Shifting Focus towards the Development of Oil Resources

Wednesday 6 March 2013, Amsterdam

SM’s crude oil production declined at a negative CAGR of 0.9% during the 2007–2010 period, although it increased in 2011. This decline has affected its operational metrics in a scenario of high imparity between crude oil and natural gas prices. As a result, the company increased the weight of crude oil in its production mix and is now involved in the development of oil-rich resources. In line with this, SM has been increasing its investments in the Permian and Rocky Mountains regions in the US since 2010.

The company’s oil-rich resources are mainly located in the Bakken/Three Fork formation, Mississippian Lime play and the Permian basin. It also has several other prospects such as the Niobrara formation and other in the Powder River basin and DJ basin. Its major focus is currently on the development of the Bakken/Three Fork formations. SM has proved reserves of around 50.6 mmboe in the Rocky Mountain region (including Bakken/Three Forks and other oil-rich formations), of which nearly 86.3% is crude oil while the remaining 13.7% is natural gas. The company’s drilling activities in the Bakken/Three Fork formations are in the initial development phase. Its drilling activities in Q3 2012 mainly targeted the delineation of the company’s acreage in these formations, in which it operated four rigs. SM expects to focus more on in-fill drilling and multi-well pad drilling in these formations the future.

Other major prospects include the Gooseneck, Raven and Borden prospects. The company also expects promising results from the Mississippian Limestone play, in which it operated two rigs in the Mississippian Limestone play at the end of Q3 2012. These prospects have not yet seen any significant drilling activities by the company so far but form part of its strategic drilling inventory, which will drive its transition towards oil-weighted resources in the long term. It held a total reserve base of 17.9 mmboe in the Permian basin in 2011, comprising 70.4% crude oil and 29.6% natural gas. The company plans to accelerate its development activities in these regions, thereby growing its oil-rich production in the long term.

Until 2010, SM largely invested its capex in the Eagle Ford shale with a very small portion allocated to other areas. However, the company’s JV with Mitsui on its acreage in this shale has reduced its capex requirement, which it can direct towards the development of oil-rich prospects. Therefore, the company’s capital investment in other areas is expected to increase in the future, thereby allowing it to accelerate the development of its oil-rich resources and drive the shift towards oil.

Expects SM’s production to grow by 27.7% to 36.2 mmboe in 2012 compared to 28.3 mmboe in 2011, and at a CAGR of 13.7% during the 2012–2016 period. Moreover, the share of oil is expected to grow from 41% in 2011 to 45% in 2012 and to continue to increase in the future. Increasing production coupled with an increasing bias towards oil volumes is expected to favor SM’s financial margins and boost its cash flows in the future, thereby improving its valuation statistics.