SM Energy Company (NYSE:SM) Q2 2020 Earnings Conference Call - Final Transcript
Jul 31, 2020 • 10:00 am ET
[Operator Instructions] Your first question comes from the line of Gabe Daoud from Cowen. Your line is now open.
Hey, good morning, everyone. Thanks for all the prepared remarks last night. I guess, maybe, Jay, can you maybe just elaborate a little bit on the decision to pursue growth next year and perhaps define what meaningful growth equates to in your eyes for next year?
Sure. I'll answer to, certainly, the last part. I mean, I think -- we didn't give specific numbers for next year. This is Wade, by the way. But you can assume something like double-digit growth from a production standpoint and even stronger when you're thinking of oil growth. So I would characterize it more like strong double-digit growth. And that's coming off of a reduced number this year, obviously, with what's going on in this quarter.
Yes, this is Javan. I think there's sometimes in these downturns people have a misunderstanding about levered companies, and we really don't have an option here to just stop activity and watch our leverage skyrocket, right? That's just not what you should expect a fairly levered company to do. So when prices drop, we cut activity very quickly in order to -- and then as we think costs start to get to bottom, then we will increase activity again to keep our cash flows up and maintain our -- and keep our leverage down. And that's what you should expect levered companies to do at -- in this part of the cycle.
And probably three important points for me for that 2021 activity is the returns that will be generated are all well above our hurdles. I think we stated that it would be within cash flow overall and it maintains leverage into the year at like a 3 times level. So I think those are the key points.
Yes. Thanks, guys. That's helpful. I guess as a follow-up. Let's say, you stay within free cash flow next year, is that on strip pricing, I guess, as a quick follow-up? And then and so that's the pricing rate, is that right?
Yes, it's strip pricing. I can tell you that. And the strip that we were using when we ran that is very similar to today, so.
Understood. Okay. And then just -- and maybe quantify the amount of activity that you are adding in 4Q? And then a 10% increase in budget activity or capital activity for next year. What does that mean from like a rig and crew perspective? And is all that capital directed to the Permian? I'll just stop there. Thanks, guys.
Okay. Yes, Gabe, this is Herb. So roughly, it's about a 10% capital increase from our latest guidance from this year. And in terms of rigs, it will be around 3%, maybe a little bit more in the Permian. And then in South Texas, it will be between 1% and 2%, and it will depend a little bit on where commodity prices are. And