SM Energy purchases 46,750 net acres in Midland Basin
Denver-based SM Energy (ticker: SM) announced the acquisition of 46,750 net acres in the Midland Basin today. The acreage is “largely contiguous” and includes approximately 4,900 BOEPD of production, two new wells coming online this month, and 6 MMBOE of PDP reserves from Rock Oil Holdings LLC, according to a company press release. The implied deal metrics of SM’s acquisition are $20,962.57 per acre, $200,000 per flowing BOE, and $163.33 per BOE of proved reserves.
SM Energy building Core Area in the Permian
SM Energy building Core Area in the Permian
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group
Re: SM Energy building Core Area in the Permian
Seems like they are paying a lot for this relatively unproved acreage. Parsley recently made comparable acquisitions for 8k and 12 k an acre. Your thoughts, Dan?
Re: SM Energy building Core Area in the Permian
RBC Capital's take on the SM Energy acquisition:
Key points:
Announces sizable Midland Basin acquisition in Howard County. SM
purchased 24,783 net acres including 4,900 Boepd (77% oil) from Rock
Oil for $980 million. The acreage is a large contiguous block in Howard
County. The transaction will be partially funded through a 16 million share
common equity issuance ($480 mm in gross proceeds; 23% of shares
outstanding) and a $150 million convertible note offering. The transaction
is expected to close on 10/4/16.
Valuation looks quite reasonable. We estimate the transaction equates
to $30-32,000/undeveloped acre, a decent premium to recent Howard
County transactions, although recent prolific industry results (CPE, FANG,
OXY have all posted 1,200+ Boe/d IP30 rates) have re-rated well
economics. There is extensive vertical well control on SM’s acreage (over
100 vt. wells) and a handful of operated hz wells (recent Wolfcamp well
had 1,600 Boe/d IP30). The Wolfcamp “A” has been largely delineated
with consistent results near SM’s acreage, with smaller sample sizes in
the WC ”B” and Lower Spraberry. We currently give SM credit for 640
gross locations and view other zones (Middle Spraberry, WCC/D) and
downspacing (above 8 wells/section) as upside.
Securing a capital efficient growth engine. SM will run 1 rig in Howard in
4Q16, slightly increasing its FY16 CapEx to $685-$690 million. SM plans to
increase to at least 2 rigs beginning in 2017 (4 total Midland rigs). With
ample inventory, the Permian should receive the lion’s share of capital for
the foreseeable future, which will provide for more capital efficient growth
in 2017 (RBC at 5% production growth within CF) & beyond.
Equity issuance 18%/11% dilutive to FY17/18 CFPS; Non-core asset
sales to fill funding gap. We are raising our FY17/18 production
estimates 2%/6% (more Permian, less Bakken activity). Overall, we see
this transaction 18%/11% dilutive to our FY17/18 CFPS estimates. SM
equity/convert issuance leaves a ~$250-300 million acquisition funding
gap, which SM indicated could be filled by additional non-core asset sales
in early 2017, including non-operated Eagleford position (27,350 Boe/d),
which we estimate could generate $850-$950 million.
Increasing NAV to $44 and price target to $34. SM has made significant
progress to establishing itself as a sizable Permian player and we expect
execution on its delineation/downspacing program in Howard County will
help narrow valuation gap to Permian peers over time (currently 4-6 turn
2017E EBITDAX discount). Additionally, we see the acquisition as 13%
accretive to our NAV. We increased our price target to $34.
Key points:
Announces sizable Midland Basin acquisition in Howard County. SM
purchased 24,783 net acres including 4,900 Boepd (77% oil) from Rock
Oil for $980 million. The acreage is a large contiguous block in Howard
County. The transaction will be partially funded through a 16 million share
common equity issuance ($480 mm in gross proceeds; 23% of shares
outstanding) and a $150 million convertible note offering. The transaction
is expected to close on 10/4/16.
Valuation looks quite reasonable. We estimate the transaction equates
to $30-32,000/undeveloped acre, a decent premium to recent Howard
County transactions, although recent prolific industry results (CPE, FANG,
OXY have all posted 1,200+ Boe/d IP30 rates) have re-rated well
economics. There is extensive vertical well control on SM’s acreage (over
100 vt. wells) and a handful of operated hz wells (recent Wolfcamp well
had 1,600 Boe/d IP30). The Wolfcamp “A” has been largely delineated
with consistent results near SM’s acreage, with smaller sample sizes in
the WC ”B” and Lower Spraberry. We currently give SM credit for 640
gross locations and view other zones (Middle Spraberry, WCC/D) and
downspacing (above 8 wells/section) as upside.
Securing a capital efficient growth engine. SM will run 1 rig in Howard in
4Q16, slightly increasing its FY16 CapEx to $685-$690 million. SM plans to
increase to at least 2 rigs beginning in 2017 (4 total Midland rigs). With
ample inventory, the Permian should receive the lion’s share of capital for
the foreseeable future, which will provide for more capital efficient growth
in 2017 (RBC at 5% production growth within CF) & beyond.
Equity issuance 18%/11% dilutive to FY17/18 CFPS; Non-core asset
sales to fill funding gap. We are raising our FY17/18 production
estimates 2%/6% (more Permian, less Bakken activity). Overall, we see
this transaction 18%/11% dilutive to our FY17/18 CFPS estimates. SM
equity/convert issuance leaves a ~$250-300 million acquisition funding
gap, which SM indicated could be filled by additional non-core asset sales
in early 2017, including non-operated Eagleford position (27,350 Boe/d),
which we estimate could generate $850-$950 million.
Increasing NAV to $44 and price target to $34. SM has made significant
progress to establishing itself as a sizable Permian player and we expect
execution on its delineation/downspacing program in Howard County will
help narrow valuation gap to Permian peers over time (currently 4-6 turn
2017E EBITDAX discount). Additionally, we see the acquisition as 13%
accretive to our NAV. We increased our price target to $34.
Dan Steffens
Energy Prospectus Group
Energy Prospectus Group