On Oct 4, 2016, we issued an updated research report on Colorado-based SM Energy Company (SM - Analyst Report) .
We expect the company’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 SM Energy as one of the most attractive players in the exploration and production 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, the company has meaningful leasehold positions of the leading U.S. shale plays like the Bakken, Niobrara, Haynesville, and Granite Wash. We expect the company’s holdings in these shale plays to provide it with many years of profitable drilling inventory. Growth drivers include the South Texas Eagle Ford Shale and Rockies Williston Basin Bakken/Three Forks shales.
SM Energy has been able to lower its per unit cash operating costs and continues to improve drilling as well as reduce capital expenditure – an impressive achievement amid the low price scenario.
Eagle Ford will likely accelerate growth because of additional takeaway and the company also remains proactive in its Permian play. The inclusion of additional acreage to its holding in the Permian play (through the recent Rock Oil acquisition) 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.
However, SM Energy is a firm in the upstream energy space and hence, is adversely impacted by weak commodity prices. 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 its capital spending could hurt production volumes.
Though SM Energy holds considerable acreage in the Williston Basin, most of its holdings lie in the region having low yield. Thus, its results will likely lag its peers who have acreage in the core region of the Bakken.
Oil and gas companies like SM Energy need to explore and find economic reserves to stay competitive in this space. If a company fails to add commercially viable oil and gas reserves or properly market production, its financial condition and results of operations may be affected.
Zacks Rank and Stocks to Consider
Currently, SM Energy carries a Zacks Rank #2 (Buy). Some better-ranked players from the energy sector include Enviva Partners, LP (EVA - Snapshot Report) , NGL Energy Partners (NGL - Snapshot Report) and Evolution Petroleum Corp. (EPM - Snapshot Report) . All of these stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Enviva Partners posted a positive earnings surprise of 20.51% in the preceding quarter.
NGL Energy Partners has a mixed earnings surprise history. The partnership posted positive earnings surprise in two of the last four quarters. It reported a positive earnings surprise of 1480.0% in the preceding quarter.
In the last reported quarter, Evolution Petroleum Corp. delivered a positive earnings surprise of 350.00%. Coming to the earnings surprise history, the company beat estimates in two of the last four quarters.
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