We have reaffirmed our Neutral recommendation on
SM Energy Company
), reflecting its complimentary position to reap benefits from
its asset mix, promising organic production growth outlook and
ample liquidity. However, a depressed natural gas price
environment is expected to weigh on the stock. The company holds
a Zacks #3 Rank, which is equivalent to a short-term Hold rating.
Why the Reiteration?
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.
Given the significant liquids content and favorable economics,
the Eagle Ford represents an attractive resource potential where
the company has built a premier position. Given the current tepid
gas price scenario, it intends to boost the liquids composition
in its portfolio. As such, liquids are expected to comprise 50%
of production by the end of 2013.
SM has meaningful leasehold positions of the leading U.S. shale
plays, including the Bakken, Niobrara, Haynesville, and Granite
Wash, which we believe will provide the company with many years
of profitable drilling inventory. The company also plans to spend
more on its Eagle Ford, Bakken/Three Forks, and Permian drilling
operations. Its 2013 capex outlay covers more than 43% and 19% of
the total budget for Eagle Ford and Bakken/Three Forks,
The company expects to deliver 255-267 billion cubic feet
equivalent/Bcfe of hydrocarbon for this year. This represents
about 20% growth from the 2012 level that will likely be followed
by about 15% production growth in 2014 and 2015. Meanwhile, it
reaffirmed its full year 2012 as well as the fourth quarter's
production guidance at 57.5-60.5 Bcfe and 215.5-218.5 Bcfe,
However, we remain on the sidelines because of the depressed
natural gas price environment. The company derives a significant
portion of its operating revenues from natural gas, and may face
near-term headwinds in this market from struggling commodity
We see no earnings momentum for the stock over the last 7 days
for the fourth quarter of 2012. The Zacks Consensus Estimates for
the fourth quarter is currently pegged at 23 cents per share,
reflecting a year-over-year decrease of 61.4%.
Other Stocks to Consider
Cabot Oil & Gas Corp
) is expected to perform impressively over the next few months
and it carries a Zacks #1 Rank (Strong Buy).
CABOT OIL & GAS (COG): Free Stock Analysis
SM ENERGY CO (SM): Free Stock Analysis Report
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