Painted Pony Energy Ltd. (TSE:PONY)is back on track to reward shareholders as production volumes are transferring into meaningful cash-flow growth
SmallCapPower | October 3, 2017: Painted Pony Energy Ltd. (TSX: PONY) is a growth-oriented Canadian natural gas producer operating in the Montney formation in northeast British Columbia. Painted Pony’s philosophy is to grow through production development drilling for natural gas and natural gas liquids. The Company’s strategic objective is to provide shareholders with an impressive and consistent per share growth profile of production, reserves and cash flow through the development of its premium, sweet natural gas resource base located in the optimum area. Shareholders have been waiting for that payoff for a few years. Nonetheless, the recent investments and the superior double-digit growth shows that Painted Pony Energy is back on track to reward shareholders.
Investment Thesis
- Impressive and continued reserves growth
- Production volumes growth transferring into meaningful cash-flow growth
Impressive and Continued Reserves Growth
Reserves represent the deep, underlying value of companies in the oil and gas business. During 2016, PDP reserves went up by 102% to 0.5 Tcfe (80.7 MMboe) while total 1P reserves increased by 31% to 2.7 Tcfe and 2P reserves increased to more than 4.9 Tcfe. Painted Pony Energy was able to generate one of the best finding, development and acquisition PDP recycle ratios in the industry of 2.0 times and a Proved recycle ratio of 2.6 times in 2016, inclusive of changes in future development capital.
Production Volumes Growth Transferring into Meaningful Cash Flow Growth
Daily production for 2016 averaged 139.2 MMcfe/d (23,204 boe/d), which was a 49% increase over 2015 annual average daily production of 93.6 MMcfe/d (15,604 boe/d). Natural gas liquids production volumes increased 416% to 3,177 bbls/d during the fourth quarter of 2016 compared to 616 bbls/d during the fourth quarter of 2015. This increased production was made possible through the drilling program in liquids-rich Townsend and Blair acreage and the early commissioning of the Townsend Facility. As a result of the increase in production volumes, Painted Pony Energy saw dramatically increased funds flow from operations during the fourth quarter of 2016 by a factor of 10 times to $26.5 million ($0.26/share) compared to $2.6 million ($0.03/ share) during the fourth quarter of 2015.
Financial Analysis
Production volumes for the three month ended June 30, 2017 increased by 144% compared to the three month ended June 30, 2016. Increases in liquids production reflects the focus on Painted Pony’s more liquids-rich inventory being produced through the Townsend Facility. The production volume increase during the period was driven by production additions from successful new drills in the Blair Creek, Townsend and Daiber areas, the commissioning of the Townsend Facility in the third quarter of 2016, and the UGR acquisition.
Petroleum and natural gas revenue totaled $66.4 million for the three months ended June 30, 2017, representing a 458% increase from second quarter 2016 revenue of $11.9 million. The change in quarterly revenue is driven by a 181% increase in realized natural gas prices, a 13% increase in realized NGL prices, and a 144% increase in average production volumes for the quarter.
Increases in both cash flows from operating activities and funds flow from operations for the second quarter of 2017 compared to the second quarter of 2016, are a result of increased production volumes and higher realized commodity prices.
Outlook and Valuation
Despite strong 2018 expected production growth and significant cash flow per share growth, Painted Pony Energy trades at a discount to its natural gas-weighted peer group on 2018 metrics.
Painted Pony Energy bet big on rapid growth, including some borrowing that would hopefully result in a large payoff down the road. Shareholders have been waiting for that payoff for a few years. Nonetheless, recent investments and superior growth are likely set to payoff. So in addition to the usual seasonal gas price, there could be an earnings boost as well to propel the stock to a far superior return.
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