We have upgraded our long-term recommendation on Colorado-based SM Energy Company (SM) to Neutral from Underperform.
SM Energy boasts attractive oil and gas investments, balanced and diverse portfolio of proved reserves and development drilling opportunities, which we expect to create long-term value for shareholders. We view the company as one of the most attractive players in the exploration and production (E&P) space.
Given the significant liquids content and favorable economics, Eagle Ford represents an attractive resource potential and SM Energy has built a premier position there. Development of the Eagle Ford Shale is an important part of the company’s goal to increase stockholder value. We also believe that the company’s emerging core portfolio will support visible organic growth for the next several years.
SM Energy also remains proactive in its Permian play. The additional acreage on its Permian play along with the increase in the rig count validates the potential of the basin. The initial production rates of the Mississippian Limestone development has been promising and mainly reflects continued drilling activities in its Permian shale position.
With the company’s increasing focus on oil, specifically in the Permian and Rocky Mountain regions, we believe that it will be able to boost its oil-weighted activities. Additionally, it has meaningful leasehold positions of the leading US shale plays, including the Bakken, Niobrara, Haynesville, and Granite Wash, which we believe will provide the company with several years of profitable drilling inventory. Growth drivers include the South Texas Eagle Ford Shale and Rockies Williston Basin Bakken/Three Forks shales.
SM Energy has been able to raise a significant amount of capital from the sale of a number of assets, placing the firm well with respect to capital for growth. It has transformed into a resource play with a high-graded asset base.
However, in terms of geographic diversification, SM Energy’s lack of exposure to other refining regions in other countries weakens its competitive positioning, in our view. With majority of its capacity located in North America, the company’s results are heavily dependant on refining margins in a single market.
Though the company holds considerable acreage in the Williston Basin, most of its holdings lie in the region having low yield. Thus, its results will likely lag its peers who have acreage in the core region of the Bakken.
SM Energy is an independent oil and gas company that competes with the likes of Stone Energy Corp. (SGY).
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