SM Energy Company (SM - Analyst Report) is on track with its divestiture plan. The oil and gas company has signed an asset sale agreement related to its entire Marcellus position with an affiliate of Endeavour International Corporation for a total cash consideration of $80 million. The transaction, which is subject to customary closing conditions, is slated to close in the fourth quarter of 2011.
The deal covers SM Energy’s total leasehold acreages at McKean and Potter counties of Pennsylvania stretching approximately 42,000 net acres as well as associated pipeline assets. There are currently three producing wells on the property with first quarter 2011 production of 2 million cubic feet of oil equivalent per day (MMcfe/d). As of year-end 2010, there were 5.6 billion cubic feet equivalent (Bcfe) of booked reserves related to these assets, of which 50% were classified as proved developed.
The Marcellus shale is one of the largest natural gas finds in the United States spreading from West Virginia and Ohio across Pennsylvania and into New York. But environmental concerns have cropped up from hydraulic fracturing methods used in the shale rock to extract fuel, compelling drillers to consider moving out.
The latest move is part of the company’s extensive plan to offload its non-core assets and comes on the heels of two Eagle Ford Shale monetization agreements. The company had earlier stated that it expects to raise $300–$500 million over the next 12 months either through joint venture agreements or through asset sales, including its Marcellus shale properties.
Recently, SM Energy shed 5,400 acres of non-producing land in the Eagle Ford Shale area of LaSalle and Dimmit counties, Texas for about $225 million. Following this, the company divested a 2.5% working interest in its non-operated Eagle Ford Shale acreage in Texas to a subsidiary of Mitsui & Co. Ltd. for $680 million.
To date, the company has closed or entered into transactions in excess of $1 billion to fund for the development of higher value assets in its portfolio. We believe that SM’s emerging core portfolio will support several years of visible organic growth. The company’s attractive oil and gas investments, a balanced and diverse portfolio of proved reserves and development drilling opportunities will create value for shareholders. However, we maintain our long-term Neutral recommendation considering the company’s natural gas-weighted reserves and production.
SM Energy, which competes with Ultra Petroleum Corp. (UPL - Analyst Report), currently retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating.