Amy Allen - aallen@wolferesearch.com - Do not forward
OIL AND GAS
Mid & Small Cap E&P – Market Weight
October 20, 2016
SM
ENERGY
Click here
to enter text.
(SM – $40.73 – Peer Perform)
Shares reflect Rock solid Midland M/A
 On 10/18, SM announced $1.6bn Midland acquisition. This note is a
deep dive into the acquired assets See our 10/18 note for transaction
details and first blush commentary. This note concentrates on the valuation
impact of the newly acquired 35.7k net acres in Howard and Martin Counties,
along with the 2.4kboed of existing production.
 Howard and Martin counties yield strong well production Our analyses
of the state well data show strong historical average IP rates, low variability
across well results, and high oil content, when compared to other Midland
counties. The addition of the QStar acreage to the Rock Oil Holdings
acreage acquired last quarter provides opportunities for longer lateral lengths
and more intense sand loadings, which in our analysis show decent
correlation to higher IPs/EURs. The targeted intervals are Wolfcamp A & B
and Lower Spraberry, which produce some of the strongest results in our
well analysis of the respective counties.
Trading and Fundamental Data
52-Week Range
Market Cap. (m)
Shares Out. (m)
Dividend Yield
2016E FCF Yield
Avg. Daily Vol. (000)
Short-Interest Ratio
% of Float
2016E Net Debt to
Capital
$7-$43
$3,436
84
0.2%
-0.4%
3,063
3.8
14.1%
56%
Price Performance
YTD
SM
107%
8%
5%
5%
26%
0%
S&P 500
SPSIOP-USA
Estimates
FY15
Production
(kboed)
EBITDAx
($mn)
EV/EBITDA
P/E
LTM
FY16
FY17
176
156
148
1,127
816
843
6.0x
8.2x
8.0x
-76.3x
-17.8x
-26.0x
$45
$40
$35
$30
$25
$20
$15
$10
10-16
08-16
06-16
04-16
02-16
12-15
$5
10-15
 Significant value accretion but largely captured in recent trading in our
view We estimate the enterprise value created from developing the QStar
acreage at ~$2.2bn or 37% above the purchase price (explains in part why
the PE sponsor took nearly $500mm in equity). Our midcycle EBITDAx went
up 21% and we are now incorporating a 6.5x multiple, two turns above its
historical average to reflect the growth and margin improvement potential.
Our new FV estimate is $42-45/share from prior $34-36 range. See page
2-3 for further details on our fair value calculation methodology and key
estimate updates.
Source: FactSet/Wolfe Research
 More appraisal drilling needed to de-risk the NE portion of the acquired
acreage While industry drilling has derisked the majority of the western
Howard acreage, a material portion of the newly acquired acreage lies in the
north east corridor of Howard Cty, closer to the Eastern shelf. As one moves
east and south toward the shelf, the rock is less thermally mature, thinner,
and experiences facies change – mudstones/limestones to carbonates.
While this suggests good storage, lower secondary permeability, thinner
intervals, and immature oil suggests risks to recovery rates, in our view.
 We will be hosting CEO Jay Ottoson on November 14 at 11am EST.
Given current news flow, we will obviously have a lot to talk about. Dial in
details -- (888) 428-7458; passcode 111416.
Bob Parija, CFA
(646) 582-9274
Bparija@wolferesearch.com
DO NOT FORWARD – DO NOT DISTRIBUTE – DOCUMENT CAN ONLY BE PRINTED TWICE
This report is limited solely for the use of clients of Wolfe Research. Please refer to the DISCLOSURE SECTION located at the end of
this report for Analyst Certifications, Important Disclosures and Other Disclosures.
WolfeResearch.com
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October 20, 2016
Investment Conclusion – Reiterate PP with Fair Value range between $42 - $45/share
Value Accretive deal but current share price reflects balanced risk/reward in our view. We reiterate our PP
rating and increase our FV range to $42 – 45/share from our prior estimate of $34-36/share Based on our
analysis of the Howard County acquisition and non-core Williston basin asset sale, we have updated our fair
value and key estimates. We have raised our NAV to $45 from $36 based on converting risked well locations to
production on the 35.7k newly acquired net acres in Howard and Martin counties discounted back at the
companies cost of capital. Our overall Permian Midland asset value increased from $2,589mm post the Rock Oil
holdings deal to the current $4,780mm, reflecting an additional upside of ~$2,200mm from the QStar acreage
acquisition. On the multiples front, we also increased our target multiple from 4.5x to 6.5x to reflect the increase in
growth and margins resulting from the company’s two recent Permian Midland M&A transactions. See Exhibits 14 below for our fair value calculation methodology and key estimate updates post the transaction.
