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April 12, 2011
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SM Energy Company (SM) has struck a 10-year midstream service contract with a wholly owned subsidiary of Energy Transfer Partners (ETP), ETC Texas Pipeline, LTD. (“ETC”). Under the deal, ETC will provide gathering, transportation, and processing services from the Eagle Ford shale acreage of SM Energy in South Texas. The company did not disclose any financial terms but stated that the deal is fee based and does not require any upfront capital investment.
ETC intends to build a gathering and transportation pipeline and related facilities, accompanied with a new processing plant to facilitate SM Energy's Eagle Ford properties in South Texas.
Per the agreement, ETC will supply through its pipeline up to 240,000 million British thermal unit (MMBtu) on a daily basis, or approximately 190 million cubic feet per day (MMcf/d) and subsequently process the same at the new plant. Importantly, ETC remains committed in this gas transportation deal over a ten-year term starting 2013.
SM Energy is focusing on increasing expenditures on the company’s Eagle Ford, Bakken and Granite Wash plays. Development of the Eagle Ford Shale, with an estimated current total production of 80,000 barrels per day, is an important part of SM Energy’s goal to increase stockholder value. We believe that the company’s emerging core portfolio is a positive catalyst for visible organic growth over the next several years.
Earlier in January 2011, SM Energy set its capital budget of $1.04 billion for 2011, with $830 million (about 80% of the annual capital budget) allotted for drilling. Of the drilling budget, 60% is apportioned toward Eagle Ford Shale.
However, the company’s natural gas-weighted reserves keep us on the sidelines. SM Energy draws a significant portion of its operating revenues from natural gas. Consequently, it may face near-term headwinds in this sector on the back of struggling commodity prices.
SM Energy holds a Zacks #3 Rank, which equates to the short-term Hold rating.
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