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.

Portfolio Update: Sympathizing With Investors Enduring Pain

  • Despite mostly upbeat Q2 results, my stock picks aren’t moving higher.
  • Sentiment is still negative in the energy market, capping energy stocks gain.
  • Painted Pony and Point Loma are underperforming.
  • Prairie Provident and Granite Oil are my two favorite buys right now.

Click here to read the entire article on Seeking Alpha.

Painted Pony: Making Sense Of The Guidance

Fellow contributor Dutchtender made me realize there is something wrong from Painted Pony Petroleum’s guidance of January 2017 and May 2017.

Painted Pony - January 2017 & May 2017 Guidance

Guidance2017 Production (boe/d), Liquids Pourcentage2018 Production (boe/d), Liquids Pourcentage2017 Leverage (YE Net Debt/CFO)2018 Leverage (YE Net Debt/CFO)
May 201748,400 (8%)84,800 (7%)1.51.2
January 201748,000 (10%)72,000 (11%)1.31.2
August 201646,00070,0001.91.4

Source: Painted Pony Energy, 2017 Corporate Presentations

Something is going on. Leverage is increasing considerably despite AECO prices being somewhat stable and despite adding over 60 million new shares. More surprisingly, leverage fell from the August 2016 guidance to the January 2017 guidance, despite lower AECO prices. Let’s find out what is causing this.

Painted Pony - 2017 & 2017 Capital Expenditures

Guidance2017 Capex (C$M)2018 Capex (C$M)Total (C$M)Production Growth (boe/d)Efficiency (C$/boe/d)
May 201734830164961,60010,536
January 201731938570449,00014,367

Source: Painted Pony Energy, 2017 Corporate Presentations

The company is more efficient. The additional leverage was not because of higher capital expenditures.

Painted Pony - Cash Flow From Operations

Guidance2017 CFO/Mcf (C$/Mcf)2018 CFO/Mcf (C$/Mcf)
May 20171.411.55
January 20171.621.85

Source: Painted Pony Energy, 2017 Corporate Presentations

Part of the problem is that less cash will go into Painted Pony’s coffers. The changes are staggering: cash flow per unit decreases 13% in 2017 and 16% in 2018.

Lastly, I think the biggest reason is the new way leverage is calculated in these presentations. In the recent presentations (January and May 2017), leverage is taken as year-end net debt to Q4 CFO annualized. Because Painted Pony’s production growth is achieved primarly at year-end, the cash flow is substantially higher in Q4 than the average in the rest of the year.

As such, the substantial increase in leverage is due to the way leverage is calculated, to 20% higher costs, and, to a lesser extent, slightly lower realized prices and slightly lower liquids production.

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

Portfolio Update: Moving Chips To My Winners

I am now well positioned for 2017 after another series of move in my portfolio.

  • I added to my positions in Painted Pony Petroleum and in Gear Energy by selling part of my position in MEG Energy. I am preparing my portfolio for lower oil prices.
  • I opened a position in Tidewater Midstream & Infrastructure.
  • I bought back shares in TransGlobe Energy. TransGlobe’s Canadian transformation is a game changer to me. Plus the acquisition metrics are very good for TransGlobe shareholders.
  • I opened a position in Point Loma Resources.

I made a quick analysis for Point Loma Resources after hearing about the stock on Seeking Alpha. The stock is indeed trading at a very low 6.3X Year-End 2016 FFO. I estimate FFO of C$17.92 per barrel at year-end 2016. Furthermore, the company holds no debt except for convertible debentures and plans to grow production aggressively next year. In other words, the multiple should be higher.

Other interesting news for Canadian oil and gas producers: lower oil exports from Venezuela and possibly lower transport tariffs from TransCanada.

Lower heavy crude from Venezuela will benefit Canadian heavy oil and tighten the price differential of Canadian heavy oil versus WTI.

Finally, the new push for natural gas pipelines in the Northeastern US will force TransCanada to lower its transportation tariffs. Else it will face a severe decrease in its market share in Eastern Canada.

Disclosure: I am long GXE, MEG, PLX, PPY, TGL, TWM. Not for republication on Seeking Alpha.

Portfolio Update: Aggressive Moves To Start 2017

Here are my trades to start the year:

  • I added to my position in Amaya. Indeed, bad names will stop appearing in bad actor clause negotiations now that both David Baazov and Daniel Sebag are gone. Plus Amaya’s operations are coming out as very strong.
  • I bought back shares in Corridor Resources, as you know. It’s now or never for Corridor to move west and grab assets on the cheap before oil heads substantially higher. I need to go long before reading about the acquisition in a press release.
  • I added to my position in MEG Energy after the company announced a major refinancing plan.
  • I added to my position in Painted Pony Petroleum. The company is still undervalued despite being up 60% since I bought it nine months ago.

I also went long lithium by buying all the junior exploration companies operating in Quebec: Critical Elements, Nemaska Lithium and Natan Resources. I’ll let you know shortly how I narrowed it down to those three companies.

Disclosure: I am long AYA, CDH, CRE, MEG, NMX, NRL, PPY. Not for republication on Seeking Alpha.