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We have reaffirmed our Neutral recommendation on SM Energy Company (SM - Analyst Report), reflecting its complimentary position to reap benefits from its asset mix, promising organic production growth outlook and ample liquidity. However, a depressed natural gas price environment is expected to weigh on the stock. The company holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.

Why the Reiteration?

SM Energy is an independent oil and gas company engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America.

Given the significant liquids content and favorable economics, the Eagle Ford represents an attractive resource potential where the company has built a premier position. Given the current tepid gas price scenario, it intends to boost the liquids composition in its portfolio. As such, liquids are expected to comprise 50% of production by the end of 2013.

SM has meaningful leasehold positions of the leading U.S. shale plays, including the Bakken, Niobrara, Haynesville, and Granite Wash, which we believe will provide the company with many years of profitable drilling inventory. The company also plans to spend more on its Eagle Ford, Bakken/Three Forks, and Permian drilling operations. Its 2013 capex outlay covers more than 43% and 19% of the total budget for Eagle Ford and Bakken/Three Forks, respectively.

The company expects to deliver 255–267 billion cubic feet equivalent/Bcfe of hydrocarbon for this year. This represents about 20% growth from the 2012 level that will likely be followed by about 15% production growth in 2014 and 2015. Meanwhile, it reaffirmed its full year 2012 as well as the fourth quarter’s production guidance at 57.5–60.5 Bcfe and 215.5–218.5 Bcfe, respectively.

However, we remain on the sidelines because of the depressed natural gas price environment. The company derives a significant portion of its operating revenues from natural gas, and may face near-term headwinds in this market from struggling commodity prices.

We see no earnings momentum for the stock over the last 7 days for the fourth quarter of 2012. The Zacks Consensus Estimates for the fourth quarter is currently pegged at 23 cents per share, reflecting a year-over-year decrease of 61.4%.

Other Stocks to Consider

Cabot Oil & Gas Corp (COG - Analyst Report) is expected to perform impressively over the next few months and it carries a Zacks #1 Rank (Strong Buy).
 

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