Exhibit 1: Fair Value Calculation
Company
SM
Mid-cycle
Target
NAV
Weighting EBITDAx EV/EBITDAx
($/share)
($mm)
Multiple
Peer Perform
45
50%
1,150
6.5x
Rating
Implied
Value
($/share)
42
Weighting FV ($/share)
50%
43
Valuation
Our fair value is based on a 50/50 combination of Net Asset Value (NAV) and EV/EBITDAx multiple applied to the mid-cycle estimates (3-5 year forward
EBITDAx estimates), the former to ensure we do not lose sight of upside resource potential and the latter to enforce discipline around the current outlook
on commodity prices and operating environment. On consensus 12-month forward EV/EBITDAx multiples, SM’s 5-year range is between 2.5x - 7.2x.
Exhibit 2: NAV Summary Assumptions
Operated Eagle Ford
Non-operated Eagle Ford
Bakken/Three Forks
Powder River Basin
Midland - Howard County
Midland - Upton County
Permian Midland
Total Operating Assets
Other Assets
Tax Loss Carryforwards
Realized hedging
PV of unrealized hedging
Liabilities
Net Debt
Capitalization of operating
Healthcare
Known estimable litigation
Implied Equity Value
Shares Outstanding (mn)
Implied Value ($/share)
Exhibit 3: Consensus 12m Forward EV/EBITDAx
769
510
1,294
85
3,534
1,246
4,780
7,439
271
71
55
(3,283)
(41)
(37)
0
4,475
100
45
Source: Company reports, DrillingInfo, Wolfe Research
Source: Bloomberg Finance LP, Wolfe Research
Key Risks
The key risk for the E&P sector includes volatile commodity prices. Specific to the company, SM is in development mode incorporating pad
drilling primarily with its Eagle Ford acreage but in the more immediate outlook a focus on its black oil opportunities in the Permian and
Williston basins. Given the discrete timing of drilling, completion, and bringing to sales, we believe production additions may be lumpy for the
foreseeable future. Moreover, greater activity in its various oily basins may create tightness in rig and service/frac spread availability which
could impact operating margins and cash flow negatively. Access to pipeline takeaway and processing infrastructure in the Permian
and Powder River basins may not expand commensurate with the company and industry production, making pricing and sales growth
targets more difficult to achieve.
WolfeResearch.com
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October 20, 2016
Minor updates to our key 2016 and 2017 estimates, as the majority of the upside of the transaction will not be
realized until 2018. We will publish our 2018 estimates post the 3Q earnings call. See Exhibit 4 below for our key
estimate updates for 2016 and 2017. The majority of the ’17 estimate change reflects the loss of production from
the Raven/Bear Den Williston basin asset sale combined with a slower production ramp in the Permian due to
management’s stated intent to dedicate 1 of the 2 incremental rigs in Howard County to holding acreage.
Exhibit 4: Key Estimate Updates Post-Transaction
Capex ($mn)
Prior
New
%
Prior
New
%
2016E
2016E
change
2017E
2017E
change
676
676
0%
933
821
-12%
56
57
1%
57
54
-5%
817
816
0%
870
843
-3%
(2.37)
(2.29)
3%
(1.88)
(1.57)
17%
Production (mmboe)
EBITDAx ($mn)
EPS
Source: Company Reports, Wolfe Research
The addition of the QStar acreage to the newly acquired Rock Oil Holdings acreage increases SM’s Midland
Basin acreage to 82,450 net acres. With this deal, SM now has a material presence in Midland basin -- 60k net acres
in Howard/Martin Counties and ~22.5k net acres in Upton County. See Exhibit 5 below for a breakdown of SM’s post
transaction asset portfolio in the Midland. The Rock Oil and Qstar acreage in Martin and Howard counties
appears to be contiguous in certain areas, see Exhibit 6 below for a breakdown of Qstar and Rock Oil wells in
each respective county.
