Mikaila Adams
OGFJ, Associate Editor
After SM Energy, formerly St. Mary Land & Exploration Co. (NYSE: SM), announced its 2011 capex budget of $1 billion and outlined its plans to raise between $300 million and $500 million through asset sales and joint ventures, Jefferies & Co. Inc. released a report saying the company’s impressive growth was overshadowed by a funding gap.
According to the August 24 Jefferies report, SM Energy will continue to outspend cash flows will continue in 2011. “The production guidance is big, but significant funding gaps aren't taken lightly in this market. Especially after last month's capex raise,” noted Jefferies.
The company’s 2011 capex budget of $1 billion is $400 million above cash flows assuming a $6 natural gas price and $500 million above cash flows assuming a $5 natural gas price.
The program, called “ambitious” by Jefferies, will allow acceleration of production growth (~20% above midpoint of 2010's guidance); but the analysts see funding as an issue.
To help bridge the gap, SM Energy again plans to divest non-core assets.
As part of its turnaround program that begain in 2009, the Denver-based company took to selling assets.
This spring, SM Energy sold Williston Basin reserves in North Dakota to a partnership between GE Energy Financial Services and Sequel Energy LLC for $137 million. The comany entered into two agreements to sell non-core properties in the Rocky Mountain region with estimates of 20 MMboe of proved reserves and 3,000 boe/d of production.
In December of 2009, the company closed the sale of all operated and non–operated properties in the Hanging Woman Basin coalbed methane project in Wyoming and Montana to J.M. Huber Corp. (ranked No. 26 in the OGFJ100P at the time).
Fast forward to now.
Currently, the company has 43,000 Marcellus shale acres available in McKean and Potter counties for sale or for a joint venture. Jefferies sees a JV generating upwards of $175 million.
Jefferies sees a sale of the assets bringing in a lower valuation versus prior Marcellus transactions, somewhere in the $4,000/acre range, with a JV agreement generating a slightly higher per acre valuation. According to Jefferies, “13 mmcfe/d of non-core proved developed properties should fetch roughly $140 million based on a comparable transaction value of $10,500 per flowing mcfe. Together this package should generate proceeds of roughly $300 million, at the low end of SM's $300-500 million range.”
To fill the remaining $100-$200 million gap, Jefferies notes the company still has $900 million remaining on its revolver and could sell even more assets.
Ultimately, says Jefferies, “funding the gap is not the issue, the gap itself is. Growth for the sake of growth has not been rewarded by the market. We don't see that changing anytime soon.”
Bank of America Merrill Lynch (NYSE: BAC) will advise SM on the asset sales.