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SM Energy Company (SM)

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We are downgrading our recommendation for SM Energy Company (SM) to Underperform from Neutral. The company's holding in the non-core region of the Williston Basin will lag the output of its peers with acreage in the core region of the Basin.

Moreover, midstream disruptions in the Bakken and the Permian hindered output in April 2012, and are likely to put pressure on the company's output guidance. Other risks that could potentially impact the company's operations include a lack of service rig availability, dry holes, mechanical failures and adverse weather conditions.

Hence, we have downgraded our recommendation to Underperform from Neutral. Our $43 price objective reflects a multiple of 3.8x the trailing the 12-month cash flow.

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