SM Energy doubles Permian Basin acreage with $980 million buy

By Pranav Kiran

(Reuters) - SM Energy Co (SM.N) said on Monday it would pay more than $980 million (751 million pounds) to double its holdings in the prolific Permian Basin in Texas, showing that some oil producers are still willing to spend big on good assets.

The deal to buy Rock Oil Holdings LLC from private equity firm Riverstone Holdings LLC will give SM Energy 24,783 acres in Howard County. SM Energy already has about 20,000 acres in the Permian Basin.

The assets being bought, which produce 4,900 barrels of oil equivalent per day (boe/d) on a net basis, are in a region of the basin that is emerging as a top-tier area, SM Energy Chief Executive Jay Ottoson said in a statement.

"We like SM broadening its footprint in our favourite Permian Basin, but the acreage valuation looks lofty at this price," Raymond James analyst Pavel Molchanov said in an email to Reuters.

SM Energy's shares rose as much as 11 percent before easing back to be up 5.9 percent at $31.03 in afternoon trading.

A more-than 60 percent fall in oil prices since mid-2014 has prompted oil producers to move crews and high-speed rigs to "sweet spots" with the most oil.

The average price per acre in the Permian Basin has risen over the past few months, given promising well results, said KeyBanc Capital Markets analyst Chris Stevens.

Diamondback Energy Inc (FANG.O) said last week that two wells in its first three-well pad in Howard County had initial production rates of more than 1,200 boe/d.

Adjusted for production, SM Energy is paying Riverstone about $31,500 per acre, higher than the $20,000 per acre Callon Petroleum Co (CPE.N) paid in a recent deal, said Bill Costello, a portfolio manager at Westwood Holdings Group.

Callon Petroleum said in April it would spend about $220 million to buy acreage, primarily in Howard County.

SM Energy said it was offering 15 million shares and $100 million in unsecured convertible notes to fund the deal.

The company, which increased its 2016 capital budget by $15 million-$20 million from its earlier estimate of $670 million, said it expected to add one rig in the Permian Basin in the fourth quarter and two more in 2017. SM Energy is currently running two rigs in the Permian Basin.

Jefferies and Petrie Partners advised Rock Oil on the deal.

(Reporting by Pranav Kiran in Bengaluru; Editing by Saumyadeb Chakrabarty and Swetha Gopinath)