SM Energy (NYSE:SM) executives used the company’s fourth-quarter and full-year 2025 results call to frame 2025 as a “pivotal year” and to outline a 2026 plan centered on free cash flow, balance sheet improvement, and integration work tied to its announced merger with Civitas.
2025 highlights: records, Uinta integration, and debt reduction
President and CEO Beth McDonald said 2025 set the stage for what she called a “transformational moment” for the company. She highlighted records in operating cash flow, adjusted EBITDAX, total production, and oil volumes. McDonald noted that oil represented 53% of total production during the year.
On the balance sheet, McDonald said SM Energy reduced net debt by $437 million and ended the year at roughly one times leverage. She added the company returned $104 million to stockholders through dividends and share repurchases. McDonald also said the company expanded scale and inventory through organic reserve growth and its announced merger with Civitas.
2026 framework: “integrate, execute, bolster”
Looking ahead, management organized its outlook around three objectives: integrate Civitas, execute a capital plan designed to maximize sustainable free cash flow, and bolster the balance sheet while increasing returns to shareholders.
McDonald said the company is targeting $200 million to $300 million in synergies from the Civitas combination and has “already actioned” $185 million of that target. She characterized those actions as close to $1 billion in present value and just under 20% of SM Energy’s market cap, adding that total synergies could unlock up to $1.5 billion in present value, or nearly 30% of market cap.
Capital, activity levels, and production cadence
Management said the 2026 plan was built to maximize free cash flow at $60 oil and $3.50 gas. SM Energy guided to 2026 capital investments of $2.65 billion to $2.85 billion, with about 45% directed to the Permian. McDonald said total expected capital spending is about 14% lower than pro forma 2025 levels.
As part of the shift, the company is reducing activity to 11 rigs, down three rigs from a pro forma average of 14. McDonald emphasized the company is prioritizing “value over volume,” and noted that first-quarter estimates reflect only two months of Civitas.
For production, management pointed investors to the back half of 2026 as the more representative “go-forward run rate.” Executives said second-half volumes are expected to range between 420,000 and 430,000 BOE per day at 55% oil.
In Q&A, executives addressed why capital spending is front-end loaded. McDonald said the company entered the year with 15 rigs and expects spending to step down as activity is optimized to average around 11 rigs. She said the portfolio combination provides “optionality and optimization beyond what either company could do individually.”
Stream conversion impacts and basin-level details
In response to a question on year-over-year production changes and a shift from three-stream to two-stream reporting, CFO Wade Pursell said the plan is focused on free cash flow and that a production reconciliation is provided in the company’s materials. Pursell said there is “really no change” from this conversion in SM South Texas or the Uinta Basin.
He provided additional basin-level color for modeling:
- DJ Basin: The company expects about 20% of DJ BOEs to be allocated to NGLs. Pursell said investors can use Civitas’ historical gas and NGL realizations as estimates.
- Permian Basin: Pursell said the impact is “really small,” with about 5% of BOE expected to be reported as NGLs going forward. He suggested using Civitas’ historical NGL realizations and SM Energy’s realizations for Permian gas.
McDonald also broke down the expected Permian program composition as roughly one-third Delaware and two-thirds Midland. She said the company is still optimizing the allocation within the Midland.
Executives also discussed the DJ program, saying they like its returns and capital efficiency. McDonald said slowing activity there provides flexibility and time for the combined technical teams to optimize development and maximize free cash flow.
Liquidity actions, divestiture plans, and shareholder returns
Pursell said SM Energy is focused on strengthening what he described as an already strong capital structure, emphasizing liquidity, maturity profile, and leverage. He said the borrowing base on the secured bank facility was increased to $5 billion, lender commitments were increased to $2.5 billion, and the maturity was extended to Jan. 30, 2031. Pursell said the company currently has nearly $3 billion of liquidity.
He also discussed a recently announced $950 million sale of select natural gas-weighted South Texas assets, which the company expects to close in the second quarter. Pursell said the company anticipates using liquidity to address debt maturities, including taking out all 2026 bond maturities this year and potentially the $417 million bond due in 2027. He added that SM Energy recently received credit upgrades from S&P and Fitch.
On leverage, Pursell said pro forma leverage is in the “mid ones” area and that the company aims to move into the “low ones” area over time. He said that as leverage moves lower—assuming liquidity and the maturity profile remain manageable—the company expects to increase the portion of free cash flow directed to stock buybacks.
Management also announced a 10% increase in the fixed dividend to $0.88 per share annually. Pursell said the increased dividend provides a yield of “just under 4%” and remains a core component of the company’s framework. After dividends, management plans to allocate quarterly free cash flow 80% to debt reduction and 20% to share repurchases.
When asked about the dividend increase, Pursell said it was not driven by investor pressure, but rather by management’s confidence in the combined company, the strength of the balance sheet, asset quality, and visibility. He said this was the third time the company has increased the fixed dividend since it was set in late 2022.
Executives also said cash taxes in 2026 are expected to be “pretty minimal,” citing the benefit of IDCs and what they referred to as the “Big Beautiful Bill.” Pursell said that even with the divestiture and associated gain, the company is projecting minimal cash taxes for the year.
In closing remarks, McDonald reiterated the “integrate, execute, bolster” priorities and said the Civitas integration is progressing well. She added that the $950 million divestiture is intended to further strengthen the balance sheet and accelerate capital returns under the company’s updated program.
About SM Energy (NYSE:SM)
SM Energy Company (NYSE: SM) is an independent energy firm engaged in the exploration, development, and production of crude oil, natural gas, and natural gas liquids in the United States. The company focuses on identifying and exploiting unconventional onshore basins, leveraging advanced drilling and completion techniques to optimize resource recovery. SM Energy’s operations are supported by an integrated approach to reservoir management and strategic midstream partnerships, enabling efficient transportation and marketing of hydrocarbons.
The company’s core asset areas include prolific basins such as the Permian, Eagle Ford, and the Rocky Mountain region.
