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SM Energy Shares Gain More Than 20%: Time to Buy the Stock?
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SM Energy (SM - Free Report) shares have surged 20.7% year to date (YTD), significantly outperforming the 2.7% growth seen by the broader industry. A key factor behind this growth is the company’s strong presence in the Midland Basin, a sub-basin of the Permian. Additionally, SM Energy’s recent agreement to acquire assets in the Uinta Basin from XCL Resources marks a shift from its traditional focus on the Permian.
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For investors, the critical consideration is how to position themselves in response to these developments. However, before exploring investment strategies, it’s essential to revisit some core fundamentals of this leading exploration and production company.
SM’s Solid Footprint in Oil-Rich Midland Basin
SM Energy generates most of its revenues from operations in the Midland Basin. In the second quarter, more than 60% of the company’s revenues came from its activities in this region, with production totaling 7,249 thousand barrels of oil equivalent, 64% of which was oil. With oil prices expected to remain strong, the business outlook for this upstream firm appears promising.
Image Source: SM Energy
In 2024, SM Energy plans to drill a net of 72 wells and complete a net of 71 wells in the Midland Basin, highlighting the company's strong commitment to this region. The company’s operations in the Midland Basin span across 111,000 net acres, reflecting its focus on maximizing production and growth in this area.
On June 27, SM Energy inked an accord to acquire 80% of Uinta Basin oil and gas assets owned by certain entities affiliated with XCL Resources for a net purchase price of $2.04 billion. Once the acquisition closes, it will add approximately 37,200 net acres to the company’s top-tier portfolio. This will not only increase oil production significantly but will add roughly 390 net drilling locations.
Many analysts believe that while the Uinta Basin is smaller, it might have the potential to outperform the Permian Basin due to its higher oil content and lower operating costs. This makes the Uinta Basin an attractive area for future development and could enhance SM Energy’s overall performance.
Is SM Energy Stock a Wise Investment Choice Right Now?
Once completed, likely by Oct. 1, the acquisition is expected to immediately enhance SM Energy's financials. This move will allow the company to maximize its return on capital while preserving its strong balance sheet. Supported by these positive developments, the board of directors has authorized an 11% increase in the fixed quarterly dividend, which is anticipated to begin in the fourth quarter.
Further, SM Energy’s board of directors has authorized a new $500 million share repurchase program, which will run through 2027 and replace the remaining portion of the existing program.
The outlook for SM Energy is exceptionally promising, making it a compelling addition for investors. Sporting a Zacks Rank #1 (Strong Buy), SM Energy stands out as a top pick You can see the complete list of today’s Zacks #1 Rank stocks here.
Investing in SM Energy at this time is also supported by the stock's valuations. SM shares are relatively inexpensive, with the current 3.88X trailing 12-month Enterprise Value (EV)/Earnings before Interest Tax Depreciation and Amortization (EBITDA) staying below the 4.09X five-year median. Additionally, SM Energy is trading at a discount compared to the industry average of 7.43X. It is also cheaper than larger exploration and production players such as EOG Resources, Inc. (EOG - Free Report) and ConocoPhillips (COP - Free Report) , which have respective EV/EBITDA of 5.47X and 5.54X.
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SM Energy Shares Gain More Than 20%: Time to Buy the Stock?
SM Energy (SM - Free Report) shares have surged 20.7% year to date (YTD), significantly outperforming the 2.7% growth seen by the broader industry. A key factor behind this growth is the company’s strong presence in the Midland Basin, a sub-basin of the Permian. Additionally, SM Energy’s recent agreement to acquire assets in the Uinta Basin from XCL Resources marks a shift from its traditional focus on the Permian.
For investors, the critical consideration is how to position themselves in response to these developments. However, before exploring investment strategies, it’s essential to revisit some core fundamentals of this leading exploration and production company.
SM’s Solid Footprint in Oil-Rich Midland Basin
SM Energy generates most of its revenues from operations in the Midland Basin. In the second quarter, more than 60% of the company’s revenues came from its activities in this region, with production totaling 7,249 thousand barrels of oil equivalent, 64% of which was oil. With oil prices expected to remain strong, the business outlook for this upstream firm appears promising.
In 2024, SM Energy plans to drill a net of 72 wells and complete a net of 71 wells in the Midland Basin, highlighting the company's strong commitment to this region. The company’s operations in the Midland Basin span across 111,000 net acres, reflecting its focus on maximizing production and growth in this area.
Uinta Basin Acquisition Agreement: SM’s Growth Driver
On June 27, SM Energy inked an accord to acquire 80% of Uinta Basin oil and gas assets owned by certain entities affiliated with XCL Resources for a net purchase price of $2.04 billion. Once the acquisition closes, it will add approximately 37,200 net acres to the company’s top-tier portfolio. This will not only increase oil production significantly but will add roughly 390 net drilling locations.
Many analysts believe that while the Uinta Basin is smaller, it might have the potential to outperform the Permian Basin due to its higher oil content and lower operating costs. This makes the Uinta Basin an attractive area for future development and could enhance SM Energy’s overall performance.
Is SM Energy Stock a Wise Investment Choice Right Now?
Once completed, likely by Oct. 1, the acquisition is expected to immediately enhance SM Energy's financials. This move will allow the company to maximize its return on capital while preserving its strong balance sheet. Supported by these positive developments, the board of directors has authorized an 11% increase in the fixed quarterly dividend, which is anticipated to begin in the fourth quarter.
Further, SM Energy’s board of directors has authorized a new $500 million share repurchase program, which will run through 2027 and replace the remaining portion of the existing program.
The outlook for SM Energy is exceptionally promising, making it a compelling addition for investors. Sporting a Zacks Rank #1 (Strong Buy), SM Energy stands out as a top pick You can see the complete list of today’s Zacks #1 Rank stocks here.
Investing in SM Energy at this time is also supported by the stock's valuations. SM shares are relatively inexpensive, with the current 3.88X trailing 12-month Enterprise Value (EV)/Earnings before Interest Tax Depreciation and Amortization (EBITDA) staying below the 4.09X five-year median. Additionally, SM Energy is trading at a discount compared to the industry average of 7.43X. It is also cheaper than larger exploration and production players such as EOG Resources, Inc. (EOG - Free Report) and ConocoPhillips (COP - Free Report) , which have respective EV/EBITDA of 5.47X and 5.54X.