Painted Pony: The Capital Lease

It all started with this:

In addition, the Company has completed an engineering study with a third party midstream company to build a natural gas processing facility, including refrigeration and associated liquids handling, at the Townsend 33-J pad with an expected capacity of approximately 190 MMcf/d. This new plant is anticipated to commence operations in late 2015 pending execution of final agreements, and is expected to reduce transportation, processing, and operating costs, and increase liquids production.

Painted Pony Energy Press Release, August 13, 2014

In other words, Painted Pony will be paying fat fees to AltaGas for a long time.

Fast forward to today, and the capital lease expense will amount to C$60M in 2018, or C$0.59 for each Mcf from Townsend (commitment of 267 MMcf/d starting January 1, 2018).

It’s not all bad. AltaGas spent C$440M to build the facility. Using debt, this would translate to C$35M of interests per year from the financing rate of last August. Plus the additional leverage, which would have been unworkable in the current natural gas environment.

Painted Pony gained access to a new processing plant without adding debt, while sacrificing some of its netback from the associated production. The charge of C$0.59 per Mcf from Townsend is significant.

LNG being so far down the road, the upside from this partnership in the medium-term is the marketing of NGLs by AltaGas. Painted Pony will be able to export propane to Asia as soon as Q1 2019.

Disclosure: I am long PONY. Not for republication on Seeking Alpha.

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