Colorado-based SM Energy Company (SM), formerly known as St. Mary Land & Exploration Company, entered into a 10-year gas services agreement with Eagle Ford Gathering LLC.
 
Under the terms of the contract, SM Energy will produce 200,000 million British thermal units per day (MMBtu/d) of Eagle Ford Shale natural gas, while Eagle Ford Gathering will offer gathering, transportation and processing services.
 
Eagle Ford Gathering LLC, a 50:50 joint venture (JV) between Kinder Morgan Energy Partners, L.P. (KMP) and Copano Energy, L.L.C. (CPNO), will spend approximately $137 million in the first phase of the project. Under the deal, Eagle Ford Gathering will construct a pipeline, which will collect gas and transport it through Kinder Morgan’s Laredo-to-Katy pipeline to Copano’s Houston Central plant where the gas will be processed.
 
SM Energy also announced that the deal with Eagle Ford Gathering is fee-based and does not require any upfront capital investment. The company expects the pipeline to come online in the summer of 2011.
 
On the other hand, Kinder Morgan’s Eagle Ford Gathering JV with Copano was aimed at facilitating natural gas producers in South Texas. Consequently, providing transportation as well as midstream services to SM Energy in the Eagle Ford Shale will help Kinder to expand its Texas intrastate pipeline system and provide incremental cash flow for unitholders.
 
SM Energy has been working over the years to build a significant position by focusing on greater acreage in potential resource plays, including the Eagle Ford, Bakken, Haynesville, Marcellus, Granite Wash and Woodford shale. This service agreement is a prudent step for the company as it will provide support to SM Energy’s extensive asset base in this region.
 
Development of the Eagle Ford Shale is an important part of SM Energy’s goal to increase stockholder value. We believe that SM Energy’s emerging core portfolio is a positive catalyst for visible organic growth in the next several years.
 
While the company draws a significant portion of its operating revenues from natural gas, we believe it may face headwinds in this sector in the near term due to struggling commodity prices.
 

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