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SM Energy's Eagle Ford Matures as New Ventures Eyed

Around the middle of the year, SM Energy Co. management will have a clearer picture of how it will allocate its spending among a number of opportunities as it targets annual production growth of 15-20% over the next three years, executives said during a conference call Wednesday.

First quarter production was near the top of guidance at 10.35 million boe, or 115,000 boe/d. Average daily production increased by 5% from the fourth quarter of 2012 and was composed of 30% oil/condensate, 18% natural gas liquids (NGL), and 52% natural gas. SM Energy said it expects its product mix to be 50% liquids by year-end.

Operated net production in the Eagle Ford Shale averaged 51,800 boe/d, a 15% sequential increase over fourth quarter 2012 production of 45,200 boe/d. Average daily operated Eagle Ford production increased 74% over the year-ago quarter. During the quarter, SM Energy operated five rigs on its acreage and made 28 flowing completions. In the nonoperated portion of the program, net production for the first quarter averaged 16,000 boe/d, an increase of 3% over fourth quarter 2012. Operator Anadarko Petroleum Corp. ran nine rigs during the quarter.

SM Energy executives said Wednesday the company's Eagle Ford program is ahead of schedule and running under budget as the company is drilling wells faster than it had anticipated. At its midyear capital allocation meeting, there will be "some knobs to turn," other than borrowing, to fund the program going forward, COO Jay Ottoson said.

Water for hydraulic fracturing in the drought-stricken Eagle Ford region is not a worry for the company, CEO Tony Best said, as SM Energy has secured sufficient water rights for supply from the Rio Grande. Even if water takes are prorated, "we'll have plenty of water to run our program," he said.

In the Bakken Shale/Three Forks, SM Energy ran four rigs during quarter and plans to release two of these and contract for one more walking rig during the second quarter. Drilling is focused on the Raven/Bear Den and Gooseneck prospects in McKenzie, Williams and Divide counties, ND. First quarter average daily production was 12,200 boe/d, a 3% increase from the fourth quarter and an 18% increase from the first quarter of 2012. During the quarter, the company made 11 gross flowing completions in the play.

In the Permian Basin, SM Energy operated three rigs during the quarter, with two of these focused on its 66,000 net acre position targeting the Mississippian Lime in the northern Midland Basin and a third rig focused on the Bone Spring formation in the Delaware Basin.

"Our Permian Mississippian prospect is the same geologic age as the Mississippian other people are chasing in Oklahoma and Kansas, but it's more of a conventional play, which produces at lower water cuts," Ottoson said. "...[W]e've had fairly consistent results with our short lateral program. We've recently begun using a longer lateral well design, and our first result, the Roy 1803H [100% working interest] has averaged 988 boe/d over the 12 days it's been online."

Denver-based SM Energy said it expects to have 150,000 net acres in its new East Texas play upon the consummation of various transactions, which are expected to close during the second quarter. The company's acreage is primarily in Walker, San Jacinto, Polk and Washington counties, TX. SM Energy continues to add acreage in the exploratory play where it announced a Woodbine test well earlier this year. The company expects to drill additional test wells targeting primarily Woodbine and Eagle Ford intervals in the second half of the year. "It's early days, but we're very enthusiastic about the potential of this project," Ottoson said. Some of the acquired East Texas acreage has dry gas potential that the company does not currently plan to pursue, he said.

The company is growing its acreage in the Powder River Basin to 105,000 net acres with its latest acquisition from an undisclosed seller, which is expected to close during the second quarter and add about 40,000 net acres. SM Energy is focusing on the Frontier, Sussex and Shannon formations on its acreage. The company had mixed results from wells in its initial target, the Niobrara formation, Ottoson said.

However, recent results in the Frontier section have been "very good," he said. "We're really excited about the Frontier, and we think that the Shannon interval could be interesting as well. In fact, we recently completed a Shannon test that had a peak 30-day IP [initial production] of approximately 500 boe/d."

Company-wide production guidance for the second quarter is 10.5-11.0 million boe and 42.8-44.5 million for the full year 2013.

SM Energy reported net income of $16.7 million (25 cents/share), compared to $26.3 million (39 cents/share) for the year-ago quarter. Adjusted net income was $55.3 million (82 cents/share), compared to $32.8 million (48 cents/share) for the year-ago quarter, and excludes the impact of hedging and impairment of properties, among smaller items.

Earnings before interest, taxes, depreciation, depletion, amortization, accretion and exploration expense were $328.8 million, a record level and an increase of 27% from $259 million for the year-ago quarter. Total operating revenues for the first quarter were $484.2 million compared to $377.4 million for the same period of 2012, a 28% increase.

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