Exhibit 5: SM Permian Acreage Post Acquisition
Exhibit 6: Howard & Martin County Rock Oil & QStar Wells
Martin County
Source: Company Reports
WolfeResearch.com
Howard County
Note: Data includes horizontal & vertical wells
Source: Wood Mackenzie North America Well Analysis Tool
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October 20, 2016
As shown below in Exhibit 7, Rock Oil and QStar have completed both horizontal and vertical wells on the
majority of the acquired acreage, with Qstar adding ~190 wells, 6 of which are horizontal. The exception is the
northeast corridor of Howard County (highlighted in the black box below in Exhibit 7), which comprises a large
portion (appears to be ~50%) of the acquisition. While Howard and Martin County show strong horizontal well
results as whole, it is early days in the North-eastern section of acquired acreage. Our concern is that SM will
need to balance a combination of concerns around thermal maturity, variances in interval thickness, and facies
change – from mudstones and limestones in the West to carbonate rock that can signal good porosity but issues
with secondary permeability.
Exhibit 7: Howard & Martin County Rock Oil & QStar Wells
Our main concern with the new acreage is the
northeast corridor of Howard County, which we
have outlined in Exhibit 7, to the left. Neither Rock
Oil nor QStar have drilled in this area before, which
appears to be a significant portion of the deal.
Additionally, according to Wood Mackenzie North
America Well Analysis Tool, there have only been
~4 industry horizontal wells drilled in this northeast
corridor in Howard County to date; see the
highlighted box in Exhibit 9 below. SM Energy only
highlighted one horizontal well drilled in this area,
by Apache with an IP30 of 587 BOED and a
shorter (~4200 feet) lateral length.
Martin County
Howard County
Source: Wood Mackenzie North America Well Analysis Tool
WolfeResearch.com
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October 20, 2016
Exhibit 8: Howard & Martin County Acquisition Acreage
Exhibit 9: Howard & Martin County Industry Horizontal Wells
Martin County
Source: Company Reports
Howard County
Note: Horizontal wells with first year production post 2010
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
While there are few horizontal well data points in the northeast corridor of Howard County, there are many vertical
wells in the area. As indicated on the 10/18 call, the company claimed there are 68 vertical penetrations in that
area, 20 of which have detailed logs and the company has four in that area. See Exhibit 10 below for the overlay
of vertical and horizontal wells in in Howard and Martin Counties, with the same Qstar newly acquired acreage in
the northeast corridor of Howard County highlighted.
WolfeResearch.com
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October 20, 2016
Exhibit 10: Howard & Martin County Industry Horizontal & Vertical Wells
Martin County
Howard County
Note: Vertical wells with first year production post 2010
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
WolfeResearch.com
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In Exhibits 11-15, we show industry peak 30 day IP rates across the two newly acquired Martin and Howard
counties. Both counties show strong IP rates, low variances, and high oil content. As indicated by the company,
we highlight the Wolfcamp A & B and Lower Spraberry as initial target intervals, with current appraisal of the
Middle Spraberry. The P50 for the peak 30 day IP rate in Howard and Martin county is 772 BOED and 680 BOED,
respectively, with P10/P90 of 3.1x and 5.0x, illustrating strong IP rates with low variability throughout each county.
Our analysis yielded 93% oil in the first month of production for Howard and 85% for Martin, which will decline as
the wells’ days on production increases, and coincides with the company’s guidance for 80% oil cut in these
areas.
Exhibit 11: Howard County IP Rates, Standard Deviation & Well Count by Formation
Note: Data includes only horizontal wells with greater than 6 months well data and 7,500 ft. lateral length. Red outline indicates company focus
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
Exhibit 12: Martin County IP Rates, Standard Deviation & Well Count by Formation
Note: Data includes only horizontal wells with greater than 6 months well data and 7,500 ft. lateral length. Red outline indicates company focus
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
WolfeResearch.com
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Exhibit 13: Howard and Martin P90, P50, P10 of Peak 30 Day IP rates
Note: Data includes only horizontal wells with greater than 6 months well data and 7,500 ft. lateral length in the lower/ middle Spraberry and Wolfcamp A & B
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
Exhibit 14: Martin & Howard County Cumulative Probability of Peak IP Rates
Note: Data includes only horizontal wells with greater than 6 months well data and 7,500 ft. lateral length in the lower/ middle Spraberry and Wolfcamp A & B
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
WolfeResearch.com
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Exhibit 15: Average Cumulative Oil Production by County
Note: Data includes only horizontal wells with greater than 6 months well data and 7,500 ft. lateral length in the targeted intervals
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
Two other highlights of the transaction are the potential for increased lateral lengths and greater sand loading. In
Exhibits 16-20, below we analyze the relationship between lateral length and proppant loading vs cumulative oil
production in both Howard and Martin Counties. Based on our analysis, in Howard County the average reported
horizontal lateral length in the Spraberry is 6,920 ft. and the average lateral length is 7,488 ft. in the Wolfcamp.
