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Endeavour to Buy SM Energy's Marcellus Assets

SM Energy Co. has agreed to sell its Marcellus Shale assets in Pennsylvania, including its entire 42,000-acre leasehold and associated pipeline assets in McKean and Potter counties, to a subsidiary of Houston-based Endeavour International Corp. for approximately $80 million, the companies said Monday.

Included in the transaction are three producing wells on the acreage with average first quarter production of 2 MMcfe/d. As of year-end 2010, there were 5.6 Bcfe of booked reserves related to the assets, of which 50% were classified as proved developed, according to Denver-based SM Energy.

Closing is expected to occur in the fourth quarter of this year, with an effective date of April 1, 2011.

"We continuously look to high-grade our portfolio through the divestiture of non-core assets, and this transaction is yet another example of this process," said SM Energy CEO Tony Best.

The deal is part of Endeavour's plan to expand its position in the Marcellus Shale.

The transaction would provide Endeavour with significant production and reserve potential on acreage that is adjacent to its existing Marcellus acreage -- much of it in neighboring Cameron County, PA -- along with 100% ownership of Potato Creek LLC, which owns a midstream gathering system and related facilities in McKean County, including a 10-mile 16-inch diameter trunkline connected and flowing to Tennessee Gas Pipeline's 24-inch diameter mainline. Folsom, NJ-based South Jersey Industries (SJI) on Monday said one of its subsidiaries had agreed to sell its 30% ownership in Potato Creek to Endeavour for $9 million.

Following the completion of the transaction, Endeavour's leasehold interests in the Marcellus would total approximately 93,000 gross (68,000 net) acres.

"Our development model indicates recoverable natural gas potential from 1.0 to 1.3 Tcf with more than 300 identified drilling locations on our McKean and Cameron county leasehold," said Endeavour CEO William L. Transier. "As operator of these assets, including the gathering infrastructure, we have the opportunity to accelerate our development plans in an effort to realize the value of our investment while expanding our position in this three-county area."

Earlier this year Best told financial analysts the Eagle Ford Shale would get the bulk of SM Energy's capital spending this year (see Shale Daily, April 15).

Last month SM Energy and a unit of Japan's Mitsui & Co. Ltd. struck a drilling carry agreement in the Eagle Ford that is worth $680 million to the Denver-based producer and is part of its sell-down in the South Texas play (see Shale Daily, June 30). That deal, combined with the company's previously announced LaSalle and Dimmit counties Eagle Ford divestiture (see Shale Daily, June 15) and the Endeavour deal, will free up more than $1 billion "that will be used to fund the development of higher-value assets in our portfolio while preserving the strength of our balance sheet," Best said.

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