SM Energy makes another $1-billion deal for Midland basin acreage

SM Energy Co., Denver, has agreed to acquire 35,700 net acres in Howard and Martin counties of West Texas from Houston-based QStar LLC, a portfolio company of EnCap Investments LP and a related entity, for $1.1 billion in cash plus 13.4 million shares of SM Energy common stock.

The acquired acreage complements and is partially contiguous to the 24,783 net acres in Howard County acquired by SM Energy as part of its $980-million deal for Rock Oil Holdings LLC, which closed earlier this month (OGJ Online, Aug. 8, 2016). The two deals expand SM Energy’s Permian Midland basin footprint to 82,450 net acres.

“As with our initial Howard County acquisition, we expect to immediately employ our operational expertise to the area,” commented Jay Ottoson, SM Energy president and chief executive officer. “Our preliminary plans for Midland basin activity include adding a fourth rig during the fourth quarter of 2016 and increasing to six rigs in early 2017, thereby increasing our expected aggregate 2016 capital program before acquisitions to approximately $710 million,” he said.

In tandem with the announcement of its latest Midland basin purchase, SM Energy said it has agreed to sell its Williston basin assets outside of Divide County, ND, to Oasis Petroleum Inc. for $785 million (OGJ Online, Oct. 18, 2016). SM Energy plans to use the proceeds from the Oasis deal to fund the majority of the $1.1-billion cash portion of the QStar deal. The remainder is to be funded under its revolving line of credit.

SM Energy also said it remains on track with the planned sale of its nonoperated Eagle Ford assets, which it sees as a potential source of funding for its accelerated Permian activity in the coming years.

The purchase from QStar is effective Sept. 1 and expected to close mid-December. The sale to Oasis is effective Oct. 1 and expected to close early-December.

Permian deal count

SM Energy’s two Midland basin deals are among scores targeting Permian basin acreage to have taken place in recent months. In the Midland alone, Concho Resources Inc., QEP Resources Inc., Pioneer Natural Resources Co., Parsley Energy Inc., Callon Petroleum Co., and Laredo Petroleum Inc. have each moved to expand their positions since late last spring.

Private equity firms in particular have been active in the region as both opportunistic sellers and buyers that hope to develop acreage. Their involvement includes the formations of Blackstone Group LP-backed entities Guidon Energy in the Midland and Jetta Permian LP in the Delaware, and Midland-focused Double Eagle Energy Permian LLC through the merger of firms owned by Post Oak Energy Capital LP and Apollo Natural Resources Partners Funds I and II.

Just last week, RSP Permian Inc. agreed to buy Delaware basin-focused Silver Hill Energy Partners LLC and Silver Hill E&P II LLC, which are controlled by affiliates of Kayne Anderson Capital Advisors LP and Ridgemont Equity Partners, for $2.4 billion (OGJ Online, Oct. 14, 2016). Other producers recently moving in on Delaware basin acreage include Parsley, EOG Resources Inc., PDC Energy Inc., Diamondback Energy Inc., Silver Run Acquisition Corp., Resolute Energy Corp., and Oaktree Capital Management LP-backed Charger Shale Oil Co. LLC.

The Permian’s rig count rose 67 units between May 13 and Oct. 14 to a total of 201, according to the latest data from Baker Hughes Inc. The US Energy Information Administration separately estimates the region’s tally of drilled but uncompleted wells grew by 52 in September to 1,378 (OGJ Online, Oct. 17, 2016).

Contact Matt Zborowski at

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