Painted Pony Petroleum Ltd.- Time To Mount Up

PPY : TSX : C$6.50
Target: C$14.00

Painted Pony Petroleum is a junior oil & gas explorer focused primarily on the Montney in northeast British

Energy — Oil and Gas, Exploration and Production
Investment recommendation
Painted Pony announced its 2014 capital program, with plansto spend $149M next year focused largely on its Montney development in NEBC. The budget was slightly less than we had previously forecast, and is likely reflective of caution on behalf of management to natural gas pricing, despite the recent run-up. 2014 production guidance was not given which is not a surprise as this is typically not provided by the Company with its annual budget.

PPY expects Q4/13 production to a 9,100 boe/d, which was lower than our forecasts and may put
the stock under some pressure in trading .
In our view, PPY’s 2014 capital budget announcement was largely a
non-event. We believe PPY will need to show meaningful production
growth through 2014 for its share price to be rewarded in the market.
We continue to believe however that PPY remains a prime candidate for
takeout, or for a JV-related capital injection, particularly as west coast
LNG activity heats up through 2014 as we expect it will, and that its
asset base is considerably undervalued in this context . PPY is rated BUY
with a C$14.00 target (down from C$15.00), which is NAV based.

Investment highlights
 Capital program. PPY announced a 2014 capital budget of $149M,
which was slightly less than the $165M we had been forecasting. As
a result, we have modestly lowered our production and cash flow
estimates for next year .
 Drilling plans in the Montney. As expected, the bulk of PPY’s budget
will be focused on the continual development of its Montney
property in NEBC. PPY plans to drill 18 (17 net) Montney
horizontals next year, with a particular focus on the Blair and
Townsend blocks . The Townsend area is where PPY is
seeing significantly higher liquids rates, and we will be watching for
higher liquids yields in the new year to boost well economics.


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