Exhibits 16-17 show there is a decent linear relationship between lateral length and cumulative oil production,
which persists as we compare the lateral length to the cumulative 365 day oil in Exhibit 17. The same strong
relationships can be seen in Martin County, in Exhibits 18 and 19. Martin County has a reported average lateral
length of 7,032 ft. in the Spraberry and 7,026 ft. average in the Wolfcamp. Martin County also demonstrates a
continuously strong relationship with lateral length and cumulative oil as the days on production increase from 180
days to 365 days, shown in Exhibits 18-19. Lastly, in Exhibit 20 we show the relationship between proppant per
lateral length (lbs. / ft.) vs 180 day cumulative oil production, demonstrating that there is a relationship between
increased proppant loads and strong cumulative production, as noted by the company.
WolfeResearch.com
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October 20, 2016
Exhibit 16: Howard County Lateral Length vs. Cumulative 180 Day Oil
Note: Data includes only reported horizontal wells
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
Exhibit 17: Howard County Lateral Length vs. Cumulative 365 Day Oil
Note: Data includes only reported horizontal wells
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
WolfeResearch.com
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Exhibit 18: Martin County Lateral Length vs. Cumulative 180 Day Oil
Note: Data includes only reported horizontal wells
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
Exhibit 19: Martin County Lateral Length vs. Cumulative 365 Day Oil
Note: Data includes only reported horizontal wells
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
WolfeResearch.com
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Exhibit 20: Howard & Martin County Proppant Per Lateral Length vs. Cumulative 180 Oil
Note: Data includes only reported horizontal wells with first production dates from 1/1/2015 to 12/31/15 in the Spaberry and Wolfcamp
Source: Wood Mackenzie North America Well Analysis Tool, Wolfe Research
WolfeResearch.com
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October 20, 2016
Exhibit 21: Financial Summary Post Transaction
2012
2013
2014
2015
2016E
2017E
3-Yr Avg
5-Yr Avg
2012
1,395,573
112,255
1,507,828
2013
1,485,568
67,968
1,553,536
2014
1,879,186
95,612
1,974,798
2015
1,413,608
80,000
1,493,608
2016E
646,435
30,000
676,435
2017E
791,355
30,000
821,355
3-Yr Avg
950,466
46,667
997,133
5-Yr Avg
1,243,230
60,716
1,303,946
Production Growth Analysis
Crude Production
NGL Production
Natural Gas Production
Total Production (mmcfe)
Y/Y Growth
2012
10,367
6,153
120,078
219,194
2013
13,947
9,506
149,346
290,064
32%
2014
16,652
12,998
152,930
330,830
14%
2015
19,217
16,060
173,641
385,303
16%
2016E
17,778
14,347
150,542
343,295
-11%
2017E
20,145
11,328
134,588
323,431
-6%
3-Yr Avg
19,047
13,912
