After rebranding itself last year and finishing a transformation into "a significant resource play company," SM Energy Co. plans to step up development in the Eagle Ford Shale of South Texas and the Bakken-Three Forks formation while it hopes to sell down Eagle Ford assets, secure a joint venture (JV) partner in the Haynesville Shale and exit the Marcellus Shale.
CEO Tony Best told financial analysts in New York that SM Energy had a "breakout year" last year as it further delineated its position in the Eagle Ford, where it has grown its understanding of the dry gas and oil windows. He said SM has secured "significant takeaway capacity" from the play, as well as contracted for drilling and completion services it will need this year and next.
On Monday SM Energy said it had made new long-term service agreements with ETC Texas Pipeline Ltd., a unit of Energy Transfer Partners LP. ETC will gather, transport and process production from the rich gas portion of the company's Eagle Ford assets. ETC will construct a gathering and transportation pipeline and related facilities, as well as a new processing plant. ETC has committed to provide up to a maximum level of 240,000 MMBtu/d in firm commitment transportation over a 10-year term beginning in 2013.
"We believe that this is a positive development since one of the main concerns in South Texas is the lack of availability of takeaway capacity in light of increased industry activity," analysts at Canacord Genuity Energy Research said in a note Tuesday. "In our view, this announcement coincides with the company's accelerated development beginning in late 2012.
"SM Energy is presently one of our best Eagle Ford ideas, and we believe the company is one of the most leveraged and attractively priced producers in the trend."
This year, "first and foremost our focus is going to be on oil and rich gas projects," Best told attendees at the the Independent Petroleum Association of America's Oil & Gas Investment Symposium in New York City Tuesday. Because SM Energy has built up a large drilling inventory, it can allocate capital to the highest-return projects, "and certainly in this environment that's going to be oil and rich gas," Best said.
SM Energy is targeting 20% production growth this year, Best said. The company's capital budget of $1.04 billion is to be funded through cash flow and asset sales. Eighty percent of the budget is focused on drilling with more than 90% of drilling capital to be invested in liquids and rich gas projects, he said. Additionally, more than 85% of capital spending is to be on company-operated properties.
The Eagle Ford will get the lion's share of spending at 60% of the drilling budget, with Bakken-Three Forks garnering 20% followed by the Granite Wash at 7%. The Permian Basin, the Haynesville Shale and the Niobrara/other oil categories round out the drilling budget of $830 million.
On the transaction front, SM Energy's data room for its Eagle Ford sale is still open and has been drawing interest, Best said. "It does look a little bit like a United Nations forum," he said. "We're please to see that level of interest." A deal announcement is expected later this year. "We think our timing is good to be out in the market, and we're anxious to see the results of the data room..."
In the Haynesville Shale SM Energy is discussing JV possibilities that would provide drilling carries in order to hold acreage in the play, Best said. If no deal is struck, SM Energy will continue to drill to hold production itself, he said. While the company's Haynesville wells have been "very strong...nobody cares too much because it's gas," he said.
And in the Marcellus Shale, where the company plans minimal investment this year, SM Energy is looking for opportunities to exit the play. However, absent a compelling agreement the company will maintain its position there, Best said.