SM Energy (NYSE:SM) plans to invest the majority of its 2012 capital budget into the development of the Eagle Ford Shale as the company continues to pursue crude oil and liquids opportunities in the onshore United States. The company will also target the Bakken and Three Forks formations in the Williston Basin, and the Granite Wash in the Texas Panhandle as part of this strategy. (To know more about oil and gas, read Oil And Gas Industry Primer.)

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2012 Capital Expenditures
SM Energy plans to spend from $1.2 billion to $1.3 billion in drilling capital in 2012, with the company's operated Eagle Ford Shale development program receiving $650 million to $700 million. The company will also be involved in this play on a non operated basis, but will have most of its drilling and completion cost obligations covered by a third party.

It expects that this level of expenditures will lead to average daily production ranging from 601 to 620 million cubic feet of natural gas equivalents per day in 2012. This represents growth of approximately 32% over 2010 levels.

Operated Eagle Ford Shale
SM Energy has 149,000 net acres under lease in its operated Eagle Ford Shale program. The company has drilled 84 gross wells since entering this play, including 44 operated wells in 2011. It reported 381 billions of cubic feet equivalent of proved reserves in the Eagle Ford Shale at the end of 2011.

The company plans to operate as many as six rigs in the Eagle Ford Shale in 2012, and will institute pad drilling during the year. It's also testing down spacing in portions of its acreage in 2012.

Non Operated Eagle Ford Shale
SM Energy is involved in the Eagle Ford Shale on a non operating basis with Anadarko Petroleum (NYSE:APC) in a joint venture. In 2011, SM Energy sold a 12.5% working interest in its non operated Eagle Ford Shale program to Mitsui E&P Texas LP. The agreement requires Mitsui E&P Texas LP to carry SM Energy for up to $680 million of future development costs of these properties.

Bakken Play
SM Energy has just over 200,000 net acres under lease that is exposed to either the Bakken or Three Forks formations in the Williston Basin. The company has allocated total capital of $160 million to $185 million for development here in 2012, and will start the development of a third project area during the year.

One of the leaders in developing the Bakken play is Continental Resources (NYSE:CLR), which reported average daily production of 41,243 barrels of oil equivalent in the fourth quarter of 2011.

Granite Wash
SM Energy has also budgeted from $60 million to $70 million to develop Granite Wash and other formations in the Texas Panhandle in 2012. The company is currently operating four rigs here and has approximately 34,000 prospective acres.

Another operator active in developing the Granite Wash is Linn Energy (Nasdaq:LINE). The company plans to allocate more than 50% of its 2012 capital budget and drill approximately 60 operated wells into the Granite Wash.

The Bottom Line
SM Energy is successfully making the transition away from natural gas development and has established advantageous positions in a number of productive oil and wet gas plays in the onshore U.S. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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