152,924
350,676
-1%
5-Yr Avg
17,548
12,848
152,209
334,585
8%
Total Ending Reserve Balance
Y/Y Reserve growth
293,347
428,664
46%
547,564
28%
471,381
-14%
2012
2%
2013
1%
2014
-1%
2015
25%
2016E
22%
2017E
2%
3-Yr Avg
17%
5-Yr Avg
10%
1,023,409
68%
1,501,108
68%
1,618,793
66%
1,127,404
56%
816,285
52%
843,033
53%
928,907
53%
1,181,324
59%
86,706
1.16
310,531
4.37
395,498
5.64
(25,856)
(0.53)
(184,291)
(2.29)
(150,617)
(1.57)
(120,255)
(1.46)
69,053
1.12
Capex Analysis
(E&P Cash Capex including unproved)
(Other Capex)
Total Capex
Margin Analysis
Realized Hedges % Total Revenue
EBITDAX ($mn)
EBITDAX margin
Adjusted Net Income ($mn)
Adj EPS Including Stock Comp Expense
Balance Sheet Analysis
Cash Return on Cash Invested (avg)
EBITDAX/Avg Gross PPE
2012
16.6%
19%
2013
19.9%
24%
2014
17.5%
21%
2015
12.2%
13%
2016E
8.5%
8%
2017E
7.3%
7%
3-Yr Avg
9.3%
9%
5-Yr Avg
13.1%
15%
NDTC
Debt to PDP Reserves ($/boe)
Net Debt/EBITDAx
EBITDAX/gross interest expense
50%
8.65
1.4
12.6
45%
7.66
0.9
14.3
50%
8.13
1.4
13.3
58%
10.30
2.2
7.0
56%
59%
58%
54%
4.0
4.7
4.1
4.1
3.5
5.3
2.5
8.7
Cash Flow Analysis
Sources of Cash ($mn)
Uses of Cash ($mn)
2012
1,427,798
(1,541,066)
2013
1,920,406
(1,644,084)
2014
2,261,301
(2,543,429)
2015
1,518,085
(1,518,187)
2016E
3,288,286
(3,282,622)
2017E
905,874
(831,441)
3-Yr Avg
1,904,082
(1,877,417)
5-Yr Avg
1,978,790
(1,963,953)
(518,223)
(515,256)
(27,771)
(208,022)
(250,350)
(296,859)
916,625
13.48
592,957
7.03
584,523
5.80
698,035
8.77
968,527
13.34
Free Cash Flow ($mn)
Debt Adjusted Cash Flow
Debt Adjusted Cash Flow per share
(585,859)
(215,022)
911,490
13.54
1,323,687
19.46
1,424,844
20.93
Reserves Analysis
All-in F&D/$ BOE
Net F&D/$ BOE
Net F&D/$ MCFE
Pre-tax Recycle Ratio
Recycle Ratio
2012
13.74
13.60
2.27
1.80
1.80
2013
8.53
6.98
1.16
3.32
3.32
2014
15.39
15.29
2.55
1.69
1.68
2015
98.46
-80.05
-13.34
0.15
0.15
3-Yr Avg
14.69
14.17
2.36
1.52
1.52
5-Yr Avg
14.89
14.30
2.38
1.59
1.59
Net Reserve Replacement
329%
380%
315%
-19%
206%
232%
4.6
8.0
4.3
8.9
5.2
9.9
3.8
7.3
4.4
8.7
4.6
8.3
PV10/BOE (standardized measure)
10.30
9.35
10.41
3.96
7.91
9.26
PV/Share (standardized measure)
46.38
60.25
84.77
27.60
57.54
51.89
Trading Multiples
2016E
2017E
Consensus 3-Yr
Avg
EV/EBITDAx
5.8x
8.1x
4.7x
PDP R/P
Current Year Proved R/P
Liquidity Analysis
Borrowing base/commitment upside
Bank Commitments
YTD Letters of Credit or CP
Estimated Current Borrowings
Ending Cash Balance
YE Liquidity ($mn)
2016E
2017E
1,350 Discretionary Cash Flow
1,250 Cash Capex
585
(821)
P/E
(312) Multiple of '17 capex
6
943 YE Liquidity ($mn)
0.9x
-17.8x
-26.0x
Summary NAV
Key Assets
Operated Eagle Ford
Non-operated Eagle
Bakken/Three Forks
Powder River Basin
Permian Midland
Total Operating Assets
769
510
1,294
85
4,780
7,439
Other Assets
Tax Loss Carryforwards
Realized hedging
gains/(losses)
PV of unrealized
hedging gains/(losses)
Liabilities
271
71
55
(3,283)
Net Debt
