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On Sep 17, 2013, we upgraded independent oil and gas company, SM Energy Company (SM - Analyst Report) to Outperform based on its improved growth momentum, which signals sustained long-term growth.

Why the Upgrade?

SM Energy has witnessed some moderation since its second-quarter 2013 results on Jul 31. In that quarter, adjusted earnings of $0.76 per share were in line with the Zacks Consensus Estimate but increased sevenfold from the year-ago earnings of $0.10 per share on the back of record production.

The company’s second-quarter production came in at 131.8 thousand barrels of oil equivalent per day (MBoe/d). It also showed an improvement of 42.3% from the year-ago level of 92.6 MBoe/d. The outperformance was mainly attributable to the leasehold expansion in New Ventures along with acreage additions in its East Texas and the Powder River Basin.

We expect the company’s attractive oil and gas investments, balanced and diverse portfolio of proved reserves and development drilling opportunities to create long-term value for shareholders. We view SM Energy as one of the most attractive players in the exploration and production (E&P) space. The company reported an impressive second quarter with increased proved reserves (while driving down finding and development (F&D) costs), improved net resource potential in the Eagle Ford and Bakken, and better-than-expected production.

Following the release of the second quarter results, the Zacks Consensus Estimate for 2013 jumped 14.6% to $3.54 per share in the last 60 days. The same for 2014 rose 11.4% to $4.01 a share. With the Zacks Consensus Estimate for both 2013 and 2014 rising steadily, the company now has a Zacks Rank #1 (Strong Buy).

Given the company’s increasing focus on oil, specifically in the Permian and Rocky Mountain regions, we believe that SM Energy will be able to boost its oil-weighted activity. Additionally, SM has meaningful leasehold positions in the leading US shale plays, including the Bakken, Niobrara, Haynesville, and Granite Wash, which we believe will provide many years of profitable drilling inventory. Growth drivers include the South Texas Eagle Ford Shale and Rockies Williston Basin Bakken/Three Forks shales. In fact, approximately 43% of the company’s 2013 capex outlay has been earmarked for Eagle Ford, while 19% will go toward the Bakken/Three Forks region.

Other Stocks That Warrant a Look

Other stocks in the industry that are currently performing well include Susser Petroleum Partners LP (SUSP - Snapshot Report), Profire Energy, Inc. and China Petroleum & Chemical Corp. (SNP - Analyst Report). Each of the stocks has a Zacks Rank #1 (Strong Buy).

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