Sanchez Energy Corp. (NYSE: SN) has executed an agreement with Sanchez Production Partners LP (NYSE MKT: SPP) (SPP) pursuant to which SPP has acquired the company's 50% interest in Carnero Gathering LLC for an initial payment of approximately $37 million and the assumption by SPP of remaining capital commitments to Carnero Gathering, which are estimated at approximately $7.4 million.
Carnero Gathering, a joint venture that is 50% owned by Targa Resources Corp. (NYSE: TRGP), will own a total of approximately 45 miles (10 miles of which remain under construction) of high pressure natural gas gathering pipelines that currently connect SPP's existing Western Catarina Midstream system to nearby pipelines in South Texas (the Carnero Gathering System). The Carnero Gathering System will ultimately connect to a cryogenic natural gas processing plant that is under construction in La Salle County, Texas owned by a separate joint venture between Sanchez Energy and Targa. Sanchez Energy has invested approximately $26 million in Carnero Gathering since entering the joint venture with Targa in October 2015. The processing plant is expected to be operational in early 2017.
In addition to the initial payment and reduced capital commitments, Sanchez Energy will be entitled to receive future payments from SPP that are dependent upon the achievement of certain volume, transportation fee and delivery targets.
Stifel analysts say the deal improves the balance sheet modestly. “We view the sale positively and project YE16 net debt/TTM EBITDA of 5.6x compared to our prior estimate of 5.7x, while our 2016 interest coverage estimate of 5.9x remains unchanged. We forecast YE16 liquidity of ~$650MM.”
The analysts maintain a hold rating “based on challenging well economics and near-term commodity price headwinds.”