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SM Energy Targets Eagle Ford, Ponders Haynesville

Like its peer Petrohawk Energy Corp. (see related story), SM Energy Co. is focusing more on the Eagle Ford. Plans for its Haynesville holdings are evolving.

CEO Tony Best told financial analysts Wednesday that the company's growth is being driven by the liquids-rich Eagle Ford as well as the company's Bakken/Three Forks program in the Williston Basin.

"The results of our drilling programs in the SM Energy-operated Eagle Ford and Bakken/Three Forks programs continue to meet or exceed expectations," he said. "These two programs are the core that the company will be growing from for the next several years. The results from our simul-frac testing are very promising and provide us a clearer picture of how to optimize the long-term development of these assets."

Meanwhile, the company is considering the future of its Haynesville Shale holdings, said COO Jay Ottoson in response to an analyst's query. Ottoson noted that SM Energy got into the Haynesville relatively early and cheaply, paying about $500 an acre.

"...[W]e've had this acreage for a while, so our cost embedded in these acres is actually quite a bit smaller than a lot of other peoples' who are in the play," he said. "We have to really think about how much value do you add if you HBP [hold by production] that acreage. There's a number of factors that come into our consideration about what we're going to do in the Haynesville. There's a lot of different opportunities for monetizing part or all of the asset, and then you have to really think about is this really the best time to be selling a gassy asset like that."

For now Ottoson said SM Energy is proving up its Haynesville acreage, "which should add value no matter which way we go."

The company said it is limited in its rich gas production due to temporary infrastructure limitations. Expectations are that an additional 10 MMcf/d will be available in the fourth quarter of 2010 under an existing downstream arrangement.

SM Energy said that in anticipation of increased Eagle Ford activity next year and beyond, it is making longer-term commitments for rigs, field and well services as well as marketing services. "We are positioning ourselves for long-term performance," Best said, noting that this is "firm evidence of our plan to grow the Eagle Ford over the next few years."

The operating partner on the nonoperated portion of SM Energy's Eagle Ford shale position, Anadarko Petroleum Corp., operated an average of six drilling rigs during the third quarter, and it is expected that additional rigs will be added in the fourth quarter, SM Energy said. The company's net daily production from this program grew 142% from 5.7 MMcfe/d to 13.8 MMcfe/d during the second quarter of 2010 to the third quarter of 2010.

In the Williston Basin SM Energy had two operated rigs running during the third quarter with the focus on Bakken and Three Forks wells. The company drilled a three-well simul-frac completion pilot in a 1,280-acre spacing unit in its Bear Den prospect during the third quarter, which was completed around mid-October. The company said it plans to continue operating two drilling rigs in the play for the remainder of the year.

The company reported quarterly production of 298.4 MMcfe/d, which was at the high end of the guidance range of 277-299 MMcfe/d, primarily due to strong results in the Eagle Ford Shale program. Sequentially equivalent production grew 8% from 276.4 MMcfe/d in the second quarter of 2010 driven by a 12% increase in oil production.

For the third quarter the average equivalent price net of hedging was $7.51/Mcfe, which is an increase of 9% from the $6.86/Mcfe realized in the comparable period in 2009. Average realized prices, inclusive of hedging, were $5.81/Mcf and $64.28/bbl in the third quarter, which are increases of 17% and 3%, respectively, from the same period a year ago. Revenue associated with NGLs is reported within natural gas revenues.

SM Energy posted net income for the third quarter of 2010 of $15.5 million, or 24 cents/share. This compares to a net loss of $4.4 million, or minus 7 cents/share, for the same period in 2009. Adjusted net income for the quarter was $20 million, or 31 cents/share, versus $14.7 million, or 23 cents/share, for the third quarter of 2009.

Data rooms for the two packages offered for sale opened last month and bids are expected in mid-November for both, the company said. The sale of the noncore proved developed properties is expected to close in late December. Sale of a Marcellus Shale package is expected to close in early January. Proceeds from the sales are expected to be $300 million to $500 million.

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