Capitalization of operating leases
(41)
Healthcare
Known
estimable
litigation
Implied Equity Value
(37)
4,475
2015
EV/Proved Reserves
707
9.8x
Shares Outstanding
(mn)
Implied NAV ($/share)
100
45
Note: Price as of
10/20/2016
Source: Company reports, Bloomberg Finance LP, Factset,Wood Mackenzie N.A. Well Analysis Tool, Wolfe Research
WolfeResearch.com
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October 20, 2016
Exhibit 22: Integrated and E&P Valuation Comparison (closing price as of 10.19.16)
Company
Global Integrateds
ExxonMobil
Chevron
Royal Dutch Shell a
Royal Dutch Shell b
Total SA
BP
Simple Avg
Wgtd Avg
Large Cap NA E&P
ConocoPhillips
Occidental
Suncor
EOG
Anadarko
Canadian Natural
Apache
Hess
Devon Energy
Pioneer Natural
Marathon Oil
Noble Energy
Continental
Whiting Petroleum
Cenovus
Encana
Chesapeake
Concho Resources
Cimarex Energy
EQT
Cabot Oil & Gas
SM Energy
Southwestern Energy
Rice Energy
Range Resources
Antero Resources
Murphy Oil
Gulfport Energy
EP Energy
California Resources
Simple Avg
Wgtd Avg
Overall Simple Avg
Rec Target
UP
OP
PP
OP
PP
OP
OP
PP
PP
PP
PP
OP
PP
OP
78
115
87
100
79
203
49
UP
6.9
OP
OP
OP
PP
PP
UP
OP
PP
OP
UP
PP
UP
PP
147
134
78
11
34
31
25
3.6
Share Mkt Cap
price ($)
($B)
87.17
102.27
1,816
1,899
40.74
427.70
41.72
74.51
38.46
95.06
63.93
43.44
64.32
52.37
42.96
189.03
14.65
35.91
53.18
8.63
15.61
15.06
6.72
139.47
140.30
65.98
21.58
40.73
12.48
25.03
38.22
27.08
29.32
27.61
4.42
12.74
361.5
192.9
171.7
171.7
111.6
92.7
51.7
56.9
64.0
52.3
35.4
47.9
24.4
16.6
22.5
32.1
12.4
15.4
19.9
2.4
13.0
14.4
6.0
19.6
13.3
11.4
10.0
3.5
6.2
4.9
9.4
8.3
5.0
3.5
1.1
4.9
Bloomberg Consensus
P/E
EV/EBITDA
2016e
2017e
2015
2016e
Debt /
Capital
Div yld
Current
2015
16.5%
15.0%
14.0%
14.0%
19.9%
21.1%
16.7%
16.2%
3.4%
4.2%
6.2%
6.2%
5.8%
5.2%
5.2%
4.8%
22.8x
28.1x
15.0x
15.6x
11.6x
17.2x
18.4x
19.8x
39.4x
89.9x
26.3x
27.4x
14.9x
31.3x
38.2x
41.2x
20.3x
22.8x
13.6x
14.2x
11.6x
15.6x
16.3x
17.5x
9.7x
8.3x
8.3x
8.3x
6.2x
6.5x
7.9x
8.4x
12.2x
10.3x
8.9x
8.9x
7.7x
7.3x
9.2x
10.0x
8.4x
6.6x
6.1x
6.1x
5.9x
5.4x
6.4x
6.9x
34.7%
17.4%
20.7%
30.3%
48.9%
37.9%
63.4%
14.5%
49.6%
21.3%
24.6%
40.7%
60.3%
52.0%
16.3%
44.4%
80.5%
30.9%
16.5%
13.4%
50.2%
0.0%
49.0%
38.8%
49.0%
39.1%
32.9%
27.9%
88.1%
117.6%
40.0%
33.4%
32.5%
2.4%
4.1%
3.0%
0.7%
0.3%
2.1%
1.6%
1.9%
0.6%
0.1%
1.4%
1.1%
0.0%
0.0%
1.3%
0.4%
0.0%
0.0%
0.2%
0.1%
0.4%
0.0%
0.6%
0.0%
0.2%
0.0%
3.4%
0.0%
0.0%
0.0%
0.9%
1.5%
1.7%
NA
NA
34.2x
NA
NA
NA
NA
NA
17.4x
NA
NA
630.0x
NA
NA
NA
NA
NA
130.7x
NA
117.0x
NA
NA
74.7x
962.7x
117.2x
54.5x
NA
NA
5.7x
NA
237.6x
39.6x
149.9x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
203.9x
NA
NA
NA
891.4x
568.9x
NA
46.0x
NA
42.0x
5.6x
NA
427.5x
19.7x
194.0x
91.7x
57.1x
28.9x
170.7x
NA
45.0x
56.0x
NA
33.3x
322.0x
NA
NA
NA
NA
NA
44.5x
8.4x
NA
39.1x
100.3x
46.6x
NA
16.9x
83.4x
NA
119.3x
148.8x
30.9x
NA
NA
83.1x
66.4x
65.7x
9.9x
11.8x
9.2x
14.1x
