Completion timing and better than expected well performance in the Permian Basin and Austin Chalk prompted Denver-based SM Energy Co. on June 18 to raise its production guidance.

The company said it would produce between 12-12.2 million barrels of oil equivalent (MMboe) during the second quarter, up from previous guidance of 11.5-11.9 MMboe. The increase pushed up full-year guidance to between 45.4-48.4 MMboe, up from of 45-48 MMboe.

The news was delivered along with strong IP rates from three tests—two in the Permian Basin’s RockStar area and one in South Texas.

“Higher than expected production volumes in the Permian reflect strong early performance from a number of new wells including the Wolfcamp D and Dean tests, as well as completion timing,” SM Energy President and CEO Jay Ottoson said in a statement. “In South Texas, production is benefiting from our newly-designed development wells, as well as a better than expected decline rate at a recently completed Austin Chalk test. Better well performance while maintaining capital discipline further supports our goal to be free cash flow positive in the second half of this year.”

Source: SM Energy
Source: SM Energy

For the Dean test in the Permian Basin, SM Energy reported 30-day peak IP rates of about 1,550 boe/d (92% oil) from a lateral of about 10,350 ft. The 30-day IP for the Wolfcamp D test averaged about 1,400 boe/d (80% oil) from a 7,920-ft lateral, SM Energy said in the release.

More positive results flowed from the Watson State Austin Chalk test in South Texas. The company reported a 30-day IP of nearly 3,200 boe/d in the play.

“These intervals, in addition to our recent Middle Spraberry test in RockStar, are potential catalysts to drive inventory growth and value creation from our existing footprint,” Ottoson said.

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Additional tests are being planned for the Middle Spraberry, Dean and Wolfcamp D.

The update was received favorably by analysts.

“We expect shares to outperform on the 2Q 2019 production guidance increase and upbeat operational update,” Gabriele Sorbara, principal and senior equity analyst for Williams Capital Group LP, said in a note.

The analyst also noted that the rise in second-quarter production guidance was not “a complete surprise, considering management has shown the Merlin-Maximus project was outperforming in its recent slide deck and management has a history of initially guiding conservatively.”

Source: SM Energy
Source: SM Energy

Williams Capital Group raised its 2019 total and oil production estimate for SM Energy by 3.3% and 0.6% to 129.7 Mboe/d and 57.2 Mbbl/d, respectively.

“We believe the bias is towards the upper-end of its guidance. However, the company noted that 2H 2019 is impacted by shut-ins associated with offset operator completion activity,” Sorbara said. “SM reiterated achieving free cash flow positive in the second half of this year. At strip prices, we model a $12 million outspend in 2H 2019, including $4.7 million of free cash flow in 4Q 2019. However, in 2020, assuming similar activity/spending levels to 2019, we model a $201.7 million outspend at strip prices.”

SM Energy reported in May that its first Middle Spraberry test in the RockStar area reached a 30-day peak IP rate of about 1,000 boe/d at 86% oil.

The company has said it has at least 12 years of inventory each in the Midland and the Eagle Ford.

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