[Editor's note: SM Energy has subsequently followed though on plans discussed in this article.]

SM Energy Co. (NYSE: SM) will spend the next two years doting on its newly augmented Midland Basin acreage now that its $980 million acquisition is complete.

SM Energy intends to feed the Permian 80%-90% of capex during the next two years. SM Energy will likely run four rigs in the play in 2017 and up to eight in 2018, Chris Stevens, an analyst at KeyBanc Capital Markets, said in an Oct. 13 report. KeyBanc estimates SM Energy’s 2017 capex at $720 million.

SM Energy continues to tweak its assets and make additional moves in the next six months that could dramatically impact the company.

The company intends to sell interests in the Bakken/Three Forks and Eagle Ford while high-grading acreage in the Permian and will seek accretive acquisitions in the basin. SM is also conducting downspacing tests in the Permian.

The company will hunt for bolt-on acquisitions around its current core areas in the Midland Basin, but won’t rule out acquisitions in the Delaware Basin, Stevens said.

“However, most of the deals in the Delaware Basin might be bigger than what SM is currently looking to acquire,” Stevens said, with such acquisitions running more than $2 billion dollars.

Smaller deals could be funded with cash from anticipated asset sales, but a “compelling larger deal” would be considered, with equity funding a portion, Stevens said.

On Demand

Beyond the Permian, SM Energy plans to sell.

“We estimate potential cash proceeds of $1 billion to $1.1 billion between a sale of the non-operated Eagle Ford acreage and its Bakken/Three Forks assets in McKenzie County,” Stevens said.

Since Oct. 3, SM Energy has been marketing about 54,500 net Williston Basin acres, including its Raven/Bear Den acreage. Associated production is about 13,500 barrels of oil equivalent per day (boe/d).

Stevens estimates that the Bakken assets up for sale, which do not include Divide County, N.D., are worth about $500 million. SM Energy has no plans to develop the acreage and will use proceeds to pay debt and fund Permian operations.

For now, the company has no plans to sell its Divide assets, but it will evaluate whether the assets fit with SM Energy’s portfolio.

“SM would also consider selling Divide County in the future, if it does not receive any capital and there is a need for the cash,” Stevens said.

In the Eagle Ford, the company’s sale of non-operated Eagle Ford acreage is considered inevitable. The 36,000 net acre area includes production of 27,350 boe/d and midstream assets. Estimated cash flow in 2017 is $140 million, Stevens said.

Stevens said the acreage could generate proceeds of $500 million- $700 million.

“This is a difficult asset to accurately value given the large PDP component that is highly sensitive to small changes in dollars per flowing boe/d multiples,” he said.

De Facto Pure Play?

SM finds itself with a lot of work to do with the fourth quarter underway.

On Oct. 5, the company nearly doubled its Permian holdings to 46,750 net acres. SM deemed 41,200 of the acres in the core part of the play in southwest Martin, Midland, Upton, Reagan, Howard and Glasscock counties, Texas.

With so much of its capex focused on the Permian, the basin will be the company’s primary production center and cash flow driver.

SM is focused on delineating Howard County, Texas, in 2017 and adjusting well spacing to optimal distances before it significantly ramps up activity in 2018.

“At this point, management believes the Wolfcamp A and Lower Spraberry are the two primary targets with the potential for 2-3 landing points in each,” Stevens said.

Longer term, the Middle Spraberry, Wolfcamp C and Wolfcamp D could provide upside.

SM’s management is also encouraged by the higher oil mix in Howard—about 80% compared to 70% in Upton. A greater amount of carbonate in the formation could also result in greater recoveries as witnessed so far with strong initial rates and a shallower decline profile.

In 2017, the company benefits from an inventory of 78 drilled but uncompleted (DUC) wells, 45 of which Stevens said are complete.

But until the company sorts out divestitures, spacing and its recent acquisition, the company will likely run four rigs in the Permian and one in the Eagle Ford while completing wells in the Bakken.

Darren Barbee can be reached at dbarbee@hartenergy.com.