SM Energy’s 2016 Bakken plans: target DUCs, drill in Divide

By Luke Geiver | February 24, 2016

SM Energy Co., the independent exploration and production company with operations in the Eagle Ford, Permian and Bakken will focus on the Bakken and Permian in 2016. In the midst of low oil prices, the company has adopted a plan to preserve liquidity, persevere debt adjusted per share and progress well results and its portfolio.

In 2016, overall production volumes will be down, the company said in its 2016 guidance update. Volumes will range between 51MMboe to 55 MMboe. “Cash flow is the lifeblood of our business,” said Jay Ottoson, president and CEO of SM Energy. “There is no question that the macro is tough right now.”

To receive the best possible returns in 2016, the company has chosen to focus on the more-oily assets it has in the Permian Basin and the Williston Basin. Much of its Eagle Ford acreage resources is made up of condensate, the company said. “Economics are less attractive [in the Eagle Ford] then the Williston Basin and the Permian,” Ottoson said.

This year, the company will increase the number of wells it both drills and complete in Divide County, North Dakota compare to last year. SM intends to drill 20 wells and complete 50 wells, reducing its current inventory of drilled but uncompleted wells from 50 to roughly 20. In 2015, the company drilled and completed 11 wells in the county that targeted the Bakken formation. Previously, most operators in the area were only targeting the Three Forks formation, according to the company.

The company will also deploy new completion techniques test and proved to increase production without increasing well completion costs. The strategy to complete most wells will now involve cemented liners with plug-and-perf style completions that increase estimated ultimate recoveries without requiring the use of more proppant. Most wells will cost $4.5 million to drill and complete for SM this year. The cost is linked to service costs reductions of roughly five percent attained in December, and the shorter depth required to reach the targeted formation in Divide County.

Although Ottoson believes the first six months of 2016 “are going to be ugly,” in regards to the price of oil, there should be some recovery in price in the second half of 2016. The company projects oil prices in the $37/b range for 2016 and $45 for 2017.

During the 2016 guidance call, members of SM Energy’s executive team reiterated that the company is in better shape than many of its peer in regards to debt ratios and 2016 operational requirements.

This year, the company has to maintain a certain amount of acreage to keep the future value of the company alive, Ottoson said. “Given how we see the world,” he said, the company believes there will be a turnaround in the industry and that its acreage will remain a major value in the future.

Like most E&Ps, the company believes its borrowing base redetermination will be lowered this Spring. According to SM Energy, the company’s revolving credit facility could be cut by banks from its current level of roughly $2 billion to $1.5 billion or less.

Following a year of record production, Ottoson said the company will now focus on continuing to improve performance and economics, and, to “position the company for significant value growth as product prices recover.”