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Shares of SM Energy (NYSE: SM) slumped by double digits last month. While a dip in oil prices did not help, the primary culprit was the company's decision to pay a hefty premium for land in the Permian Basin.
In early October, SM Energy announced that it retained an advisor to help it sell the bulk of its properties in the Bakken shale. Doing so would enable the company to focus on a simple strategy of developing its assets in the Permian Basin and Eagle Ford shale.
A few weeks later, the company announced that it secured a deal for those properties, selling 55,000 net acres to Bakken-focused driller Oasis Petroleum (NYSE: OAS) for $785 million in cash. The deal enabled Oasis Petroleum to add to its core Bakken holdings while allowing SM Energy to focus on its core areas. More importantly, the cash from Oasis gave SM Energy the firepower to sign a deal to acquire 35,000 net acres in the Permian Basin for a whopping $1.6 billion in cash and stock. While that deal would bolster the company's acreage position to roughly 82,500 acres, SM Energy paid a very hefty price tag of $42,000 an acre for the land, according to analysts.
That price was well above the average range of $25,000 to $35,000 an acre that drillers had been paying for land in the Permian and
SM Energy has undergone a pretty remarkable transformation this year, going from a no-growth driller to a high-growth company. That said, it paid a pretty hefty price to do so. That is a bit of a concern for the market, especially because crude prices started selling off at the end of the month, which has investors worried that SM Energy paid too high a price.
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