11.3x
11.8x
8.8x
8.9x
7.7x
18.6x
8.6x
9.6x
14.0x
5.4x
7.5x
NA
7.6x
13.1x
17.9x
11.5x
14.1x
5.5x
9.1x
17.3x
13.5x
11.5x
5.3x
11.0x
NA
NA
10.9x
11.2x
10.3x
14.4x
16.8x
13.6x
20.8x
13.4x
16.7x
11.4x
17.1x
16.3x
18.0x
12.9x
10.2x
16.4x
9.2x
16.3x
20.3x
18.6x
14.2x
21.7x
12.1x
18.7x
7.7x
21.6x
12.1x
19.6x
10.0x
8.3x
9.9x
NA
NA
15.1x
15.8x
14.0x
7.4x
10.0x
8.1x
12.2x
8.6x
9.1x
7.8x
9.0x
10.7x
14.3x
7.6x
8.6x
12.0x
7.6x
9.4x
10.2x
8.8x
13.3x
12.8x
9.0x
9.9x
7.2x
10.1x
7.5x
10.8x
9.3x
5.5x
7.4x
NA
NA
9.5x
9.8x
8.9x
2017e
Price/Earnings
2015
2016e
2017e
Wolfe Research Estimates
EV/EBITDAX
2015
2016e
2017e
2015
EV/DACF
2016e
2017e
23.0x
31.3x
36.6x
98.4x
92.1x
153.2x
9.6x
7.8x
10.7x
8.3x
33.6x
23.1x
13.0x
11.7x
15.5x
10.7x
45.1x
27.6x
27.2x
25.9x
67.5x
58.1x
122.7x
113.4x
8.7x
8.9x
9.5x
9.9x
28.3x
29.9x
12.3x
12.5x
13.1x
13.8x
36.3x
39.0x
NA
398.6x
77.8x
1531.3x
NA
180.7x
NA
NA
17.0x
NA
NA
68.2x
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
99.2x
746.8x
94.9x
NA
30.0x
25.6x
NA
22.9x
179.8x
117.0x
NA
6.4x
10.5x
12.4x
14.3x
11.6x
12.1x
9.3x
8.1x
7.0x
18.8x
9.0x
8.0x
14.5x
15.2x
13.4x
20.8x
14.1x
16.9x
11.2x
8.8x
16.5x
16.9x
11.0x
9.8x
7.5x
9.0x
43.4x
11.2x
7.8x
8.4x
6.9x
7.8x
9.4x
12.8x
6.9x
8.4x
9.4x
17.8x
10.6x
15.1x
12.8x
11.0x
10.1x
9.4x
6.3x
35.1x
9.5x
9.5x
13.9x
20.5x
16.1x
23.1x
19.3x
18.1x
15.0x
27.1x
20.2x
22.1x
13.2x
11.2x
8.4x
10.3x
43.0x
11.8x
10.1x
9.0x
10.1x
9.4x
10.2x
14.2x
7.1x
9.1x
NA
NA
4.7x
8.1x
6.7x
12.9x
143.1x
NA
94.9x
162.1x
NA
77.8x
127.8x
78.8x
47.5x
NA
NA
5.8x
NA
NA
174.7x
NA
NA
NA
NA
232.5x
NA
42.3x
NA
44.4x
6.1x
NA
NA
66.9x
NA
45.1x
NA
39.7x
85.7x
511.0x
NA
13.5x
18.5x
13.7x
13.3x
6.1x
7.1x
15.9x
14.4x
11.1x
5.8x
11.9x
4.0x
12.0x
14.9x
21.0x
13.4x
18.6x
8.3x
14.3x
12.2x
22.0x
9.6x
8.8x
10.3x
6.6x
18.3x
14.2x
13.3x
10.8x
9.1x
7.8x
8.9x
7.2x
12.8x
8.1x
5.5x
7.5x
9.8x
60.7x
17.6x
20.7x
13.7x
15.6x
8.6x
6.5x
19.1x
15.6x
13.9x
6.9x
12.7x
4.7x
18.1x
18.0x
23.3x
14.8x
21.9x
11.5x
33.2x
12.6x
32.2x
12.4x
11.9x
12.7x
9.8x
29.1x
18.3x
14.3x
12.6x
10.2x
11.1x
13.8x
7.5x
16.3x
12.4x
11.9x
9.4x
9.8x
68.7x
NA
215.1x
NA
100.0x
NA
143.9x
10.6x
10.8x
14.9x
13.7x
17.0x
12.6x
12.6x
13.0x
17.5x
18.3x
17.9x
14.8x
58.6x
34.9x
Source: Company reports, Bloomberg Finance LP, FactSet, Wolfe
WolfeResearch.com
Page 14 of 17
Amy Allen - aallen@wolferesearch.com - Do not forward
SM Energy
October 20, 2016
DISCLOSURE SECTION
Analyst Certification:
The analyst of Wolfe Research, LLC primarily responsible for this research report whose name appears first on the front page of this
research report hereby certifies that (i) the recommendations and opinions expressed in this research report accurately reflect the research
analysts’ personal views about the subject securities or issuers and (ii) no part of the research analysts’ compensation was, is or will be
directly or indirectly related to the specific recommendations or views contained in this report.
