What SM Energy said at the Barclays CEO Energy Conference
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SM Energy (NYSE: SM) highlighted the company’s continued focus on the development of its Eagle Ford Shale position and reiterated a commitment to maintaining a strong balance sheet in the midst of rapid growth for the company. These and other comments on the company’s strategy were made at the Barclays CEO Energy Power conference held last week in New York City.
Overview
SM Energy is an exploration and production company with a diversified portfolio of oil and gas assets spread across the United States. These include positions prospective for the Eagle Ford Shale in Texas and the Bakken play in North Dakota. The company is also active in the Permian Basin, Mississippi Limestone and Granite Wash plays.
Eagle Ford Shale
The Eagle Ford Shale has been the main focus of the company in 2012 and SM Energy has budgeted from $520 million to $570 million in capital here during the year. This represents just under 50% of its drilling budget. This aggressive program has paid off for the company and SM Energy reported that production from the Eagle Ford Shale averaged 230 million cubic feet of natural gas equivalents per day in July 2012.
Newfield Exploration Co. (NYSE: NFX) is also involved with the Eagle Ford Shale and is developing this formation as part of a strategy to diversify away from natural gas. The company has 230,000 net acres under lease, most of which are located in the Maverick Basin. Newfield Exploration reported several completed wells here recently with initial 24 hour production rates ranging from 750 to 1,130 barrels of oil equivalent (BOE) per day.
Pipeline Constraint
Since the development of the Eagle Ford Shale has increased so rapidly over the last few years, it has been difficult for operators to find sufficient infrastructure to handle the resulting oil and gas production. SM Energy indicated that the company’s Eagle Ford Shale production will encounter a pipeline constraint when it reaches approximately 289 million cubic feet of natural gas equivalents per day. The company expects this pipeline constraint to occur before the end of 2012.
SM Energy is working to obtain additional takeaway capacity in the Eagle Ford Shale and expects to have capacity of 325 million cubic feet of natural gas equivalents per day in the first half of 2013 and 400 million cubic feet of natural gas equivalents per day in the final six months of the year.
Other companies are investing to provide this infrastructure. Enterprise Products Partners L.P. (NYSE: EPD) operates a cryogenic natural gas processing plant in Lavaca County, Texas, and recently started up an additional train at this facility. The expansion adds capacity of 300 million cubic feet per day at this facility allowing natural gas liquids extraction of 74,000 barrels per day.
Bakken
SM Energy is also ramping up development in the Bakken play where the company has 196,000 net acres under lease. The company is focused on the Raven and Bear Den prospects and added a fourth operated rig here at the end of the second quarter of 2012. SM Energy is implementing pad drilling on its acreage to increase efficiency and lower costs.
Other operators are also crowding into this crude oil play. QEP Resources (NYSE: QEP) recently purchased an additional 27,600 net acres exposed to the Bakken. The company paid $1.38 billion for the properties and now has 118,000 net acres under lease.
Balance Sheet
SM Energy also highlighted its balance sheet as a competitive advantage relative to its peers. The company has a debt to total book capitalization ratio of 43% and has only $61 million borrowed against its $1 billion credit facility. SM Energy has even more borrowing capacity if needed as the company’s borrowing base was recently raised to $1.55 billion. SM Energy has three senior note issues outstanding with maturities in 2019, 2021 and 2023.
Other oil and gas companies are more levered than SM Energy and are actively trying to reduce debt. Forest Oil (NYSE: FST) reported long-term debt of $1.94 billion at the end of the second quarter of 2012 and is engaged in an effort to delever its balance sheet. The company recently announced the sale of natural gas gathering assets located in Texas for $34 million and plans to use the proceeds to pay down borrowings on the company’s credit facility.
SM Energy is betting that the Eagle Ford Shale will be productive enough to power the company’s growth for the next few years. The company also plans sustainable growth and will keep an eye on its balance sheet during this growth process.
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