SM Marcellus Asset Sale Hits a Snag


Colorado-based SM Energy Company (NYSE:SM - News) is contemplating legal action against Endeavor International Corporation (NYSE:END - News) after the latter backed out of the previously agreement to buy its assets in McKean and Potter Counties, Pennsylvania for $110 million.

Earlier this week, Houston-based Endeavor acknowledged that it had terminated the purchase and sale agreement with SM Energy, SM Energy’s partners and a subsidiary of Endeavor related to oil and gas assets in the Marcellus Shale in Pennsylvania. The reason for the withdrawal remains unknown.

SM Energy refutes Endeavor’s ability to withdraw from the agreement. SM Energy also expressed deep concerns about Endeavor’s dealings and proclamation. With respect to this behavior, the company and its partners plan to pursue any and all legal remedies arising from Endeavour's actions.

However, SM Energy has no intention of making any capital expenditure associated with its Marcellus Shale assets in 2012 that are essential for maintaining most of its acreage position.

Per the deal announced in July, Endeavor was to buy assets that included SM Energy’s entire Marcellus Shale leasehold position of around 42,000 net acres and associated pipeline assets. Currently, there 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 these assets, of which 50% were classified as proved developed.

The deal includes 100% ownership of Potato Creek LLC, which owns gathering and related facilities in southern McKean County, as well as a 10-mile 16” trunkline connected with and flowing to the Tennessee Gas Pipeline’s 24” mainline.

The sale of certain assets in SM Energy’s portfolio of Marcellus and Eagle Ford holdings are part of a turnaround program that commenced in 2009. Last year, the company proposed to raise between $300 million and $500 million to fund an ambitious capex budget of $1 billion.

SM Energy holds a Zacks #3 Rank, which translates into a Hold rating for a period of one to three months. We maintain an Outperform rating on the stock for the long term.

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