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SM Energy Kept at Outperform

Zacks Equity Research

On Dec 24, we reiterated our Outperform recommendation on independent oil and gas company, SM Energy Company (SM), based on its improved growth momentum, which signals sustained long-term growth. The company now has a Zacks Rank #2 (Buy).

Why the Upgrade?

SM Energy has witnessed some moderation since its third-quarter 2013 results on Oct 29. In that quarter, adjusted earnings of $1.54 per share comfortably surpassed the Zacks Consensus Estimate of $1.09 per share. The results also increased tenfold from the year-ago earnings of $0.14 on the back of strong production.

The company's third-quarter production came in at 138.8 thousand barrels of oil equivalent per day (MBoe/d). It also showed an improvement of 34.4% from the year-ago level of 103.3 MBoe/d. The growth was mainly attributable to the company’s leasehold expansion in New Ventures along with acreage addition in Midland Basin and Powder River Basin.

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 space. The company reported an impressive third quarter with increased proved reserves (while driving down finding and development costs), improved net resource potential in the Eagle Ford and Bakken, and better-than-expected production.

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, SM has meaningful leasehold positions in the leading U.S. shale plays, including the Bakken, Niobrara, Haynesville, and Granite Wash, which we believe will provide many years of profitable drilling inventory. Growth drivers include the South Texas Eagle Ford Shale and Rockies Williston Basin Bakken/Three Forks shales. In fact, approximately 43% of the company’s 2013 capex outlay has been earmarked for Eagle Ford, while 19% will go toward the Bakken/Three Forks region.

Other Stocks That Warrant a Look

Other stocks in the sector that are currently performing well include Blueknight Energy Partners, L.P. (BKEP), Harvest Natural Resources Inc. (HNR) and Clayton Williams Energy, Inc. (CWEI). All these sport a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on SM
Read the Full Research Report on CWEI
Read the Full Research Report on BKEP
Read the Full Research Report on HNR

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