SM Energy Strikes 10-yr Deal - Analyst Blog
April 12 2011 - 9:30AM
Zacks
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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