Underwhelming Offers Halt SM Energy’s Bakken Sale

SM Energy Co. (NYSE: SM) will hang on to its Bakken assets in Divide County, N.D., after offers from potential buyers failed to meet the company’s expectations for the 123,570-net acre position.

The main culprit appears to be the price of oil, which has not risen enough to generate a palatable offer for SM. That’s despite the position’s core status and second-half 2017 production of about 1.3 million barrels of oil equivalent.

The sale, meant to deleverage Denver-based SM’s portfolio, has been “postponed indefinitely,” the company said.

Jay Ottoson, SM’s president and CEO, said the company has already funded its expected 2017 and 2018 capex through the sale of third-party-operated Eagle Ford assets. On March 13, the company sold the assets to Venado Oil & Gas LLC and backer KKR & Co. LP for $800 million.

SM said the additional cash flows from the Divide assets will also reduce the 2017-2018 expected outspend.

“We do not need to sell our Divide County assets,” Ottoson said. “We have concluded that current market uncertainty around forward oil prices is not conducive to realizing a sales price that meets our deleveraging objective. We remain committed to our long-term financial strategy, which is best served by retaining the cash flow generated by the Divide County assets and supported by a solid balance sheet, significant liquidity and continuing hedging strategy.”

Kyle Rhodes, an analyst at RBC Capital Markets, said SM’s Divide County assets could generate proceeds of up to $500 million in a slightly higher oil environment.

“We see this as a slight negative for SM, as we believe the cancellation of a Divide County sale suggests the transaction will be for PDP value only when it is resumed,” Rhodes said.

Capital One Securities likewise saw a carrying value of $600 million for the Divide asset, suggesting about $2,000 per acre after discounting production.

“Based on our modeling, sale proceeds would have had to exceed about $380 million in order for the deal to begin de-levering the balance sheet,” the firm said. “For perspective, our current net debt-to-EBITDA multiple of 3.4x for year-end 2018 would have declined to 3.0x in the event of a $600 million deal price.”

The asset generates slightly less than 10% of SM’s EBITDA and about 7% of production, said Brian T. Velie, an analyst at Capital One. “As the focus on Midland growth intensifies, those numbers become inconsequential. Shelving the deal doesn’t materially change the SM story, but it is a short-term disappointment.”

Should SM leave its 17 net drilled but incomplete (DUCs) in Divide County as-is, retaining the asset adds “roughly $85M of cash flow through 2018 at current strip prices,” said Chris Stevens, an analyst at KeyBanc Capital Markets.

“While this is likely met with some disappointment from investors who were expecting this asset sale to reduce leverage (we were estimating $450 million proceeds), it is the prudent thing to do,” Stevens said. SM has no immediate need for the proceeds as it “has $659 million of cash on the balance sheet that should last through mid-2018.”

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