SM Energy Co (SM) Q3 2026 Earnings Call Highlights: $400 Million in Synergies, $1. ...

Negative Points

• Third quarter oil production was about 2% below the midpoint of guidance at 230,000 barrels per day, due to higher Permian downtime and Uinta takeaway constraints.

• Uinta rail capacity remains constrained until terminal expansion in Q1 2027, limiting oil volumes and affecting Q4 and early 2027 expectations.

• Full-year cash taxes are now expected at $100 million to $120 million, up from prior sensitivity of about $50 million at $85 oil, due to utilization of tax attributes.

• Inflationary pressures persist, including higher diesel unit costs, fuel-related transportation costs, and other consumables like OCTG.

• Third quarter LOE was elevated by compliance work on acquired Permian assets, and the higher level is expected as a reasonable run rate into 2027.

• Only $50 million of the $400 million synergies were included in the 2026 budget, with the full run rate benefit expected in 2027.

• The company faces potential industry-wide inflation that could impact 2027 capital requirements, though it aims to offset with efficiencies.

Q & A Highlights

Q: Regarding the Uinta constraints, with the refinery back online and the terminal expansion expected in early 2027, should we assume the expansion just relieves the bottleneck rather than dramatically increasing takeaway capacity, and that you remain roughly 20% local refineries and 80% rail? A: Beth McDonald (President and CEO) explained that the terminal is shared with only one other operator, and the planned expansion more than doubled capacityfar beyond what either party committed to. This gives SM the ability to expand in the basin beyond the original plan and to shift capital as needed to ensure cash flow continues to reach market.

Q: Last quarter you indicated that second-half 2026 average production was a good baseline for 2027, given Permian downtime and Uinta takeaway constraints. Does that baseline still hold? A: Beth McDonald (President and CEO) confirmed the baseline of 435,000440,000 MBOE per day total production with approximately 238,000 barrels of oil per day still holds. When formalizing the 2027 budget, the company will weigh early-2027 Uinta takeaway constraints against potentially shifting activity to other basins, with more detail in February.

Q: What are the capital requirements to hold the second-half run rate flat into 2027, and will inflationary pressures be too much to offset? A: Beth McDonald (President and CEO) said 2026 average capital of approximately $2.75 billion, excluding one-time costs, is a good starting point for 2027. She acknowledged inflation could hit the sector but noted SM benefits from a full year of merger synergies that exceeded expectations, with more details when the 2027 budget is formalized.

Q: What should we use for 2027 cash taxes, and is the company fully exposed for the rest of 2026? A: Wade Pursell (CFO) confirmed the company is fully exposed for the rest of 2026, with full-year cash taxes now expected at approximately $100 million$120 million due to higher commodity prices and utilized tax attributes. For 2027, he suggested assuming something similar at elevated oil prices, with lower taxes if oil returns to the $80$85 range.

Q: What key changes drove the strong uplift in Delaware Basin Permian wells, and is SM doing something different from the industry? A: Blake McKenna (COO) attributed the improvement largely to completion design, with shared technical learnings from combining both teams in the Permian post-merger. He said SM heavily leverages offset data and internal technical expertise to approach wells differently, calling it a technical differentiator for the company.

Q: With synergies largely captured and the focus shifting to continuous improvement, what is the opportunity set over the next 1218 months and which line items will you target? A: Blake McKenna (COO) said the company starts with large D&C cost items, then moves to operational and cultural efficiencies and smaller items across D&C and LOE. Beth McDonald (CEO) added that G&A will keep improving as software and contractor contracts roll off near the one-year merger anniversary, and interest savings will grow as free cash flow rises under the 80/20 framework.

Q: Can you provide more context on the DJ Basin local sand mine investment and what percentage of well costs proppant represents? A: Blake McKenna (COO) said SM invested alongside an operator successfully running a sand mine in the basin, similar to its approach of operating its own mine in the Uinta. Proppant is the number one frac input cost, and while savings depend on frac design, meaningful savings should show up in results starting in Q1Q2 of next year.

Q: Given volatility in the 2027 strip around $85, how do you think about opportunistic hedging going forward? A: Wade Pursell (CFO) said the hedging strategy is a methodical execution of the same approach used for over a decade, layering in incremental hedges at higher prices tied to the balance sheet. With leverage lower, targeted hedge percentages are now closer to 30%, down from 50% coming out of the merger.

Q: Can you discuss the first SM-designed Uinta pad beyond the strong 30-day rates, including spacing optimization and enhanced completions? A: Blake McKenna (COO) described the Uinta as extremely complex with stacked formations, requiring three-dimensional optimization of spacing both vertically and horizontally. The team used extensive offset data and testing to fine-tune landing zones and match frac designs to oil-bearing zones, supported by low-cost integrated sand and water systems.

Q: What drove the Q3 LOE uptick in the Permian and South Texas, and is it structural or one-time? A: Blake McKenna (COO) said third-quarter LOE was elevated by compliance work on acquired Permian assets, which is now complete, as reflected in the Q4 guide of $660 million$680 million. He views the Q3 level as a reasonable run rate into 2027 given the more oil-weighted portfolio, with synergies working to offset costs.

Q: Should we expect Permian-driven production growth in Q4, and will the high well count help offset typical first-quarter seasonality? A: Beth McDonald (President and CEO) noted the sequential Permian decline was planned, reflecting a new lower activity baseline established in JulyAugust, and production should be flat to slightly up from here. She reminded that activity levels change through the year, so the production profile is not linear, with formal 2027 guidance in February.

Q: Following the South Texas sale, should we still expect the $1 billion divestiture goal within one year, or does the macro warrant more patience? A: Beth McDonald (President and CEO) said the answer is unchangedthe company is substantially there but not rounding up, with the Galvan sale getting it meaningfully close. With expanded scale, SM has a larger candidate set for accretive non-core divestitures and will continue reviewing transactions and portfolio trends.

Q: Of the $400 million in actioned synergies, how much is being felt in 2026 financials versus the full run rate in 2027, particularly in the D&C bucket? A: Beth McDonald (

For the complete transcript of the earnings call, please refer to the full earnings call transcript .