We maintain an Outperform rating on SM Energy Company ( SM )--an independent oil and gas company engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America.
With significant liquids content and favorable economics, the Eagle Ford represents an attractive resource potential in which the company has built a premier position. Development of the Eagle Ford Shale is an important part of SM Energy's goal to increase stockholder value.
While Eagle Ford will likely accelerate faster than expected because of additional takeaway, the company also remains proactive in its Haynesville shale position. SM Energy's increased capex guidance mainly reflects continued drilling activities in its Haynesville shale position in East Texas.
Given the company's increasing focus on oil, specifically the Permian and Rocky Mountain regions, we believe that SM Energy will be able to increase its oil-weighted activity. SM Energy remains proactive in its production target and expects production growth of 35-40% in 2012.
Additionally, SM has meaningful leasehold positions of the leading US shale plays, including the Bakken, Niobrara, Haynesville, and Granite Wash, which we believe will provide the company with many years of profitable drilling inventory. Growth drivers include the South Texas Eagle Ford Shale and Rockies Williston Basin Bakken/Three Forks shales. We also believe that SM Energy's emerging core portfolio will support visible organic growth for several years.
SM Energy has been able to raise a significant amount of capital following the sale of a number of assets, placing itself in a well-capitalized position for growth. SM Energy has transformed into a resource play with a high-graded asset base. SM Energy remains proactive in its attempt to hold a significant position in the emerging shale plays and focus more on resource, with an inventory of repeatable drilling prospects and a high rate of return.
SM Energy's attractive oil and gas investments, balanced and diverse portfolio of proved reserves and development drilling opportunities create long-term value for shareholders. The company holds a Zacks #3, which translates into a Neutral rating for the short term. It faces competition from Chesapeake Energy Corporation ( CHK ).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.