SM Energy Co., Denver, plans to pay more than $2 billion to buy 80% of XCL Resources LLC and make a move into Utah’s Uinta basin.
The proposed purchase of most of XCL—Northern Oil and Gas Inc., Minneapolis, plans to pay $510 million for the remainder of that company—from EnCap Investment LP and Rice Investment Group was hailed as a surprise by several analysts, one of whom said investors may have preferred that the company put itself on the market rather than continue to buy.
When completed, SM Energy’s deal will add about 390 net drilling locations across more than 37,000 net acres that president and chief executive Herb Vogel said will increase SM Energy’s inventory by about 2 years to 12 years. SM executives said the assets being acquired have an 88% oil mix and are projected to have cash production margins higher than SM Energy's operations in the Midland basin and in South Texas.
“We’ve been really patient and persistent in identifying the right transaction and I’m very pleased to say that this checks all the boxes and meets all of SM’s strategic objectives,” Vogel said on a June 27 conference call. “We’ve identified development potential across as many as 17 benches within nearly 4,000 ft of hydrocarbon column, which ranks among the largest over-pressured hydrocarbon columns in US producing basins.”
Answering a question about why SM Energy is expanding into Utah, Vogel told analysts that the basin’s potential productivity and operating economics are strong—Raymond James analyst John Freeman said the buy could boost SM Energy’s 2025 free cash flow by 2025 and lift its free cash flow yield to 16%— but also pointed to his team’s discipline in turning down other opportunities in fields beyond its core Permian basin and Eagle Ford holdings.
Regulators' role, mixed 2025 outlook
Investors, however, aren’t initially sharing Vogel’s enthusiasm: Shares of SM (Ticker: SM) fell more than 10% to $43.35 after the announcement June 27, which trimmed the company’s market capitalization by about $500 million.
Andrew Dittmar, principal analyst at Enverus Intelligence Research, said investors’ reaction likely stems in part from SM Energy's planned use of some cash for the acquisition as well as the need for more details on its strategic reasons. But he said recent regulatory scrutiny of in-basin consolidation also looks to have played a role here.
“SM could get access to a bigger runway of lower breakeven inventory by looking to the Uinta,” Dittmar said. “Concerns about having the deal blocked by regulators may have lessened interest from incumbent players like Ovintiv and made the asset more attractive to new entrants.”
At TD Cowen, analysts led by Gabe Daoud Jr. struck a skeptical tone that included the point that 2025 production guidance for SM Energy’s existing assets now sits about 5% below consensus estimates.
“While the Uinta retains attractive stacked pay potential with an improved oil marketing environment, we think investors would've preferred to see SM expand in the Permian, or sell the company outright,” the analysts wrote.
Looking ahead to 2025, Vogel and his team are now projecting net daily production of 195,000 boe/d, which is 20% higher than SM Energy’s standalone forecasts. The company’s oil mix is set to climb about eight points to about 52%.
“We’re confident that our team is going to be able to really get after this asset, which is kind of in an overlooked basin—and we like that it’s been overlooked,” Vogel said.
