SM Energy is acquiring an 80% interest in XCL Resources for $2.04 billion; non-op E&P Northern Oil & Gas is buying the remaining 20% for $510 million. (Source: Shutterstock/ SM Energy/ XCL Resources)
SM Energy shares dipped by more than 10% as investors weighed the company’s multibillion-dollar acquisition and entry into Utah oil country.
SM Energy Co. agreed to acquire private Uinta Basin operator XCL Resources in a three-way deal that includes non-op E&P Northern Oil & Gas, the companies announced June 27.
NOG, in partnership with SM Energy, will buy a 20% stake in XCL for $510 million. SM is paying $2.04 billion for the 80% majority interest, bringing the total deal value to $2.55 billion.
Analysts say Denver-based SM’s entry into the Uinta Basin adds scale to the company, which already operates in the Eagle Ford Shale and the Permian Basin.
Investors might say differently: After closing at $48.42 per share on June 26, SM Energy shares were trading down about 10% near midday on June 27—hovering around $43.34 per share.
Most E&P companies have sought out acquisitions in basins where they already operate for operational synergies from combining land positions and their familiarity with the plays, said Andrew Dittmar, principal analyst at Enverus Intelligence Research.
But investors can get jumpy when a company looks to dig roots someplace new.
“It has been more unusual to see an E&P in this market enter a new basin, making SM a bit of an outlier,” Dittmar wrote in a June 27 report.
What SM is after is high-quality, low-cost drilling inventory at attractive prices. Finding M&A opportunities that checked those boxes was going to be difficult in the Permian Basin, where there’s a frenzied land grab of historic scale underway with land trading hands at high premiums.
SM also has a footprint in the Eagle Ford. The play is more fragmented with M&A opportunities than the Permian, but the highest quality inventory is largely in the hands of large cap E&Ps.
Picking up XCL’s Uinta asset base adds quality inventory for SM. Uinta locations have some of the highest oil recoveries per lateral foot in the Lower 48—only wells in the prolific Delaware Basin screen higher, Dittmar said.
XCL’s inventory is economic to drill with WTI prices at or below $50/bbl, “despite the relatively high discount applied to oil production there compared to WTI pricing,” he said.
“While the strategic rationale for a pivot into the Uinta is sound, SM may have a bit of work to do explaining the acquisition to investors more familiar with the Permian and Eagle Ford,” Dittmar said.
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SM Energy to Buy XCL Resources in $2.55B Entry into Uinta Basin
Getting waxy
The addition of Houston-based XCL, a private E&P backed by EnCap Investments LP and Rice Investment Group, will boost SM’s net production by 43,000 boe/d (88% oil).
On a pro forma basis, SM’s total output will grow around 30% to 188,000 boe/d (54% oil), according to Gabriele Sorbara, managing director of equity research at Siebert Williams Shank & Co.
“We believe the Uinta basin is an attractive play with stacked pay potential (as many as 17 benches) that is beginning to see more investor attention as operators such as Ovintiv Inc… and Crescent Energy… boast strong results and economics,” Sorbara wrote in a June 27 report.
The XCL deal includes 390 net locations with breakevens ranging between $43/bbl and $53/bbl—adding about two years of running room to SM’s portfolio.
XCL was already working to close an acquisition of its own; the company was required to petition the U.S. Federal Trade Commission to try to acquire Altamont Energy, a nearby Uinta neighbor.
XCL has been in talks to acquire Colorado-based Altamont Energy since last summer, according to documents filed with the FTC.
However, XCL and EnCap require approval by the FTC before acquiring any other waxy crude oil producer with an output of more than 2,000 bbl/d in certain Utah counties. The requirement stems from a 2022 FTC settlement regarding EnCap’s acquisition of EP Energy Corp., which had operations in the Uinta Basin and in South Texas.
Under terms of the settlement, EnCap was required to divest EP’s Utah business and assets to Crescent Energy Co.
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