SM Energy's Anadarko Basin sale should draw high bids

“Shrink-to-grow” strategy may generate up to $500M for Eagle Ford, new ventures

SM Energy Co. (NYSE: SM) has engaged an advisor to market all of its properties in the Anadarko Basin, which includes the company’s Granite Wash interests, the company said July 10.

Proceeds from the sale, which could reach $500 million according to estimates by Jefferies LLC analysts, are expected to fund “strategic projects” in the company’s portfolio.

This “shrink-to-grow” strategy rarely leads to stock outperformance “unless the volumes sold are recouped through reinvestments on a timely basis,” said the analysts in a research note following SM Energy’s announcement Wednesday.

“We believe SM is prepared to reinvest Anadarko Basin proceeds into acceleration of the Eagle Ford and new ventures. We expect an increase in production and capex guidance in the August update which should be favorably received,” they continued.

Production from the assets represents slightly over 9,000 boe/d (75% wet gas), which is approximately 8% of the company’s total production in the first quarter of 2013. The company’s Anadarko Basin assets include approximately 56,000 net mineral acres, of which, 32,000 are estimated by Jefferies to be in the Mayfield area in western Oklahoma, comprising the majority of SM’s Granite Wash activity.

Due to the high oil and liquids content of the assets, sale proceeds should command numbers at the high end of historical comps and are likely to bring in enough to bridge a $234 million funding gap this year, as well as fund acceleration of the company’s Eagle Ford program should they choose to complete more wells, a likely scenario, noted the analysts.

During the first quarter of 2013, SM Energy operated five drilling rigs on its operated Eagle Ford shale acreage and made 28 flowing completions. In the non-operated portion of the company's Eagle Ford shale program, the operator ran nine drilling rigs during the first quarter of 2013.

The $500 million (~$9,000 per flowing mcfe) estimated proceeds compares favorably to recent Granite Wash transactions of the last two years. In May, EnerVest paid $7,580 per flowing mcfe for Laredo Petroleum assets comprised of 94% wet gas and 6% condensate. “The same metric equals $409 million for SM. Furthermore, the sales metric should exceed what SM is trading for currently ($6,400 per flowing mcfe),” the analysts noted.

SM Energy expects the marketing process to take approximately six months.

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