SM Energy Company (

SM

)

Q4 2011 Earnings Call

February 23, 2012 10:00 AM ET

Executives

David Copeland – SVP and General Counsel

Tony Best – President and CEO

Wade Pursell – EVP and CFO

Jay Ottoson – EVP and COO

Brent Collins – Senior Director, Planning and IR

Analysts

Brian Lively – Tudor Pickering Holt

Welles Fitzpatrick – Johnson Rice

Stephen Shepherd – Simmons & Company

Ryan Todd – Deutsche Bank

Gil Yang – Bank of America Merrill Lynch

Anne Cameron – BNP Paribas

Nicholas Pope – Dahlman Rose

Michael Scialla – Stifel, Nicolaus

Yiktat Fung – Jefferies & Company

Presentation

Operator

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Good morning. My name is Kina, and I will be your conference operator today. At this time, I would like to welcome everyone to the SM Energy Fourth Quarter 2011 Earnings and Operations Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session.

(Operator Instructions) Thank you.

David Copeland, you may begin your conference.

David Copeland

Thank you, Kina. Good morning to all of you, joining us by phone and online for SM Energy’s Fourth Quarter 2011 Earnings Conference Call and Operations Update.

Before we start, I’d like to advise you that we will be making forward-looking statements during this call about our plans, expectations and assumptions regarding our future performance. These statements involve risks which may cause our actual results to differ materially from the results expressed or implied in our forward-looking statements.

For a discussion of these risks, you should refer to the cautionary information about forward-looking statements in our press release from yesterday afternoon, the presentation posted to our website for this call, and the “Risk Factors” section in our Form 10-K that will be filed today.

We’ll also discuss certain non-GAAP financial measures that we believe are useful in evaluating our performance. Reconciliation of these – those measures to the most directly comparable GAAP measures and other information about these non-GAAP metrics are described in our earnings press release from yesterday.

Additionally, we may use the terms “probable,” “possible” and “3P reserves” and “estimated ultimate recovery,” or “EUR,” on this call. You should read the cautionary language page in our slide presentation for an important discussion of these terms and the special risks and other considerations associated with these non-proved reserve metrics.

The company officials on the call this morning are Tony Best, President and Chief Executive Officer; Jay Ottoson, Executive Vice President and Chief Operating Officer; Wade Pursell, Executive Vice President and Chief Financial Officer; Brent Collins, our Senior Director of Planning and Investor Relations; and myself, David Copeland, Senior Vice President and General Counsel.

With that, I’ll turn the call over to Tony.

Tony Best

Good morning and thank you for joining us for our fourth quarter and full year 2011 earnings and operations call. I’ll cover a few introductory comments and then turn the call over to Wade and Jay for their respective financial and operational reviews.

We will be referring to slides this morning from the presentation that was posted to our website last evening.

I’m going to review our key highlights for 2011 beginning on slide number three. On the production front SM Energy had record production in 2011 of a 169.7 BCF equivalent or 28.3 million barrels of oil equivalent, which is a 54% increase over the 110 BCF equivalent we produced in 2010. Our production mix for the year was 59% natural gas and 41% liquids.

Looking at quarterly production the company grew 62% from the fourth quarter of 2010 to the fourth quarter of 2011. Adjusting for divestures that occurred over the same period, production on retained assets grew 65%. Our production growth is being driven largely by our total Eagle Ford program which grew over 275% year-over-year. What a great year from a production standpoint for our company.

Moving on to slide four, I’ll discuss our proved reserves at year end 2011. Total proved reserves grew 28% year-over-year to approximately 1.26 trillion cubic feet equivalent or 210 million barrels of oil equivalent. The portion of our proved reserves which are reported as liquids grew 73% for the year.

Our reserves product mix at end of the year stood at 53% gas and 47% liquids. We had a slightly over one half of a TCF equivalent through the drill bit, which results in a drilling reserve replacement of 310% for the year. This growth in proved reserves was accomplished while keeping our PUD percentage relatively flat to the prior year.

At year end 2011 our PUD percentage was 33% and the companies PV-10 increased 48% to 3.5 billion from 2.3 billion in 2010. Jay will comment further on reserves during our key place discussion later in the presentation. Reserve growth is another area where we had standout performance in 2011.

Slide five shows our recent performance on a couple of important reserve metrics. Our drilling F&D was somewhat higher than 2010 coming in at $2.85 per MCF equivalent or $17.10 per barrel of oil equivalent. Due to our increased focus on plays with high liquids content, significant infrastructure expenditures in the Eagle Ford and general cost pressures in our industry.

And as I mentioned earlier, our drilling reserve replacement was above 300% again this year. I’m proud of our results for the year and think that they continue to demonstrate the dramatic improvement in our project inventory over the last few years.

Now on slide six. From a transactional standpoint, 2011 was an incredibly busy year. SM Energy closed on the nearly $1 billion in property transactions last year. Obviously the $680 million transaction with Mitsui that will result in carrying substantially all of our drilling cost in our non-operated Eagle Ford program for the next several years was the largest of these.

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