SM Energy said next year it will spend 90% of its planned drilling and completions budget of $1.2 billion on its Eagle Ford, Bakken/Three Forks and Permian Basin programs and will grow overall production by 20%.
"The capital budget is anchored by our high-return Eagle Ford and Bakken/Three Forks development programs, with additional investments being made in emerging oil programs in the Permian Basin," said CEO Tony Best. "Our production mix will continue to shift from lower-value natural gas to higher-value liquids throughout the year. We expect to grow production by 20% in 2013, followed by annual production growth of approximately 15% in 2014 and 2015 with improving leverage metrics and no equity dilution."
SM plans to spend $650 million in the Eagle Ford; $290 million in the Bakken/Three Forks; $170 million on its operated Permian acreage; $45 million on its operated Granite Wash acreage; $20 million on other operated acreage; and $25 million on nonoperated other acreage. The total to be spent on drilling and completions is $1.2 billion of total $1.5 billion in capital expenditures. Its largest holdings are the Bakken/Three Forks (196,000 net acres) and Eagle Ford (195,000 net acres). The company also has unconventional positions in the Arkoma-Woodford (82,000 net acres) and the Permian (68,000 net acres).
Equities analysts were enthusiastic about the outlook; BMO Capital Markets and Wells Fargo Securities each have an "outperform" rating. "Bottom line, a solid outlook, and one that can be achieved within existing takeaway capacity, and that demonstrates the resource potential of SM's Eagle Ford and Bakken acreage," wrote BMO analyst Phillip Jungwirth. "The main drawback is that growth is back half-weighted (as expected) and investors could take a 'show-me' approach to growth, but we'd be buying now given the attractive valuation [BMO price target: $65/share]."
Wells Fargo valued SM shares of $82-88 with a net asset value estimate of $77.59. "SM Energy has been characterized as a diverse, well disciplined, low-risk operator for years," wrote Wells Fargo's David Tameron. "Under CEO...Tony Best, SM has transitioned to a resource play focus with a highgraded asset base. We believe the combination of strong, fully funded production growth (estimated 26% in 2012), higher liquids percentage (which should reach 50% of production next year), and a diversified asset portfolio will result in share outperformance versus its peers."
The company expects full-year 2013 production to be 255-267 Bcfe (699-732 MMcfe/d), which represents a 20% annual increase over 2012 at the midpoint. SM expects to exit 2013 producing within 769-808 MMcfe/d, at 50% natural gas, 29% oil and 21% natural gas liquids. "This production growth profile is weighted to the second half of the year and reflects the timing of previously contracted firm transportation agreements in the company's operated Eagle Ford shale program," SM said.
It reaffirmed fourth quarter and full-year 2012 production guidance of 57.5-60.5 Bcfe and 215.5-218.5 Bcfe, respectively. Annual 2013 production is expected to grow 20% year/year to 255-267 Bcfe (42.5-44.5 million boe); liquids are expected to comprise 50% of production by the end of 2013.
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