SM Energy Co. and a unit of Japan's Mitsui & Co. Ltd. have struck a drilling carry agreement in the Eagle Ford Shale that is worth $680 million to the Denver-based producer and is part of its sell-down in the South Texas play. Mitsui, which already has a Marcellus Shale stake, recently announced a deal in Poland, where it said it plans to apply shale lessons learned in the United States.
"Combined with our previously announced LaSalle and Dimmit counties Eagle Ford divestiture [see Shale Daily, June 15], we are generating nearly $1 billion in funds that will allow us to further develop our Eagle Ford assets while locking in some solid returns and maintaining a strong balance sheet," said SM Energy CEO Tony Best. "This specific transaction allows us to continue participating in the development of high-value Eagle Ford assets while providing us more control over our capital investment decisions."
Last spring Best told financial analysts the Eagle Ford would get the bulk of the company's capital spending this year (see Shale Daily, April 15).
The deal gives Mitsui a 12.5% working interest in SM Energy's nonoperated Eagle Ford position. SM Energy will be carried on 90% of its drilling and completion costs (excluding those for midstream gathering assets) in the acreage until $680 million has been expended.
Last year Mitsui and Anadarko Petroleum Corp. entered a joint venture in the Marcellus Shale with the former agreeing to pay $1.4 billion to acquire a 32.5% stake in Anadarko's 300,000-plus acre leasehold there (see Daily GPI, Feb. 17, 2010).
Earlier this month the Japanese company announced a deal with Marathon Oil Corp. to acquire a 9% working interest in 10 of Marathon's Paleozoic shale gas exploration concessions in Poland. A subsidiary of Nexen Inc. also is a partner, owning 40% of the concessions.
"We are conducting shale gas development and production activities in the Marcellus Shale [in] Pennsylvania. With our experience and knowledge acquired from this project, we intend to expand our presence in the European gas market, which follows the U.S. gas market," Mitsui said when announcing the Marathon deal.
"Additionally, we aim to expand our shale gas business into the U.S., Europe and other areas around the world, leveraging our global network and the knowledge and know-how regarding shale gas obtained through the Marcellus Shale gas project and this project."
In the SM Energy transaction Mitsui will also reimburse SM Energy for its share of capital expenditures and other costs, net of revenues, between the effective date of March 1, 2011 and closing. These costs are estimated at $20-40 million. The reimbursement will be applied to the remaining 10% of SM Energy's drilling and completion costs in the acreage, making the company effectively 100% carried until the reimbursement amount is exhausted, it said.
Once the reimbursement dollars have been expended, SM Energy will remain 90% carried until the remaining portion of the $680 million carry has been spent. Mitsui will also reimburse SM Energy for 50% of its capital investment expenditures in the related midstream assets in which the purchaser is acquiring an interest. This amount is estimated at $20-30 million.
Closing is expected during the third quarter of 2011. After closing SM Energy will have about 46,000 net acres in the nonoperated portion of its Eagle Ford position, down from roughly 85,000 net acres. Its average working interest in the acreage will be reduced from 27% to 14.5%.
Reported average daily production from SM Energy's nonoperated Eagle Ford position at the end of the first quarter was 43.5 MMcfe/d (42% oil, 36% natural gas and 22% natural gas liquids). Proved reserves were 52 Bcfe (52% proved undeveloped) as of Dec. 31.
SM Energy will have about 196,000 net acres in the Eagle Ford, of which about 75% will be operated by the company, after its recent Eagle Ford transactions are completed.