After a year offering up Marcellus Shale assets, SM Energy Co. (NYSE: SM) worked out a deal with a subsidiary of Endeavour International Corp. (NYSE: END) to sell the assets in McKean and Potter Counties, Pennsylvania for roughly $80 million.
Now, however, it looks like the deal struck in July may have hit a snag. The deadline to close in the sale is December 14, 2011. Endeavour has already exercised its option to extend the deadline from its previous October 15 cut-off, paying a $6 million deposit in order to conduct additional due diligence.
Whether or not the deal closes is still to be seen, but according to a Jefferies & Co. Inc. note to investors dated December 13, Endeavour held $185 million in cash on its balance sheet as of September 30 and has enough liquidity to close the deal.
Offered for sale is SM Energy’s entire Marcellus Shale leasehold position of roughly 42,000 net acres and associated pipeline assets. There are currently three producing wells on the acreage with average first quarter production of 2 MMcfe/d. As of year-end 2010, there were 5.6 bcfe of booked reserves related to these assets, of which 50% were classified as proved developed.
The deal includes 100% ownership of Potato Creek LLC, which owns gathering and related facilities in southern McKean County, including a 10-mile 16” trunkline connected and flowing to the Tennessee Gas Pipeline’s 24” mainline and proprietary and fully processed 3-D seismic covering the entire Potato Creek lease block.
According to Jefferies analysts, however, the 42,000 acres are “not the most desirable” in the Marcellus.
“If deal doesn’t close, SM’s funding shortfall would increase by $1.20 per share from the $360 million shortfall projected for 2012,” the analysts continued.
The uncertainty of the Marcellus assets, noted Jefferies, “doesn’t alter our high-conviction view that SM’s Eagle Ford position is prolific and desirable to any buyer seeking a “plug and play” liquids-rich asset in the initial stages of development.” As they point out, “30,000 core acres in Galvan Ranch could be as prolific as 200,000 acres in the Bakken because the EF will be more densely drilled, although the wet/dry gas component will be higher in the EF.”
The sale of certain assets in SM Energy’s portfolio of Marcellus and Eagle Ford holdings are part of a turnaround program that began in 2009. Last year, the company set forth to raise between $300 million and $500 million to fund an ambitious capex budget of $1 billion.
