We downgraded our recommendation on SM Energy Company (SM) to Neutral from Outperform on Jan 15, 2014. The company holds a Zacks #3 Rank, which is equivalent to a short-term Hold rating.
Why the Downgrade?
We see no earnings momentum for the stock over the last 7 days for the fourth quarter of 2013. The Zacks Consensus Estimate for the fourth quarter is currently pegged at $1.42 per share, reflecting a year-over-year decrease of 16.4%.
SM Energy is an independent oil and gas company engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America.
We expect the company’s attractive oil and gas investments, balanced and diverse portfolio of proved reserves and development drilling opportunities to create long-term value for shareholders. We view SM Energy as one of the most attractive players in the exploration and production space. The company reported an impressive third quarter with increased proved reserves (while driving down finding and development costs), improved net resource potential in the Eagle Ford and Bakken, and better-than-expected production.
Given the significant liquids content and favorable economics, Eagle Ford represents an attractive resource potential where the company has built a premier position. Development of this shale is an important part of SM Energy’s goal to increase stockholder value. We also believe that SM Energy’s emerging core portfolio will support visible organic growth for the next several years.
Given the company’s increasing focus on oil, specifically in the Permian and Rocky Mountain regions, we believe that SM Energy will be able to boost its oil-weighted activity. Additionally, SM has meaningful leasehold positions in the leading U.S. shale plays, including the Bakken, Niobrara, Haynesville, and Granite Wash, which we believe will provide with many years of profitable drilling inventory. Growth drivers include the South Texas Eagle Ford Shale and Rockies Williston Basin Bakken/Three Forks shales. In fact, approximately 43% of its 2013 capex outlay has been earmarked for Eagle Ford, while 19% will go toward the Bakken/Three Forks region.
On the flip side, though the company holds considerable acreage in the Williston Basin, most of its holdings lie in low-yielding regions. Thus, its results will likely lag its peers who have acreage in the core region of the Bakken.
Recently, SM Energy announced its plan to sell all of its assets in the Anadarko basin, including its interests in the Granite Wash play. These assets yield about 9,000 barrels of oil equivalent per day comprising 75% natural gas and accounting for around 8% of the company’s total output in the first nine months of 2013. The sale of these assets would impact the company’s earnings in the near future.
Apart from successful exploration activities, SM Energy also depends on property acquisitions to expand its resource base. The company may find it difficult to complete accretive transactions in the future, which could negatively impact its growth rate.
Other Stocks to Consider
Some better-ranked stocks in the industry include Seadrill Partners LLC (SDLP), Ocean Rig UDW Inc. (ORIG) and Helmerich & Payne Inc. (HP). Seadrill Partners sports a Zacks Rank #1 (Strong Buy), while Ocean Rig and Helmerich & Payne carry a Zacks Rank #2 (Buy).
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment