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SM Energy Upgraded On Midland Basin Purchase

SM Energy Upgraded On Midland Basin Purchase - SM Energy Company NYSE:SM

MUFG’s Michael McAllister believes the pending purchase by SM Energy Co SM 4.87% of Midland Basin acreage in Howard County provides a re-rate catalyst.

McAllister upgraded the rating on the company from Underweight to Neutral, while raising the price target from $16 to $36.

“In our opinion, the company’s historically low multiple reflected the scarcity of upside potential that its portfolio of assets offered to the investment community,” the analyst mentioned.

The Midland Basin Purchase

McAllister believes that SM Energy has been a “good operator,” although its acreage has been more Tier 2 than that of most of its peers.

However, this has changed with the announcement of its intention on August 8 to purchase 24,783 acres in Howard County, Texas.

The analyst pointed out that this was one of the more active areas in the Midland Basin, with the industry having “delineated the inventory of the Wolfcamp A, Lower Spraberry, and Wolfcamp B as formations worthy of development in a sub-$50/Bbl environment.”

Adds To The Scale

When this purchase is added to the 16,000 net acres that the company already has on the Midland/Upton border, it gives SM Energy the scale that it had so far been lacking.

“The company's plan is to operate one rig through this year, then to dedicate two rigs to the new acreage in 2017. Based on that, and combined with the two rigs operating on the Upton/Midland County acreage, we expect strong oily production growth from SM Energy in 2017,” McAllister added.

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