SM Energy Trims Down at Eagle Ford

SM Energy Company (SM - Analyst Report) reached an agreement to sell a portion of its Eagle Ford Shale position for about $225 million in cash. However, the company did not disclose the buyer’s name. The transaction is pending customary closing conditions, purchase price adjustments as well as transaction fees.

Under the terms of the deal, SM Energy, formerly known as St. Mary Land & Exploration Co., intends to sell 15,400 acres of non-producing land in the Eagle Ford Shale area of LaSalle and Dimmit counties, Texas. The company expects the deal to close in August 2011.

The deal will also entitle the undisclosed recipient to approximately 12% of the takeaway capacity associated with SM Energy’s contract with Eagle Ford Gathering LLC, a joint venture between Kinder Morgan Energy Partners LP (KMP - Analyst Report) and Copano Energy LLC (CPNO - Snapshot Report).

Three wells have already been drilled on the sold acreage, which have failed to deliver till now due to limited infrastructure. The land also had insignificant proved reserves at the end of last year.

SM Energy also highlighted that separate negotiations related to the transactions involving its total Eagle Ford Shale position are ongoing. Earlier this month, the company initiated talks regarding the divestiture of a major portion of its Eagle Ford Shale asset. The company also signed a deal to sell non-core assets in southeastern Texas’ Constitution Field for aggregate proceeds of approximately $44 million.

The arrangements are part of SM Energy’s objective to offload approximately 20% to 30% of its total 250,000 net acre Eagle Ford Shale position. We believe this divestiture will help the company to streamline its portfolio while holding a significant position in emerging shale plays and focusing more on resource, with an inventory of repeatable drilling prospects that have a high rate of return.

We believe that SM Energy’s emerging core portfolio is a catalyst for organic growth over the next several years. However, the company’s highly gas-weighted reserves/production profile offsets its strength and remains a key area of concern. Therefore, we are maintaining our long-term Neutral recommendation on the stock.

SM Energy currently retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

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