SM Energy - Update Jan 12

[dan_s]

This week, SM announced that they were selling most of their assets in the Powder River Basin. This is an area that is non-core for SM. Sales proceeds of approximately $500 million will reduce the company's net debt by ~15%. < Shoring up the balance sheet is a good thing and justifies a higher multiple to value the stock.

I am expecting SM to add another operated rig in the Permian Basin that will quickly replace the 2,200 Boepd of production that they are selling. Keep in mind that SM has not released a D&C capex program for 2018, nor have they given any production guidance for 2018.

SM is trading for $26.60 today.

In the last 3 months, 11 ranked analysts set 12-month price targets for SM. The average price target among the analysts is $30.40. The range of price targets for this one is very wide: $23 to $46. I have updated my forecast model for SM and posted it to the EPG website. I have taken production out of the first half of 2018 and increased production in the second half of 2018. I also added 2,000 Boepd to 2019 because the company should now exit 2018 at a higher rate of production. You should all take a very hard look at the RED BOX on the forecast model.

My valuation of SM is now $41.00/share. < This is $7.00 higher than my valuation on 12-7-2017.

Things to remember about SM:
> The Powder River Basin sale will focus more attention on the Permian Basin. Take a look at page one of our 12-7-2017 profile on SM to see the well results they are getting in Howard Co.
> SM is now a pure play on Texas, primarily the Midland Basin where they are running seven operated rigs today. The Midland Basin is a sub-basin of the Permian Basin.
> They will probably keep running two rigs in the Eagle Ford and add another rig in the Midland Basin.
> If liquids prices stay high, there is upside to my valuation.
> Make sure you look at the hedges shown at the bottom of the forecast/valuation model.
> SM trades today at a much lower multiple of cash flow from operations than the Permian Basin pure plays in the Sweet 16.

[ChuckGeb]

Thought they still have Bakken production.

[dan_s]

Insignificant and not in their three year growth plan. Rocky Mountain region was less than 12% of Q3 revenues, including the Powder River Basin.
90% of growth will be in the Midland Basin. JV partner in the Eagle Ford provides most of the D&C capital there in 2018.

[charlie1]

Credit Suisse raised its SM target from $27 to $31 on Jan 10
Raymond James raised its target from $29 to $31 on Jan 11