SM Energy Cores up in Midland Basin with simultaneous transactions

SM Energy CEO Jay Ottoson Source: Bizjournals

SM Energy funding majority of $1.1 billion portion of acquisition with proceeds from Williston Basin asset sale

DENVER – SM Energy Company announced it entered into a purchase agreement to acquire 35,700 net acres in Howard and Martin Counties in West Texas, expanding the company’s Midland Basin footprint to approximately 82,450 net acres.

The acquired acreage complements, and is partially contiguous to, the SM Energy’s recently closed Howard County acreage acquisition and includes approximately 2,400 Boe per day net production.

The purchase price is $1.1 billion cash, plus 13.4 million shares of SM common stock to be issued to the seller. The seller is QStar LLC, a portfolio company of EnCap Investments L.P. and a related entity.

SM Energy also announced it entered into an agreement for the sale of its Williston Basin assets located outside of Divide County for $785 million, subject to customary purchase price adjustments. The purchaser is Oasis Petroleum Inc.

Click here for video: CEO Mike Swihart explains how well automation reduces costs, boosts production for Permian Basin operators. Systems start at $3,000 fully installed by Production Lift Technologies of Midland, Texas.

“Our strategy is straight-forward, we intend to deliver growth in cash flow per debt-adjusted share by being a premier operator of top tier assets. We have established a position as an outstanding operator in the Midland Basin, and with this acquisition we also establish significant scale. We are particularly excited about the performance and future potential of Howard County, leading us to further core up our portfolio and focus on this fast emerging, top tier area, said CEO Jay Ottoson.

SM Energy plans to fund the majority of the $1.1 billion cash portion of the acquisition with the proceeds from the Williston Basin asset sale and the remainder under the company’s revolving line of credit, which has a borrowing base of $1.35 billion, aggregate commitments of $1.25 billion and was undrawn as of Oct. 14, 2016.

“As with our initial Howard County acquisition, we expect to immediately employ our operational expertise to the area. Our preliminary plans for Midland Basin activity include adding a fourth rig during the fourth quarter of 2016 and increasing to six rigs in early 2017, thereby increasing our expected aggregate 2016 capital program before acquisitions to approximately $710 million. We continue to work to concentrate capital on the highest return programs and generate higher company-wide margins, which drive cash flow growth and value creation for our shareholders.”

The company is issuing to the sellers $500 million in SM Energy common stock based on the 30-day volume-weighted average price of $37.35 per share, or approximately 13.4 million shares.

Further, SM Energy remains on track with the planned sale of its non-operated assets in the Eagle Ford program, which we expect will be a potential source of funding for the acceleration of activity in the Permian Basin over the coming years.

“We are delighted to have QStar/EnCap as new shareholders and believe their desire to take a significant portion of the consideration in stock is a strong vote of confidence in the quality of the QStar acreage and in our Company,” said Ottoson.

The acquisition is expected to close mid-December, 2016, with an effective date of Sept. 1, 2016, and the divestiture is expected to close early-December, with an effective date of Oct. 1, 2016.