SM Energy adds to Midland basin drilling plans

Dec. 4, 2023

SM Energy Co., Denver, will increase Midland basin drilling activity this quarter and ramp up capital spending by 30% as the company looks to build on a recent land exchange.

SM Energy spent $228 million in third-quarter 2023 as part of a development that includes 24 net wells drilled, 13 of them in South Texas and 11 in the Midland basin. For the last 3 months of 2023, president and chief executive officer Herb Vogel and his team plan to spend $290-305 million, some of which has been delayed from this year’s third quarter, with the goal of drilling about 30 net wells. Seventeen of those are slated for the Midland basin; South Texas activity is forecast to remain at 13 net wells.

Helping drive the capex increase is development of acreage in the Sweetie Peck area south of Odessa, Tex., that SM Energy acquired during the third quarter via an asset exchange. The deal has grown SM Energy’s working interest in nine 15,000-ft lateral drilled but uncompleted wells to nearly 100% from roughly 42%. Vogel told analysts Nov. 2 his team expects to bring those wells online during first-quarter 2024, “setting us up for stronger oil production early in the year.”

SM’s Sweetie Peck growth adds to other 2023 deals in the Midland basin, including one in late June for nearly $89 million and about 20,000 net acres in Dawson and Martin counties. Those transactions have grown the operator’s footprint in the Midland basin by more than a third this year. The company recently contracted for a fourth rig that it plans to run for 6 months.

Third-quarter production from the Midland basin totaled 77,400 boe/d, 49,400 of which was oil. Those numbers were up from 73,000 and 45,900, respectively, in second-quarter 2023. In addition, the company produced 76,300 boe/d from South Texas operations. Total production of 153,700 boe/d was up nearly 12% from the prior-year quarter but is forecast to come down slightly in fourth-quarter 2023 to 151,000-152,000 boe/d.

SM Energy posted net income of $222 million in the 3 months ended Sept. 30, a drop from $481 million in the same period of 2022 due to lower prices, a higher income tax payment, and the year-ago gain of more than $137 million on derivative contracts. Adjusted EBITDAX grew 3% year-over-year to $476 million.