SM finally gets it done.

[setliff]

Press Release: SM Energy Announces Sale Of Non-Operated Eagle Ford Assets For $800 Million
DOW JONES & COMPANY, INC. 5:00 AM ET 1/3/2017

SM Energy Announces Sale Of Non-Operated Eagle Ford Assets For $800 Million

PR Newswire

DENVER, Jan. 3, 2017

DENVER, Jan. 3, 2017 /PRNewswire/ -- SM Energy Company(SM) today announced that it has entered into a definitive agreement with a subsidiary of Venado Oil and Gas, LLC, an affiliate of KKR, for the sale of the Company's third party operated assets in the Eagle Ford, including its ownership interest in related midstream assets, for a purchase price of $800 million (subject to customary adjustments).

President and Chief Executive Officer Jay Ottoson comments: "We are pleased to announce the signing of this agreement as we kick off 2017. This sale supports SM's strategy to be a premier operator of top tier assets. Our 2017 capital program will focus on our top tier oil position in the Midland Basin, consisting of approximately 87,600 net acres, and our top tier operated natural gas and NGL position in the Eagle Ford, consisting of approximately 161,500 net acres. The proceeds from this sale will provide us with additional flexibility to pursue aggressive growth from our Midland Basin assets, with related capital expenditures in excess of cash flow over the next few years, while at the same time improving our debt metrics and maintaining strong liquidity."

The assets expected to be sold include approximately 37,500 net acres in the Maverick Basin/Eagle Ford area of south Texas and a 12.5% interest in the Springfield Gathering System. As of year-end 2015, net proved reserves associated with these assets were 65 MMBoe (38% oil, 31% natural gas and 31% NGLs). In the third quarter of 2016, these assets produced approximately 27,260 net Boe per day (33% oil, 33% natural gas and 34% NGLs.) The transaction is expected to close in the first quarter of 2017, with an effective date of November 1, 2016, and the purchase price will be subject to certain closing price adjustments. The transaction is subject to the satisfaction of customary closing conditions, and there can be no assurance that the transaction will close on time or at all.

Scotia Waterous served as the Company's financial advisor in this transaction.

[dan_s]

WOW, that is a higher sales price than I thought they would get.

A few things to keep in mind.
1. The "Closing Date", not the "Effective Date" is when the production and proven reserves change hands. So, the production will be included in SM's Q1 results.
2. SM uses the "Successful Efforts" method of accounting, so it will record a gain or loss on the sale in the quarter in which the deal closes, probably Q1.
3. The $800 million proceeds from the sale compares to SM's cash flow from operations of approximately $600 million in 2016. This is a really BIG DEAL for SM.
4. SM had $3.9 Billion of total debt at the end of Q3

I see that Anadarko has not announced a sale, so maybe SM got this done on their own.

[setliff]

mkt right now doesn't think its a big deal

[dan_s]

Wall Street always seems to over-react to big announcements that they cannot grasp. SM is a Mid-Cap that does not get the same level of coverage that goes to companies like EOG, CLR, PXD and DVN.

I have updated my forecast model for SM and it will be posted to the EPG website this afternoon.

My valuation increases to $62.00/share, which compares to First Call's price target of $47.45/share.

SM traded at $43/share in early October. I think we can all agree that the outlook for oil, natural gas and NGL prices is better today than it was three months ago. I also think the outlook for SM Energy is much better.

On the right side of my forecast model for SM (and on all of the forecast models on our website), I put a red box that shows First Call's cash flow per share forecast for SM for 2016 to 2019. Note that FC's CFPS forecasts are fairly close to my forecasts of CFPS shown on row 47.

SM is considered an Eagle Ford company today by Wall Street. In 2017 they will move to a Permian Basin company.

My $62/share valuation is only 8X CFPS. All of the Permian Basin companies in the Sweet 16 trade for more than 20X CFPS.

SM has not yet issued production guidance for 2017. Production will dip in Q2 assuming they close the Eagle Ford sale at the end of Q1. However, they are planning a six rig Permian Basin program in 2017, which could ramp up production much faster than what I have in my forecast model.

[setliff]

SM Energy Sinks on Eagle Ford Asset Sale -- Market Talk
DOW JONES & COMPANY, INC. 11:00 AM ET 1/3/2017

12:00 ET - SM Energy(SM) is missing out on the broad rally today sparked by crude's first move above $55/barrel. SM off 4.7% at $32.88 after announcing deal to sell 37,500 acres in the Eagle Ford Shale in south Texas, as well as its stake in a pipeline system there, for $800M to a company backed by KKR. SM says it will use the money to develop it Permian Basin properties and some analysts say the price exceeds the $750M they expected in the sale. Baird says SM's decline today as well as its recent past trading at a discount to Permian rivals "suggest shares continue to hold contrarian merit." (ryan.dezember@wsj.com; @RyanDezember)

[dan_s]

How the market reacts to news is often the reverse of what you would expect. I just chalk it up to the general confusion on Wall Street and how they misread big news.

For those of you that are not familiar with SM Energy, I urge you to read our recent profile. You can find it on the EPG website under the Sweet 16 tab.

[cviller]

Would you sell PE and put the proceeds into SM?

[dan_s]

I really do not like to tell anyone how to time your BUYS and SELLS. That said, I do think SM has more upside at this point.

Keep in mind that Wall Street is head over heals in love with the Permian Basin and Parsley Energy (PE) is a "pure play" on the Permian. Also, keep in mind that Wall Street has fallen out of love with the Eagle Ford.

"Love" can push stock prices very high.