Painted Pony – Ride To Profits

PPY : TSX : C$6.63
Target: C$15.00

Energy — Oil and Gas, Exploration and Production

Investment recommendation
PPY released two new Montney test rates, one from each of the Lower and Upper Montney zones at Daiber. Both wells were producing north of 10mmcf/d during the final hour of testing. In our view, the Upper Montney well carries more weight, as it is the first Upper Montney well from the Daiber pad, but both wells further delineate PPY’s Montney position in the area and should boost production levels as we head into year end.

The new well results, along with updated rates from Townsend, continue to support our investment thesis for the stock. We
continue to rank PPY BUY and our C$15.00 target price represents a 1.0x multiple of our contingent net asset value (CNAV).
Investment thesis
PPY’s share price has been under pressure as of late, with the stock off ~13% since the start of October. While concerning, we note that operationally the company continues to perform well. Production is on the rise, well results continue to be strong, and the company retains a  very strong balance sheet (no debt as of the end of Q2/13). In our view the share price drop is related to:
1. Negative sentiment related to takeout potential. While we acknowledge there are several producers with Montney assets on the market, we believe that PPY’s Montney position is best positioned to capitalize on LNG related M&A activity. In
addition to its proximity to the coast, and being located on existing and proposed pipelines, PPY’s large contiguous asset
base with a recognized contingent resource of ~4.3 TCF (including 2P reserves) is trading at extremely discounted levels,
in our view. As we review in Exhibit 5, we believe PPY’s share price is building in less than $0.09/mcf of contingent


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