SM Energy announces sale of non-operated Eagle Ford assets for $800 million
Denver-based SM Energy (ticker: SM) announced Tuesday that the company has divested its non-operated Eagle Ford assets for $800 million.
SM has entered into a definitive agreement with a subsidiary of Venado Oil and Gas, LLC, an affiliate of KKR (ticker: KKR) for the sale of SM’s third party operated assets, including its ownership interest in related midstream assets, according to a company press release.
The assets expected to be sold include approximately 37,500 net acres in the Maverick Basin /Eagle Ford area of south Texas and a 12.5% interest in the Springfield Gathering System. As of year-end 2015, net proved reserves associated with these assets were 65 MMBOE (38% oil, 31% natural gas and 31% NGLs). In the third quarter of 2016, these assets produced approximately 27,260 net BOE per day (33% oil, 33% natural gas and 34% NGLs.) The transaction is expected to close in the first quarter of 2017, with an effective date of November 1, 2016.
Metrics for the deal work out to approximately $29,374.03 per flowing BOE, assuming no value for the gathering system. Based on today’s sale, Anadarko (ticker: APC), the operator on the assets sold to Venado, could generate around $2 billion in proceeds from the upstream portion if it were to sell its Eagle Ford position, excluding about $750 million of midstream value, Wells Fargo said in a research note following the announcement.
Continued focus on the Midland Basin
Today’s announcement continues a pattern of deals in which SM has focused its attention on its Midland Basin acreage and monetized other assets. In October and December, SM announced a number of deals in which the company sold Williston Basin acreage and purchased more land in the Midland.
The October deal saw the company purchase 35,700 net acres in Howard and Martin Counties in West Texas from QStar LLC for $1.6 billion, and sell Williston assets for $0.8 billion. In the December deal, SM purchased an additional 4,100 Midland acres from QStar, bringing SM’s total Midland footprint to approximately 87,600 acres.
“Our 2017 capital program will focus on our top tier oil position in the Midland Basin , consisting of approximately 87,600 net acres, and our top tier operated natural gas and NGL position in the Eagle Ford, consisting of approximately 161,500 net acres,” said SM President and CEO Jay Ottoson. “The proceeds from this sale will provide us with additional flexibility to pursue aggressive growth from our Midland Basin assets, with related capital expenditures in excess of cash flow over the next few years, while at the same time improving our debt metrics and maintaining strong liquidity.”
Johnson Rice & Company now models full-year production and cash flow per share moving from 153 MBOEPD and $5.96 to 133 MBOEPD and $4.88, respectively. Enterprise value to EBITDA is expected to increase from 8.2x to 8.8x as well while net debt to EBITDA shrinks from 3.6x to 3.3x, and liquidity increases from $0.9 billion to $1.6 billion, giving the company a stronger balance sheet.
Analyst Commentary
Johnson Rice & Company
As a reminder, the company's current guidance assumes 6 rigs in the Midland Basin in
FY:17 and 11 in FY:18, however with the influx of cash we would not be surprised to see
the rig count guidance, and more importantly production guidance, drift upwards.
The price is in-line with our flowing production valuation assuming $45k/flowing boe,
$25k/flowing NGL, and $3.5k/flowing mcf; however, we had assumed that the midstream
and acreage value would be able to get the price closer to $1.0b. The buyer
is Venado, a KKR portfolio company that initially had made its name as an early explorer
of the East Texas Eagle Ford (i.e. El Halcon).
SunTrust Robinson Humphrey
SM Energy (SM, $34.48, Not Rated) announced the sale of non-operated Eagle Ford assets to a private
for total proceeds of $800mm or ~$4,100/acre. While acreage valuation appears lower than recent deals
at $6,000+/acre, the true deal value metrics are difficult to analyze due to ambiguity over the infrastructure
price. However, the announced transaction is a good sign of continued interest in this East Texas play.
Wells Fargo
Selling NonOp
Eagle Ford Position. SM announced the sale of their NonOperated
Eagle Ford position to Venado, KKR
affiliate, for $800MM. Expected to close in 1Q17. Sale includes 12.5% working interest in the Springfield Gathering System,
27,260 boe/d (barrels/day) of flowing production, along with 37,500 net acres of which relatively little is undeveloped. Overall
proceeds from the sale are inline
with our expectations and what we had modeled in their NAV. As outlined by management
previously, proceeds from the sale will cover the planned outspend associated with developing their newly acquired Midland
Basin assets over the next two years and
right now we model outspend in 2017 of $220MM and $175MM in 2018 which is
more than covered by proceeds from this sale.
Capital One Southcoast
Price tag equates to ~12% of SM's enterprise value, and the lost volumes & cash flow represent ~18%/~22% of SM's total production & EBITDA. Specifically, we estimate the properties generate ~$170MM of annual EBITDA at our '17 price deck of $50/$3. Deal metrics thus include ~$23K per flowing boe/d and ~4.7x EBITDA vs SM’s standalone multiples of ~$48K per flowing boe/d and 8.9x EBITDA based on ‘17.
