SM Energy (SM) Update

[dan_s]

SM Energy is a "company in transition" and their production will drop in Q1 due to a significant asset sale (Non-OP Eagle Ford) expected to close soon and continue to drift lower until late Q3. Production should ramp up sharply in Q4 and the company believes they have 15% annual production growth locked in beyond 2017.

I have updated my forecast model of SM and it will be posted to the EPG website later today.

I am reducing my valuation by $9/share to $48.00/share, which compares to First Call's price target of $43.50.

I will be moving SM to our Small-Cap Growth Portfolio, primarily because several of our small-caps deserve "promotion" to the Sweet 16. I want the Sweet 16 to have "Aggressive Growth" locked in.

There is significant upside to my valuation for SM because:
> I am using a much lower multiple of operating cash flow per share to value it than I am using for the other Permian Basin companies and
> If they report strong well results in the Permian Basin it should draw more (and better) Wall Street attention.

SM's production mix in 2017 s/b approximately 46.5% natural gas, 29.0% crude oil and 24.5% NGLs. If by Q4 their production mix is trending to more oil, that will also help Wall Street's opinion of this company.