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SM Energy Homing In On Eagle Ford Shale

SM Energy Co. said it plans to spend $1.04 billion next year, $830 million of that on drilling, mostly in the Eagle Ford Shale and the Bakken/Three Forks in the Williston Basin. The company's putting its money in "all the right places," according to an analyst at Tudor, Pickering, Holt & Co. Securities Inc.

CEO Tony Best said the "budget emphasizes how far we have come in a short time, with 80% of our drilling capital being invested in Eagle Ford Shale and Bakken/Three Forks projects next year. Our program for 2011 is focused on oil and rich gas projects that will generate solid returns for shareholders, while modest investments in natural gas and exploration projects will provide inventory for the future."

Full-year production will grow about 20% year over year in 2011, the company said. In 2010 production is estimated to be 106.5-109 Bcfe, while next year it is estimated to be 128-132 Bcfe. Adjusting for planned divestitures, year-over-year production growth on retained properties will be even higher.

The company's 2011 plans reflect the rising prominence of the Eagle Ford Shale of South Texas in an era in which producers are increasingly targeting liquids-rich plays. They are also in line with intentions that Best laid out for financial analysts last month (see Shale Daily, Nov. 5).

In the Eagle Ford SM Energy plans to begin the year operating two rigs on its 165,000 net acre position in Webb and La Salle counties. Over the course of the year it plans to increase its operated rig count to four, the majority of which will target portions of the acreage containing rich gas and condensate. More activity is also planned for La Salle County in order to de-risk and delineate that portion of the company's acreage.

In the partner-operated portion of SM Energy's 84,500 net acre position prospective for the Eagle Ford, seven rigs are being operated by Anadarko Petroleum Co. For 2011 SM Energy anticipates that Anadarko will operate an average of ten rigs for the year.

SM Energy has allocated about $500 million for drilling in its total Eagle Ford shale position for 2011. Based on current plans, capital expenditures net to the company would exceed this amount, so SM Energy is planning to sell down or joint venture a portion of its position in the play, which will lead to a smaller amount of net investment in 2011, it said.

The company said it expects to sell 20-30% of its Eagle Ford acreage position (a "positive," according to TPH) and that as a result the net spending for 2011 will be approximately $500 million after adjustments.

SM Energy recently concluded negotiations with its incumbent gas marketer to increase the takeaway capacity available in the operated portion of its Eagle Ford position. Capacity was recently increased from 80 MMcf/d to 100 MMcf/d and is expected to increase again by mid-2011 to 150 MMcf/d. This is in addition to the previously announced Eagle Ford Gathering LLC agreement (see Shale Daily, Nov. 17; Daily GPI, July 7), which ultimately provides up to 200,000 MMBtu/d (approximately 160 MMcf/d) of takeaway capacity.

"The runway is being laid for the company's planned capital ramp over the next two years," TPH said.

SM Energy said it plans to spend about $170 million, or 20% of its drilling capital, on projects targeting the Bakken and Three Forks intervals in the Williston Basin. The company plans to operate two drilling rigs through the first half of the year, with the addition of a third rig planned at mid-year. Substantially all of this activity is expected to occur in McKenzie and Divide counties, ND.

The company said it plans to spend $60 million next year on horizontal wells targeting the Marmaton and Missourian washes (collectively referred to as the Granite Wash) in Beckham County in western Oklahoma. Two operated drilling rigs will be required.

The company plans to spend $40 million in the Permian Basin, with about $20 million expected to be spent on Wolfberry wells.

Approximately $35 million is budgeted for Haynesville Shale activity. SM Energy has budgeted five gross operated horizontal wells for 2011, of which the majority of costs will be carried under a previously announced carry and earning agreement covering a portion of the company's acreage position in East Texas. SM Energy said it will also participate in about 20 gross (two net) partner-operated horizontal wells next year in the Haynesville.

Meanwhile the company is looking at options for its operated Haynesville acreage in East Texas that would allow it to drill enough wells in 2011 and early 2012 to hold its existing acreage while minimizing capital deployed. Twelve gross wells in 2011 in addition to operated wells and eight gross wells in 2012 would need to be drilled to hold the acreage. SM Energy has about 22,000 net acres in the Shelby Trough in East Texas that is prospective for both the Haynesville and Bossier shales as well as other productive zones.

"We would applaud an outright sale of the Haynesville as economics struggle to compete with SM's core assets," TPH said.

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