We maintain our Neutral recommendation on SM Energy Company (SM), which carries a Zacks #3 Rank (short-term Hold rating). The company’s strong first quarter 2011 results as well as its greater focus on oil-weighted resource plays remain tempered by its heavily natural gas centered production profile.
The company recorded impressive first quarter 2011 results buoyed by strong production growth as well as lower unit lease operating expense. SM Energy registered a 40% year-over-year volume growth, exceeding its own target range of 333-366 million cubic feet equivalent per day (MMcfe/d). This was mainly on the back of appreciable results from its Eagle Ford Shale program.
Given the company’s focus on oil, specifically the Permian and Rocky Mountain regions, SM Energy also lifted its capital budget for 2011 to $1.08 billion from its prior expectation of $1.04 billion. The company expects its overall production to range from 396–429 MMcfe/d for the upcoming quarter and 400–416 MMcfe/d for the full year.
Denver, Colorado-based oil and gas company SM Energy remains proactive to hold a significant position in emerging shale plays and focus more on resource, with an inventory of repeatable drilling prospects and a high rate of return. In this regard, the company has built a premier position in the Eagle Ford Shale, given its significant liquids content and favorable economics. Notably, about 60% of the annual capital budget allotted for drilling has been apportioned toward Eagle Ford Shale.
However, the company derives a significant portion of its operating revenues from natural gas. Consequently, its results are vulnerable to struggling commodity prices as well as the current tentative outlook on the North American natural gas market.
SM Energy, which competes with Range Resources Corporation (RRC), currently retains our long-term Neutral recommendation.
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