SM Energy’s $343 Million Anadarko Basin Sale Frees Cash For Other Plays

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To buy Granite Wash interests in the Anadarko Basin with 3Q13 production of 8,500 BOE/d.

SM Energy Co. (NYSE: SM) will divest all of its properties in the Anadarko Basin, which includes the company’s Granite Wash interests, to various affiliates of EnerVest Ltd. for about $343 million, the company announced Nov. 5.

The sale marks another deal, such as Forest Oil’s $1 billion divestiture of Texas Panhandle assets, in which a company has sold attractive assets to focus on more lucrative plays elsewhere. SM is expected to shift capital from the deal to the Eagle Ford, Bakken and Permian.

Production from the assets for the third quarter of 2013 was approximately 8,500 barrels of oil equivalent per day (BOE/d), 75% of which is natural gas. The production constituted about 6% of SM’s total production in the third quarter of 2013.

The Anadarko Basin assets include about 58,000 net mineral acres.

Tony Best, CEO, said he was pleased to reach an agreement at a competitive price.

“As our portfolio continues to deepen and strengthen, we regularly look for opportunities to monetize non-core assets in order to high grade our portfolio and develop higher return assets, while preserving the strength of our balance sheet,” Best said.

The sales price was in line expectations of $300-$350 million, said Gabriele Sorbara, an analyst for Topeka Capital Markets.

The assets’ third quarter production puts the transactions value at $40,353 per flowing BOE of production and $5,914 per acre.

“We view the transaction as an incremental positive, as it allows SM to redeploy the proceeds to its high rate of return projects in the Eagle Ford shale and Bakken/Three Forks,” Sorbara said. “With the company’s recently disclosed position in the Permian Basin (we think is situated in the core fairway), we believe the horizontal plays (Wolfcamp zones, Spraberry, Jo Mill, etc.) will command a growing capital allocation in the coming year.”

Sorbara maintained a “buy” rating on SM, and expects shares to react positively to the sale.

“SM is one of our favorite names at the current valuation,” he said.

The company’s 72,500 net acres in the Permian, including 19,000 in Upton County and 53,500 in southwestern Dawson/ southeastern Gaines counties could give SM 2,500 net locations on 160 acre spacing provide “upside to our 2014/2015 production growth and cash flow estimates,” Sorbara said.

The effective date of the transaction is Oct. 1 and closing is expected by the end of 2013. The transaction is subject to closing conditions, purchase price adjustments, and transaction fees.

Wells Fargo Securities LLC served as financial advisor to SM Energy.