SM Energy Trims Eagle Ford Acres - Analyst Blog
June 30 2011 - 12:25PM
Zacks
U.S. oil and gas development company, SM Energy
Company (SM) will sell a 12.5% working interest in its
non-operated Eagle Ford Shale acreage in Texas to a subsidiary of
Mitsui & Co. Ltd.
Mitsui will pay $680 million for the prolific Eagle Ford
acreage. Mitsui will carry 90% of SM Energy’s drilling and
completion costs on its non-producing land until it has spent $680
million for the benefit of SM Energy. Additionally, it will pay
between $20 million and $40 million as its share of SM Energy’s
drilling costs incurred between March 1, 2011 and the closing
date.
The divestiture, which is expected to close during the third
quarter of 2011, will reduce SM Energy's acreage in the Shale to
46,000 net acres from 85,000 acres.
Upon closure, the company’s average working interest will also
narrow down to 14.5% from the previous 27% in the acreage. As of
December 2010, the proved reserves of SM Energy’s total
non-operated Eagle Ford shale acreage were 52 billion cubic feet
equivalent.
Earlier this month, the company also entered into an agreement
to sell a portion of its Eagle Ford Shale position for about $225
million in cash. Under the terms of the deal, the company intends
to sell 15,400 acres of non-producing land in the Eagle Ford Shale
area of LaSalle and Dimmit counties, Texas. This deal is likely to
close in August 2011.
These deals are part of SM Energy’s objective to dissolve
approximately 20% to 30% of its total 250,000 net acre Eagle Ford
Shale position. We believe these divestitures will help the company
to streamline its portfolio while holding a significant position in
emerging shale plays and focusing more on resource, with an
inventory of repeatable drilling prospects that have a high rate of
return. The company will retain approximately 196,000 net acres in
the Eagle Ford shale, of which approximately 75% will be operated
by it after both transactions are wrapped up.
However, the company’s highly gas-weighted reserves/production
profile offsets these strengths and remains a key area of concern.
Therefore, we are maintaining our long-term Neutral recommendation
on the stock.
SM Energy currently retains a Zacks #3 Rank, which is equivalent
to a short-term Hold rating. The company competes with
Concho Resources, Inc. (CXO) and Ultra
Petroleum Corp. (UPL).
CONCHO RESOURCS (CXO): Free Stock Analysis Report
SM ENERGY CO (SM): Free Stock Analysis Report
ULTRA PETRO CP (UPL): Free Stock Analysis Report
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