SM Energy Co. (NYSE: SM) has postponed indefinitely the planned sale of its Divide County, North Dakota assets as valuations in the sales process did not reach the company's threshold to meaningfully reduce its leverage.
President and CEO Jay Ottoson commented: "We have successfully pre-funded the expected outspend for our capital program for 2017 and 2018 with the completed sale of our third party-operated Eagle Ford assets, and we do not need to sell our Divide County assets. We have concluded that current market uncertainty around forward oil prices is not conducive to realizing a sales price that meets our deleveraging objective. We remain committed to our long-term financial strategy, which is best served by retaining the cash flow generated by the Divide County assets and supported by a solid balance sheet, significant liquidity and continuing hedging strategy.
"As a result of retaining our Divide County assets, we have positively revised our production guidance for the year to add 1.3 MMBoe, which is applied to the second half of the year, thereby increasing projected cash flow and reducing projected outspend."
Sifel analysts, in a note, called the announcement “a modest negative as the anticipated sale was expected to improve liquidity and SM's focus as it ramps activity on its Midland Basin properties.”
“Our prior model anticipated 3Q17 Divide County proceeds of $375MM, which essentially included no undeveloped acreage value. The change has a modest impact on our debt metrics and improves our NAV estimate 2% to $75/share. We now project YE 2017/2018/2019 net debt/EBITDA of 3.4x/2.6x/1.9x vs 3.1x/2.7x/2.0x, respectively. In addition, we forecast a 2017/2018 outspend of $265MM/$732MM vs $330MM/$799MM, previously. Liquidity of $1.6B at 3/31/17, comprised of a $925MM revolver and $659MM in cash and cash equivalents, should be ample to cover the 2017/2018 cash flow shortfall,” the analysts continued.