wells by over 30%, and its Midland Basin and South Texas Austin Chalk assets demonstrate superior cumulative oil production performance, outperforming regional peers by approximately 30% when normalized to 10,000-foot laterals. This specialized focus allows SM Energy to achieve efficient development and potentially superior margins in its niche plays. For instance, the Austin Chalk wells have demonstrated exceptional returns, with some pads projected to reach payout in just eight months. The waxy crude from the Uinta Basin, a high-quality oil, commands a market premium and contributed the highest cash production margin among all three operating assets in Q2 2025.

However, SM Energy faces competitive disadvantages in terms of scale and diversification compared to integrated majors like ConocoPhillips or larger independents like EOG Resources. These larger entities often benefit from broader asset portfolios, which can offer greater stability and growth opportunities, and potentially lower costs per unit due to their sheer size. While SM Energy may lead in localized operational execution and capital efficiency in its specific plays, it may lag in overall financial resilience and the ability to compete in larger-scale projects or acquisitions.

The company's strategic response to this competitive environment is multi-faceted. It leverages its technological advantages to drive down costs and enhance productivity, ensuring its assets remain highly economic. The acquisition of the Uinta Basin, with its competitive returns and accretive financial metrics, was a direct move to enhance scale and inventory life, making SM Energy more competitive. The company also strategically manages its capital allocation, flexing between its oil-rich Uinta Basin and more gassy/NGL-rich South Texas assets based on commodity price environments, aiming to maximize free cash flow generation over multiple years. This flexibility, coupled with a disciplined approach to debt reduction, allows SM Energy to transfer enterprise value to equity holders, a key differentiator against more debt-laden competitors like Occidental Petroleum.

Barriers to entry in the E&P industry, such as high capital requirements and complex regulatory approvals, inherently protect established players like SM Energy from new entrants. These barriers, while also benefiting larger rivals, reinforce the value of SM Energy's existing asset base and operational track record.

Outlook and Guidance

SM Energy's outlook for the remainder of 2025 and into 2026 reflects a continued focus on operational execution, debt reduction, and disciplined capital allocation. For the full year 2025, the company reiterates its total net production guidance of 200,000 to 215,000 BOE per day. The oil contribution is expected to increase to 53% to 54%, or approximately 106,000 to 116,000 barrels per day at the midpoint, driven by the greater contribution from the Uinta Basin.

Full-year capital expenditures guidance has been updated to approximately $1.375 billion, an increase from the original $1.30 billion, primarily to accommodate previously excluded non-operated capital projects. These projects are not expected to contribute to production until 2026. The company anticipates operating an average of two drilling rigs and a spot completion crew in the Midland Basin, one to two drilling rigs and a spot completion crew in South Texas, and three drilling rigs and one completion crew in the Uinta Basin for the majority of the remainder of 2025.

Depletion, depreciation, and amortization (DDA) expense for the full year 2025 is expected to increase to approximately $16 per BOE due to the higher expected oil production. A significant positive development for cash flow is the projected reduction in cash taxes to approximately $10 million for 2025, down from a previous range of $75 million to $95 million. This is a direct benefit from the One Big Beautiful Bill Act (OBBBA), enacted on July 4, 2025, which includes provisions such as the reinstatement of 100% bonus depreciation and immediate expensing of qualified R&D expenditures. The company does not expect to be subject to the Corporate Alternative Minimum Tax (CAMT) for the foreseeable future due to OBBBA provisions.

For Q3 2025, production is expected to range from 209,000 to 215,000 BOE per day, with 53% to 54% oil (111,000 to 116,000 barrels per day). Capital expenditures for Q3 2025 are projected to be between $300 million and $320 million, including approximately 25 net drills and 30 net completions.

Looking ahead to 2026, the company plans to discuss its detailed strategy early next year, acknowledging the inherent uncertainty in commodity prices. However, management indicates that, assuming current commodity prices, the plan would likely involve flat to single-digit production growth at similar capital levels. The primary focus for 2026 will be on increasing the return of capital to stockholders, particularly through the Board-approved stock repurchase program, once the 1x leverage target is achieved. The company's hedging strategy, which includes $55 floors on costless collars, underscores its comfort level with free cash flow generation even at lower oil prices.

Conclusion

SM Energy has successfully executed a transformative strategy, integrating the high-quality Uinta Basin assets to achieve a significant step change in scale and production. This expansion, coupled with the company's long-standing commitment to operational excellence and technological innovation across its Midland Basin and South Texas assets, positions it as a resilient and high-performing independent E&P company. The consistent outperformance of its wells against peers, driven by advanced drilling techniques and efficiency gains, underpins a compelling investment thesis.

The company's disciplined financial management, highlighted by its rapid debt reduction and strong cash flow generation in Q2 2025, is a testament to its strategic priorities. With a clear path to achieving its 1x leverage target and a renewed focus on enhancing shareholder returns through dividends and future share repurchases, SM Energy offers a balanced value proposition. While the broader energy market remains susceptible to geopolitical and economic volatility, SM Energy's low-breakeven assets, strategic hedging, and adaptable capital allocation provide a robust foundation for sustained value creation, making it a compelling consideration for discerning investors seeking exposure to a technologically advanced and financially disciplined E&P player.