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Painted Pony announced that it has entered into an agreement to sell a 75% working interest in 11,280 gross acres (8,460 net), within the company’s NE BC Montney portfolio, for $45 mm in cash. Management has intimated that this transaction has no associated production or PDP reserve value, and thus the company has opted to make no changes to its formal 2019 guidance at this time. Playing its cards close to its chest, the company did not unveil any details as to which block of land this represents, though it’s expected that more information will be revealed upon close of the transaction; currently slated for October 31, 2019. Proceeds from this transaction will be earmarked for debt repayment, which would see the company’s net debt position improve markedly, with our estimated total debt balance of $373 mm exiting 3Q19, poised for a 12% reduction upon successful close. Further, its expected 2019e D/CF (trailing) will fall from 4.6x to ~4.0x.
PAINTED PONY PETROLEUM
Painted Pony reported 2Q19 results that were well behind consensus expectations on both a production and AFFO basis. Volumes of 48,978 boe/d trailed “street” estimates by 4% while AFFO of $9.1 mm, or $0.06/sh, lagged consensus at $13.3 mm, or $0.08/sh. With more shut-ins and commodity price volatility ahead, Painted Pony is reducing its 2019 guidance to 49,000-51,000 boe/d on spending of $80-$95 mm. For scale, prior guidance was 54,000-56,000 boe/d on capex of $95-$110 mm. July volumes were 52,350 boe/d. Management is in discussions with large industrial customers for the delivery of natural gas, which could lead to improved physical and financial diversification of its realized gas pricing. The company is also contemplating asset dispositions (both core and non-core) which could help improve a severely challenged leverage position. Mr. Rick Kessy, COO, is leaving the company and will be replaced by incoming VP Operations and Development, Mr. Mike Backus.
Painted Pony’s 1Q18 production of 60,703 boe/d matched our forecast, while cash flow of $46.4 mm, or $0.29 per share, was slightly higher than GMP FE and consensus estimates. In keeping with the recent theme of spending within cash flow, the company has reduced its 2018e capital program from $185 mm and 61,000-63,000 boe/d, to $145-$165 mm and 58,000-60,000 boe/d. The midpoint of the revised guidance range would imply a 16% decrease in capital, though volumes only roll back by 5%. The company’s bank line was reduced $50 mm, to $400 mm, but is now more flexible with all financial covenant requirements removed. Drawings on this LOC at the end of 1Q18 totalled $164 mm.
Painted Pony’s first well drilled into its 36-section Montney block at Beg was tested for 6.6 days and finished with a 24-hour flow rate of 1,900 boe/d, including 9.5 mmcf/d of natural gas and an estimated 340 bbl/d liquids (60% condensate). Given this result, combined with offsetting competitor activity, management believes this entire block is prospective for Montney development. Future plans for this area remain under consideration, but could include: 1) further development which would require a 15-20 km long pipeline to connect to the AltaGas Townsend facility, or 2) the outright sale of this block to pay down debt and focus on its core Montney holdings.
In line with many within its peer group, Painted Pony has announced a 2018 capital program bound within cash flow. The 2018e program, which currently contemplates spending $185 mm to drill and complete 29.0 and 31.0 net wells, respectively, is expected to generate volumes of 61,000 – 63,000 boe/d. Captured within the substantial production growth noted above, is an increased liquids weighting. The company forecasts a 47% YoY increase in liquids production, 50% of which will be high yield condensate. With stubbornly low western Canadian natural gas prices persisting in 4Q17e, the company voluntarily shut-in ~9,000 boe/d. As such, 4Q17e volume targets have drifted downwards to between 51,000 – 53,000 boe/d, falling short of GMP FE’s former view of ~55,000 boe/d.
Impact: Slightly positive. While there will be no changes to our formal estimates as a result of this update, the underlying risk of the Company growing from 16,600 boe/d in 2Q16 to 40,000 boe/d by the end of the year is significantly reduced with confirmation of corporate volumes at 30,000 boe/d over the past 5 days.
Painted Pony reported 2Q16 production and cash flow that overlaid our estimates. As expected, the Company has formally increased its 2016 capital spending guidance to $199 mm from $179 mm previously, as a result of early commissioning of the AltaGas Townsend facility, which will naturally necessitate more wells to achieve the unchanged 40,000 boe/d 2016e exit marker. Current volumes through the Townsend facility are tracking the new ramp-up schedule while total corporate volume guidance of 23,000 boe/d in 3Q16e appears to be running hotter than our prior forecast. Based on reduced well costs reverberating through our RENAV methodology, we have increased our target price to $13.00/share.
Impact: Positive, while cash flow and production were in line for the quarter, it appears current production is putting the Company on track to beat our prior 3Q16e forecast.
