SM Energy Co. (NYSE: SM) plans to acquire bolt-on acreage in the Midland Basin, a pickup from its $1.6 billion October deal, to acquire 35,700 acres in Howard and Martin counties, Texas.
The bolt-on stems from an option to purchase an additional 4,100 net acres in Howard County, Texas, for $120 million, SM said Dec. 1.
The company said it would offer 10.9 million shares to fund the deal, which could raise up to $418 million in gross proceeds.
The company also said Dec. 1 that it closed on its sale of Bakken/Three Forks assets to Oasis Petroleum Inc. (NYSE: OAS) and is receiving attention from potential buyers for its Eagle Ford interests.
The company’s stock offering represents 11% of SM’s outstanding stock, said Kevin Smith, an analyst for Raymond James. Net proceeds left over from the purchase will be used to reduce debt and for general corporate purposes.
“With the equity issuance, SM is taking full advantage of the more than 25% two-day run-up in its stock price after the latest OPEC meeting in order to bolt-on drilling inventory and de-lever the balance sheet,” Smith said.
After the close of its Oct. 18 deal with QStar LLC, an undisclosed seller and the bolt-on, SM’s Midland holdings will stand at 86,550 net acres. The deal is expected to close in December.
The December bolt-on with seller RRP-QStar LLC features a significant markdown from other Midland deals.
SM agreed to paid QStar $1.1 billion in cash consideration and about 13.4 million shares of common stock for the Midland acreage—roughly $1.6 billion.
The bolt-on acreage will cost about 30% less.
“We estimate the transaction equates to $27,000 to $29,000/undeveloped acre, a discount to recent Howard County transactions given the deal's bolt-on nature,” Kyle Rhodes, an analyst at RBC Capital Markets, said in a Dec. 2 report.
On Oct. 5, SM also closed on the purchase of 24,783 net Midland acres from Rock Oil Holdings LLC for $980 million as the company’s position in the basin coalesced.
In Rotation
SM’s M&A may wrap up as early as first-quarter 2017.
SM said Dec. 1 it closed its previously announced deal to sell Williston Basin assets to Oasis. Proceeds of about $765 million will help to buoy the company’s liquidity and lessen the impact of its Oct. 18 Midland deal. Oasis purchased 55,000 acres but SM retained its Divide County, N.D., core.
The deal otherwise allows SM to exit an area it recently has starved of capital.
SM is moving forward with plans to divest its outside-operated Eagle Ford shale assets. The company said interest by possible buyers has been significant and that it expects to receive bids for the acreage in December, with a goal of closing a transaction within first-quarter 2017.
The overage from SM’s public offering—about 3x the bolt-on purchase price—should give the company additional time and flexibility to sell its interests in South Texas, Rhodes said.
Analysts’ price expectations vary for the Eagle Ford, with some estimating a value of up to $950 million or as little as $750 million.
For the year, SM’s production could decline by 10% to 15% due to reduced activity, a shift to more oily areas and weak commodity prices, Rhodes said.
Darren Barbee can be reached at dbarbee@hartenergy.com.
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