SM Energy (SM)

[dan_s]

This North Dakota asset sale announced on January 10th should bring in more than $200 million in cash proceeds, but I am not considering it in my forecast/valuation model for SM until an actual sale is announced. Obviously, the sale will lower production post-closing (2H 2017 and 2018), but it will also raise the multiple that I use to value the company. My current valuation of SM is $63.00, compared to First Call's price target of $47.00.
The two things that will help SM the most this year:
1. Rising NGL prices. SM produces a lot of unhedged NGLs
2. Strong well results in the Permian Basin. SM has put together ~88,000 acres in the Midland Basin (a sub-basin of the Permian). See note from BofA Merrill Lynch below.

SM Energy Announces Plans To Further Core-Up Portfolio With The Sale Of Divide County Assets

DENVER, Jan. 10, 2017 /PRNewswire/ -- SM Energy Company (NYSE: SM) today announced that it has engaged Tudor, Pickering, Holt & Co. to run a formal bid process for sale of the Company's Divide County area assets in the Williston Basin. Assuming an acceptable offer is received, the Company expects to close the sale transaction around mid-year of 2017. Associated December 2016 production for the Divide County assets was 10,700 Boe/d.

President and Chief Executive Officer Jay Ottoson comments: "This sale process continues our drive to generate differential shareholder value through concentrating our capital spending on top tier asset development. Over the next few years, we intend to focus on generating significant high margin production growth from our operated acreage positions in the Midland Basin and Eagle Ford. We expect that the sale proceeds from this planned exit of the Williston Basin and from the pending sale of our non-operated Eagle Ford assets will allow us to fully fund our drilling program, while providing us with significant liquidity and the ability to reduce our outstanding debt."
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BofA Merrill Lynch (1-4-2017):
"Since August 2016, SM has executed three acquisitions for $2.7bn that have expanded
the company’s Permian footprint with a focus on Howard County, with new acreage
labeled RockStar. About 75% of SM’s 88k net acre Permian position is located in large
contiguous blocks on the western side of the county. We view Howard County as still in
the early stages of development relative to other areas within the basin and with four of
the company’s seven rigs in 2017 dedicated to de-risking the play, we believe
delineation by SM and peers could be a significant catalyst in 2017. In particular, we
expect focus on the less de-risked northeast portion of the acreage where SM plans to
allocate one rig next year. We believe successful execution in Howard County should
drive a re-rating of the shares, although this also stands out as the key risk to the story."

BofA Merrill Lynch rates SM a BUY with a price target of $52.00.

My updated forecast model for SM will be posted to the EPG website this afternoon. - Dan