Acquisition Expands SM Energy's Permian Basin Footprint

Denver-based SM Energy Company will almost double its Permian Basin footprint with the acquisition of Rock Oil Holdings LLC from Riverstone Holdings LLC for $980 million.

The acquisition will expand SM Energy’s Midland Basin footprint to approximately 46,750 net acres. This acreage includes approximately 4,900 barrels of oil equivalent per day (boepd) net production and 6 million barrels of oil equivalent (MMboe) of proved developed producing reserves, the company said in an Aug. 8 press statement. The acreage SM Energy is acquiring is largely contiguous with its existing acreage, and includes two new wells expected to come online this month.

The company has been looking for some time to expand its asset base in the Midland Basin, SM Energy President and Chief Executive Officer Jay Ottoson said in the press release.

“This is a negotiated transaction for assets in Howard County, a region of the Midland Basin that is emerging as a top tier area for well performance.”

SM Energy expects to run one rig in the area during this year’s fourth quarter and two rigs throughout 2017, Ottoson stated. As a result, the company will boost its estimated total capital spend this year by approximately $15 to $20 million. SM Energy also expects the implementation of pad drilling, reservoir modelling, zipper fracs, and leading-edge completion technologies to add value from the start.

The company expects the acquisition to close Oct. 4. SM Energy will fund the acquisition through its planned underwritten public offering of 15 million shares of its common stock and a $100 million offering of a series of senior unsecured convertible notes due 2021.

Assuming a $40/barrels of oil equivalent (boe) per day oil price, the purchase price implies SM paid approximately $32,000/acre, according to an Aug. 9 research note from Stifel Research. While not cheap, SM’s purchase price compares to recent transactions, including:

• Howard County of $11,000/acre for 78,000 net acres by Moss Creek from Tall City/Element Oct. 23, 2015
• $28,000/acre for 12,000 net acres by Diamondback Energy from Cobra Oil & Gas May 31
• $16,000/acre for 14,000 net acres by Callon Petroleum Company from Big Star May 31

SM Energy’s expansion in the Permian makes sense, given the company’s success and relatively small footprint at Sweetie Peck, Stifel analysts noted.

The Permian Basin remains at the top of the investor buy list, as evidenced by the continued strength of companies and stocks that can play offense and increase their exposure, according to an Aug. 9 analyst note from Tudor, Pickering and Holt.

“Although we believe other basins will see an eventual recovery, the Permian stands out with respect to its advantaged attributes – areal extent, multi-zone serendipity, rate of change with respect to both costs and well performance, crude oil leverage and lack of regulatory headwinds,” Tudor, Pickering and Holt analysts noted.

Earlier this month, SM Energy reported that its second quarter 2016 earnings exceeded expectations across the board, the result of outstanding execution and well results. The company’s production of 14.3 MMboe exceeded the company’s estimate of 1 MMboe due to the performance of new wells in the Permian Basin and Eagle Ford exceeding expectations, the company said in an Aug. 2 press statement.

SM Energy’s second quarter 2016 Permian Basin net production totaled 849,000 boe, 73 percent of which was oil, the company said in the Aug. 2 release. During the second half of this year, the company plans to focus its drilling activity in the Sweetie Peck area, which offers the highest returns in its portfolio, as well as substantial upside for reserve and inventory growth, the company said.