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Endeavour Kills Deal for SM Energy's Marcellus Assets

Endeavour International Corp. on Wednesday said it has terminated purchase and sale agreements with SM Energy Co. and other minority owners to buy a 42,000-acre leasehold and associated pipeline assets in McKean and Potter counties in northern Pennsylvania.

The $80 million deal, which was announced in July (see Shale Daily, July 19), had been expected to close by the end of the year with an effective date of April 1, 2011. Houston-based Endeavour offered no reason for terminating the deal and neither company responded to requests for further comment.

The transaction would have provided Endeavour with significant production and reserve potential on acreage that is adjacent to its existing Marcellus acreage -- much of it in neighboring Cameron County, PA -- along with 100% ownership of Potato Creek LLC, which owns a midstream gathering system and related facilities in McKean County, including a 10-mile, 16-inch diameter trunkline connected and flowing to Tennessee Gas Pipeline's 24-inch diameter mainline. A subsidiary of Folsom, NJ-based South Jersey Industries had agreed to sell its 30% ownership in Potato Creek to Endeavour for $9 million.

Analysts said termination of the deal would have minimal impact on SM Energy's plans for 2012. "We see this announcement as a minor negative," Canaccord Genuity Energy Research analysts wrote in a note. Activity in the Eagle Ford will be of more significance to the company in 2012, they said.

Analysts at Tudor, Pickering, Holt & Co. (TPH) said losing the Marcellus deal is "more of a bump rather than a fork in the road" for the Denver-based producer. "We don't see significant risk to SM's 35-40% y/y production guidance for 2012," the TPH analysts said. And SM Energy "does not have any liquidity concerns, so we don't think the terminated agreement should materially affect shares," according to Wells Fargo Securities analyst David Tameron. SM Energy had previously seen delays in marketing the Marcellus package, but "we would expect that the company will begin the marketing process again," Tameron said.

Last week SM Energy and Mitsui & Co. Ltd. unit Mitsui E&P Texas LP said they had closed an acquisition and development agreement giving Mitsui E&P a 12.5% working interest in SM Energy's nonoperated Eagle Ford Shale acreage (see Shale Daily, Dec. 6). When the deal was announced in June it was said to be worth $680 million to SM Energy, which has been selling down its stake in the South Texas Eagle Ford (see Shale Daily, June 30).

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