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SM Energy (SM) Eyes Long-Term Growth Despite Macro Risks

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On Jun 3, 2016, we issued an updated research report on Colorado-based SM Energy Company (SM - Free Report) .

We expect SM Energy’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 the company as one of the most attractive players in the exploration and production (E&P) space.

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 Energy has meaningful leasehold positions in the leading U.S. shale plays like Bakken, Niobrara, Haynesville, and Granite Wash. We believe that the company’s favorable position in these areas will provide it with many years of profitable drilling inventory. The key growth drivers for SM energy include the South Texas Eagle Ford Shale and Rockies Williston Basin Bakken/Three Forks shales.

Eagle Ford will likely accelerate faster than expected because of additional takeaway. On the other hand, the company remains proactive in its Permian play. The inclusion of additional acreage to its holding in the Permian play validates the potential of the basin. Moreover, the leasehold expansion in New Ventures, along with acreage additions in its East Texas and the Powder River Basin, contributed to production growth.

Given the significant liquids content, Eagle Ford represents an attractive resource potential. Development of the Eagle Ford Shale, where the company holds a premier position, is an important aspect of SM Energy’s goal to increase stockholder value. We also believe that the company’s emerging core portfolio will support visible organic growth over the next several years.

However, SM Energy is a firm in the upstream energy space, which exposes it to weak commodity prices. Also, the company anticipates a substantial decline in the number of operating rigs in 2016, which in turn, would result in reduced production. Moreover, cuts in capital spending could hurt production volumes.

Though the company holds considerable acreage in the Williston Basin, most of its holdings lie in the region having low yield. Thus, SM Energy’s results will likely lag its peers who have acreage in the core region of the Bakken.

Further, constraints and delays in bringing additional capacity could limit production growth. Disappointing results from the Eagle Ford Shale, Bakken, Niobrara, and Granite Wash plays could also result in weaker-than-expected performance by the stock.

Stocks to Consider

Currently, SM Energy carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the oil and gas sector include CVR Refining, LP , Murphy USA Inc. (MUSA - Free Report) and Braskem S.A. (BAK - Free Report) . All these stocks sport a Zacks Rank #1 (Strong Buy).

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