SM Energy has balance sheet 'dry powder,' staggered maturities; shops non-core assets

By Paul Deckelman

New York, Sept. 12 - SM Energy Co. has what its chief executive officer called "a strong balance sheet" with plenty of "dry powder" to fund the Denver-based oil and natural gas exploration and production company's current development projects and the "exciting new ventures" it is looking at.

And CEO Anthony J. Best also told attendees at the Barclays CEO Energy-Power Conference on Thursday in New York that the company expects to increase its financial resources for further investment in the company with what he expects to be the successful sale of four packages of non-core assets that it is currently shopping around to interested buyers.

Company ups borrowing base

Best noted SM's Monday announcement that the borrowing base under its senior secured revolving credit facility was increased to $2.2 billion from $1.8 billion as a result of its lenders' regularly scheduled semiannual redetermination.

Despite the higher borrowing base, "we have no intention to change our commitment level [from its bank group] at this point," he said, so that will remain at the current $1.3 billion; there were no other changes to the terms of the credit facility resulting from the borrowing base redetermination.

"I think that the increased borrowing base reflects the company's growing proved reserve base, so we're very pleased with that increase," Best said.

SM only has $28 million drawn against that credit facility, which matures in 2018, "so I think it also goes without saying that we've got plenty of dry powder to not only fund our [current] program but also to pursue new opportunities as they arise," he added.

Besides whatever the company draws under the credit facility, its capital structure includes four junk bond senior note issues totaling some $1.6 billion: $350 million of 6 5/8% notes due 2019 that the company did in January of 2011, $350 million of 6½% notes due 2021 that came to market in November of 2011, $400 million of 6½% notes due 2023 that were sold in June of 2012 and its most recent transaction, $500 million of 5% notes due 2024. That deal, upsized from $400 million originally, priced at par on May 15 of this year.

The maturities, Best said, "stagger very nicely, well out in time."

Favorable leverage ratio

The company's leverage ratio of debt as a multiple of trailing 12-month EBITDAX - conventional EBITDA plus exploration costs, a commonly used earnings measure in the energy industry - stood at 1.4 times as of June 30, versus a peer-group average of 2.4 times, "so I think we're very well positioned there," Best said.

A slide presentation prepared by the company for display during Best's presentation identified the peer-group companies as Bill Barrett Corp., Continental Resources, Inc., Cabot Oil & Gas Corp., Comstock Resources Inc., Concho Resources, Inc., Denbury Resources Inc., Energen Corp., Forest Oil Corp., Laredo Petroleum Holdings, Inc., Newfield Exploration Co., QEP Resources, Inc., Range Resources Corp., Whiting Petroleum Corp., EXCO Resources Inc. and Cimarex Energy Co. and depicted SM's leverage ratio as better than those of 11 of the 15 peer-group companies, with the other four having lower leverage measures.

Best continued that the company expects to exit this year with the debt-to-EBITDAX ratio below the 1.6 times that it had given out as guidance earlier in the year, "so that continues to look very strong, relative to the peer group."

Shopping non-core assets

Best said that right now, SM is focusing its efforts in three core areas: the Eagle Ford Shale geologic formation in southern Texas, the Bakken/Three Forks shale formation in North Dakota and the Permian Basin formation in western Texas. The company owns additional reserves in other areas of the United States, but "every year, we will review the entire portfolio and identify assets that we view as positive to go to market with.

He said that the company currently has four "packages" of assets "out on the street" that it is shopping around to potential buyers: in the Anadarko Basin in western Oklahoma and the "Panhandle" region of northern Texas, some Permian Basin assets that it is choosing not to pursue development in, some reserves in northwestern Louisiana and some wells it was developing in the Bakken region with other companies where SM was not the primary operator.

The largest of those is the Anadarko Basin package, representing 58,000 acres and 48 million barrels of oil equivalent of reserves. Best said the company hopes to see "significant proceeds" from the sale of those assets and said that it was seeing "an awful lot of interest in that package" from potential buyers. He said SM expects to receive bids by mid-October and hopes to close on a sale by the end of this year or early next year.

The Permian Basin package is 14,000 acres of land; the company had drilled a well there producing 500 barrels of oil equivalent per day, "but we are pursuing what we think are higher-potential opportunities in the Permian."

Those and the two smaller packages indicate that "we are serious about continuing to high-grade our portfolio going forward," he said, noting that in the last seven years, SM has sold over $2 billion worth of assets, allocating the proceeds from such sales to either its new-ventures program of exploration, testing and acquisitions in other, less-developed energy regions or to development of existing assets.

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