SM Energy's Assets Impress; Low Commodity Price a Drag
On Aug 31, 2015, we issued an updated research report on independent oil and gas firm SM Energy Company SM.
SM Energy is engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America. We expect the company’s attractive oil and gas investments, balanced and diverse portfolio of proved reserves and development drilling opportunities to create long-term value for shareholders. We view SM Energy as one of the most attractive players in the exploration and production (E&P) space.
Given the company’s increasing focus on oil, specifically in the Permian and Rocky Mountain regions, we believe that SM Energy will be able to boost its oil-weighted activity. Additionally, the company has meaningful leasehold positions of the leading U.S. shale plays, including the Bakken, Niobrara, Haynesville, and Granite Wash. We believe that the company’s presence in these shale plays will provide it with many years of profitable drilling inventory. SM Energy’s growth drivers include the South Texas Eagle Ford Shale and Rockies Williston Basin Bakken/Three Forks shales.
We expect growth from Eagle Ford to accelerate faster than expected because of additional takeaway. Also, the company remains proactive in the Permian play, which should improve its prospects. The inclusion of additional acreage to its holding in the Permian play validates the potential of the basin. Moreover, the leasehold expansion in New Ventures along with acreage additions in its East Texas and the Powder River Basin contributed to production growth.
However, being a firm in the upstream energy space, SM Energy is likely to face troubles amid weak commodity prices. The company anticipates a substantial decline in the number of operating rigs in 2015, which in turn, would result in reduced production. Moreover, a 40% cut in its capital spending could hurt production volumes.
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.
Further constraints and delays in bringing additional capacity could limit production growth. Again, disappointing results from the Eagle Ford Shale, Bakken, Niobrara and Granite Wash plays could result in weaker-than-expected performance by the stock.
Zacks Rank and Key Picks from the Sector
SM Energy carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same space are Alon USA Partners, LP ALDW, Braskem S.A. BAK and Mitcham Industries Inc. MIND. All these stocks sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
SM ENERGY CO (SM): Free Stock Analysis Report
BRASKEM SA (BAK): Free Stock Analysis Report
ALON USA PTNRS (ALDW): Free Stock Analysis Report
MITCHAM INDS (MIND): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research