Important Disclosures:
Price Chart with Ratings and Target Price History
Note: OP = Outperform; PP = Peer Perform; UP = Underperform
Wolfe Research, LLC Fundamental Valuation Methodology:
Company:
Fundamental Valuation Methodology:
SM
50% EV/EBITDAx multiple and 50% Net Asset Value
Wolfe Research, LLC Fundamental Recommendation, Rating and Target Price Risks:
Company:
Risks That May Impede Achievement of the Recommendation, Rating or Target Price:
SM
The key risk for the E&P sector includes volatile commodity prices. Specific to the
company, SM is in development mode incorporating pad drilling primarily with its Eagle
Ford acreage but in the more immediate outlook a focus on its black oil opportunities in
the Permian and Williston basins. Given the discrete timing of drilling, completion, and
bringing to sales, we believe production additions may be lumpy for the foreseeable
future. Moreover, greater activity in its various oily basins may create tightness in rig and
service/frac spread availability which could impact operating margins and cash flow
negatively. Access to pipeline takeaway and processing infrastructure in the Permian and
Powder River basins may not expand commensurate with the company and industry
production, making pricing and sales growth targets more difficult to achieve. Worries
over environmental impacts from fracking may lead to legislation that could potentially
restrict development or increase the cost of operations.
WolfeResearch.com
Page 15 of 17
Amy Allen - aallen@wolferesearch.com - Do not forward
SM Energy
October 20, 2016
Wolfe Research, LLC Research Disclosures:
Company:
Research Disclosures:
SM
None
Other Disclosures:
Wolfe Research, LLC Fundamental Stock Ratings Key:
Outperform (OP):
The security is projected to outperform analyst's industry coverage universe over the next
12 months.
The security is projected to perform approximately in line with analyst's industry coverage
universe over the next 12 months.
The security is projected to underperform analyst's industry coverage universe over the
next 12 months.
Peer Perform (PP):
Underperform (UP):
Wolfe Research, LLC uses a relative rating system using terms such as Outperform, Peer Perform and Underperform (see definitions
above). Please carefully read the definitions of all ratings used in Wolfe Research, LLC research. In addition, since Wolfe Research, LLC
research contains more complete information concerning the analyst’s views, please carefully read Wolfe Research, LLC research in its
entirety and not infer the contents from the ratings alone. In all cases, ratings (or research) should not be used or relied upon as investment
advice and any investment decisions should be based upon individual circumstances and other considerations.
Wolfe Research, LLC Sector Weighting System:
Market Overweight (MO):
Market Weight (MW):
Market Underweight (MU):
Expect the industry to outperform the primary market index for the region (S&P 500 in the
U.S.) by at least 10% over the next 12 months.
Expect the industry to perform approximately in line with the primary market index for the
region (S&P 500 in the U.S.) over the next 12 months.
Expect the industry to underperform the primary market index for the region (S&P 500 in
the U.S.) by at least 10% over the next 12 months.
Wolfe Research, LLC Distribution of Fundamental Stock Ratings (As of September 30, 2016):
Outperform:
Peer Perform:
Underperform:
39%
49%
12%
1% Investment Banking Clients
0% Investment Banking Clients
0% Investment Banking Clients
Wolfe Research, LLC does not assign ratings of Buy, Hold or Sell to the stocks it covers. Outperform, Peer Perform and Underperform are
not the respective equivalents of Buy, Hold and Sell but represent relative weightings as defined above. To satisfy regulatory requirements,
Outperform has been designated to correspond with Buy, Peer Perform has been designated to correspond with Hold and Underperform
has been designated to correspond with Sell.
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WolfeResearch.com
Page 16 of 17
Amy Allen - aallen@wolferesearch.com - Do not forward
SM Energy
October 20, 2016
Copyright © Wolfe Research, LLC 2016. All rights reserved. All material presented in this document, unless specifically indicated otherwise,
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Page 17 of 17