Zacks_Analysts' Blog : Kinder Morgan Dynamic in Eagle Ford - Analyst Blog

Through a joint venture (JV) with Copano Energy LLC (CPNO), Kinder Morgan Energy Partners LP (KMP) entered in to a long term Eagle Ford Shale gas services agreement with Chesapeake Energy Corporation (CHK).

This is a 14-year term agreement. As per this agreement, Eagle Ford Gathering (the JV between KMP & CPNO) will accumulate Chesapeake's gas from major delivery points and provide transportation, processing and fractionation services. Chesapeakehas also committed a significant quantity of natural gas production from multiple counties in South Texas over this period.

Eagle Ford Gathering also plans to increase the capacity of a previously announced 30-inch gas pipeline to 600 billion British thermal units per day from 375 billion, which will enable the JV to serve additional Eagle Ford Shale producers. For this, the JV will invest approximately $175 million.

Eagle Ford Shale production is gaining traction and needs adequate infrastructure for further processing. In light of this, we view this agreement as a welcome development.

Currently, shale gas accounts for about 15%–20% of total U.S.gas production, but this will likely go up in the future. Given enough natural gas trapped in underground shale formations, exploration interest has been rising despite a low-price environment.

Kinder Morgan is one of the largest publicly traded master limited partnerships (MLPs) and generally serves as a benchmark for the pipeline MLP group. The partnership has always been active on the growth front by organic and inorganic means.

While acquisitions remain the key growth avenue, its organic efforts keep it focused on fee-based and diversified businesses that have enabled the partnership to spread out its business risks.

The partnership’s distribution (increased 6% year over year in the third quarter of 2010) growth prospects are closely linked with the successful completion of organic growth projects. Our current concerns are the risk of deploying more capital to sustain growth, cost overruns and execution risks. We maintain our long-term Neutral recommendation for KMP units with the Zacks #3 Rank (Hold).