SM Energy amends credit for Uinta Basin asset purchase

DENVER-based SM Energy (NYSE:SM) Co has revised its credit agreement to facilitate the acquisition of oil and gas assets in the Uinta Basin, underscoring the company's strategic expansion in the region. The amendment, effective as of Monday, allows SM Energy to incur certain debts to fund the purchase from XCL AssetCo and affiliates.

The First Amendment to the Seventh Amended and Restated Credit Agreement, dated July 2, 2024, involves Wells Fargo Bank, National Association, as the administrative agent, and other lenders. It provides for amendments to the Credit Agreement that enable SM Energy to disregard the proceeds from any senior unsecured or convertible notes when determining compliance with covenants related to restricted payments until the closing of the acquisition.

Additionally, the amendment permits the company to maintain higher cash balances than previously allowed to ensure sufficient funds for the acquisition, known as the XCL Acquisition. It also allows for the possibility of securing a bridge loan facility or issuing senior unsecured notes with special mandatory redemption provisions, should the need arise.

Importantly, the changes include provisions for liens on the proceeds of senior unsecured notes placed in escrow, a necessary step in securing the assets from XCL AssetCo, LLC, and its related entities. This strategic move is poised to enhance SM Energy's portfolio in the energy sector and demonstrates the company's commitment to growth through acquisition.

The details of the First Amendment were disclosed in a filing with the Securities and Exchange Commission (SEC) by SM Energy, which operates under the ticker NYSE:SM. The filing also includes the First Amendment as Exhibit 10.1, ensuring full transparency of the terms and conditions associated with the amended credit agreement.

In other recent news, SM Energy has been the center of attention following its acquisition of XCL Resources, a move that RBC Caets sees as significantly beneficial to the company's free cash flow per share. Despite the market's lukewarm response, RBC Capital maintains a Sector Perform rating for SM Energy. Truist Securities, on the other hand, adjusted its price target for SM Energy to $49.00, maintaining a Hold rating. The firm's revised model suggests higher earnings and free cash flow estimates for SM Energy.

BMO Capital also maintained its Market Perform rating on SM Energy, projecting significant enhancements to Free Cash Flow Per Share, Earnings Per Share, and Cash Flow Per Share due to the company's venture into the Uinta Basin. Roth/MKM kept its Buy rating on SM Energy, suggesting the company's estimated production of approximately 195,000 barrels of oil equivalent per day may be conservative.

RBC Capital Markets raised SM Energy's price target from $50.00 to $54.00, recognizing the company's successful growth initiatives, including the development of wells in the new Permian 'Klondike' acreage. These are recent developments that reflect SM Energy's ongoing efforts to maintain stable production levels and implement operational efficiencies.

InvestingPro Insights

As SM Energy Co (NYSE:SM) takes a significant step to expand its footprint in the Uinta Basin through strategic acquisitions, it's essential for investors to consider the company's financial health and market performance. With a market capitalization of $5.08 billion and a robust P/E ratio of 6.9, which has slightly adjusted to 6.78 in the last twelve months as of Q1 2024, SM Energy appears to be valued reasonably in the current market.

InvestingPro data reveals a notable gross profit margin of 81.55% for the same period, indicating strong profitability relative to revenue. Furthermore, the company's ability to maintain dividend payments for 32 consecutive years, coupled with a recent dividend growth of 20.0%, underscores its commitment to shareholder returns. These financial metrics are complemented by the company's operational efficiency, as evidenced by an operating income margin of 39.58%.

Amidst this financial backdrop, the InvestingPro Tips highlight that analysts have recently revised their earnings expectations downwards for the upcoming period, suggesting that investors should keep an eye on future earnings reports. However, the company's proven track record of profitability over the last twelve months and a strong return over the last five years may offer reassurance. Investors looking for more detailed analysis and additional InvestingPro Tips can explore the comprehensive insights available on InvestingPro. There are currently 8 additional tips listed, which could provide a deeper understanding of SM Energy's prospects.

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