SM Energy Company (SM - Analyst Report) recently announced its decision to acquire almost 35,700 net acres in the Midland Basin of West Texas for a consideration of $1.6 billion. The payment will be made through both cash and stock. Simultaneously, the company decided to divest its resources in North Dakota’s Williston Basin for roughly $785 million.
SM Energy is expected to pay $1.1 billion in cash and roughly 13.4 million shares to QStar LLC – a portfolio company of EnCap Investments L.P. and a related entity – to buy the Permian acreage. The acquisition plan reflects SM Energy’s focus on increasing its resources in the most productive properties so as to be able to earn significant cash flows for shareholders in the long run. Notably, the latest deal, which is anticipated to complete in December this year, will increase SM Energy’s asset base in the Permian Basin to 82,450 net acres.
We note that SM Energy has been selling assets that do not fit its portfolio to enhance its presence in the Permian Basin. In fact, a major part of the aforesaid Permian Basin acreage buyout will be funded using the proceeds generated from the sale of Williston Basin properties. The remainder will likely be financed from the company’s revolving credit line.
SM Energy is planning to employ the fourth rig for the Midland Basin activity during the last quarter of this year. The company intends to increase the rig count in the area to six by early 2017. Consequently, the company is expected to enhance aggregate 2016 capital spending to roughly $710 million before the latest acquisitions.
Denver, CO-based 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. 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.
However, SM Energy is a firm in the upstream energy space and hence, is likely to face troubles amid weak commodity prices like other firms in the oil exploration and production sector, such as Antero Resources Corporation (AR - Snapshot Report) , Apache Corp. (APA - Analyst Report) and Comstock Resources Inc. (CRK - Analyst Report) .
Currently, SM Energy carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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