SM Energy Company has agreed to sell its Marcellus shale assets in McKean and Potter Counties, Pennsylvania, to Endeavour International for total cash proceeds of approximately $80 million. The transaction includes SM Energy's entire leasehold position in the play of approximately 42,000 net acres as well as associated pipeline assets. There are currently three producing wells on the acreage with the average first quarter production of 2 MMCFE/d. As of year-end 2010, there were 5.6 BCFE of booked reserves related to these assets, of which 50% were classified as proved developed.
Deal Value Analysis
In a simple way, the metric of this deal is calculated as $1,905/acre. However, the assets being sold include 2 MMCFE/d of production, which if valued at $40,000/BOE, yields ~$13 million for reserves. After deducting for the reserves, the acreage value remains at ~$67 million or $1,595/acre.
What’s happening in Marcellus Shale
The Marcellus shale play runs through northern Appalachia, primarily in Pennsylvania, West Virginia, New York, and Ohio. It is part of the Devonian black shale and the thickness of the gas-producing rock is as much as 900 feet. The formation runs an estimated 600 miles north to south, and is estimated to hold as much as 500 trillion cubic feet of natural gas, about 50 tcf of which is recoverable using current technology. It is one of the richest gas formations in North America.
The proximity to customers in Eastern urban centers is what makes the Marcellus so desirable. Fort Worth-based Range Resources was one of the early players in the Marcellus and still has a huge position in the play. Recently, Range divested Barnett assets to focus on Marcellus Shale. Norway’s Statoil has signed a joint venture with Chesapeake to work together in the Marcellus, and other US and foreign companies also are involved in drilling and infrastructure development.
A substantial amount of drilling for natural gas locked in the Marcellus Shale is occurring in Pennsylvania. There are two reasons for that:
- First, of course, is that much of the Marcellus Shale lies under Pennsylvania.
- Pennsylvania does not collect a severance tax on natural gas.
SM Energy’s Outlook
With these many beneficial facts about Marcellus shale, why is SM Energy divesting its Marcellus assets.
SM Energy is trying to accelerate its liquids rich production; thereby the company is ramping up drilling programs in Eagle ford and Bakken/Three Forks. Approximately 84% of SM Energy’s current capital budget is focused on three core liquids-rich resource plays- Eagle Ford Shale; Bakken / Three Forks and Granite Wash. The company is planning to attain +20% production growth in 2011.
In addition, SM Energy recently divested non-operated position and portion of operated position in Eagle Ford to Mitsui; and Statoil and Talisman, respectively. This clearly says that, SM Energy is interested in focusing on its core liquids rich plays; and hence the reason for divesting Marcellus assets.