Painted Pony announced that it has entered into an asset exchange agreement with a large industry partner consistent with Progress-Petronas. The exchange encompasses a mutual 15.4 net sections (9,856 net acres), primarily at Daiber, wells and a working interest in a facility owned and operated by Progress-Petronas. The deal will net Painted Pony an additional 5.4 mmcfe/d which will have to be tied-in to the Company’s infrastructure and will, most importantly, bestow 100% WI in the land and wells acquired in the swap. We have made no changes to our estimates in light of the deal and as such continue to offer an Outperform ranking and 12-month target price of $12.50 per share, recently revised in our Facts dated July 20, 2016, concurrent with the Company’s announcement of an early start-up of the 198 mmcf/d Townsend facility
Painted Pony announced first gas sales out of the Townsend facility with targeted ramp up to 50 mmcf/d in August, 100 mmcf/d in September, and 150 mmcf/d in October. Increased volumes forecasts paired with lower anticipated capital lease fees drives a 12% and 6% increase to our cash flow estimates in 2016e and 2017e respectively. Outperform recommendation is reconfirmed on an increased target price of $12.50 per share (previously $10.50 per share).
Impact: Positive, as early completion of the Townsend facility derisks a major component of the Company's production ramp up. Additionally, lower capital lease fees as a result of an extended amortization and slight efficiencies gained will manifest in higher corporate cash flows moving forward, all else equal.
Painted Pony reported 1Q16 production and cash flow that were in line with our estimates.
Impact: Slightly positive. Lower capital requirements on unchanged exit volume guidance should support higher debt-adjusted cash flow and production growth figures relative to our prior outlook. We view slightly lower production in 1Q16 and 2Q16 due to pricing related shut-ins as immaterial to our outlook.
The Company reported 57% per share reserve growth (2P) alongside a drama c reduc on in unit FDC which led to stellar all-in 2P FD&A costs of $0.98 /boe ($8.28/ boe PDP). The backbone of this performance was in recognition of well costs falling by ~19% and per well EUR bookings increasing by 33% y/y to 8.8 bcfe. Positive technical revisions comprised 50% of the Company’s 2P addi ons this year. 4Q15 volumes tracked expecta ons as do current volumes of 16,700 boe/d. 4Q15 cashflow of $0.03 per share trailed consensus of $0.045 due to wider than expected Station 2/AECO differentials, which have significantly narrowed since the beginning of 2016.
Impact: Positive, as the Company reported 57% per share reserve growth (2P) alongside a dramatic reduction in unit FDC which led to stellar all-in 2P FD&A costs of $0.98 /boe ($8.28/boe PDP). The backbone of this performance was recognition of well costs falling by ~19% and per well EUR bookings increasing by 33% y/y.
Painted Pony’s latest six Montney wells have come in $0.5 mm below budget at $5.4 mm, which is down from the previous estimate of $5.9 mm. With the nature of these savings expected to be permanent, the Company is comfortable in reducing its 2016e capital budget by 8% to $197 mm and its 2017e capex by 15% to $298 mm. Despite the meaningful decrease in capital inputs, the Company’s original 2016e and 2017e production targets of 23,000 boe/d and 48,000 boe/d, respectively, remain intact. The positive changes to our forecast continue to support our Top Pick ranking and target price of $7.00 per share.
Impact: Positive. Stronger implied capital efficiencies embedded in Painted Pony's revised guidance notionally support higher debt-adjusted cash flow and production growth figures relative to our prior outlook.
Impact: Positive. An earlier Townsend plant start-up date will allow the Company to ramp up volumes ahead of schedule while announced firm service commitments on the NGTL system, set to commence in late 2017, provide access to a second pricing hub.
PAINTED PONY PETROLEUM PAINTED PONY PETROLEUM
Construction of the Townsend AltaGas facility is ahead of schedule and ~ 70% complete which should lead to commissioning earlier than originally expected. A new 130 mmcf/d firm service agreement via TransCanada’s Towerbirch Expansion Project will physically connect the Company’s operations to Alberta’s AECO hub. 4Q15e volumes averaged 15,000 boe/d but have since jumped to 17,500 boe/d in 2016 YTD. With virtually no changes to our forecast in this update we are maintaining a 12-month target of $7.00 per share. Implicitly, our target now frames a potential doubling of the share price within a year and compels us to reinstate our Top Pick ranking.
Painted Pony released 2Q15 operational and financial results that were in line on a production basis and 27% ahead on a cash flow basis, due principally to cash costs that were 25% lower than our forecast. The Company also updated production performance from its two latest parallel pair Montney wells in Townsend, with combined volumes of 21.1 mmcf/d over the last 72 hours and a calculated liquids yield of 52 bbl/mmcf (including 34 bbl/mmcf of condensate), which is a strong early result for its compelling growth plans here over the next 5 years.
Impact: Positive, as the firm transportation contracts provide both certainty for delivery of the Company's volumes and the optionality to deliver them to multiple markets, including potential west coast LNG terminals. Operationally, results from Painted Pony's most recent Townsend wells completed with parallel-pair methodology appear to validate the newer generation completion techniques in the liquids-rich Townsend region.
Painted Pony’s 1Q15e production came in 2% ahead of our expectations while cash flow followed suit, with its $10.2 mm or $0.10 per share beating our estimate of $0.07 per share (Consensus was $0.10 per share) as we were proven too conservative in our modelling of the Station 2 natural gas price differentials over the period.
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