A subsidiary of Mitsui & Co. Ltd. will acquire a 12.5% working interest in the nonoperated Eagle Ford shale position of SM Energy Co., Denver.
Mitsui will carry 90% of SM Energy's drilling and completion costs on its nonoperated acreage until it has spent $680 million for the benefit of SM Energy. The agreement excludes costs associated with construction of gathering assets.
Mitsui will also reimburse SM Energy for the purchaser's share of capital expenditures and other costs, net of revenues, related to the period between the effective date of Mar. 1, 2011, and the closing date. These reimbursed costs (net of revenues), estimated at $20-$40 million, will be payable to SM Energy at closing, and SM Energy will apply them to the other 10% of its drilling and completion costs.
As a result, SM Energy will effectively be 100% carried until the reimbursement amount is exhausted. After that, SM Energy will continue to be 90% carried until the remaining portion of the $680 million carry has been spent.
Mitsui will also reimburse 50% of SM Energy's total capital investment expenditures in the related midstream assets in which the purchaser is acquiring an interest. This reimbursement is estimated to be $20-30 million.
The use of the reimbursement proceeds related to the mid-stream assets is not restricted, and the proceeds will be treated as proceeds from divestitures in SM Energy's consolidated financial statements. Closing is anticipated to occur during the third quarter of 2011 and is subject to customary closing conditions and transaction fees.
After closing, SM Energy will have 46,000 net acres in the nonoperated portion of its Eagle Ford shale position, down from roughly 85,000 net acres. Its average working interest will be reduced to 14.5% from 27%.
Reported average production from SM Energy's total nonoperated Eagle Ford shale position as of Mar. 31, 2011, was 43.5 MMcfd of gas equivalent, 42% oil, 36% natural gas, and 22% natural gas liquids. Proved reserves at the end of 2010 were 52 bcfe, 52% proved undeveloped.
SM Energy will have roughly 196,000 net acres in the Eagle Ford shale, 75% operated, after the Mitsui transaction and the previously announced divestiture of Eagle Ford assets in LaSalle and Dimmit counties, Tex., are completed.
The size and timing of these transactions vary from the assumptions made in SM Energy's issued guidance because the transactions are expected to close later in the year than originally anticipated and because SM Energy is retaining a larger position in the Eagle Ford than was originally assumed. As a result, reported production and capital spending for the year will exceed the company's published guidance.
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