(SM) SM Energy Trims Eagle Ford Acres

U.S. oil and gas development company, SM Energy Company (SM) will sell a 12.5% working interest in its non-operated Eagle Ford Shale acreage in Texas to a subsidiary of Mitsui & Co. Ltd.

Mitsui will pay $680 million for the prolific Eagle Ford acreage. Mitsui will carry 90% of SM Energy’s drilling and completion costs on its non-producing land until it has spent $680 million for the benefit of SM Energy. Additionally, it will pay between $20 million and $40 million as its share of SM Energy’s drilling costs incurred between March 1, 2011 and the closing date.

The divestiture, which is expected to close during the third quarter of 2011, will reduce SM Energy’s acreage in the Shale to 46,000 net acres from 85,000 acres.

Upon closure, the company’s average working interest will also narrow down to 14.5% from the previous 27% in the acreage. As of December 2010, the proved reserves of SM Energy’s total non-operated Eagle Ford shale acreage were 52 billion cubic feet equivalent.

Earlier this month, the company also entered into an agreement to sell a portion of its Eagle Ford Shale position for about $225 million in cash. Under the terms of the deal, the company intends to sell 15,400 acres of non-producing land in the Eagle Ford Shale area of LaSalle and Dimmit counties, Texas. This deal is likely to close in August 2011.

These deals are part of SM Energy’s objective to dissolve approximately 20% to 30% of its total 250,000 net acre Eagle Ford Shale position. We believe these divestitures will help the company to streamline its portfolio while holding a significant position in emerging shale plays and focusing more on resource, with an inventory of repeatable drilling prospects that have a high rate of return. The company will retain approximately 196,000 net acres in the Eagle Ford shale, of which approximately 75% will be operated by it after both transactions are wrapped up.

However, the company’s highly gas-weighted reserves/production profile offsets these strengths and remains a key area of concern. Therefore, we are maintaining our long-term Neutral recommendation on the stock.

SM Energy currently retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating. The company competes with Concho Resources, Inc. (CXO) and Ultra Petroleum Corp. (UPL).

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